Insider Trading 101 – An Introduction to SEBI (Prohibition of Insider Trading) Regulation, 2015 – as updated till January 2019
The global market of trading stocks and other securities is highly unpredictable and is driven by myriad factors. One of these factors, which prominently affects stock prices and market activities, is the day-to-day financial and corporate decisionand policy-making by the companies, whose shares are listed on the markets. Since the inception of trading in stocks, information, decisions and policies related to stocks have led to unforeseen lows and highs in the routine lives of every investor around the world.
These game-changing decisions and policies are kept highly confidential amongst the highranking personnel who are crucial to the decision-making process. This is due to their direct impact on the price of market shares and other securities. In legal terms, any information related to such decisions and policies is termed as ‘unpublished price sensitive information’ (UPSI) and everyone who is in possession of or having access to UPSI is termed as an ‘Insider’.
What is Insider Trading?
Considering that any UPSI that an insider possessescan drive the profits and losses in the associated stock market and listed securities, such an insider can easily share this UPSI with others to help such other people or themselves secure their profits beforehand. Such unauthorised personnel could include anyone from a colleague to a family member, and this means of trade is greatly unfair to genuine investors and shareholders. Such an unfair trading method is defined as ‘Insider Trading’. SEBI’s regulation seeks to Prohibit such activity.
How have the laws against Insider Trading Evolved?
Laws that prohibit insider trading have existed since before the independence era and have been continually upgraded and amended to improve the ethics and fairness of trading in securities.
In 1948, the Thomas Committee studied the Insider Trading laws regulated in countries like the U.S.A., U.K., Japan, Germany, France and Australia, and made proposals for restricting Insider Trading by legislation, inter alia,through the Securities Exchange Act, 1934.
In the Companies Act, 1956, Section 307 and 308 made it mandatory to have a register of directors and shareholdings, and persons deemed to be directors to make disclosure of shareholdings, respectively.
Again, in the years 1978 and 1986, two other committees called the ‘Sachar Committee’ and the ‘Patel Committee’ were formed to recommend measures for controlling insider trading in India.
Further, in 1989, the ‘Abid Hussain Committee’ added the proposal to penalise the Insider Trading Activities by civil and criminal proceedings, and also suggested that SEBI initiate regulations and codes of conduct for preventing illegal trading activities.
Finally, in 1992, the SEBI Insider Trading Regulations were published and brought into force.
In 2015, SEBI issued the updated SEBI (Prohibition of Insider Trading)Regulation, which defined specific criteria for ‘insiders’ and the code of conduct companies should follow to prevent insider trading.
Recently, in January 21, 2019, the 2015 Prohibition of Insider Trading Act was substantially amended, and fully became effective from April 01, 2019.Some of these amendments are described in this article.
What do Companies need to learn from SEBI’s PIT Regulations, 2015?
The SEBI (Prohibition of Insider Trading)Regulation, 2015, that is in effect today, is thoroughly detailed and self-explanatory about every aspect of insider dealings and prohibitive measures which companies and associated personnel must undertake. However, to give you a quick overview of what these Regulations proclaim, here are some of the points mentioned in the regulation which are briefly paraphrased for your understanding:
No insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information (UPSI). When a person who has traded in securities has been in possession of UPSI, his trades would be presumed to have been motivated by the knowledge and awareness of such information in his possession. The insider may prove his innocence by demonstrating the circumstances mentioned in the regulation.
No insider shall communicate, provide, or allow access to any UPSI, relating to a company or securities listed or proposed to be listed, to any person including other insiders except where such communication is in furtherance of legitimate purposes, the performance of duties or discharge of legal obligations.
The Board of Directors or such other analogous authority shall, in consultation with the Compliance Officer, must specify the Designated Persons (DPs) to be covered by the code of conduct on the basis of their role and function in the organisation and the access that such role and function would provide to UPSI in addition to seniority and professional designation.
The Board of Directors shall require the DPs to execute agreements to contract confidentiality and non-disclosure obligations on the part of such parties, and such parties shall keep information so received confidential, except for the purpose of sub-regulation (3), and shall not otherwise trade in securities of the company when in possession of UPSI.
Without prejudice to the power of the Board under the Act, the code of conduct shall stipulate the sanctions and disciplinary actions, including a wage freeze, suspension, recovery, clawback etc. that may be imposed, by the listed company required to formulate a code of conduct under sub-regulation (1) of regulation 9, for the contravention of the code of conduct.
Designated persons shall be required to disclose names and Permanent Account Number or any other identifier authorised by the law of the following persons to the company on an annual basis and as and when the information changes for:
- Immediate relatives
- Persons with whom such designated person(s) shares a material financial relationship
- Phone, mobile and cell numbers which are used by them
In addition, the names of educational institutions from which designated persons have graduated and names of their past employers shall also be disclosed on a one-time basis.
The Board of Directors shall ensure that a structured digital database is maintained containing the names of such persons or entities as the case may be (DPs) with whom information is shared under this regulation along with the Permanent Account Number or any other identifier authorised by law where Permanent Account Number is not available. Such databases shall be maintained with adequate internal controls and checks such as time stamping and audit trails to ensure non-tampering of the database.
The newest factor which was included in theseRegulationsmandated maintaining a ‘structured digital database’ or a compliance management software, and this code has put Indian organisations in great need of an application which can provide an efficient and organised management of their UPSI and their recipient insiders or DPs.
Which is why, Axar Digital, a leading compliance software development company in India, came up with their all-inclusive automated PIT Regulation compliance management software, ‘InsiderLens’. This revolutionary solution provides precise functionalities such as:
- Tracking all UPSI and list of Designated Persons (DPs) who possess it
- Automated monitoring of the trading activities of insider personnel
- Tamper-proof security protocols for the database
- Tracking trading activities of every connected person, their close relatives and the ones having maintained financial relations
- Flagging off any mismatch in BenPos provided by the RTA
Insider trading is now criminally prosecutable, and it prevents the accumulation of illegal wealth. This prohibition regulation and the compliance software to implement it are a step towards protecting the interests of minority shareholders and helping every shareholder tradeon the same level playing field.
You can learn more about the InsiderLens software on the Axar Digital website.