As on February 11, 2020, the operating SEBI regulations that listed companies must comply with are the SEBI (Prohibition of Insider Trading) Regulations, 2015. They were issued in the Gazette of India on January 15, 2015 and they became effective from May 15, 2015. These regulations were thereafter amended 4 times, once in 2018 and thrice in 2019, thus:
- SEBI (PIT) (Amendment) Regulations, 2018 with effect from, April 1, 2019
- SEBI (PIT) (Amendment) Regulations, 2019 w.e.f. January 21, 2019
- SEBI (PIT) (Second Amendment) Regulations, 2019 w.e.f. July 25, 2019
- SEBI (PIT) (Third Amendment) Regulations, 2019 w.e.f. December 26, 2019
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Insider trading can be said to occur if the following 3 conditions are met:
- A person privy to information of a price sensitive nature before such information is released by the company to the bourses/general public,
- Trades in the listed securities of the company whose price could be affected by the above-mentioned information,
- And makes a gain from such trading activity
Price sensitive information is any information that can have a significant upward or downward impact on the price of the company’s listed security.
For example, good quarterly results in the 3rd quarter, on the back of 2 not very good quarters, could have a truly upward/positive impact on the company’s share price. Similarly, winning a large international contract, or being awarded a patent for a critical product/component of a product could have positive impact. On the other hand, should the company lose a major IPR litigation, or suffer a major accident that destroys a significant asset, or lose a senior executive who is known to have steered the company’s fortunes for a long time – all these and such other events will have a downward or negative impact on its share price.
UPSI is such information as given in the above examples, that is known to some key executives (viz., CFO/CMO) or office-bearers (viz., Directors) but has not yet been disclosed or made known to the general public. Thus UPSI is an inclusive concept not rigidly defined.
The regulations themselves list some examples of UPSI as below:
- Financial results
- Changes in capital structure
- Mergers, de-mergers, acquisitions, de-listings, disposals, expansion of business and such other transactions
- Changes in key managerial personnel
A Designated Person (DP) is a person who has rightful access to UPSI, and does not require to be an Employee of the Company. Regulation 9(4) includes the following types of individuals within the definition of DP:
- Employees expected to have access to UPSI due to their functional role and designated as such by the Board of Directors (BoD)
- Employees of material subsidiaries designated by their BoDs
- Promoters of the company and promoters of intermediaries & fiduciaries
- CEO and employees upto 2 levels below CEO, regardless of their ability to have access to UPSI
- Support staff of the company, intermediary or fiduciary who could have access to UPSI
Under the SEBI PIT regulations, a Structured Digital Database (SDD) is the foundation of a system to track the movement of UPSI during its entire period of existence, and trading activities of DPs and CPs during this period.
Thus, the SDD is to contain details of 3 things – Unpublished Price Sensitive Information (UPSI), Designated Persons (DPs) & their Connected Persons (CPs) and the trading activity of DPs and CPs involving the listed scrips of the company from the creation of the UPSI till its publication/ release to the public.
Further, the Regulations state that every issuer i.e. Listed Company, shall maintain a database digitally which shall have following features:
- It shall be ‘Non-tamperable’
- All data contained in it will have a date and time stamp
- An Audit trail will be provided to show who created it and when
- Internal checks and controls will ensure that besides the CO and the Designated
- Persons, no other persons will be able to use it
“If the database is not established and entries in the software are not made before March 31, 2020, this can be considered as non-compliance of Regulation 3(5) of SEBI (PIT) Regulations, 2015 and Code of Conduct under the said Regulation. Further this can be reported as non-compliance by the Secretarial Auditors of the Company in their Secretarial Audit Report, and Annual Compliance Report to be submitted to the stock exchange by May 30, 2020. The same would form part of the Annual Report as well.”
Note: The preceding paragraph within quotes is from an answer provided to us by the firm of Secretarial Auditors which has audited InsiderLens, to confirm that our solution is compliant with the relevant SEBI Regulations.