Worried about complying with SEBI’s new regulations on insider trading?
You have good reason to be! Here’s why:

“With effect from April 01, 2019, “structured digital database”containing the names of such persons or entities as the case may be with whom information is shared under this regulation along with the Permanent Account Number or any other identifier authorized 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.”

Regulation 3(5) of SEBI (Prohibition of Insider Trading) Regulations, 2015, with Amendment Regulations announced in 2018.

Indian laws pertaining to the prohibition of insider trading have been evolving over the past few years. SEBI has issued substantive regulatory requirements relating to insider trading in its Prohibition of Insider Trading Regulations (2015) as quoted above. Further, these laws are only being strengthened in the subsequent Amendment Regulations, like the 2018 amendments. With SEBI’s increasing emphasis on enforcing its regulations, Companies now need to urgently review their compliance processes.

Given that SEBI now also has enhanced powers to take penal action against companies that do not comply, it would be prudent for senior stakeholders and company management to take serious note of the new requirements for compliance.

What do companies that don’t comply stand to lose?

SEBI’s approach to insider information is stringent. The onus lies on insiders to prove that there was no misuse of privileged information during any trade that they have carried out. Mere possession of inside information at the time of trading can be considered as a ground for regulatory violation.

Currently, Compliance Officer and Insiders need to watch out for two types of offences in this context:

  • Trading Offence : An insider (person with privileged information, not available to general public) may be liable to be booked for this offense if he or she has engaged in trading while in possession of UPSI (Undisclosed Price Sensitive Information)
  • Communication Offense : An insider may be liable to be booked for this offense if he or she is found to have disclosed UPSI to another individual, except for a legitimate purpose or as required for performance of duty or discharge of legal obligations.

Risk Mitigation & Assurance for Compliance Officer
The need of the hour

The need of the hour is an automated digital solution which will comply with SEBI’s guidelines for a structured digital database of persons with insider information, which also has adequate security controls to ensure non-tamperability. At Axar Digital Services, we have designed a robust and secure web-based Insider Trading Management System (ITMS) called InsiderLens, to help mitigate risk for Compliance Officers as well as Insiders and Company Stakeholders.

So, don’t waste any more time thinking about how to implement such a solution or the cost of deployment! What you need is:

  • Automated digital solution for structured digital database of persons with insider information.
  • Adequate security controls to ensure non-tamperability.
  • Keep track of UPSI with zero delay from the moment sensitive information is discussed by Designated Persons (DP’s).
  • Keep track of every single person exposed to UPSI DP’s as well as Connected Persons (CP’s) including Close Relations (CR’s) and Maintained Financial Relations (MFR’s).
  • Maintain track of any trading activity till time of public disclosure of the UPSI.
  • Flag off any mismatch in Benpos provided by the RTA.

How InsiderLens helps mitigate risk of regulatory action

InsiderLens is an insider trading compliance platform which can be used by Compliance Officer to effectively manage and regulate several processes which may impact fair trading. The use of an ITMS platform helps insulate compliance officer from legal or regulatory actions in case of violations by Insiders or Connected Persons. The platform ensures adherence to best trading practices and helps the Compliance Officer, as well as senior management, gain peace of mind in terms of compliance with regulations.

InsiderLens : Key Features

Alert for window closure to all Designated Persons

BenPos reconciliation

Recording of declarations by Designated Persons

Easy reporting of trades and disclosures

Timely alerts and reminders to prevent Insiders from trading in violation of the Regulations.

Keeping track of trade intimations and trade requests

Two-factor authentication for ensuring database security

Generates various reports such as Insider Report, Changes in Holding and Periodical Disclosure Report, Quarterly Monitoring Report and Deviation Report and more.

Security

  • UPSI data encryption & role-based authentication.
  • Role-based access control allows access to content only to authorized users
  • Idle session deletion & timeout
  • Ability to disallow multiple sessions
  • Administrators have strict control over creation of new users in the application

Hosting Options

On premise

Hosted in your in-house server, allowing you full control of your data. Involves investment in dedicated hardware, operating platform and database licenses.

On Cloud

Hosting on your preferred Cloud solution provider. Payment based on annual maintenance charges.

Understanding Regulatory Terminologies

Insider: A “designated person”, “connected person” or a person possessing or having access to Unpublished Price Sensitive Information (UPSI)

Designated Person: One who has been associated with the company in any capacity such as a director, promoter, officer or employee or in a contractual or fiduciary relationship with the company; and includes a list of “deemed designated persons”.

Connected Person: Any person who is or has been associated with the Company during six months prior, in any capacity and has direct or indirect access to Unpublished Price Sensitive Information (UPSI)

Unpublished Price Sensitive Information (UPSI): Any information relating to securities of a company that is not generally available and, upon being available, is likely to materially affect the price of the company’s securities. It includes matters such as financial results, dividends, changes in capital structure, significant corporate transactions and changes in key managerial personal.

Source: SEBI (Prohibition of Insider Trading) Regulations, 2015.

Best Practices for Insider Trading Prevention

  • Deploy best-in-class digital compliance platform specifically designed to ensure compliances with SEBI’s PIT regulations
  • Ensure that the digital platform is created by companies with proven knowledge and expertise in the field.
  • Create and distribute a stringent Code of Conduct for trading among employees, management and company stakeholders and designate an officer to ensure adherence to the Code of Conduct.
  • Tightly control information during sensitive windows like board meetings or company negotiations for major transactions.
  • Use trading plans and Chinese walls to defend against violations.
  • Prepare a plan of action to follow in case of leakage of sensitive information or violation of trading window closures, so that quick action can be taken.

Axar - the last word on Insider Trading Prevention

Insider trading prevention is crucial for the growth and development of the capital markets and at Axar Digital Services, we’re doing our best to help you comply with Prohibition of Insider Trading Regulations. We believe in helping clients to meet the highest possible standards of corporate governance and transparency in information disclosures. Relevant information about a company should be equally available to all participants in trading – this means that those with privileged information cannot be allowed to trade publicly before the information becomes available to all participants to allow for fair trading.

The Securities & Exchange Board of India (SEBI) regulates Insider Trading.

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

Please click this link

https://www.sebi.gov.in/legal/regulations/sep-2019/securities-and-exchange-board-of-india-prohibition-of-insider-trading-regulations-2015-last-amended-on-september-17-2019-_41717.html

to obtain the latest version of the complete and up-to-date text of the entire regulations.

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
  • Dividends
  • Changes in capital structure
  • Mergers, de-mergers, acquisitions, de-listings, disposals, expansion of business and such other transactions
  • Changes in key managerial personnel

Any employee with access to UPSI is a Designated Employee.

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
The Regulations require every issuer, i.e. listed company to create and maintain a Structured Digital Database (SDD). The Board of Directors of the Company is responsible for ensuring this. They can assign this task to the Company’s Compliance Officer (CO). Most often, the Company Secretary (CS) is the CO or Chief Compliance Officer.

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
To achieve the creation and maintenance of an SDD in the manner described above, there does not appear to be any other way except through a separate software solution.
As a normal excel sheet cannot meet the above specifications required by the PIT Regulations, there is no alternative to creating and maintaining this structured digital database, other than to maintain it in a separate software.

“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.

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