Prohibition of Insider Trading - Management, Company Law | Company Law - B Com PDF Download

SEBI (Prohibition of Insider Trading) Regulations, 2015

These regulations have been issued in repeal of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015. These are effective from 15th January, 2015. These regulations have enjoined a role upon the “Compliance Officer” of the company to ensure compliance with the requirements. Some of the important definitions are :

Regulation 2 (d) : “Connected Person”

“Connected Person” means (i)any person who is or has during the six months prior to the concerned act been associated with a company, directly or indirectly, in any capacity including by reason of frequent communication with its officers or by being in any contractual, fiduciary or employment relationship or by being a director, officer or an employee of the company or holds any position including a professional or business relationship between himself and the company whether temporary or permanent, that allows such person, directly or indirectly, access to unpublished price sensitive information or is reasonably expected to allow such access.

Without prejudice to the generality of the foregoing, the persons falling within the following categories shall be deemed to be connected persons unless the contrary is established,:

1. An immediate relative of connected persons specified in clause (i); or
2. A holding company or associate company or subsidiary company; or
3. An intermediary as specified in section 12 of the Act or an employee or director thereof; or
4. An investment company, trustee company, asset management company or an employee or director thereof; or
5. An official of a stock exchange or of clearing house or corporation; or
6. A member of board of trustees of a mutual fund or a member of the board of directors of the asset management company of a mutual fund or is an employee thereof; or
7. A member of the board of directors or an employee, of a public financial institution as defined in section 2 (72) of the Companies Act, 2013; or
8. An official or an employee of a self-regulatory organization recognised or authorized by the Board; or
9. A banker of the company; or
10. A concern, firm, trust, Hindu undivided family, company or association of persons wherein a director of a company or his immediate relative or banker of the company, has more than ten per cent. of the holding or interest;

Regulation 2(g): “Insider” 

“Insider” means any person who is:

(i) A connected person; or

(ii) in possession of or having access to unpublished price sensitive information.

Regulation 2(n): “Unpublished price sensitive information”

“unpublished price sensitive information" means any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities and shall, ordinarily including but not restricted to, information relating to the following:

(i) financial results;

(ii) dividends;

(iii) change in capital structure;

(iv) mergers, de-mergers, acquisitions, delistings, disposals and expansion of business and such other transactions;

(v) changes in key managerial personnel; and

(vi) material events in accordance with the listing agreement.

It must be understood that the definition of “connected person” as above brings into its ambit the relatives as well as a host of other persons and the persons in the know of things inside the company are required to be quite careful about divulging of information which may turn price sensitive if it gets to a market intermediary. While the regulation 3(1) is specific that no insider shall communicate, provide or allow access to any unpublished price sensitive information 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, performance of duties or discharge of legal obligations, regulation 3(2) states that no person shall procure or cause the communication by any insider of unpublished price sensitive information. An explanatory note under sub-regulation (2) states that inducement and procurement of unpublished price sensitive information not in furtherance of one’s legitimate duties and discharge of obligations would be illegal under this provision.

The Board of Directors of the company are required to get executed agreements to ensure confidentiality and non-disclosure obligations on the part of functionaries who handle price sensitive information and when in possession of such information. Regulation 4 states that when in possession of Unpublished price sensitive information, no insider shall trade in securities that are listed or proposed to be listed on a stock exchange subject to certain exceptions where the I annocence may be proved by the insider. In the case of connected persons, the onus of establishing that they were not in possession of unpublished price sensitive information shall be upon them and the Boards of Companies are expected to specify standards as may be deemed necessary.

An insider is entitled to formulate a trading plan and present it to the compliance officer for approval and public disclosure pursuant to which trades may be carried out on his behalf in accordance with such plan. The same has to be in compliance with sub-regulation (2) of Regulation 5. The trading plan once approved by the compliance officer shall be irrevocable and and insider shall mandatorily have to implement the plan. Upon approval of the trading plan, the compliance officer shall notify the plan to the stock exchanges on which the securities are listed. Initial disclosures have been prescribed at the time of notification of the regulations and further continual disclosures have also been prescribed within 2 trading days if the value of the securities traded whether in one transaction or a series of transactions over a calender quarter aggregating to a value in excess of Rs Ten lakhs or such other value as may be specified. This requirement is applicable to every promoter, key managerial personnel and director of every company whose securities are listed on any recognized stock exchange and as and when a new key managerial personnel or director takes over. The companies are also required to disclose the same within 2 trading days of receipt of disclosure.

The Board of Directors of a listed company are required to formulate and publish a code of fair disclosure containing the practices and procedures in the company’s official website. The Board of Directors of a market intermediary too shall formulate a code of conduct for its employees to regulate, monitor and report trading towards achieving compliance with the regulations. The market intermediaries too shall have a compliance despite their being not listed companies.