Insider Trading Regulations: SEBI’s Proposals at a Glance

On November 24, 2023, the Securities and Exchange Board of India (SEBI) released a consultation paper with proposals to facilitate the adoption of trading plans (TPs) by insiders (such as individuals who are part of senior management or key managerial personnel, etc.) who may be perpetually in possession of Unpublished Price Sensitive Information (UPSI).

The Board considered it necessary to bring in changes to the 2015 Regulations, in light of the submission of a meagre number of TPs (i.e., 30) by insiders to stock exchanges over the last five years. In its report, the Working Group constituted by SEBI has zeroed in on existing provisions that deter insiders from adopting TPs and suggested certain amendments to the SEBI (Prohibition of Insider Trading) Regulations, 2015.

The recommendations contained in the consultation paper are as follows: –

  • Cool-off period to be brought down

Presently, a TP can be executed only after 6 months from the date of its public disclosure. However, market conditions while implementing the TP may be highly distinct from the time it was formulated, therefore, the consultation paper proposes to reduce the cool-off period, i.e., the period between the public disclosure of the TP and its execution, from 6 months to 4 months.

  • Reduction of the minimum coverage period

The consultation paper envisages reducing the minimum period of trading from 12 months to 2 months, as market uncertainty makes it difficult for insiders to plan 12 months in advance.

  • Removal of the black-out period requirement

Another major amendment proposed is the removal of the black-out period requirement. As per Regulation 5(2)(ii) of the 2015 Regulations, a TP should “not entail trading for the period between the twentieth trading day prior to the last day of any financial period for which results are required to be announced by the issuer of the securities and the second trading day after the disclosure of such financial results”. SEBI noted in its consultation paper that such a restriction considerably reduces the number of trading days available in the year for trading using a TP. Accordingly, the consultation paper has proposed that this provision be deleted in order to enable flexibility to execute trades.

  • Insiders can set price limits for trades

As per the draft amendments, an insider would be eligible to set price limits during the formulation of a TP. This is to protect insiders from the adverse effects of fluctuations in the price of securities, which would need to be within +/-20% of the closing price on the date of submission of the TP. In case of price fluctuations beyond the limit, the trade cannot be executed, i.e., an insider with a TP cannot go beyond the limit.

The limits so specified have to be within the stipulated range to ensure that insiders don’t misuse the provision and set unrealistic price limits to influence market participants.

  • Contra-trade restrictions to apply to trades executed under TP

Noting that the necessity to carry out contra-trade within a short period of time arises only on account of personal exigencies which cannot be planned in advance through TPs, it has been proposed to withdraw the exemption granted in this regard.

  • Disclosure of TP

  1. After approval of TP, the compliance officer has to notify the plan to stock exchanges (on which the securities are listed) within 2 days. Currently, there is no time limit in place for the same.
  2. The Working Group has further proposed certain suggestions to protect the privacy of insiders by masking their personal details while disclosing the TP to stock exchanges, as it may potentially lead to misuse or abuse of TPs by other insiders. Three such alternatives have been put forward with respect to the furnishing of personal details of insiders such as name, designation and PAN – a) masking of personal details b) continuing the existing procedure c) making two separate disclosures; one containing the full disclosure to be kept confidential by stock exchanges and the other without personal details to be publicly made available. A common reference number with a time stamp is proposed to be added on filings which will act as a unique identifier to prevent any possible misuse arising from masking of names from the public.
  3. Additionally, it is recommended that a format for reporting details of TP be prepared in consultation with market participants.

Remarks

Overall, the proposals suggested in the consultation paper are broadly positive, since it appears that SEBI has received and appreciated the challenges faced by insiders using trading plans. We will need to wait to see what public comments are received, and whether SEBI implements these proposed changes by notifying amendments to the SEBI (Prohibition of Insider Trading) Regulations soon.

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Photo by uschools on Canva 

As per the draft amendments, an insider would be eligible to set price limits during the formulation of a TP. This is to protect insiders from the adverse effects of fluctuations in the price of securities, which would need to be within +/-20% of the closing price on the date of submission of the TP. In case of price fluctuations beyond the limit, the trade cannot be executed, i.e., an insider with a TP cannot go beyond the limit.

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SEBI’s Insider Trading Tentacles Reach (Overreach) “fiduciaries”

Recurrent cases of insider trading in eminent corporates has necessitated periodic updation of regulations to meet the needs of the ever-evolving market. The social culture of casually discussing or watsapping Unpublished Price Sensitive Information (UPSI), that is not only difficult to track but also poses evidentiary challenge in the court, needed immediate overhauling. Further, placing all the investors trading in the secondary market on equal footing to ensure symmetrical flow of information among them is exemplar of the non-partisan philosophy that the regulatory authority strives to establish. Towards this objective, the Securities and Exchange Board of India (SEBI), on the recommendations of Shri T. K. Vishwanathan’s Committee on Fair Market Conduct, introduced a myriad of changes through an amendment to the SEBI (Prohibition of Insider Trading) Regulations, 2015 which came into effect in April 2019. Notwithstanding the earnest intention behind the modifications, the amendments are not infallible and could encounter a lot of implementation challenge.  

Major Changes brought about by the amendments to the SEBI Insider Trading Regulations: 

 
Fiduciaries: 

The amendments have brought in various new concepts affecting entities such as law firms, auditors, consultants etc. who, by the very nature of the work carried on for listed company, either get access to UPSI or expressly receive them for specified purposes. UPSI is not generally available to the public and if exposed, would materially affect the price of the securities being traded in the secondary market. Therefore, the role of these entities in stifling leakages was considered crucial and nomenclated as fiduciaries under these amendments through the following concepts: 

Connected Person: 

Individuals associated with the work related to listed company in the last six months, directly or indirectly in any capacity, are considered insiders. The fiduciaries i.e. professional firms such as auditors, accountancy firms, law firms, analysts, insolvency professional entities, consultants, banks etc., assisting or advising listed companies are also covered under the definition of “insider” as connected persons.  

Legitimate purposes: 

Although the regulations allow the use of USPI for legitimate purposes, such as in furtherance of the scope of work assigned by listed company, it cannot be communicated to any other person including other connected persons who are not part of the assignment. The information should be shared only on a need to know basis within the organization.   

Duty to frame code of conduct and recognize Designated Persons: 

The fiduciaries are required to frame code of conduct for regulating, monitoring and reporting trading by Designated Persons (one who is in possession of UPSI or likely to have access to UPSI) and to appoint a compliance officer to implement such code of conduct.  

The amendments also envisage to include immediate relatives of Designated Persons and persons having financial relationship with Designated Persons as insiders requiring compliance with the code of conduct.  Generally, they include partners, retainers at all levels, support staff such as IT Staff and Secretaries and those having access to UPSI.   

Steps envisaged for prevention of insider trading by fiduciaries: 
  • Client information of Listed Companies have to be shared only on a need to know basis within the organization. Adequate and effective system of internal controls must be put in place to ensure compliance with the requirements given under the regulations to prevent insider trading. 
  • A code of conduct has to be framed and a compliance officer has to be appointed who would identify the Designated persons and implement the code of conduct. 
  • Details, including cell numbers of the insiders (Designated person, his relatives and individuals with whom he shares material financial relationship) must be maintained in a database. Further, past employment and educational institutions from where they passed out and their PAN should also be collected. Management must ensure maintenance of structured digital database for the same. 
  • A list of securities as a “restricted list” which shall be used as the basis for approving or rejecting applications for pre-clearance of trades must be maintained confidentially by the compliance officer. 
  • The management, in consultation with compliance officer, is required to determine the threshold value within which Designated persons need not take pre-clearance for executing trades. Any trading over the threshold would require pre-clearance from the compliance officer. 
  • The code of conduct shall stipulate the sanctions and disciplinary actions, including wage freeze, suspension, recovery, clawback etc. that may be imposed for violation of the same. 
  • Violations of insider trading needs to be reported to SEBI. 
  • Individuals must be sensitized regarding the duties and responsibilities attached to the receipt of inside information, and the liability that attaches to misuse or unwarranted use of such information. 
  • On an annual basis, management has to review the implementation of the code of conduct and make changes if necessary.  

 

Unsettled Issues Post-Amendment to the Insider Trading Regulations:

 

  1. Collection of details of past employment, educational institutions from where they passed out and PAN Details relating to fiduciaries and their immediate relatives. 

 

Collection by the compliance officer of a listed company or fiduciary, the details such as phone numbers, past employment, educational institutions from where they passed out and PAN of not only Designated Person but also their immediate relatives is a compromise of the privacy rights of individuals. It is empowering a company official to collect personal details of people who are not even remotely associated or aware of the UPSI or the work carried on by the Designated Persons. Herein “Immediate relative” means a spouse of a person, and includes parent, sibling, and child of such person or of the spouse, any of whom is either dependent financially on such person or consults such person in taking decisions relating to trading in securities. The data that compliance officer is collecting is personal data of many and purpose of such collection will not make much difference in compliance of insider trading law. If a relative denies sharing personal information, what should compliance officer do is also not clear. 

The Listed Companies are expected to sign confidentiality agreement with fiduciary and whereby it can bind fiduciaries with their code of conduct. SEBI also has the power to call for data while investigating a case of insider trading. While all these powers are available additionally empowering compliance officers to collect personal data and private information of relatives, without even having an allegation of commission of an offence is unjustified. Moreover, it seems SEBI has not made any prescriptions to prevent misuse of such personal data at the hands of a listed company.  

 

2. The regulations allow the compliance officer of a listed company to specify those working in a fiduciary as Designated persons under their code of conduct and make their code of conduct applicable. Thus, there is no requirement of a separate code of conduct, and this amendment is an attempt to overreach its powers on people over whom SEBI has no jurisdiction. 

 

The amendments impose overlapping obligations on listed companies and fiduciaries to frame and implement a code of conduct. A listed company would be in a better position to analyze and make the code of conduct applicable to partners, employees or persons who are given access to UPSI. It also creates ambiguity especially if the Designated persons, thresholds, pre-clearance requirements as recognized under the listed company’s code of conduct is different from those prescribed by fiduciaries in their code of conduct. 

Therefore, fiduciaries should not be placed at same footing as that of listed company or intermediary who access UPSI. This is the approach taken by the Vishwanathan committee as well.  Fiduciaries are not regulated under the SEBI Act, 1992. They include persons associated with the securities market within the meaning of Section 11B of the SEBI Act, 1992 and such association is only while handling UPSI received from a listed company or while carrying on statutory functions in connection with securities market. Thus, requiring fiduciaries to frame their own code of conduct and making all requirements of code of conduct as in the same manner that applicable to an intermediary seems to be an attempt to overreach by SEBI and indirectly bring all consulting firms (lawyers, accountants, management consultants) under its jurisdiction.   

Thus, it is inappropriate to have a separate code of conduct for regulating trading of Designated persons of fiduciary. Similarly, requiring private information of immediate relatives of fiduciaries to be procured by listed company or fiduciary is in violation of privacy rights of such persons. These are clear case of overreach of powers by SEBI.  

 

 

Image Credits Photo by nrd on Unsplash

 

It is inappropriate to have a separate code of conduct for regulating trading of Designated persons of fiduciary. Similarly, requiring private information of immediate relatives of fiduciaries to be procured by the listed companies or fiduciary is in violation of the privacy rights of such persons.

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