NEW INSIDER TRADING NORMS: “NOBODY” WOULD BE SPARED

It seems that the Securities & Exchange Board of India (SEBI) has made the right arrangements to curb the menace of insider trading. In fact, it has already implemented the new insider trading norm under SEBI (Prohibition of Insider Trading) Regulations, 2015 from May 15, which it notified in January this year. As per these norms, all the listed companies have to give full information regarding the details of stock and securities possessed by promoters, key management people and directors. It also includes their relatives and persons that are “connected” with them. Interestingly, this disclosure should be made about all the securities, whether they are possessed before and after assuming that role and office.

Actually these new norms have been conceived by the apex market regulator due to cases of insider trading activity not only in the smaller companies but in some big companies too. For instance, recently the chief of Murugappa Group was charged for insider trading. Under the new norms “no insider shall communicate, provide, or allow access to any unpublished price sensitive information relating to a company or securities listed or proposed to be listed to any insiders except where such communication is in furtherance of legitimate purposes.” This clearly sounds quite strict and SEBI’s intention to curb the insider trading menace is quite obvious by this definition. The new norm clearly says that no insider shall trade in securities that are listed or proposed to be listed on the stock exchange when in possession of unpublished price sensitive information.

Companies to Formulate Code of Conduct

Under the new norms every company has to formulate a Code of Conduct and Code of Fair Disclosure and would also have to disclose them in an appropriate manner. These codes are in relation to practices and procedures followed by the company while handling and fairly disclosing “unpublished price sensitive information” (UPSI). As per the new norms, companies must deal with only those market intermediaries and participants which have formulated such codes of conduct and should handle UPSI with them only.

As per the Code of Conduct, all the information regarding stocks held by promoters, key management, relatives etc. and any transaction made by them should be disclosed in a prescribed format and anyone should have access to that information and code of conduct on the company’s website itself. Companies are also required to appoint a compliance officer for this code of conduct. On the checking part, stock exchanges have been empowered to put in place appropriate systems to check the adherence of these norms and their violations.

It is important to note that all companies are now required to disclose the details of promoters, directors, etc., including name, address, PAN number and type of securities held pre and post-shareholding in the firm, mode of acquisition, value of such securities, etc. Also, the code of conduct should clearly demonstrate the process to regulate, monitor and report trading by the company’s employees and other connected persons as per the norms. Legal experts, though in favour of the norms, are concerned about the applicability aspect.

According to chartered accountant Shivkant Vaish, the SEBI norms are so stringent that people person like internal auditors, accounting consultants, law firms, analysts, consultants and other capital market participants who are dealing with the company would also be required to have such codes of conduct as formulated by the companies. “It clearly means that connected persons who don’t normally operate in capital markets also have to formulate code of conduct, which is quite difficult for them as a compliance officer should also be deputed by them,” Shivkant points out.

Defining the Connected Person

As per the definition of a connected person, this includes any person who is or has during the six months prior to the concerned Act been associated with the company, including through frequent communication with its officers or as a director, officer, vendor and others with an access to unpublished price sensitive information. The definition also gives an exhaustive list of persons coming within the purview of ‘connected person’ and all these categories of persons would be deemed as connected person unless it is established to the contrary. On the other hand, SEBI (Prohibition of Insider Trading) Regulations, 2015 defines an insider as any “connected person” or “any person” in possession of or having access to unpublished price sensitive information.

“Going by the definition of a connected person, virtually everybody has been included in the term, be it vendors, bankers, other participants, and even journalists,” informs Dhruv Agarwal, a senior financial officer of a listed company. As per the norm, the scope of an ‘insider’ has been widened enormously and any person, whether or not related to the company, may come within the purview of the regulations if he or she is expected to have access or possess unpublished price sensitive information. This clearly means that connected person would also include holding or subsidiary or even associate company, mutual fund, clearing house, stock exchange official, bankers, immediate relatives, etc.

“This is a real challenge for companies’ auditors as almost all the third party universe has been covered under this definition and it would be very difficult to check these participants and comply with the code of conduct,” Dhruv adds. On the other hand, these norms are also applicable to all type of securities, listed or proposed, to be listed at the stock exchanges and unpublished price sensitive information could be related to any such security. The norm has retained strict penal action for illicit insider trading transaction as were in SEBI (Prohibition of Insider Trading) Regulations, 1992. 

Top Companies Follow Suit

Soon after the new insider trading norm coming into force, top corporates have followed suit in framing Code of Conduct and Code of Fair Disclosure. Companies like HDFC, Yes Bank, Bajaj Auto, Jubilant Life Sciences, Ashok Leyland, JK Lakshmi Cement, BEML, Aurobindo Pharma etc. didn’t waste much time to formulate and upload Code of Conduct on their websites. Many companies are now in the process of fulfilling all the requirements of the new insider trading norm.

They have also formulated the practices and procedures followed for fair disclosure and handling of unpublished price sensitive information and initiated the process of appointing compliance officers to adhere to these norms. Experts are of the opinion that these norms will ensure greater transparency in the capital markets and help in ensuring genuine trades, while curbing illicit trades.

What Does Sensitive Information Mean?

The new norm tries to define ‘unpublished price sensitive information’ (UPSI) in a comprehensive manner to include various types of information which would be sensitive for the company on various financial parameters. However, as per experts, there is no clarity about whether employee stock option (ESOP) has also been covered by these new norms. As per the definition, this pertains to any information about the company or security which is generally not available in the public domain but if it becomes available is likely to materially affect the price of the securities. These kinds of information would usually be related to:
(a) Financial results
(b) Dividends
(c) Change in capital structure
(d) Mergers, de-mergers, acquisitions, delistings, disposals and expansion of business and such other transactions
(e) Changes in key managerial personnel
(f) Material events in accordance with the listing agreement.

If any insider possesses any price sensitive information then he or she would be subject to trading window restriction, and the timing for re-opening of this trading window shall be determined by the compliance officer taking into account various factors. This re-opening of the trading window shouldn’t be earlier than 48 hours after that information comes into the public domain and becomes generally available. The trading window shall also be applicable to any person having contractual or fiduciary relation with the company, such as auditors, accountancy firms, law firms, analysts, consultants, etc., assisting or advising the company.