This article is written by Aarohee, pursuing an Introductory Course: Legal Writing For Blogging, Paid Internships, Knowledge Management, Research And Editing Jobs from LawSikho.

Introduction

As recently reported on January 30th 2020, by The Economic Times, in the fiscal year 2019 – market regulator Securities and Exchange Board of India (SEBI) took 70 cases for investigation relating to insider trading. In the same year, based on the annual reports of SEBI, the term “Insider Trading” has occurred 35 times, which is the highest from the past three years reported cases of insider trading.  

In India, insider trading is predominantly regulated by SEBI which is a statutory body responsible for governing the trading in National stock exchange and Bombay stock exchange. The SEBI was established, under the act of Securities and Exchange Board of India, 1992 with an intention to regulate the capital market and to protect the retail investors of the market.

What is insider trading

The definition of “insider trading” has not been explicitly given under the SEBI’s Act of 2015, however on an equal footing, the term is defined under section 195 of The Companies Act 2013.  It says that “insider trading” is an act of buying and selling of stocks or securities such as (bonds or stock options) of a listed company, based on non-public information about the company.

To put it simply, let’s understand this concept through an example. Assume that there is a pharmaceutical company named “ABC” and a high level employee of that company overhears a meeting wherein the CEO is finalising a deal to announce a new vaccine within the next day or so and because of which the price of stocks are expected to go way up. Now, the employee decides to communicate this insider knowledge to one of his relatives, following which they both will buy 2000 shares of the company, and as a result both will make profit out of it through buying shares of the company before announcement and with the help of non-public information. Lastly, they will sell it when the price of shares will increase in the market after the release of such vaccines.

If we derive the understanding of the concept “insider trading” via this example, it merely formulates that the information which the employee overheard was sensitive information regarding the launch of a vaccine. Then, when he decided to disclose such sensitive information or non-public information to his relatives with an intention to make strange profits, it set an example of an illegal act of insider trading.  

Who is an insider

To determine the concept of “who is an insider”, let’s first understand the basic two terms of “connected person” and “unpublished price sensitive information (UPSI)”.

Now firstly, the act of insider trading is done by a person who is connected with the company and secondly, who also has access to the unpublished price sensitive information.

The SEBI regulation of (Prohibition to the insider trading) in its new regulation of 2015, have widened the scope of persons who will now fit in the ambit of the definition of “connected person” as compared with the former regulation of, 1992. Broadly putting, “connected person” is intended to be one:

1. Who is or has in any manner during the six months prior to the regulation is associated with the company; and
2. Holds/possesses any unpublished price sensitive information in relation to the company.

“Unpublished price sensitive information” under the regulation means; any information which is in relation to the company if it gets disclosed to the general public, will in some way materially affect the securities of a company in the stock market. 

Ordinarily, the following related information is included as UPSI but are not restricted to the same:

1. Financial results;
2. Dividends;
3. Changes in capital structure; 
4. Merger, de-merger, acquisition, delisting and expansions of business and such other transactions;
5. Change in key managerial personnel; and
6. Material events in accordance with the listing agreements.

Therefore, in order to finally unfold the understanding of “who is an insider”, based on the above two definitions, it means that a person who has some connection with the company and who also likely to be in possession or having access to information that is price sensitive in nature and, if such information gets published it will affect the pricing of the securities of the company. Hence, the person who is involved in the above-defined activity will be termed as an “INSIDER”.

Case laws: insider trading in financial institutions

• Bank of Rajasthan Insider Trading Case

In this case, SEBI under the provision of “insider trading” had imposed a penalty of Rs 3 crore on the former promoters of Bank of Rajasthan (BoR). According to the SEBI, while they conducted an investigation into the moment of BoR shares between May 7 and May 18 2010, which was the period prior to the announcement of an agreement between BoR and ICICI Bank Ltd merger, they witnessed a considerable price and volume moment. 

Moreover, in the process of investigation, it was noted by SEBI that one of the promoters Mr Rohit Gupta had traded in the shares of BoR in connivance with the other promoters and also, based on the unpublished price sensitive information with regard to negotiation of a merger happening between BoR and ICICI Bank Ltd.

By indulging in such activity of insider trading, the promoters of the BoR violated the provisions of insider trading norms of the Securities and Exchanges Board of India (SEBI).

As a conclusion, after considering all the facts and circumstances of the case, SEBI imposed a penalty of Rs 3 crore against all the promoters jointly and severally.

• IndiaBulls Insider trading case

In this case, Pia Johnson a member of the management committee of the board of directors of IndiaBulls Ventures Ltd (IVL) along with her husband Mehul Johnson has been charged for an alleged unlawful collective gains of Rs 87 Lakh in an insider trading case. 

According to the regulator, while Pia being the member of the board and Mehul as her husband both were thereby considered, as “insiders” under the Insider Trading Regulation, following which it was also observed that they both were reasonably expected to have access to the unpublished secret information to sale of India Land and Properties Ltd (ILPL) to IndiaBulls Infrastructure Ltd (IIL) and investment of IIL in ILPL. Wherein, ILPL was indirectly owned by IVL whereas IIL is a wholly-owned subsidiary of IndiaBulls Real Estate Ltd.

Lastly, Pia Johnson and Mehul were found guilty for wrongfully trading in the script of IVL when in possession of UPSI. The SEBI then ordered to impound Rs. 87.4 lakhs from both “jointly and severally” and directed banks and depositories that no debts shall be made, without permission of the regulator.

Compliances under insider trading regulation

SEBI regulation under chapter IV regulation 8 and 9, requires all the listed companies whose securities are listed on a stock exchange, shall formulate “codes” for regulating, monitoring and report trading for prevention of insider trading in the securities of a company and compliances under these should be observed by the designated persons.

Part A

Code of conduct (Chapter IV Regulation 9)

The key objective behind the code of conduct under the SEBI (PIT) regulation is to maintain the confidentiality of unpublished price sensitive information and to prevent misuse of such information. Such code of conduct is therefore deemed to be applicable to all the Insiders, designated persons of a company and their immediate relatives.

Further, in order to prevent insider trading in the securities of a company a code of conduct is to be mandatorily formulated by (a) Board of Directors of every listed company and (b) The Board of Directors or Heads of Organisation, of every other person who is required to handle UPSI in the course of business operations. Also, it to be ensured that there are timely initial disclosures of holding and continual disclosure of trading are made, under the SEBI (PIT) regulations and the same shall be maintained by the company for a minimum period of 5 years.

Following checklist is for a quick reference while formulating a code of conduct:

S NO.	DESCRIPTION OF REQUIREMENTS
1.	Introduction and objective of the code.
2.	Definitions clause (not restricted to the below mentioned) Explain basic terms e.g. Act, Board, Company (specify the name of the company) Compliance Officer Connected Person Designated Persons Directors Insider Immediate Relative Trading Day (Day on which the Stock Exchange is open for Trading ) Trading widow (Period of trading in the securities) UPSI (financial results, dividends, change in capital structure, mergers, de-mergers, acquisitions, delisting, disposals and expansion of business and such other transactions, changes in key managerial personnel etc.) Other transactions relating to material events as provided by listing agreement.
3.	Role and duties of a compliance officer.
4.	Restriction on communications and trading by insiders. Communication or procurement of UPSI. Responsibilities of persons who are in possession of UPSI. Chinese Walls procedures (A draft to manage confidential information and prevent its misuse).
5.	Trading when in possession of UPSI.
6.	Trading plan to trade in securities of the Company as per regulation 5 of SEBI regulation.
7.	Pre clearances of trade: Execute trades as per the code of conduct. Prior approval for the transactions, in case exceeds the set limit mentioned in the code of conduct. Trade only when “Trading Window”  is open.
8.	Code of fair disclosure as per schedule A (formulate and publish on its official website)- for details refer “PART B”.
9.	Disclosures of trading by insiders and other connected persons: Initial disclosures – Promoters, directors KMP’s to disclose the holding of securities of the company.   Continual disclosures – Promoters, Directors, Employees to disclose the number of such securities acquired or disposed, if the value exceeds 10lakh in a calendar quarter. Disclosures by other connected persons – Connected persons to disclose the holdings and trading in securities.
10.	Procedure and Penalty for contravention of the code of conduct.
10.	Penalty and punishment for inquiry in case any contravention gets suspected against the code of conduct.
11.	Inform SEBI in case of violation of SEBI regulation.

The sample of such one of code of conduct is —attachment.

Part B 

Code of fair disclosure (Chapter IV Regulation 8)

As mentioned above in the pointers of code of conduct, as far as the requirement of disclosure is concerned, the PIT regulation mandates every listed company to prepare a code of practice and procedure to make certain fair disclosure of the unpublished price sensitive information relating to the company and its securities.

To adhere with such mandate, the board of directors of such companies are required to formulate a “code of fair disclosure” and publish it on the official website of the company, following which later in case of any amendments happening in the code it should be directly intimated to all the stock exchanges where the securities of the concerned company is listed.

The sample of such one of code of fair disclosure is in clause 13 of —attachment.

Part C

Monitoring of compliances

• Compliance officer

1. The compliance officer will have to ensure that policies which are formulated by the listed company i.e. “code of fair disclosure” under regulation 8 and “code of practice” as per regulation 9, is been effectively complied.
2. Ensure that disclosures made by directors, designated persons, promoters and members of the promoter group are maintained.
3. Maintain records of Pre-Clearance, closure of trading window and disclosures to the stock exchanges.
4. Monitoring implementation of Trading Plans.
5. Periodic reporting to the board/ officers of the company.
6. Reporting to SEBI, regarding violation, if any, of the Insider Trading Regulations.

• Promoter, directors, key managerial person (kmps) and other designated persons

1. Make initial, one-time, periodic, continual and event based disclosures as prescribed.
2. Adhere the company’s code of fair disclosure and company’s code of conduct.
3. Take appropriate steps before and after sharing the unpublished price sensitive information (UPSI).

• Board of directors
• Formulate Code of Fair disclosure and Conduct and Code of Conduct for Prohibition of Insider Trading. 
• Formulate procedure and policies for inquiry in case of the unpublished price sensitive information (UPSI) gets disclosed. See attachment.

1. Monitor and report trading by its employees and other connected persons towards achieving the compliances under the regulation.
2. Ensure to comply with certain responsibilities or obligations assigned to the Board of Directors under the SEBI regulation.

Penalties for non-compliance under the regulation

Talking about the penalties, in case there will be non-compliances to any of the provisions of insider trading norms, the following consequences could be as imposed:

1. As per sec 195 of the Companies Act 2013, anyone who would be encountered for violating this provision of the act will be publishable with imprisonment for a term that may be extended to 5 years or with fine which will not be less than 5 lakh but, can also be extended to 25 crores or three times the profit earned through the act of insider trading. 
2. It is noteworthy to mention, that there is no independent regulation prescribed under the SEBI (PIT) regulation 2015, however, the penalty which has been stipulated under the Securities and Exchange Board of India Act, 1992 will be applicable.

Under section 15 (G) of SEBI Act, 1992, it claims that any insider:

1. Who for himself or for others, if deals in the securities of the listed company based on the UPSI; or
2. Communicated UPSI to any person, apart from as required in the ordinary course of business or under any law; or
3. Advices or secures for any other person to trade in securities or any body corporate based on the UPSI;

He shall be liable to a penalty which will not be less than 10 lakh but which can be extended to 25 crores or three times the amount of profits made out of insider trading.

Conclusion

As a final point, SEBI over the years has ensured to consider every possible method of application of security regulation and further, has developed its power of enforcement under the rule of law. As an effect of such responsible implementation, SEBI has emerged to be a powerful regulator to suppress the insider trading operations in India. Additionally, SEBI has established the Office of Informant Protection (OPI) as an independent office for receiving and processing Voluntarily Information Disclosures Form (VID form).

Hence, to achieve the utmost objective of the regulation or also to control the number of emerging new cases, SEBI must consider initiating prompt actions against anyone who infringes the set norms. Lastly, companies should take adequate measures as provided by SEBI to quash insider trading within their securities. As it is correctly stated by – James Surowiecki “If companies tell us more, insider trading will be worthless”.

References

1. https://www.sebi.gov.in/legal/regulations/jan-2015/sebi-prohibition-of-insider-trading-r gulations-2015-issued-on-15-jan-2015-_28884.html
2. https://www.icsi.edu/media/webmodules/linksofweeks/Report%20on%20Insider%20Trading%20.pdf
3. https://www.indiacode.nic.in/handle/123456789/2114?view_type=browse&sam_ hand l e=123456789/1362
4. https://www.mondaq.com/india/corporate-governance/19531/prevention-of-insider-tr a ding-and-corporate-good-governance

---

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join: