In this article, Sahali Manna of KIIT Law School discusses what measures must a listed company implement to ensure it complies with insider trading regulations.

“There is no other kind of trading in India, but the insider variety”– remarked a former president of the Bombay Stock Exchange in 1992.

“Insider trading has utterly no place in any fair-minded law-abiding economy” – Mr. Arthur Levitt in 1998 -chairman of Securities Exchange commission (‘SEC’)

And the entire debate of insider trading lies between these two quotes.

Understanding insider trading

By ‘insider’ we understand any connected person or a person who has the knowledge of unpublished price sensitive information. ‘Trading’ means to buy, sell, agree to buy, sell, deal in securities.

In simple terms, we can say dealing of any confidential information of a company which is not published or not in the public domain , i.e, unpublished price sensitive information, as, if it get published would have affected the securities price of a company and thus is highly discouraged by SEBI (Securities and  Exchange Board of India).

On January 15, 2015 the SEBI laid down the ‘ Prohibition of Insider Trading Regulation 2015’ to curb and prevent this malpractice. The regulations prescribed in the Insider Trading Regulations are based on the recommendation made by an 18 member committee constituted by SEBI under the chairmanship of Justice N.K Sodhi, which got approved by SEBI board in its meeting held on November 19, 2014.

As, insider trading trenches upon the faith of fair dealing, it is becoming a serious crime in the capital market. So, trading by an insider in the breach of trust and confidence is what  prohibited under the regulation.

Who comes under the restriction of insider trading and why?

In the case of . Chiarella v. US 455 US 222 the US court have mentioned that the insiders who are receiving UPSI by the virtue of their connection with the company for corporate purposes only such insiders owes a fiduciary duty to the company not to misuse or misappropriate such information for any unlawful purposes , that means by using such information one should not make out his secret profits or personal gains.

So, the corporate insiders are basically restricted directly or indirectly to use any price sensitive information which they naturally gets to know by holding important positions in their office.

It is natural psychology of human beings to take advantage and make profit from the possible resources so there is always some people who will try to take advantage of their positions and leak unpublished price sensitive information which will lead to grave compromise on fairness and equity. This will not only affect the performance of the company but will affect the integrity of the financial market. And the market will no more be attracted by the investors.

Making systematic gains from trading on the basis of material inside information, thereby turning an informational advantage into a pecuniary gain, is also a violation of the proprietary rights of the person owning such information. Information has value and can also generate value.

Measures can be adopted by a listed company to ensure it complies with the Insider trading regulation.

• As mentioned in regulation 4 of the Insider trading regulation  act that any person (insider) who deals in contravention of the provision of regulation 3 and 3A which says that any insider who in possession of any UPSI for his own or on behalf of any other person deals in the securities of a company listed or any other stock  exchange or communicates about it to any person except in ordinary course of business or profession or under any law shall be guilty of insider trading.

• As after the 2015 amendment the “connected person” got a much wider definition. It says a connected person is anyone who is or has during the six months prior to the act been associated with a company 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 employee. It also covers persons holding any position that allows access to unpublished price-sensitive information.

So before giving employment to the new employees and for the existing employees and to any other person who is in a fiduciary relation with the company ,the company must get a signature done on a legal paper stating that they will not disclose any confidential information of the company. So that a safeguard is instituted within the companies to deal with the inside information and insider trading.

• All the listed companies and organisations are associated with the securities market should frame and adopt a code of internal procedures and adopt a code of internal procedures and conduct , i.e, “code of conduct” which is to be framed on the line of “ Model code” which is specified in the schedule I of the Insider Trading Regulations, as laid down in regulation 12 of the Insider Trading Regulation. Also see here: Sample Code of Conduct
• The company may adopt  the Model Code as the code of conduct or frame a separate code of conduct without reducing the value of the requirements under the model code.
• The listed company should have to specify a trading period, that is the trading period, which the company can keep open or close as directed in the Part A of schedule 1.
• The company must ensure that the directors, officers and the employees should trade in the securities only when the trading window is opened not when it is closed.
• The company must take disciplinary actions against any director, officer or employee who communicates any information about security in contravention of the code of conduct. This may be in form of wage freeze, suspension or suspension on participation in any employee stock option plans in future. [ But this does not stop SEBI to take any action on that behalf]
• All the directors / officers / designated employees of the company and their dependents as defined by the company who intend to deal in the securities of the company (above a minimum threshold limit to be decided by the company) should obtain prior approval for the transaction in accordance with the procedures prescribed. And once the company grants the approval it has to be completed within one week from the date of the approval, failing which fresh approval will be required for the transaction.
• All the directors, officers, substantial shareholders of a listed company should make certain disclosures of their shareholding in the company
• Employees of a listed company should disclose the shares or voting rights held by him within two working days of receiving such shares or acquisition of share or voting rights.
• The  director or officer of a listed company must  disclose to the company in the prescribed format, the number of shares or voting rights held and positions taken in derivatives by such person and his dependents (as defined by the company), within 2 (two) working days of becoming a director or officer of the company. And if there is any further change in shareholding or voting rights of the director or the officer then it shall be communicated to the company by him as said in regulation 13(II).
• The company must mandate a person who is a promoter or a part of promoter group to disclose the share and number of voting right of the person within two days of becoming a part of that company. And in case of rise in his share or voting rights he has to disclose the total number of shares or voting rights held by him.
• Every listed company should disclose to all the respective stock exchange the above-discussed disclosures within 2 working days of receipt of such disclosure.
• All the listed companies should compulsory abide by the Code of corporate disclosure Practices included in Schedule II to the Insider Trading Regulations (“Disclosure Code”). Which prescribes mandatory standards and compliances to be adhered to / undertaken by.