Rights of insiders
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In this article, Neha Verma, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses the rights of insiders to trade in their company’s securities.

Introduction

Insider trading is a malpractice by which officers or employees of the Company in possession of or having access to unpublished price sensitive information of the Company’s securities misuse such information for trading or dealing in those securities for their personal advantage. Directors, officers, agents or employees of the Company gain unfair advantage over other investors dealing in the Company’s securities by utilizing non-public price sensitive information in their possession for their personal gains.

The Securities Exchange Board of India (SEBI) formulated SEBI (Insider Trading) Regulations, 1992 to curb the menace of insider trading of Companies securities. In May 2015, SEBI announced and implemented SEBI (Prohibition of Insider Trading) Regulations, 2015 (“the SEBI regulations) and repealed the SEBI (Insider Trading) Regulations, 1992. These regulations have been implemented with a view to monitor and manage the trading in securities of a Company by its directors, employees and other connected persons.

It is not possible to completely prohibit insiders from dealing in the securities of the Company therefore the SEBI regulations have provided the insiders a right to trade in their Company’s securities only under certain circumstances and after carrying out all compliances in this regard. The insiders are also required to make timely disclosures of their holding, trading and dealing in securities of the Company.

Definitions

Insider Trading

The definition of “Insider Trading” has not been provided under the SEBI (Prohibition of Insider Trading) Regulations, 2015. However, as per Section 195 of the Companies Act, 2013, the term “Insider Trading” can be defined as:

  • an act of subscribing, buying, selling, dealing or agreeing to subscribe, buy, sell or deal in any securities by any director or key managerial personnel or any other officer of a company either as principal or agent if such director or key managerial personnel or any other officer of the company is reasonably expected to have access to any non-public price sensitive information in respect of securities of company; or

  1. an act of counselling about procuring or communicating directly or indirectly any non-public price-sensitive information to any person.

Who is an insider?

Insider trading is basically undertaken by the people connected with the Company and privy to non-public information which is critical for taking investment decisions in the securities of the Company. To better understand the concept of insider trading, the definitions provided under SEBI (Prohibition of Insider Trading) Regulations, 2015 have been described below.

As per the SEBI (Prohibition of Insider Trading) Regulations, 2015, “insider” is a person who is:

  1. a connected person as defined in SEBI regulations, or  
  2. in possession of or has access to unpublished price sensitive information i.e. information not generally available to the public and is important for taking investment or trading decisions

Simply put, a connected person is any person associated with the company, directly or indirectly who has

  • Regular communication with officers/employees of the company;
  • Has access to unpublished price sensitive information.

Categories of ‘connected persons’

  1. An immediate relative of a Connected person; or
  2. A subsidiary company or holding company or associate Company; or
  3. An asset management company, trustee company or an investment company or a director or an employee thereof; or
  4. An official of a clearing house or corporation or an official of a stock exchange; or
  5. A banker of the Company; or
  6. An employee or official of a self-regulatory organization authorized or recognized by the Board; or
  7. A member of the Board or an employee of a public financial institution; or
  8. A member of the board of the asset management company of a mutual fund or is an employee thereof or a member of board of trustees of a mutual fund; or
  9. Any trust, Hindu Undivided family, concern, company, firm or association of persons wherein a director of Company or his immediate relative or banker of the Company has interest or holding of more than ten per cent; or
  10. An intermediary or a director or an employee of the intermediary of the Company.

What is unpublished price sensitive information?

Unpublished Price Sensitive Information can be defined as

any information which directly or indirectly relates to a Company or its securities and which if generally available has the power to materially affect the price of the Company’s securities.

Such information is not generally available to the public.

Unpublished price sensitive information is mostly information of a Company relating to

  • financial results,
  • dividend,
  • changes in key managerial personnel,
  • changes in capital structure,
  • any acquisitions, mergers, de-mergers, disposal, delisting and expansion of business and
  • other such transactions and also includes information related to material events as provided in the listing Agreement.

Rights of Insider to Trade in Stocks

Insider trading is prohibited as per SEBI regulations and Companies Act, 2013. However there are certain circumstances where insiders are legally allowed to trade in the securities of their Company.

Regulation 4 of SEBI regulations permits insider trading in securities of the Company, in the following conditions:

  • Inter se Transfer of Securities between Promoters

The trading or dealing in securities is an off-market inter se transfer of securities between promoters who were in possession of unpublished price sensitive information and the transaction carried out by them was an informed and conscious trading decision which did not breach regulation 3 of the SEBI regulations;

  • Trading by Non-individual Insiders

In the event insider trading is carried out by non-individual insiders then they have to prove that:

  1. The individuals who took the trading decisions were not in possession of unpublished price sensitive information when they took the decision to trade in securities of the Company and these trading individuals were different from individuals who were in possession of unpublished price sensitive information; and
  2. suitable and sufficient arrangements were in place to ensure that the insider trading regulations are not violated and the unpublished price sensitive information is not transferred or disclosed by the individuals in possession of such information to individuals who take trading decisions and there is no evidence to establish breach of these arrangements;
  3. Trading or dealing in securities was pursuant to a trading plan formed in accordance with regulation 5 of SEBI regulations as explained hereinafter.

Trading Plan

Regulation 5 of SEBI regulations states that an insider has the right to formulate a trading plan to trade in securities of the Company provided he obtains the approval of the Compliance officer for such trading and he has made public disclosure of the trading plan before carrying out trading in such securities in accordance to his trading plan.

The Trading plan as set up by the insider shall have to comply with the following:

  1. Trading on behalf of the insider pursuant to such trading plan can commence only after lapse of 6 months from public disclosure of such trading plan. However, an insider may become liable if it is proved that he was in possession of non-public price sensitive information at the time of formulation of trading plan and implementation of the same;
  2. Trading plan shall not entail trading in securities for the period of twenty days prior to the last day of any financial year for which the Company’s financial results are to be declared and second trading day after disclosure of financial results;
  3. It shall entail trading for a period of at least twelve months;
  4. not involve overlap of any period for which another trading plan already exists;
  5. it should not involve trading or dealing in securities for market abuse; and
  6. it shall provide for nature of trade, value of trades to be effected or the number of securities to be traded including intervals at or dates on which such trades shall be effected.

However, an existence of trading plan does not ensure complete immunity from insider trading proceedings or proceedings for market abuse if it can be proved that unpublished price sensitive information was deliberately made generally available to take advantage of a trading plan already in existence.

Approval of Trading Plan

The trading plan as formulated by an insider needs to be submitted to the Compliance Officer of the Company for review and approval. After a trading plan has been submitted for approval then it becomes the duty of the Compliance Officer to peruse and review the trading plan to assess whether the trading plan is in compliance of SEBI (Prohibition of Insider Trading) regulations or not. The Compliance officer also has the authority to ask for any express undertakings from the insider as may be required for the assessment of trading plan and to approve and monitor the implementation of the plan.

After the trading plan is approved by the Compliance Officer then it becomes irrevocable and the insider has to mandatorily implement the plan without either deviating from the plan or trading in securities outside the scope of the trading plan. However, the trading plan shall not commence if at the time of formulation of plan the insider was in possession of unpublished price sensitive information and such information has not become generally available at the time of commencement of implementation of plan and the Compliance Officer shall ensure that such commencement is deferred until the information becomes generally available so as to avoid violation of Regulation 4(1) of SEBI regulations.

It is the duty of the Compliance officer to inform the stock exchanges where the securities of the Company are listed as soon as approval to any trading plan is granted.

Disclosures of Trading by Insiders

SEBI regulation requires insiders to make disclosures about the securities traded by them. Such disclosures shall also include disclosures of trading by an insider’s immediate relatives and trading by any other person from whom such person takes trading decisions.

The disclosures of trading in securities shall also include trading in derivatives of the securities provided that trading in derivatives of securities is permitted under any law for the time being in force. The traded value of derivatives shall be taken into account for the purpose of disclosures under the regulations.

Any aforesaid disclosures received by the Company shall be maintained by it for a minimum period of five years from the receipt of such disclosures in a format as prescribed by SEBI regulations.  

Code of Fair Disclosure

The Board of directors of each and every Company whose securities are listed on a stock exchange are required to formulate and publish on its website a code of practices and procedures for fair disclosures of unpublished price sensitive information that it intends to follow for complying with SEBI regulations made in this regard. Every such code of practices and procedures for fair disclosures of unpublished price sensitive information as formulated by the Board should be immediately notified to the stock exchange where the securities of the Company are listed.

Code of Conduct

The Board of directors of every market intermediary and listed Company is required to devise a code of conduct to regulate monitor and report trading by its employees and other connected persons for ensuring compliance with SEBI regulations. The code of conduct also contains norms for “Chinese Wall” procedures and processes for permitting designated persons to “cross the wall”.

Trading Window

The term ‘Trading Window’ means a period of trading in the securities of a Company by its ‘designated persons’. As per the Code of Conduct as prescribed by SEBI regulations, the “designated persons” of a Company i.e. employees and connected persons designated on basis of their functional area may execute trades in securities of the Company subject to their compliance of SEBI regulations in this behalf. For this purpose, a notional trading window is used as an instrument of monitoring trading by designated persons.

Whenever the Compliance officer has reason to believe that any designated person is in possession of unpublished price sensitive information then the Compliance officer may close the “trading window” of securities to which such price sensitive information relates to. When the trading window is closed then the designated persons and their immediate relatives cannot trade in those securities for which the trading window has been closed.

Case Laws on Insider Trading

Some of the case laws on insider trading are being mentioned below:

In the case of Rakesh Agarwal vs. SEBI (see here), the Securities Appellate Tribunal (SAT) held that:

“If an insider deals in securities of the Company based on the unpublished price sensitive information for no advantage to him, over other, it cannot be said to be against the interest of investors. As per SAT’s view if the objective of the SEBI Regulations is taken into consideration for prohibiting the insider trading, then the intention or motive of the insider has to be taken cognizance of. SEBI’s regulation does not specifically consider mens rea as an element of insider trading.”

In the case of Chandrakala vs. SEBI (see here), the Securities Appellate Tribunal (SAT) held that:

“The prohibition contained in regulation 3 of the SEBI insider trading regulations apply only when an insider trades in securities of the Company based on any unpublished price sensitive information and not otherwise. It means that the trades executed by the insider should be motivated by the information in the possession of the insider. If an insider trades in securities of a listed company, it may be presumed that he traded on the basis of unpublished price sensitive information in his possession unless contrary to the same can be established by the insider as the burden of proof in such cases, lies upon the insider.”

The international scenario for insider trading is more stringent as compared to India and as can be gauged from decisions in cases like “Rajat Gupta insider trading case” wherein Rajat Gupta, former Managing Director of Mckinsey & Co. was found guilty in an insider trading case and awarded a prison sentence of two years.

Conclusion

SEBI (Prohibition of Insider Trading) Regulations and Section 195 of the Companies Act, 2013 both have been laid down with the common object of controlling insider trading in companies and therefore the directors, officials and other connected persons should endeavor to ensure that any trading in securities by them is in compliance of these laid down laws and regulations. The SEBI regulations permit trading in securities by insiders in accordance with an approved trading plan or in case of off-market inter se transfer of securities between promoters or in case of non individual investors if the people taking investment decisions are different from people having non-public price sensitive information or arrangements have been made to ensure that unpublished price sensitive information cannot be passed from individuals having this information to individuals taking investment decisions.  

References

  • STATUE

  1. Companies Act, 2013
  2. SEBI (Prohibition of Insider Trading) Regulations, 2015

  • ONLINE SOURCES

  1. https://www.firstpost.com/world/rajat-gupta-case-what-about-insider-trading-in-india-503443.html
  2. https://blog.ipleaders.in/basics-insider-trading/
  3. https://indiacorplaw.in/2018/02/sebi-failing-regulating-insider-trading-india.html

 

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