Shifting to A New Well Guarded House: Prohibition of Insider Trading Regulations, 2015
Fraudulent securities transactions or insider trading is one of the run-of-the-mill corporate phenomena today and as the number of episodes of manipulation of company securities’ information was increasing at an alarming rate, it had become imperative to review the extant rules and regulations on the subject. Not much time has passed since the chief Indian Capital Market regulator, SEBI was accorded some extra teeth to prosecute and punish the offenders involved in Insider Trading.
On 15th January, 2015 , Securities Exchange Board of India notified “Prohibition of Insider Trading Regulations, 2015” in exercise of its wide ranging powers conferred by Section 30 of the Securities and Exchange Board of India Act, 1992 read with S. 11(2) (g), S. 12 A (d) and S. 12 A (e) of the Securities and Exchange Board of India Act, 1992. It is also trite to cite Section 195 of Companies Act, 2013 here which provides that, “No person including any director or KMP of Company shall enter into insider trading.” With these new regulations coming into force, the two decade old predecessor law i.e. SEBI (Prohibition of Insider Trading) Regulations, 1992 was repealed with subsequent effect on 15th May, 2015.
The new regulations reinforce framework for prohibition of securities fraud. The new regulation consists of five chapters and two Schedules whereas the previous regulation had four chapters and three schedules. In order to elucidate upon the Regulator’s intentions behind few particular provisions, SEBI has provided what are called “Notes” at about twenty eight places in the regulations. Further, there are both continuous and event based disclosures need to be complied with from the company’s perspective.
Comparison between the 1992 and the 2015 Regulations
To begin with, Insider trading prohibits ‘connected persons’ (i.e., someone who has access to a company’s insider information) from dealing in that company’s publicly traded shares. The parallel between the two delegated legislations can be drawn under the following headings:
The concept of Insider Trading has not been given expansionist meaning as such. However, few definitions have been introduced whereas others have been modified or widened. While the erstwhile Regulation did not define Board, Compliance Officer, Trading Plans, the extant Regulation takes a step forward by including them in Regulation 2. Moreover, the scope of the terms such as ‘relative’ has been expounded by including phrase, “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.” Likewise, more clarity is brought to the explanation of the term ‘Insider’ which now includes the way to procure a UPSI on the Company’s securities as well. Another feature is that several terms such as officer, stock exchanges are not defined under these regulations, which were earlier defined under 1992 regulations. Moreover, the term “connected” has been enlarged to include both contractual agency/employment and fiduciary relationship.
(B) Chapter II (Restrictions On Communication And Trading By Insiders
Communication Or Procurement Of Unpublished Price Sensitive Information): -
The new regulation is wider in scope for the purpose of prosecution. Regulation 3(2) provides that no person shall instigate insider to communicate UPSI. It also prohibits every person from procuring UPSI. Earlier, the obligation was on ‘Insider’ not to disclose UPSI to any person, and such person would not deal in securities. One of the other changes is seen in Regulation 3(4) which makes it mandatory to enter into contract of confidentiality and Non-Disclosure Agreement. Further, Regulation 5 (3) imposes obligation on Compliance Officer to review trading plan and also approve the same.
(C) General Comment on Chapter III, General provisions–
Regulation 7(2) (a) lays down the requirement of continual disclosures by promoter, directors and employees. Disclosure has to be made within two trading days if value of trade in excess of 1 million. Additionally, disclosure under Regulation 7(3) has newly found place by other connected persons which is per se an enabling provision.
(D) Chapter IV- Model Code of Conduct for prevention of Insider trading for other entities has been newly introduced.
(E) Introduction of Chapter V i.e. Miscellaneous Sanction for violations which are meant for Insider Trading exclusively. This chapter is followed by another chapter on Repeal and savings of the 1992 Regulation.
There are few mooting points which would require further consideration in the days to come. Firstly, Regulation 9(2) under the Code of Fair Disclosure, there is a requirement for companies to come up with codes for regulating, monitoring and reporting trading activities by connected persons and fair disclosure of material information (from the perspective of the Regulator) by the company. Compliance with such codes can be a complicated process for companies with larger employee population. Secondly, as one proceeds with regulations, there is a need felt to determine the import of the term ‘legitimate purposes’ as used in Regulations 3(1) and 3(2).
Similarly, there is a prohibition on procurement of such information except where the communication is for some legitimate purpose under clause (2). In the absence of any clarification, the expression will have vague interpretation. In order to ensure complete justice, there needs to be a rule based interpretation than a non reasoned and mere principle based interpretation. However, it is a ‘legitimate’ expectation that there will be periodic notifications issued by the Board in the days to come so that the regulations are interpreted in a progressive and advanced manner.
# D H Law Associates, ‘India: SEBI (Prohibition Of Insider Trading) Regulations, 2015’ (Mondaq, 28 October 2015)
# The Securities and Exchange Board of India Act, 1992
# The Companies Act, 2013 http://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf accessed 24 December, 2015
# The SEBI (Prohibition of Insider Trading) Regulations, 2015 available at