Introduction of SEBI (Prohibition of Insider Trading Regulations) 2015
In simple terms, insider trading is the act of trading, directly or indirectly, in the securities of a publicly listed company by any person based on certain information, not available to the public at large that can influence the market price of the securities of such company.
If the price sensitive information is disclosed to the public / investors, the share prices would rise if the price sensitive information is perceived to be positive and would fall if it is perceived to be negative.
Based on such price sensitive information and by the time the price sensitive information is disclosed to the public, the insider(s) may trade in securities of the company to make profits or avert losses. Such trading is done to the exclusion and economic disadvantage of investors who do not have such information.
Pursuant to a notification issued in January 15, 2015, SEBI introduced the SEBI (Prohibition of Insider Trading Regulations) 2015 (“New Regulations”) replacing the existing SEBI (Prohibition of Insider Trading) Regulations, 1992 (“Existing Regulations”). The said New Regulations will become effective on 120th day from the date of its publication in the Official Gazette.
The reason for introducing the New Regulations in substitution of the Existing Regulations was to strengthen the legal framework for prohibition of insider trading thereby bringing it at par with international laws and to overcome some drafting lacunae in the Existing Regulations.
The key provisions of the New Regulations vis-à-vis the Existing Regulations are discussed hereunder:
Definition of “connected person”
Basic concept
Under the New Regulations, a connected person is basically a person who is or has during the past (six) months prior to the concerned act been associated with a company, directly or indirectly, in any capacity.
Wide definition
Unlike the Existing Regulations, under the New Regulations, the scope of the term “connected person” is not just limited to persons that occupy responsible positions in the company or those having professional/business relations with the company but extends to persons who are associated with a company in any manner, who have or are reasonably expected to have access to unpublished price sensitive information.
The scope of ‘‘connected persons’’
Under the New Regulations has been widened to include persons associated with the company in a contractual, fiduciary or employment relationship. The intention is to bring into its ambit persons who may not seemingly occupy any position in a company but are in regular touch with the company and its officers and are involved in the know of the company’s operations.
Additionally, without limiting the generality of the definition of connected persons, like the Existing Regulations, the New Regulations also provide for categories of persons who are deemed to be connected persons unless the contrary is established. However, the categories of deemed connected persons as mentioned under the New Regulations differ from those mentioned under the Existing Regulations particularly due to introduction of the Companies Act, 2013 in replacement of Companies Act, 1956.
It is important to note that even mere reasonable expectation of access to unpublished price sensitive information can make connected person or deemed connected person an “insider”.
Immediate relatives also included
The immediate relatives of connected persons would also be regarded as connected persons. But such a presumption as a deeming legal fiction is rebuttable.
“Immediate relative” 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.
Definition of unpublished price sensitive information
Basic concept
Possession of any and every information that relates to the company cannot stop an insider from trading in securities of that company; and therefore, what is of importance is the possession of information that can materially impact the market price of the securities. If the information pertaining to the company can materially influence the price of the securities then such information is price sensitive.
Definition under New Regulations
As per the New Regulations, “unpublished price sensitive information” means any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities. Like the Exiting Regulations, the New Regulations also further provides for an illustrative list of information which is regarded as price sensitive.
Under the New Regulations, the criterion for what constitutes ‘‘unpublished price sensitive information’’ will be whether the information is ‘‘generally available’ or not. The phrase “Generally available information” has been defined to mean information that is accessible to the public on a non-discriminatory basis. 3.4 Information published on the website of a stock exchange, would ordinarily be considered generally available. Speculative reports in print or electronic media shall not be considered as published information.
SEBI’s and SAT’s rulings under the Existing Regulations
Information pertaining to the normal course of business operations of a company cannot be price sensitive as the company is expected to undertake such activities as part of its business. It has been held by the Securities Appellate Tribunal in a case decided in 2011 that as earning income by buying and selling securities is the normal activity of the investment company, every decision to buy or to sell its investments would not have effect on the price of the securities of the company and will hence not be considered as price sensitive.
SEBI has also earlier clarified that the words “directly or indirectly” in the definition of “unpublished price sensitive information” denote that the communication of such information may be done directly by the insider himself or through any other person or mode. An insider who procures or counsels someone else to deal in securities will be guilty of contravention if the latter deals with in securities. Hence, insider trading is said to have been done when an insider enable some other person to deal in securities by passing on such information.
Definition of Insider
The term “insider” means any person who is: i) a connected person; or ii) in possession of or having access to unpublished price sensitive information;
Clarification provided by SEBI under Notes for interpretation
SEBI has clarified its intention that anyone in possession of or having access to unpublished price sensitive information should be considered an “insider” regardless of how one came in possession of or had access to such information.
The onus of showing that a certain person was in possession of or had access to unpublished price sensitive information at the time of trading would, therefore, be on the person levelling the charge after which the person who has traded when in possession of or having access to unpublished price sensitive information may demonstrate that he was not in such possession or that he has not traded or he could not access or that his trading when in possession of such information was squarely covered by the exonerating circumstances.
Prohibition on “communication” and “procurement” of Unpublished Price Sensitive Information
Status under the Existing Regulations
As per regulation 3 of the Existing Regulations, an insider could not communicate or counsel or procure, directly or indirectly, any unpublished price sensitive information to any person who while in possession of such information shall not deal in securities.
While the aforesaid language seems to impose a strict prohibition on an insider in sharing the information, that prohibition was further qualified by the condition that the recipient should not deal in securities while in possession of such information.
Therefore, a mere disclosure of unpublished price sensitive information to another person did not tantamount to insider trading so long as the recipient did not deal in securities while in possession of such information.
It was also held by the Securities Appellate Tribunal in one of its decision given in 2012 that the prohibition contained under regulation 3 applied only when an insider traded or dealt in securities on the basis of any unpublished price sensitive information and not otherwise.
Also, the Existing Regulations did not contain any savings provisions for communication of information for the purpose of due diligence and allowing access to or procuring information for takeovers, mergers and amalgamations.
Changes brought under the New Regulations
The New Regulations categorically prohibit communication and procuring unpublished price sensitive information as well as trading on receipt of such information.
Therefore, it could be the case that a mere disclosure of such information in itself constitutes an offence under the proposed regulations whether or not the recipient has utilized it to gain an undue advantage.
Cases in which communication of unpublished price sensitive information is allowed
i. For furtherance of “legitimate purposes”, performance of duties “or discharge of legal obligations”.
ii. For a transaction that would entail an obligation to make an open offer under the takeover regulations where the board of directors of the company is of informed opinion that the proposed transaction is in the best interests of the company.
iii. For a transaction which does not attract the obligation to make an open offer under the takeover regulations but where the board of directors of the company is of informed opinion that the proposed transaction is in the best interests of the company and the information that constitute unpublished price sensitive information is disseminated to be made generally available at least 2 (two) trading days prior to the proposed transaction.
Rebuttable presumption – Trading when in possession of unpublished price sensitive information is deemed to be insider trading but can be proved otherwise.
Status under the Existing Regulations and SAT’s rulings
As per regulation 3 of the Existing Regulations, the mere possession of any unpublished price sensitive information at the time of dealing in securities was considered as insider trading, there was still a view that if the insider was not motivated to trade in securities on the basis of such information, then that insider would not be considered to have indulged in insider trading because genuine transactions which are undertaken by the insiders which are not related to unpublished price sensitive information would also come under purview of insider trading.
It was also clarified by SAT in a case decided in 2012 that although an insider would be privy to unpublished price sensitive information, an insider trading would be deemed to have happened only when the trading is done on the basis of such information and not otherwise. It also held that if an insider trades or dealt in securities of a listed company, it may be presumed that he / she traded on the basis of such information in his / her possession unless the contrary is established. The burden of proving a situation contrary to the presumption mentioned above lied on the insider.
In a case decided in 2008, SAT had also held the information in possession of the “insider” should be the factor or circumstance that should have induced him / her to trade in the scrip of the company. It is then that he / she will be said to have dealt with or traded “on the basis of” that information. If an insider trades or deals in securities of a listed company, it would be presumed that he traded on the basis of the UPSI in his possession unless he establishes to the contrary and the burden of proving those facts was upon the insider. Hence, the presumption that arose was rebuttable but the onus was on the insider to show that he did not trade on the basis of the UPSI and that he traded on some other basis. Status under the New Regulations
Under the New Regulations, no insider can trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information:
However, an the insider may prove his innocence by demonstrating the circumstances including the following: –
i. the transaction is an off-market inter-se transfer between promoters who were in possession of the same unpublished price sensitive information without being in breach of regulation 3 (i.e. communication or procurement of unpublished price sensitive information) and both parties had made a conscious and informed trade decision; ii. in the case of non-individual insiders: –
a) the individuals who were in possession of such unpublished price sensitive information were different from the individuals taking trading decisions and such decision-making individuals were not in possession of such unpublished price sensitive information when they took the decision to trade; and
b) appropriate and adequate arrangements were in place to ensure that the regulations were not violated and no unpublished price sensitive information was communicated by the individuals possessing the information to the individuals taking trading decisions and there is no evidence of such arrangements having been breached; iii. the trades were pursuant to a trading plan set up in accordance with regulation 5.
Analysis
It is pertinent to note that while the New Regulations prescribe only limited circumstances in which the innocence can be proved, the phraseology “by demonstrating the circumstances including the following” suggest that there may be other occasions also in which the innocence can be demonstrated.
However, under its note to interpretation, SEBI has mentioned that “it would be open to the insider to prove his innocence by demonstrating the circumstances mentioned in the proviso, failing which he would have violated the prohibition.”
The aforesaid note seem to indicate that that the innocence can be proved only under the limited circumstances as mentioned in the regulations. As per the well settled rule of interpretation, one has to look at the language of the section as the notes to interpretation are only an aid for to understand the section and they do not dilute the provisions to which they have been supplied.
Trading Plans
This is a new concept which has been introduced to have a transparent frame for trading in securities by those insiders who are having unpublished price sensitive information throughout the year.
The insider is entitled to formulate and submit trading plan in advance to the compliance officer for his approval. The compliance officer is also empowered to take additional undertakings from the insiders for approval of the trading plan. Such trading plan on approval also has to be disclosed to the stock exchanges, where the securities of the company are listed. 7.3 The trading plan once approved shall be irrevocable and the insider shall mandatorily have to implement the plan, without being entitled to either deviate from it or to execute any trade in the securities outside the scope of the trading plan.
The trading plan is required to be in compliance with the following requirements:
i. It shall be submitted for a minimum period of 12 months. [Intention being – To avoid having frequent announcements of trading plans for short periods]
ii. No overlapping of plan with the existing plan submitted by Insider. iii. It is required to set out either the value of trades to be effected or the number of securities to be traded along with the nature of the trade and the intervals at, or dates on which such trades shall be effected. [Intention being –to provide flexibility to insiders for trading]
iii. Not entail commencement of trading behalf of the insider earlier than six months from the public disclosure of the plan. . [Intention being – For insiders to get the benefit of a trading plan, a cool off period of a reasonably long period is necessary in which the unpublished price sensitive information becomes generally available]
iv. Not entail trading between 20th day prior to closure of financial period and 2nd trading day after disclosure of financial results.
Disclosures of trading by insiders
As per the New Regulations, the disclosures made by person shall also include those relating to trading by such person’s immediate relatives, and by any other person for whom such person takes trading decisions as the intention of the regulations is to prevent use by trading when in possession of unpublished price sensitive information. Disclosures are classified as Initial and Continual disclosures.
a. Every promoter, KMP and Director, whose securities are listed on any recognized stock exchange is required to disclose his holding to the Company within 30 days of the New Regulations becoming effective.
b. Every person on appointment as a KMP or a Director of the Company or upon becoming promoter is required to disclose his holding.
c, Every promoter, employee and director of company has to disclose within 2 (two) trading days if the trading value of the securities traded, whether in one transaction or a series of transactions over any calendar quarter, aggregate to a traded value in excess of Rs. 10,00,000 (Rupees Ten lakhs). Disclosures of incremental transactions shall be made when transactions effected cross the aforesaid threshold.
d. Every company has to disclose the particulars of trading to the Stock Exchange where the securities are listed within 2 trading days of the receipt of the disclosure or from becoming aware of such information.
About Bulwark Solicitors
Bulwark Solicitors is a law firm pioneered by Solicitor Chirag Sancheti and Advocate Deep Shridharani. The firm has expertise in the areas of both Litigation and non-Litigation. Under the non-litigation Law practice, the firm practices in the areas of Corporate Law, Intellectual Property Law, Bankruptcy & Insolvency Law, Competition Law, Real Estate and Conveyancing and DTAA Advisory. Further, under Corporate Law area, we practice Company Law, Securities Law, Mergers and Amalgamations, Private Equity and Venture Capital Investment Transactions, Legal Due Diligence and Foreign Exchange Management Law.