Aman Gupta

“The implications and importance of changes brought under the Insider trading regulations are manifold, where the SEBI has taken the recourse to a stricter and accountability-oriented framework regime. Here, the companies are given the responsibility to define and determine their policies for preventing insider trading.”

In January 2019, The Stock and Exchange Board of India [SEBI] by releasing a series of notifications has made significant changes in the Prohibition of Insider Trading Regulations, 2015 [PIT]. The amended PIT Regulations will come into effect on April 1, 2019 and are based on the recommendations of Fair Market Conduct [FMC] Committee Report under the chairmanship of Mr. T.K. Vishwanathan. The FMC committee undertook the much necessary task of time-bound review and revising of the PIT Regulations with the prevailing market conditions. The PIT Regulations incorporate most of the recommended changes which primarily deals with the confidentiality, code of conduct, disclosure requirements, among others. Here, the author will attempt to analyse the changes made in the Regulations in the background of existing debate over the probable misuse of confidential information by third parties. Further, highlighting the inclusion of institutional mechanism in the PIT regulations to make it more effective in restricting the instances of insider trading.

Understanding the intricacies of Insider Trading

The Black’s Law dictionary defines the insider trading as the use of non-public, material information for the purposes of trading of shares of a company by a corporate insider or any other person who owes a fiduciary relation to the company.[1] It involves the use of unpublished information gathered through privilege sources for monetary benefits at the expense of unaware public. Similarly, the PIT Regulations provide that it is trading of the securities by an insider who is in a possession of unpublished price sensitive information [UPSI]. The Regulations have stated that an insider is a connected person or a person with the access to UPSI. Any information is said to be an UPSI, if it refers to the company or its securities which by becoming generally available is likely to cause material fluctuations to the securities price. It includes, inter alia financial results, dividends, capital structure, corporate restructuring among others. Similarly, the connected person includes among others, a person who can be under a contractual, fiduciary or employment relationship with the company on either permanent or temporary basis for a period of six months prior to the incident of insider trading. Owing to which, such person is allowed to or reasonably expected to be allowed accessing UPSI, either directly or indirectly. More importantly, it brings under its ambit those persons who are not members of the company but are connected to the UPSI due to the virtue of the work they undertake, the frequency and kind of operations.

In the new Regulations, material events in accordance with the listing agreement has been omitted to be a part of UPSI as recommended by the FMC committee. One probable reason behind this change is that the Listing Obligations and Disclosure Requirements [LODR] regulations require the disclosure of all the material information. However, all material information may not be considered as price sensitive under the PIT regulations, hence such information is rightly removed from the ambit of the UPSI. One such scenario is the litigation/dispute related information which is considered to be a material event under the listing agreement and subsequently, previously considered to be an UPSI.[2] However, under the new regulations they cannot be claimed to be an UPSI as material event is no longer included in the PIT regulations.

Giving more powers to the companies

The PIT regulations under chapter II, restricts the communication and procurement of UPSI unless it is in furtherance of legitimate purposes or in performance of duties and legal obligations. However, the term “legitimate purposes” was not defined in the regulations, thus open to broad interpretations. Therefore, the FMC committee recommendations were included in the recent amendments, where the Board of Directors of a listed company are mandated to define their own policy for determining the “legitimate purposes” on the basis of Industry related requirements. Subsequently, the person receiving UPSI pursuant to legitimate purpose transactions will also be considered as an insider and hence, are supposed to maintain the confidentiality under the PIT regulations. Another important addition is the requirement to maintain a record of name of the recipients of UPSI in a structured digital database along with their PAN or any other identification as authorized by law. Here, the provisions also make it necessary to execute confidentiality and non-disclosure agreements exempting the situations where the company is of the opinion that sharing of such information is in the best interests of the company.

Here, the two main additions namely, “defining their own policy” and “best interests of the company” make it a debatable issue altogether, as to on what specific contours will these subjective definitions adhere to. The FMC committee opined that it will be difficult to unequivocally define these terms as the legitimacy question is largely a subjective consideration. Hence, it was thought to be more pragmatic, if these terms are determined after carefully considering the facts-circumstances and are left open to the companies to define and determine by themselves. However, leaving the entire scope to companies in determining the legitimate purpose, in itself appears to be a weak base to the requirement of digital database, authorized identification and confidentiality agreement.

An effective attempt at institutional mechanism

The FMC committee took the cognizance of recent cases of leak of UPSI on various social media and messenger platforms. Hence, the information originates within the company, intermediary or fiduciaries and severely affects the market price of the securities and their reputation in the industry. Thus, it was seen as a serious concern and special emphasis was laid on accountability and responsibility of the companies, intermediaries and fiduciaries to implement internal control systems in the form of policies and procedures for inquiry. Therefore, the term intermediary and fiduciaries are clarified in detail so as to cover the numerous occasions of information sharing and procuring. Likewise, various entities such as auditors, accountancy firms, law firms, insolvency professional, analysts, consultants, banks, etc. which are assisting or advising the listed companies or otherwise are brought under the scanning mechanism of insider trading.

Subsequently, another important provision in the PIT is in relation to the person who does trading while in possession of an UPSI. Here, it will be presumed that the said trading is motivated by the knowledge and awareness of such information in possession. However, such a scenario is also excused, if the information is obtained under the “best interest of the company” procedure as enshrined under the PIT. The most significant changes made in the PIT regulations are in relation to the efficient implementation of the codes of fair disclosure and conduct under chapter IV. Here, the various preventive measures are enumerated in terms of fair disclosure of events and occurrences which impact securities price in the market. Similarly, in reference to code of conduct, it is the obligation on the managing director or chief executive officer to formulate a code to regulate, monitor and report trading. However, in the absence of proper implementation, insider trading can take place. Thus, there was a need to have a preventive mechanism for institutional responsibility in cases of insider trading. In pursuance of which the chief executive officer, managing director or any such analogous person of a listed, intermediary or fiduciary company are obligated to formulate a code to adequately and effectively ensure compliance with the PIT regulations.

The institutional mechanism of internal controls are supposed to include the control on the identification of the employee having access to the UPSI; secondly, all the UPSI has to be identified and its confidentiality to be maintained. Thirdly, in reference to communication and procurement of UPSI, adequate restrictions has to be imposed and lastly, a confidentiality and non-disclosure agreement has to be entered into with all the people with whom the UPSI has been shared. The crux of the whole institutional mechanism is to prevent not only the main company but also the fiduciaries and intermediaries from committing insider trading. Furthermore, the changes are directly aimed at efficient and timely implementation of the regulations as lack of responsibility and accountability often weakens the whole process.

Concluding the PIT amendments

It is worth acknowledging that SEBI as the market regulator has very aptly taken up the duty to protect the investors from the market abuse arising out of insider trading. Therefore, a strong and strict legal enforcement framework was needed to ensure a free and fair conduct in the securities market. Thus, releasing of the PIT regulations amendments within the first month of the year shows that the issue of insider trading carries a big relevance in the market. Moreover, obligating the companies with more responsibilities and accountability under these regulations makes it clear that the future of market related laws will be based on consultative law-making process. However, the result and efficiency of these changes can only be analysed once the amended regulations become effective post April, 2019.

Aman Gupta is a Third-year B.A., LL.B (Hons). student at the National Law University, Jodhpur.

References:

1. Garner, B. A., & Black, H. C. (2009), Black’s law dictionary, 9th ed. St. Paul, MN: West.
2. Jubilant Life Sciences Limited, SEBI Order No. RA/JP/288-292/2018.