Author: Lavanya Gupta, third-year BBA LL.B (Hons.) student at Symbiosis Law School, Pune.
Time and again the Securities and Exchange Board of India (“SEBI”) has come up with Regulations to prevent insider trading and in yet another move on December 31, 2018, SEBI released the Securities and Exchange Board of India (Prohibition of Insider Trading)(Amendment) Regulations, 2018 (“PIT Regulations”). The rules revolve around the subject of Unpublished Price Sensitive Information (“UPSI”). The 2018 Amendment made substantial changes to the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 by defining various terms and giving clarity on terms such as “financially literate” and “legitimate purpose”. The Amendment came in the wake of several directions passed against various companies like Axis Bank, TATA Motors, etc. to ascertain leakage of confidential results in private WhatsApp groups and the T.K. Vishwanathan Committee’s recommendations.
WHAT IS PRICE SENSITIVE INFORMATION?
“Price sensitive information” was first defined in the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992. Regulation 2(ha) defined price sensitive information as any information, which relates, directly or indirectly, to a company and which, if published, is likely to materially affect the price of securities of the company. Such information would include periodical financial results of the company, amalgamations, mergers, etc. A similar definition was later adopted under Section 195 of the Companies Act, 2013.
WHAT ARE THE PIT REGULATIONS?
Insider trading is something which has been an issue for more than two decades and every now and then, we see cases wherein information with promoter groups is used illegally to gain supernormal profits by buying securities. In 2017, Cyrus Mistry alleged that independent directors of the Tata Group engaged in insider trading but the same was out and out refuted by the Group in their Annual Report.
As per the PIT Regulations of 2018, if companies and promoters hold on to UPSI for any ‘legitimate purpose’ they shall be considered an ‘insider’. The legitimate purpose, as per the Regulations, would include sharing of UPSI in the ordinary course of business by an insider with partners, collaborators, lenders, customers, suppliers, merchant bankers, legal advisors, auditors, insolvency professionals or other advisers or consultants provided that sharing has not been carried out to evade or circumvent the prohibition of these regulations. Furthermore as per Regulation 3(2), for each company, the Board of Directors has to formulate policies to determine what constitutes ‘legitimate purpose’ along with whistle-blower norms for reporting leaks of UPSI and enquiry norms for determining the source of leaks. This would form a part of the companies’ Code of Practises and Procedures for Fair Disclosure of Unpublished Price Sensitive Information. The companies can put in place Non-Disclosure Agreements (“NDAs”) to prevent the leaks of UPSI by insiders. However, the power might be abused by the Board of Directors to escape the PIT Regulations by making their Code of Conduct with loopholes. Additionally, this would increase compliance costs for the companies.
The making of the above-mentioned code of conduct has been also made compulsory for professional firms such as auditors, accountancy firms, law firms, analysts, etc. which assist or advise the listed companies.
As a part of the PIT Regulations, listed companies are required to maintain a structured digital database of personal information of their directors, employees and immediate relatives and persons with whom such employees share a material financial relationship. This has been done to establish connections between the company and the persons who trade and provide inputs during investigation. “Material financial relationship” has been defined as when a person is a recipient of any kind of payment such as by way of loan or gift during immediately preceding twelve months, equivalent to or at least 25% of such payer’s annual income.
Another big change brought about by the Amendment is that earlier Promoters could trade while being in possession of UPSI if the trade was off-market inter-se transfer and both parties made a conscious and informed decision to trade. However now any insider can trade if the trading is off-market inter-se transfer, both parties make a conscious decision about the trade and the trade has to be reported to the company, by the insider, within two working days and the company has to further inform the stock exchange within two trading days from receipt of the disclosure. This inclusion by the 2018 PIT Regulations widens the scope of transactions under which insider trading is allowed.
With the internet making connectivity more private and faster, the technology has also been used to pass on information regarding prices of securities. This leads to problems like key financial details of the company being circulated on WhatsApp but the source of information not being found as UPSI was available with many senior employees and board members. No solution for this problem has been devised by the PIT Regulations. The only regulation in a similar aspect is via Regulation 3(3), which raises the presumption that a person who has traded in securities and has been in possession of UPSI was ‘motivated’ by the knowledge of the information. However, when the source of informing message (in the context of WhatsApp) is unknown, it would be difficult to impose the presumption.
SEBI, through its PIT Regulations, 2018 has taken a crucial step in preventing insider trading to a large extent. However, the number of compliance requirements has increased which might make companies reluctant to take any steps in the desired direction. Only time will tell how well the PIT Regulations prevent insider trading.