INSIDER TRADING & UNPUBLISHED PRICE SENSITIVE INFORMATION

Updated: Dec 11, 2020

Author: Sharvari Manapure, a fourth-year student at the Maharashtra National Law University, Nagpur.


“There is no kind of insider trading in India but the insider variety”


INTRODUCTION

Insider trading is a thoughtful mishandling practice of unpublished price profound information and data which is recovered from or through a confidential connection for the purpose of gain in the trade of shares and securities, without revealing to the public about the subsequent alteration of the price of securities after priced and confidential information reveal[1]. Grimacing to the practice of unethical reveal of confidential information mainly due to breach in a fiduciary relationship build solely on trust and confidence comes in a conflict where the insider prioritizes its self-interest over that of the company.

The Companies Act 1956 incorporated the provision to Prohibit Insider Trading in India under Section 307 and 308 but recommendations from the various committees, Hussain Committee 1989, Patel Committee 1986, and Sachar Committee 1979, were received for the incorporation of a separate statute for regulating Insider Trading. The Patel Committee in 1986 pointed out the crux of the necessity of legislation for insider trading[2] resulting in the enforceability of SEBI (Prohibition of Insider Trading) Regulations in 1992 which was later amended in 2002 due to the discrepancies in the legislation[3]. The backbone of 2015 regulations was drawn by the Sodhi Committee Report pertaining to the literature by the International Organization of Securities Concern (IOSCO)[4]. The US was the leading country to enact legislation to formally regulate insider trading based on the Securities and Exchange, Act 1934 whereas India constituted a committee to assess and endorse appropriate restrictions in order to enact legislation. Insider trading is also governed under Section 195 of the Companies Act 2013 and furthermore, SEBI has replaced 1992 regulations with Regulation of SEBI (Prohibition of Insider Trading) 2015[5].

The enactment of SEBI Regulation 2015 is deliberated as development as it cures one of the tormentors of our market i.e. proliferation of insider trading. SEBI has not only amplified the ambit of ‘Insider’ but has also strengthened and affiliated the Indian regime with worldwide practices and has expedited legitimate business transactions. The regulation provides an exemption of communiqué of unpublished price sensitive information (UPSI) under the ambit of legitimate and authentic transactions.


AN OVERVIEW OF INSIDER TRADING REGULATIONS 2015

Comprising two schedules and five chapters The SEBI (Prohibition of Insider Trading) Regulation, 2015 embraces regulation for insider trading. The PIT Regulations 2015 are applicable to listed as well as prospective listed securities on stock exchange. The 2015 Regulations expand the ambit of ‘insider’ as well as ‘connected persons’ which shall include any person who has an employment or fiduciary relationship with the company or has access to UPSI, direct or indirect. The notes of interpretation which are mentioned with each regulation explain the legislative intent and deliver effective utilization method of the same. The words and expressions which are not interpreted under the act, a person may rely on Companies Act 2013, SEBI Act 1992, Depositories Act 1996 and SCRA 1956.[6]


UNDERSTANDING THE TERMS ‘INSIDER’, ‘CONNECTED PERSONS’ AND UNPUBLISHED PRICE SENSITIVE INFORMATION’

Regulation 2(1)(g) describes an ‘Insider’ is a person who is in possession of or has access to UPSI or is connected to such a person.[7] Regulation 2(1)(d)(i) describes ‘Connected Person’ is the person who is connected with the company that can provide UPSI.[8] The regulation expands the ambit of a connected person to any person who has a direct or indirect connection with the company not necessarily having a professional relationship. The ambit of connection and communication includes employment or professional relationship, contractual relationship, and fiduciary relationship, and immediate relatives of persons in connection[9]. The intent of the regulation is also to cover the persons who may not be in direct contact with the company but are a part of its operations.[10]

‘UPSI’ is the information relating to companies securities and would affect the price of the securities if it is revealed to the general public.[11] These include dividends, mergers, delisting, acquisitions, disposals, change in capital structure, financial results, events that are material to the agreement of listing. ‘Trading’ is inclusive of various activities relating to securities such as selling, buying, subscribing, and dealing.[12] Therefore, trading in securities through a connected person who is in possession of UPSI, this act is known as Insider Trading.


RESTRICTIONS ON AN INSIDER

There are majorly two restrictions, on communication and trading. Any kind of communication by an insider regarding UPSI or regarding the securities of the company being listed or about the prospective listing is not allowed. But in case the communication is proved to be for legitimate purposes or legal obligation or for the purpose of performing duties, exception is granted.[13] The Regulations also imposes restrictions on a person who tries to gain or procure the UPSI relating to the securities which are listed or are going to be listed unlawfully from an insider unless the exception is granted.[14] When a person is known to be in possession of UPSI, restrictions are imposed on trading by the Regulation 2015.[15]


Instances when restrictions on communication are done away with

The UPSI can be provided or given access to or be communicated in relation to the below-mentioned transactions[16]:

  1. A transaction that might lead into an obligation for the company to make an open offer after the BOD has acknowledged that the transaction is in the best interest of the company. This information is provided for investors to make an informed decision in case of mergers and acquisitions and transactions.

  2. If an obligation to make an open offer is not attracted by a transaction but the board of directors are of an opinion that the transaction is in best interest and the information is constituted as UPSI and is disseminated to be made generally available to public before two days of the proposed transactions.

DEFENSES FOR AN INSIDER

The Regulation allows the insider to prove his innocence by establishing a set of manifestations. The circumstances of innocence aren’t mentioned in the Regulations except the three provided in the proviso which is not exclusive. If an off-market transaction is made between promoters who are in possession of UPSI without violation of regulation 3, and the decision seems informed and conscious trade, then it shall qualify as a defense. If insider trades in furtherance of a trading plan, it shall qualify as a defense, as the trade would be presumed to be motivated by awareness and knowledge of UPSI. This proviso is widely criticized by the specialists due to its nature of the language being ambiguous.


ROLE OF COMPLIANCE OFFICER

Compliance Officer is a designated senior officer who is capable of appreciating legal requirements and compliance of policies, procedures, and rules for the preservation of UPSI under the regulation.[17] He has the authority to approve the trading plans.[18] Before approving the plans, he has to assess and review the plan and assure there is no potential for violation of regulations.[19] Once, the trading plan is assessed and approved, he shall notify the trading plan to the stock exchange where the securities are listed.[20]


PUNISHMENT FOR INSIDER TRADING

An insider makes a profit by giving access to confidential information which results in breach of trust and alteration in the price of shares and hence is considered violative under the Regulation prohibiting insider trading and attract penalty imposed by SEBI. The SEBI (Prohibition of Insider Trading) Regulations 2015 has replaced the two-decade-old 1992 regulations due to the need for an extensive scope. The PIT Regulations 2015 prohibits the listed company for the following acts-

  1. Revealing Unpublished Sensitive Information (UPSI)

  2. Procuring UPSI from an insider

  3. The trading in securities by an insider who is in possession of UPSI

  • Closure of Trading Window

Prospective generation of price-sensitive information, the companies are required to provide and adopt the closure of trading window which is also entrenched in the Code of Conduct. For instance, during the auditing of accounts by the board, other persons have access to such information which can be utilized for trading of shares of the company which is favorable to them. Hence, this particular period when the companies prohibit trading by insiders it is called ‘Closure of Trading Window’. The release of notification shall be done by the Company Secretary or Compliance Officer[21]. The objective of this provision is to ensure the security of unpublished price sensitive information. If the Compliance officer fails to close the trading window it shall be considered as a violation of Insider Trading Regulations. In case any director or employee trades the security under the ambit of an undue advantage, the Compliance Officer shall be held liable.[22]

  • Unpublished Price Sensitive Information

The Unpublished Price Sensitive Information (UPSI) is commenced from the date of the Board Meeting wherein a decision for a particular transaction is taken. The prohibition in dealing in shares by insiders is imposed. Although mere developments aren’t taken into account definitive information after a particular stage of development should not be publicized as it may materially affect the value of shares. Hence, the trading window should be closed before the dissemination of such information. A piece of specific information may not be price sensitive in eternity, the timing of information and trade need to be analyzed to conclude if the information is price sensitive.

  • Directors and Insider Trading

All persons including the Key Managerial Personnel are prohibited from engaging in the activities of insider trading under Section 195 of the Companies Act, 2013. The applicability of SEBI Regulations is on listed public companies whereas the provision of Companies Act is applicable to listed, private, public, and unlisted companies. Purchasing of shares by directors while in possession of UPSI or sharing this information that results in subsequent dealing of shares, such directors shall be penalized separately for dealing in shares and for sharing the information. The punishment under SEBI is severe and the orders are stringent, the profit earned by insider trading could be in thousands but the penalty may be in lakhs or more.


CONCLUSION

The leading enforcers of laws relating to insider trading have been the US. The 1934 Act of Securities Exchange was enacted after the 1929 Great Depression, the Act enabled the Securities Exchange Commission which prevents insider trading in the US. SEC analyzes the requisite jurisprudence provided by the US courts relating to insider trading. The Classical or Disclose or Abstain Theory deliberates upon disclosure by an insider about the UPSI to the public before making the trade or abstain from making the trade at all.[23] The Misappropriation Theory protects the integrity of markets against the outsider’s abuse through the access of UPSI, revealing which will result in alteration in the price of securities. The US Sanction Act 1984 has stringent regulations as it imposes a fine thrice of the profit gained by insider trading.

In the United Kingdom, there are two Acts which govern insider trading, The Financial Services and Markets Act, 2000 (FSMA) which provides a regime that prevents market abuse[24] and the Criminal Justice Act, 1993 prohibits dealing through insider information for price-effected securities, although none of this has effectively described the term ‘insider trading’.

The 1992 Insider Trading Regulations being replaced by the 2015 Regulations is a development, as it has proved to be a cure for one of the many menaces of the market to the insider trading activities. The crux of the regulations seems to miss the bull’s-eye by the difference of one ring on the target as there is a scope of improvement seen to combat the consequences of insider trading. These regulations match the global practices and seem to have an effective control as it clarifies certain provisions and concepts.

There is a requirement for an eye-opener regarding the rigorous punishment awarded by SEBI for violation of the Insider Trading Regulations. The penalty imposed is fairly higher than the amount of transaction which is misappropriated even under the deterrence theory. Although, the hope of deterrence due to the stringent penalties exists in relation to the insider and the third party who deals with the UPSI and securities of the company.


[1] Himanshu. C, Insider Trading: A Critical Analysis http://www.legalserviceindia.com/article/l199-Insider-Trading.html. [2] The High Powered Committee on Stock Exchange Reforms, 1986 (Ch. 7.25). [3] Hindustan Lever Ltd v. SEBI [1998] 18 SCL 311 (Misc); Rakesh Aggrawal v. SEBI [2004] 49 SCL 351 (SAT). [4] Rohit Subramaniam, Insider Trading Regulations: An Overview http://www.lakshmisri.com/ News-and Publications/articles/Corporate/insider-trading-regulations-2014-an-overview. [5] Kirthana Singh, Insider Trading Laws In India In Comparison With Laws In UK And US, (http://www.legalservicesindia.com/article/2567/ Insider-Trading-laws-in-India-in-comparison-with-the-laws-in-US-and-UK.html) [6] Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015, Chapter II Regulation 2(2). "Words and expressions used and not defined in these regulations but defined in the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Securities Contracts (Regulation) Act, 1956 (42 of 1956), the Depositories Act, 1996 (22 of 1996) or the Companies Act, 2013 (18 of 2013) and rules and regulations made thereunder shall have the meanings respectively assigned to them in that legislation." [7] KLG Capital Services Ltd. [WTM/MSS/ISD/18/2009] [8] Rajiv B. Gandhi v. SEBI [2008] 84 SCL 192 (SAT). [9] "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", Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015, Chapter II Regulation 2(1)(f). [10] Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015, Chapter II, Note to Regulation 2(1)(d)(2) of the 2015 Regulations. [11] Regulation 2(n) of the 2015 Regulations. [12] Regulation 2(1)(l) of the 2015 Regulations. [13] Regulation 3(1) of the 2015 Regulations. [14] Regulation 4(1) of the 2015 Regulations. [15] Regulation 4(1) of the 2015 Regulations. [16] Regulation 3(3) of the 2015 Regulations. [17] Regulation 2(1)(c) of the 2015 Regulations. [18] Regulation 5(1) of the 2015 Regulations. [19] Regulation 5(3) of the 2015 Regulations. [20] Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015, Chapter II, Note to Regulation 5(5). [21] G. Jayaraman v. SEBI [2014] 42 taxmann.com 383/124 SCL 177 (SAT - Mum.) – Order by Securities Appellate Tribunal (SAT). [22] Ibid. [23] Kirthana Singh,Insider Trading laws in India in comparison with the laws in US and UK, http://www.legalservicesindia.com/article/2567/Insider-Trading-laws-in-India-in-comparison-with-the-laws-in-US-and-UK.html. [24] Section 118(2) of the FSMA.

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