ROLE PLAYED

BY SEBI
IN
RESTRICTING
INSIDER
TRADING
 Coverage
1. Background & History
2. Governing Regulations
3. Objectives
4. Definitions
5. Duties of Compliance Officer
6. Restrictions on communication and trading by insiders
7. Trading Plans
8. Disclosure of Trading by Insiders
9. Code of Fair disclosures and conduct
10. Code of Conduct
11. Trading Window
12. Pre dealing approval
13. Penalties
14. References
 HISTORY BEHIND INSIDER TRADING IN
INDIA:
Insider trading in India was unhindered in its 130 year old stock market till about
1970.

The earliest record of dealings in securities in India traces back to East India
Company. The first Indian legislature to regulate securities market was Bombay
Securities Contract Act, 1925, it was enacted to regulate purchase and sale of
securities. However, the legislature had several shortcomings which resulted into
investors making huge losses during the period 1928 to 1938. Therefore
government was compelled to appoint certain committees to assess the
shortcomings of the legislation.

The Defense of India Act, 1939 included a provision relation to Capital Issue which
stipulated that prior Government approval was mandatory for capital issue. When
India got independence in 1947 the same rule was incorporated in Capital Issue
(Control) Act, 1947. Under this act, the office of Controller of Capital issue was set
up, which was authority to approve issue of securities, the amount, type and price
of securities etc. The Act was however, repealed in 1992 and the office of CCI was
abolished in 1992, as a part of liberalization process.

The Stock Market witnessed different phases during 1946-1947. Stock Market
being an integral part of country’s Financial system there was a need for tightening
government control on stock markets. In the view of foregoing government
constituted the Thomas Committee under the Chairmanship of P.J. Thomas the
adviser to Finance Ministry. The Committee advised that an Independent and
quasi-judicial authority with the fullest powers of supervision could only
discharge such a function and thus, recommended setting up of National
Investment Commission.

Instances of Insider Trading in India were 1st reported in 1940s.Directors, Agents,

Auditors and other officers were found to be using insider information for
profitably speculating in securities of their own Company. Thomas Committee
had analysed these instances and observed that insider trading occurred due to (i)
the possession of information by these people; (ii) before everybody else; (iii)
regarding the changes in the Economic condition of Companies and particularly,
regarding the size of dividends to be declared, or issue of Bonus shares.
Thomas Committee had pointed out the lack of a special legislation to deal with
“unfair use of insider information” in 1948 itself, it took a few decades to actually
formulate a legislation to curb insider trading.

In 1979, the Sachar Committee recommended amendments to the companies Act,

1956 to restrict prohibit the dealings of employees. Penalties were also suggested
to prevent the insider trading.

In 1989 the Abid Hussain Committee recommended that the insider trading
activities may be penalized by civil and criminal proceedings and also suggested
the SEBI formulate the regulations and governing codes to prevent unfair
dealings.

GOVERNING REGULATIONS:

 Securities & Exchange Board Of India Act, 1992

 SEBI (Insider Trading) Regulations, 1992

 SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2002

 SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2003

 SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2008

 SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2011

 SEBI (Prohibition of Insider Trading) Regulations, 2015

 REGULATORY ASPECTS OF PROHIBITION OF
INSIDER TRADING:
 SEBI (Prohibition of Insider Trading) Regulations 2015.

WHY THERE IS NEED FOR PROHIBITION OF

INSIDER TRADING???
As per SEBI the Prohibition of Insider Trading is required to make securities
market:

 Fair and Transparent.

 To have a Level Playing Field for all the participants in the market.
 For free flow of information and avoid information asymmetry

DEFINITIONS
1. INSIDER Regulation 2(g)
Insider is the person who is “connected” with the company, who could have the
unpublished price sensitive information or receive the information from
somebody in the company.

Under the new definition, an insider would mean a person in possession of or has
access to price-sensitive information or Connected Person.

SEBI defines ‘Insider’ to include persons connected on the basis of being in any
contractual, fiduciary or employment relationship that allows such people access
to unpublished price sensitive information (UPSI).

2. TRADING Regulation 2(l)

Trading means and includes

 Subscribing
  Buying
 Selling
 Dealing
 Agreeing to buy sell, subscribe, deal in any securities

3. INSIDER TRADING
Insider trading is dealing in securities of a listed company by any person who has
knowledge of material “inside” information which is not known to the general
public.

4. CONNECTED PERSON Regulation 2(d)

 Any person who is or has been associated with company, in any manner,
during the six months prior to the concerned act,
 An immediate relative to the connected person,
 A banker of the company,
 An official of stock Exchange or of clearing corporation,
 A holding/associate/subsidiary company,

This is a new definition included in the new regulations by SEBI, where in, it
defines “connected person” as anyone who is or has during the six months prior
to the act been associated with a company, directly or indirectly in any capacity,
including by reason of frequent communication with its officers or by being in any
contractual, fiduciary or employment relationship or by being a director, officer or
employee. It also covers persons holding any position that allows access to
unpublished price-sensitive information.

The above definition of connected person also brings into its ambit of those
persons who may not seemingly occupy any position in a company but are in
regular touch with the company and its officers who are involved in the day to
day operations of the Company.

5. INSIDER TRADERS
Corporate officers, directors, and employees who traded the corporate securities
after learning of significant, confidential corporate developments.
 Friends, business associates, family members and employees of law, banking and
brokerage firms who were given such information to provide services to the
corporation whose securities they traded.

6. GENERALLY AVAILABLE INFORMATION

Regulations 2(e)
Information that is accessible to the public on a non-discriminatory basis.

Note: It is intended to define what constitutes generally available information so

that it is easier to crystallize and appreciate what unpublished price sensitive
information is. Information published on the website of a stock exchange, would
ordinarily be considered generally available.

Threshold Limit for Disclosures [including KMP’s and Employees]:

The Disclosures shall be made by Promoter’s/ Director’s/ KMP as well as

employees on crossing the threshold of Rs. 10 Lakhs in value as prescribed within
two trading days of such transaction, if the value of the securities traded, whether
in one transactions or a serious of transactions over any calendar quarter.

7. UNPUBLISHED PRICE SENSITIVE INFORMATION

Regulation 2(n)
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 and shall, ordinarily but not restricted
to, information relating to the following:

1) Financial results

2) Dividends

3) Change in capital structure

4) Mergers, de-mergers, acquisitions, delisting, disposals and expansion of

business and such other transactions

5) Changes in key managerial personnel and

6) Material events in accordance with the listing agreement.

 Communication or procurement of unpublished price sensitive information:

I. No insider shall communicate, provide or allow access to any UPSI except

where such communication is in furtherance of legitimate purposes,
performance of duties or discharge of legal obligations, likewise
II. No person shall procure from or cause the communication by any insider of
UPSI except in furtherance of legitimate purposes, performance of duties or
discharge of legal obligations.
III. Unpublished PSI may be communicated, provided, allowed access to or
procured, in connection with 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. In such cases, the board of directors shall
require the parties to execute agreements to contract confidentiality and non-
disclosure obligations.
IV. Unpublished PSI may be communicated, provided, allowed access to or
procured 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 UPSI
is disseminated to be made generally available at least 2 working days prior to
the proposed transaction being effected in such form as the Board of Directors
may determine.

8. IMMEDIATE RELATIVE Regulation 2(f)

Means a spouse of a person, and includes parent, sibling, and child on such
person or of spouse, any of whom is either dependent financially on such person,
or consults such person in taking decisions relating to trading in securities.

DUTIES OF COMPLIANCE OFFICER:

The new SEBI (Prohibition of Insider Trading) Regulations, 2015 defines
compliance officer under Regulation 2 (c) which means any senior officer,
designated so and reporting to the board of directors or head of organization
incase board is not there, who is financially literate and capable of appreciating the
requirements of legal and regulatory compliance under these regulations and who
shall be responsible for compliance of policies, procedures, maintenance of
records, monitoring adherence to the rules of preservation of unpublished price
sensitive information, monitoring of trades and the implementation of codes
 specified in this regulation under the overall supervision of board of directors or
the head of the organization, as the case may be .

The new SEBI (Prohibition of Insider Trading) Regulations, 2015 cast certain duties
on the Compliance Officer of the company who is appointed under the regulations
including monitoring and compliances of requirements under these regulations.
Such duties are to be undertaken very prudently.

For instance, in case of employees where there is no requirement of initial

disclosure but continual disclosure is required to be made in case of triggering the
threshold. In such a case, it would be difficult for the compliance officer to check
whether compliances are made or not. Above this, the regulations also put an onus
on the company to intimate trading crossing a threshold of Rs. 10 Lakh in value
irrespective of the disclosure receive by the employee as the Regulation 7(2)(b)
states as follows:

“Every Company shall notify the particulars of such trading to the stock exchange
on which the securities are listed within two trading days of receipt of the
disclosure or from becoming aware of such information.”

As per the new SEBI (Prohibition of Insider Trading) 2015, it is very clear that the
company shall put in a place a system to monitor trading of all its employees
unlike of designated persons as were required under earlier regulations.

RESTRICTIONS ON COMMUNICATION:
1) No insider shall communicate, provide, or allow access to any unpublished price
sensitive information, relating to a company or securities listed or proposed to be
listed, to any person including other insiders except where such communication is
in furtherance of legitimate purposes performance of duties or discharge of legal
obligations.

2) No person shall procure from or cause the communication by any insider of

unpublished price sensitive information, relating to a company or securities listed
or proposed to be listed, except in furtherance of legitimate purposes, performance
of duties or discharge of legal obligations
3) Notwithstanding anything contained in this regulation, an unpublished price
sensitive information may be communicated, provided, allowed access to or
procured, in connection with a transaction that would:–
(i) 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
(ii) 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 two trading days
prior to the proposed transaction being effected in such form as the board
of directors may determine.

Trading when in possession of unpublished price

sensitive information.

1) No insider shall trade in securities that are listed or proposed to be listed on a stock
exchange when in possession of unpublished price sensitive information:

Provided that 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 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
these regulations are 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.

2) In the case of connected persons the onus of establishing, that they were not in
possession of unpublished price sensitive information, shall be on such connected
persons and in other cases, the onus would be on the Board.

3) The Board may specify such standards and requirements, from time to time, as it
may deem necessary for the purpose of these regulations.

TRADING PLANS: Regulation 5

An insider shall be entitled to formulate a trading plan and present it to the
compliance officer for approval and public disclosure pursuant to which trades
may be carried out on his behalf in accordance with such plan.

This provision intends to give an option to persons who may be perpetually in

possession of unpublished price sensitive information and enabling them to trade
in securities in a compliant manner. This provision would enable the formulation
of a trading plan by an insider to enable him to plan for trades to be executed in
future. By doing so, the insider who is in possession of unpublished price sensitive
information and formulated a Trading Plan approved by the Compliance Officer
subsequently would not be prohibited from execution of such trades as per the
trading plan approved by the Compliance Officer on such stand that he/she had
pre-decided the trade even before such unpublished price sensitive information
available to them.

The Trading plan shall comply with the requirements as follows:

i) It shall be submitted for a minimum period of 12 months.

ii) No Overlapping of plan with the existing plan submitted by Insider

iii) It shall 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.
iv) Trading can only commence only after 6 months from public disclosure of
plan.

v) No trading between 20th day prior to closure of financial period and 2nd
trading day after disclosure of financial results.

vi) Compliance Officer to approve the plan.

vii) 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. (Except in few case like where insider is in possession of price sensitive
information at the time of formulations of the plan and such information has not
become generally available at the time of the commencement of implementation.)

viii) Upon approval of the trading plan, the compliance officer shall notify the plan
to the stock exchanges on which the securities are listed.

DISCLOSURE OF TRADING BY INSIDERS:

Regulation 6
The disclosure to be made by any person shall also include those persons who are
immediate relatives to such person who have made the trading, and it also
includes any other person for whom such person takes trading decisions.

The disclosures of trading in securities shall also include trading in derivatives of

securities and the traded value of the derivatives shall be taken into account.
(please note that section 194 of CA, 2013 prohibits Director or KMP from entering
into forward dealings etc.)

Duration of Maintenance of Disclosures:

The disclosures made under these regulations shall be maintained by the company
for a minimum period of five years.
Classification of Disclosures:
a) Initial Disclosures
b) Continual Disclosures

Disclosures by certain persons: Regulation 7

1) Initial Disclosure:
a) Every promoter, KMP and Director of every company whose securities are
listed on any recognized stock exchange shall disclose his/her holding of
securities of the company as on the date of these regulations talking effect,
to the company within 30 days of these regulations taking effect. (Effective
Date: May 15, 2015, Due Date: June 14, 2015)
b) Every person on appointment as a KMP or a director of the company or
upon becoming a promoter shall disclose his holding of securities of the
company as on the date of appointment or becoming a promoter to the
company within seven days of such appointment or becoming a promoter.

2) Continual Disclosures:
a) Every promoter, employee and Director of every company shall disclose to
the company the number of such securities acquired or disposed of within
two working days of such transaction if the value of the securities traded,
whether in one transaction of a series of transactions over any calendar
quarter, aggregates to a traded value in excess of ten lakh rupees or such
other value as may be specified.

b) Every company shall notify the particulars of such trading to the Stock
Exchanges on which the securities are listed within two trading days of
receipt of the disclosure or from becoming aware of such information.

DISCLOSURE BY OTHER CONNECTED

PERSONS: regulation 7 (3)
Any company whose securities are listed on a stock exchange may, at its discretion
require any other connected person or class of connected persons to make
disclosures of holding and trading in securities of the company in such form and
 at such frequency as may be determined by the company in order to monitor
compliance with these regulations.

Disclosures:

WHO WHAT WHEN

7 (1) (a) (b) Disclose its holdings of Within 30 days from these
Promoter, director securities including regulations taking effect &
& KMP of listed transaction in derivatives Within 7 days of appointment
company and any to the company as on the or becoming a promoter
other person as date of regulation coming
may be determined into force or date of
by the Company appointment or becoming
promoter
7 (2) (a) Promoter, Securities including In any calendar quarter, value
director or transaction in derivatives of traded securities exceeds Rs
employee of acquired of disposed by 10 lakh with single or series of
company and any promoter, director or transaction.
other person as employee of company
may be determined and by immediate
by the Company relative of their and on
behalf of person for
whom such person takes
decision shall disclose to
the company.

Code of Fair Disclosure and conduct: regulation 8

Companies need to establish a code of practices and procedures for fair disclosures
of unpublished price sensitive information.

The new SEBI (Prohibition of Insider Trading) Regulations, 2015 intends the listed
entities to formulate a stated framework and policy for fair disclosure of events
and occurrences that could impact price discovery in the market for its securities.

The principles as set out in the schedule are:

i) Equality of access to information.

 ii) Publication of policies such as dividend, inorganic growth pursuits, calls and
meeting with analysts.

iii) Publication of such calls and meeting etc.

The Code of practices and procedures for fair disclosures of unpublished price
sensitive information and every amendment thereto shall be promptly intimated
to the stock exchanges where the securities are listed.

CODE OF CONDUCT: Regulation 9

Every Listed Company shall formulate a code of conduct to regulate, monitor and
report trading by its employees and other connected persons towards achieving
compliance with these regulations.

Every listed company formulating a code of conduct shall identify and designate
a compliance officer to administer the code of conduct and other requirements
under these regulations.

TRADING WINDOW

• “Trading window” means a period for trading in Company's securities as

specified by the Company from time to time.

• Other than the period for which trading window is closed, the same shall remain
open for dealing in securities of the Company.

• Trading window is closed for the following reasons:

a) Declaration of Financial results

b) Declaration of dividend
c) Issue of securities
d) Major expansion plans
e) Amalgamations, mergers, takeovers and buybacks
f) Disposal of undertaking
g) Any significant changes
 PRE – DEALING APPROVAL
• Designated Person or his Dependents Who intend to deal in securities of the
Company Who have access to price sensitive information of the company whose
cumulative dealing exceeds 25,000 Shares per month and/or trade in Non -
convertible Debentures exceeds Rs. 1 mn (market value), in a month have to take
Pre dealing Approval from the Compliance officer of the Company.

PENALTIES:
Monetary Penalty: Section 15G of SEBI Act, 1992 imposes penalty of at least Rs.10
lacs, which may extend to Rs.25 Crore or three times of profits made from insider
trading whichever is higher.

Imprisonment: Section 24 of SEBI Act, 1992 even goes to the extent of

imprisonment upto 10 years or fine upto 25 Crore, or both, for any offences
pertaining to contravention of the provisions of the Act.

NAME OF THE VIOLATION ACTION TAKEN BY

COMPANY SEBI
Multi Commodity 13 individuals Impounded 126 crore
Exchange (MCX) and including promoters benefitted from trading
Financial Technologies and KMP traded in the
Not to dispose of or
(Now, 63 Moons) shares of MCX and FTIL
alienate any of their assets
based on UPSI
till the penalty is credited
to an escrow account

Piramal Enterprises Ltd Directors did not Has imposed a fine of 6

announce the lakh on them.
mandatory closure of
trading window

MAN Industries Ltd Failure of dissemination Joint penalty of 25 lakh on

of price sensitive MAN Industries, its
information to the stock chairman and four officials
exchanges on time for alleged violations
 Mahindra & Mahindra Sale of shares during Imposed a fine of 2 lakh on
Ltd closure of the trading a general manager
window

ITC Ltd Failure in disclosure of Has imposed a fine of 5

sale of shares to Stock lakh on HR manager who
Exchanges failed to disclose

Satyam Computer Failure to announce the Barred Ramalinga Raju

Services Ltd mandatory closure of and four others from
trading window during accessing securities
UPSI activity markets for 14 years in
2014

References:

SEBI (Prohibition of Insider Trading) Regulations, 2015