On 15 January 2015, the Securities and Exchange Board of India (SEBI) notified the SEBI (Prohibition of Insider Trading) Regulations, 2015 (New Regulations). The New Regulations will come into force on 15 May 2015 and will replace the SEBI (Prohibition of Insider Trading Regulations), 1992 (1992 Regulations).
The New Regulations have considerably expanded the scope of compliances and restrictions. In this update, we have attempted to analyse some of the key issues emanating out of the New Regulations and their impact on corporates.
The 1992 Regulations were restricted in their application to only listed companies. However, the New Regulations apply to both listed companies and companies that are ‘proposed to be listed’. It is unclear how the term ‘proposed to be listed’ will be interpreted. We consider that this is intended to include such companies which have filed draft red herring prospectus with SEBI for an ‘Initial Public Offer’ or ‘Offer for Sale’.
New Interpretation Tool
A novel concept of including ‘notes’ to explain the provisions has been introduced in the New Regulations. While these appear to be a tool to assist in the interpretation of the New Regulations, it is unclear as to whether these notes are legally binding or merely illustrative and explanatory in nature.
Under the 1992 Regulations, only dealing in securities when in possession of unpublished price sensitive information was prohibited. However, the New Regulations have widened the ambit of restrictions on the insiders. Now it prohibits (i) communication of unpublished price sensitive information, (ii) procurement of unpublished price sensitive information, and (iii) trading in securities when in possession of unpublished price sensitive information. This necessitates strict implementation of the need-to-know principle, among all insiders. Also, the company must execute non-disclosure agreements (pre-approved by the board) along with stand-still obligations, with third parties who are likely to obtain access to unpublished price sensitive information.
Further, under the New Regulations concept of ‘dealing’ has been replaced by the concept of ‘trading’, which has been given a broad and inclusive definition and includes buying, selling, subscribing, dealing, etc. This is contrary to NK Sodhi Committee’s recommendation.
Connected Person’ Definition Widened
Under the new definition, a ‘connected person’ means anyone who has a connection with company that is expected to put him in possession of unpublished price sensitive information. As a result, corporates will be required to maintain an up-todate list of all such persons presumed to be connected. From a practical perspective, this would be a difficult task for the company.
A ‘trading plan’ is a common concept in insider trading regimes globally, especially for those who are perpetually in possession of prise sensitive information. It provides a permissible playground for insiders by permitting them to execute trades in pursuance of a pre-determined plan. A trading plan has to be submitted to the designated compliance officer of a company and can be put into action only six months after receiving the approval of the compliance officer and the same being disclosed to the public. An approved trading plan is mandatory and irrevocable with
no deviations permitted. It is important to note that acting in accordance with the trading plan does not confer complete immunity and an insider may still be liable if such insider was in possession of certain unpublished price sensitive information at the time of formulation of the plan, which information has not become generally available at the time of implementation of the plan.
Continuing Disclosure Obligations - Scope Not Clear
Initial disclosure obligation is now limited to promoters, directors and key managerial personnel, however, every promoter, employee and director of a company is required to make certain continuing disclosures to a company if the trades over a quarter breaches the specified threshold. The rationale for extending the continuing disclosure obligation to all employees of the company is not clear. The exemption of disclosure by public shareholders is a welcome move, as at certain level, it was a duplication of the SEBI Takeover Code. This is a significant relaxation.
Monitoring Obligation - Too Broad
The New Regulations make it mandatory for every company to have a code of practices and procedures for fair disclosure of ‘unpublished price sensitive information’ and to have a code of conduct to regulate, monitor and report trading by its employees and other connected persons. These codes are required to meet the minimum standards as set out in the New Regulations. Companies may need to monitor trades by all its employees and other connected persons which will be very cumbersome and practically difficult to comply-with by large Indian corporates.
The Way Forward:
The New Regulations represent a step forward in attempts by SEBI to tighten the norms around insider trading in the Indian securities market. This is definitely a welcome move, but certain clarifications on this issues highlighted will make it more easy for the companies to comply with the New Regulations.
Further, the wide ambit of the New Regulations will make compliance and monitoring more complex and time consuming. In light of this, some companies may consider having a simple code, inter-alia restricting the director(s), employee(s) and connected person(s) from trading in its securities during their association with the company and for a specified period after they leave the services of the company. For promoters an exception can be made, subject to reasonable restrictions and clear disclosures from time to time as required under the New Regulations.