Sunday, 19 April 2015

Securities and Exchange Board of India (Insider Trading) Regulations, 2015

Securities and Exchange Board of India (SEBI) formulated new regulations on the concept of insider trading to create a strong legal framework. These regulations named SEBI (Prohibition of Insider Trading) Regulations, 2015 (Regulations, 2015) were published on January 15, 2015 but are awaiting enforcement which is to begin 120 days after its publication in the official gazette i.e. May 15, 2015.

Insider Trading relates to unpublished price sensitive information (UPSI) i.e. information which is not generally available and has the potential to affect the price of a security, which is available to a ‘Connected Person’, who communicates, provides or allows access of it to any other person. This was and continues to be a prohibited act. The new regulations have just increased the ambit within which these were applied along with a few other changes. The SEBI (Prohibition of Insider Trading) Regulations, 2015 has tailored the framework in accordance to the emerging needs by following three different methods: -

A.   Increasing scope of Definitions: -

Regulations 1992 (Existing Regulation)
Regulation 2015 (New Regulation)
Connected Person
Regulation 2 (c) refers towards the position holders in a company like Directors, officers, employees etc. rather than applying practically as to the persons who possess UPSI. Also the act of procuring UPSI was not covered.
In regulation 2 (d) of the Regulations, 2015 the definition of a connected person has been simplified. A connected person now means to include any person who has a connection with the company wherein he possesses or accesses UPSI or allows procurement by any other person.
Section 2 (d) (ii) provides a list of persons deemed to be connected but who can establish the contrary including: -
   i.        immediate relatives,
  ii.        holding or associate or a subsidiary company,
iii.        intermediary or its employee or director,
 iv.        investment or trustee or asset management company including their employees and directors,
  v.        official of the exchange or clearing house or corporation,
 vi.        member of board of trustees of a mutual fund,
vii.        Board of Directors (BoD) or employee of a financial institute,
viii.        official or employee of a self regulatory organization which is recognized or authorized by the BoD,
ix.        a banker of the company,
  x.        firm/trust/HUF/company/association of persons where a director or his immediate relative or banker has more than 10 % of the holding of interest.
It was defined as per Section 6 of the Companies Act, 1956 and included the members of a HUF, spouses, and the list given in Schedule 1A therein
The new regulations  modified the word “relative” to “immediate relatives” and defines it in regulation 2 (f) as a spouse, parent, sibling, child of the connected person or the spouse, any of whom is either dependant financially on such person or consults such person in taking decisions relating to trading in securities.
Though this is a rebuttable presumption that the immediate relatives are also connected persons in lieu of their being covered by this definition.
In regulation 2 (e), the words used are quite ambiguous like persons reasonably expected to possess UPSI, persons deemed to be connected with the company, which was further explained in terms of the list of persons deemed to be connected as per section 2 (d) (ii) of Regulation 2015.
Regulation 2 (g) streamlines the previous definition and does away with the ambiguous words by simply stating that an Insider is any person who is: -
i.        a connected person or
ii.        in possession of or has access to a UPSI

So, even if a person does not hold a formal position with the company, he/she still can be covered under the definition of an Insider due to their having any type of an access to a UPSI.
Defined in two parts, the first part is in regulation 2 (ha) where ‘price sensitive information’ is referred to as the information relating to the company which if published would materially affect the price of the securities of the company.
The second part containing the definition of ‘unpublished’ is in regulation 2 (k) as any information which is not published by the company or its agents and is not specific in nature.
Regulations, 2015 combined these two parts and define UPSI under regulation 2 (n) as any information relating to a company as well as to its securities that is not generally available (definition has been inserted in Regulation, 2015) which upon becoming so generally available be likely to materially affect the price of the securities.
Compliance Officer
In schedule 1, table A, 1.0, compliance officer has been defined as a senior level employee who reports to the Managing Director/CEO of the company.
Regulation 2 (c) defines a compliance officer as a senior officer, designated as a compliance officer who reports to the Board of Directors of a company or to the head of the organization.

B.   Other Changes: -
Regulations 1992
Regulation 2015
Change of the term ‘Dealing’ to ‘Trading’
The word used in regulation 2 (d) is dealing. This definition was specifically for any person either principal or agent.
The word used in regulation 2 (l) is trading, there has been no change in the definition except that the specification of ‘any person either principal or agent’ has been deleted.

C.   New Insertions: -
Regulations 1992
Regulation 2015
Definition of ‘Generally Available Information’
Did not exist.
Regulation 2 (e) defines generally available information as any information that is accessible to the public at a non-discriminatory basis.
Trading Plan
Did not exist.

Instead of this concept, there was another concept of trading window. The time period was specified as the trading period wherein the trading window was open which allowed the directors/officers/employees of a company to trade in securities but the window was kept closed before declaration of financial results, dividends, or issue of securities, any major expansion or amalgamation, merger, takeover, disposal of undertaking or changes in policies or plans of the company.

This time period was also left for being decided by the company.

These dealings in the open trading window had to be given a pre-clearance by the Compliance Officer as per the procedure given in Schedule 1, part A and part B, 3
As per regulation 5, an insider may trade in securities by formulating a single trading plan for the whole year and present it to the compliance officer for approval and public disclosure at least six months prior to commencing any trading which should not be at a period around the declaration of financial results.

The trading plan should 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 which such trade shall be effected.

The compliance officer can ask for any undertakings that he/she deems fit to save the purpose of this regulation.

Also, implementation of the trading plan will not be allowed to commence if any UPSI in possession of the insider at the time of formulation of the trading plan has not become generally available at the time of commencement of implementation.

The compliance officer after approving the trading plan shall notify it to the stock exchange.

The trading plan once approved will have to be compulsorily complied with, hence the insider cannot deviate, change or trade outside the scope of the trading plan.

Also, the above compliances of formulating and implementing the trading plan do not grant absolute immunity to the insider.
Unpublished Price Sensitive Information (UPSI)

Two new insertions have been made to its definition by including that ‘changes in key managerial personnel’ and ‘material events in accordance with the listing agreement’ are also within the scope of UPSI.

Frequently Asked Questions (FAQ’s)

Question 1 : Would a lawyer, advocate or law firm providing investment advice to its clients be considered an Investment Advisor under the SEBI (Investment Advisers) Regulations, 2013?

Answer: No, on a perusal of regulation 3 (application for grant of certificate of investment advisor) and regulation 4 (exemption from registration) of the SEBI (Investment Advisers) Regulations, 2013 it becomes clear that any advocate, solicitor or law firm, who provides investment advice to their clients, incidental to their legal practise will not be covered in the definition of an Investment Advisor.
Question 2 : What is the punishment for the contravention of Regulations, 2015?

Answer: Regulation 10 of the Regulations, 2015 provides that any contraventions of the regulations will be dealt by the Securities and Exchange Board of India (SEBI) in accordance to the SEBI Act, 1992.

The SEBI Act, 1992 under section 15G states that the penalty for insider trading shall not be less than Rs. 10 lakhs (ten lakh) but which may extend to Rs. 25 crore (twenty-five crore) or 3 (three) times the amount of profits made out of insider trading, whichever is higher.

In Addition to Penalty: In section 24 (1) of the SEBI Act, 1992 it is stated that, ‘without prejudice to any award of penalty by the adjudicating officer under this Act, if any person contravenes or attempts to contravene or abets the contravention of the provisions of this Act or of any rules or regulations made there under, he shall be punishable with imprisonment for a term which may extend to 10 (ten) years, or with fine, which may extend to Rs. 25 crore (twenty-five crore) or with both.’

If Penalty is Not Paid: In section 24 (2) it states, ‘if any person fails to pay the penalty imposed by the adjudicating officer or fails to comply with any of his directions or orders, he shall be punishable with imprisonment for a term which shall not be less than 1 (one) month but which may extend to 10 (ten) years, or with fine, which may extend to Rs. 25 crore (twenty-five crore) or with both.’

Compounding of Offence: Section 24A states that, ‘Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), any offence punishable under this Act, not being an offence punishable with imprisonment only, or with imprisonment and also with fine, may either before or after the institution of any proceeding, be compounded by a Securities Appellate Tribunal or a court before which such proceedings are pending.

Question 3 : What is the law laid down in Companies Act, 2013 for insider trading?

Answer: The Companies Act, 1956 was silent on this regard but Section 195 of the Companies Act, 2013 states that, ‘No person including any director or key managerial personnel of a company shall enter into insider trading’. The definitions of ‘Insider Trading’ and ‘Price Sensitive Information’ mean the same as are defined in the Regulation, 1992 and the Regulation, 2015.
The punishment laid down under the Companies Act, 2013 for contravention by any person is for imprisonment for a term which may extend to 5 (five) years or with fine from a minimum of Rs. 5 lakh (five lakh) up to Rs 25 crore (twenty-five crore) or three times the amount of profit made out of such insider trading, whichever is higher, or with both.

Question 4 : Which act/regulation/rules would be attracted on the non-efficiency or malafide actions of a Compliance Officer?

Answer: The Regulation, 2015 confer upon the compliance officer a wide range of powers and duties. The question is what if the compliance officer himself/herself is inefficient or does not do his/her duties in accordance to the regulations or what if he/she becomes an insider and start trading on the same lines?
The regulation regulating the conduct of a compliance officer is laid down under the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995. The procedure laid down under these rules is: -

1.   SEBI conducts investigation under section 15-I of the SEBI Act, 1992 upon suspicion or complaint of misconduct of compliance officer.
2.   Based on the findings, SEBI appoints an Adjudicating Officer (AO).
3.   The AO issues a show cause notice to the compliance officer who is under investigation as to why such investigation should not take place.
4.   On the reply of the compliance officer, the AO decides the course of action. If the inquiry is held then the compliance officer is given an opportunity by way of personal presence to defend himself/herself.
5.   Thereafter, the AO considers the issues, evidence and findings of the inquiry.
6.   If the compliance officer is found guilty then the penalty levied is specified under section 15 HB of the SEBI Act, 1992[1]
7.   The copy of the final order is sent to the compliance officer and SEBI.
8.   An appeal from such order lies within 45 days of receiving such order to the Securities Appellant Tribunal as per section 15T of the SEBI Act, 1992.
9.   An appeal from the Securities Appellant Tribunal shall lie to the Supreme Court of India under section 15Z within 60 days of communication of such decision for resolving a question of law.

An example of such a proceeding being held for inquiring the actions of compliance officer was in the case of Satyam Computer Services Limited, wherein an order was passed in 2011, for Mr. G. Jayaram who was the compliance officer of the company, who was found guilty and was levied a fine of Rs. 5 lakh.  

Question 5: In the definition of ‘connected person’, aren’t the words ‘including by reason of frequent communication with its officers’ and ‘reasonably expected to allow such access’ too wide?

Answer: Yes, these terms may be defined as too wide to include almost anybody who has even the remotest link to an officer who is in possession of UPSI. The burden of proof is on such connected person to prove otherwise.

Question 6: What is the scope of regulations 3 and 4 of the Regulation, 2015. Is a procurer of UPSI included in the scope of regulation 4?

Answer: Regulation 3 (1) & (2) read together bar an insider to communicate, provide or allow access to any UPSI of any person including other insiders and also bars all other persons from procuring or causing communication of UPSI by any insider. Hence, it seeks to bar not only the insider but also any other person from procuring a UPSI. An exception to this bar is if such communication, procurement or permission flows from the furtherance of legitimate purposes, performance of duties or discharging of legal obligations.

Regulation 4 bars only insiders from trading in securities when they are in possession of UPSI. The instances whereupon the insider may be discharged are if all the parties to a transaction were conscious of the existence of a UPSI and took an informed trade decision or the persons holding UPSI were different from the persons taking the trading decision who did not possess any UPSI at the time they took the decision or arrangements of such a nature were in place that ensured the compliance under these regulations, 2015 were not violated or the trades were in lieu of the trading plan set up in accordance to these regulations, 2015.

So, a procurer of a UPSI who may be barred under regulation 3 shall not be so barred in regulation 4 of the regulation, 2015.

Question 7: What is the meaning of the words, ‘Securities listed or proposed to be listed on the Exchange’ used in the Regulations, 2015?

Answer: These regulations cover companies whose securities are listed or proposed to be listed. A company whose securities are not listed will not be covered under these regulations. The words 'proposed to be listed' apply to securities of a company which are proposed to be listed provided that the company is already listed.

Question 8: ‘Insider may prove his innocence’ – too vague a word to be used?
Answer: Yes, a better choice of words could have been used like ‘defences taken by an insider’ or ‘insider may shift burden of proof’ etc.

Question 9: Chapter III relating to investigation by SEBI in regulations, 1992 has been removed from the regulations, 2015 so now what will be the procedure for investigation by SEBI?

Answer: Chapter III of the regulations, 1992 expressly stated the procedure for investigation by SEBI. In the regulations, 2015 the whole chapter has been deleted. So, now the investigation procedure given in section 11C of the SEBI Act, 1992 will be followed.

Question 10: Regulation 5 of regulations, 2015 states that, ‘an insider shall be entitled to formulate a trading plan’, the meaning of which is not very clear as to whether it is a mandatory requirement or not?

Answer: If we go by the meaning of the word ‘entitled’, it means ‘right to a particular privilege or benefit, granted by law or custom’. In the present question, the right is to formulate a trading plan, the privilege is that even as an insider, the person may trade in securities and reap the benefits of it granted by the law established by these regulations, 2015.

Hence, an insider is not barred from trading in securities completely, he/she may do so if they follow the route of formulating a trading plan and going by it as laid down under regulation 5 of regulations, 2015.

Question 11: Regulation 5 states that, ‘a trading plan shall be presented to the compliance officer for approval and public disclosure pursuant to which trades may be carried out’, would that not amount to disclosure of UPSI to the public? Why is there a need for any public disclosure?

Answer: The answer to this question probably lies in the definition of ‘generally available information’ under regulation 2 (1) (e) of regulations, 2015. The sole purpose for this public disclosure seems to be adequate to make any UPSI as generally available to public. If any information upon which a trading plan was formulated is generally available to the public on a non-discriminatory basis, it ceases to give any special or secretive privilege to the actual holder of such UPSI. Upon a public disclosure, everybody knows of the existence of the information upon which the trading plan was formulated. This ensures a free, unbiased decision making.

Question 12: What does ‘not entail trading in securities for market abuse’ mean in regulation 5(vi)?

Answer: Formulating a trading plan by an insider who wants to trade in securities would not grant him/her absolute immunity from being prosecuted for market abuse. If upon an investigation it is discovered that the release of the trading plan was such that it led to the circumvention of regulation 4 of regulations, 2015, the insider would be prosecuted for fraud under regulation 2 (1) (c) (9) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Market) Regulations, 2003 which states that, ‘Fraud is the act of an issuer of securities giving out misinformation that affects the market price of the security, resulting in investors being effectively misled even though they did not rely on the statement itself or anything derived from it other than the market price’ and also under regulation 4 (2) (a) and (f) which state that, ‘Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely: (a) indulging in an act which creates false or misleading appearance of trading in the securities market’ and (f) publishing or causing to publish or reporting or causing to report by a person dealing in securities any information which is not true or which he does not believe to be true prior to or in the course of dealing in securities’.

Question 13: As per regulation 5 (4), doesn’t the mandatory application of a formulated and approved trading plan seem harsh and an impractical suggestion?

Answer: A trading plan would specify all the dealings in securities of an insider for the whole year, also once it is approved it will have to be compulsorily complied with by the insider which seems impractical based on the fact that presupposing the market conditions or even one’s own condition in the market for such a long period of time is not possible.

Having said that, the purpose for which this period was decided to be an year long was because it seemed undesirable to SEBI that there are frequent announcements of trading plan for short periods of time which would in turn render meaningless the defence of a reasonable time gap between the decision to trade and the actual trade for which the reasonable time was decided to be of one year. Also, allowing deviation from the trading plan would negate the intent behind the regulation itself. There can also not be two or more trading plans for the same time period which may create an overlap.

Question 14:  As per regulation 5 (5), after approval of the trading plan by the compliance officer, the compliance officer shall inform the same to the stock exchange. Why?

Answer: Allowing an insider who possesses UPSI to trade in securities by formulating a trading plan is an exception to the bar in regulation 4 of the regulation, 2015. The compliances for the trading plan are to ensure that such a trading plan is publicly disseminated. When the compliance officer informs the stock exchange about the existence of a trading plan of an insider, the investors in the market at large can take the potential factors of such a trading plan into view and assess the securities with the knowledge as to how the insiders perceive the prospects or approach the securities in their trading plans.

Authors: Shreya Seth, Saman Naseem 

[1] Section 15HB of the SEBI Act, 1992 states, ‘Penalty for contravention where no separate penalty is provided- may extend from Rs. 1 lakh to Rs. 1 crore’. While deciding the penalty the AO takes into consideration section 15J of the SEBI Act, 1992 i.e. the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; (b) the amount of loss caused to an investor or group of investors as a result of the default; and (c) the repetitive nature of the default.”

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