Regulations on Insider Trading

The term insider trading has been defined in regulations as the practice of purchasing or selling publicly traded securities while in the possession of any material information which is yet to realize public information. Insider trading is an illegal practice of trading on the stock exchange for owns advantage having access to unpublished price sensitive information. In order to fully understand the scope and implications of insider trading the regulation is amended from time to time.

These regulations are applicable to listed entities that are required to cover price sensitive information to control the impact of share prices of the entity. Listed entities are required to make and incorporate within the organizational hierarchy a model code of conduct to monitor and prevent insider trading in the organization.

Internal Control System
For ensuring proper control over companies which are listed or are proposed to be listed have to make sure to maintain and update  the practice of regulating the internal control system which involves the following steps:

• To review periodically the compliance requirements of the listed company.
• To place adequate restrictions on communication or procurement of unpublished price sensitive information.
• To identify, maintain and update the list of all persons who have access to unpublished price sensitive information of the company.
• To frame a Whistle Blower Mechanism for reporting any suspected violence in the company by any person.

Disclosure Requirements

1) Directors/officers/employees, Promoter and their Relatives
As per the directions in the regulations, certain persons have to disclose their holdings in the securities in the listed entity in the prescribed time frame in different circumstances such are tabulated as follows:

Case	Disclosure
Initial Disclosure: Upon Effect of these PIT regulations	Within 30 days of these regulations coming into effect.
Upon Appointment in the company holding KMP Position/ Promoter/Member of Promoter Group/Compliance Officer	Within 7 days of such appointment  or becoming promoter
Continual Disclosure: Upon involved in the transaction of an excess of  Rs. 10 lakhs or such other value in –          in a single transaction or –          in a calendar year or quarter	Within 2 trading days of such transaction wherein one transaction series of transaction over calendar quarter aggregates to a  traded value in excess of ten lakhs rupees or such values as may be specified.

2) By Company

Every company shall report such details with the authority within 2 trading days of the receipt of such disclosure and becoming aware of such information.

Securities Exchange Board of India Act, 1992 (“SEBI”) has authorized the Securities Exchange Commission (“SEC”) to regulates & control insider trading in the listed companies or proposed to be listed companies.

Terms to know

1. Listed or proposed to be listed company:

A company that has listed any of its securities on a recognized stock exchange or a company that intends to get their securities listed on a recognized stock exchange.

2. Connected person:

Means a person who is or has during the six months prior to an act, concerned has been associated with the company, directly or indirectly in any capacity including:

• Frequent communication with its officers or;
• Either in contractual, fiduciary, or employment relationship or;
• By being a director, officer or employee of the company or;
• Hold any position including a business or professional relationship between himself and the company having access to UPSI.

3. Insider:

This means any person who is a connected person or a person who is in possession of or having access to unpublished price sensitive information.

4. Generally Available Information (“GAI”):

Information that is accessible to the public on a non-discriminatory basis such as Red Hearing Prospectus (“RHP”).

5. Dealing in securities:

Act of buying, selling or agreeing to buy, sell or deal in securities by any person either as principal or agent.

6. Unpublished Price Sensitive Information:

The Unpublished Price Sensitive Information (“UPSI”) is the information related to companies or its securities, directly or indirectly, which are not yet available to the public domain and materially affect the price of the securities shall ordinarily including but not restricted to information relating to the following:

• Financial result
• Dividend
• Change in capital structure
• Change in key managerial personnel
• Merger, demerger, acquisition, delisting, disposal and expansion of business and other such transactions
• Other requirements, if any.

7. Designated Persons:

The Board of Directors of the listed entity or governing body of the market intermediary or fiduciary or on the basis of their seniority, professional designation, role and functions in the organization.

8. Informant:

Any individual who voluntarily submits any insider trading activity to the Board of Voluntary Information Disclosure Form.

9. Red Herring Prospectus:

A prospectus that does not include complete particulars of the quantum or price of the securities included therein but carries all other relevant information.

Some important points to Note:

1. Restriction on procurement & communication of UPSI:

As per Regulation 3 of PIT, Regulations provide the statutory obligation on insider in respect of listed company or proposed to be listed, not to communicate or provide any information relating to UPSI to any person including the other insiders.

The same obligation applies to any professional to procure or cause communication of UPSI except for the purpose of a legitimate purpose in the ordinary course of business.

Whereas Regulation 4 of PIT Regulations prohibits trading in securities while in the possession of UPSI by the insider.

2. Non Applicability of Regulation 3 and 4 in certain circumstances:

The following transactions are out of the ambit of the prohibition under Regulation 4 which is as follows:

• The off-market transactions amongst insiders.
• The transactions carried through block deal window mechanism between persons in possession of UPSI.
• The transactions are undertaken pursuant to statutory or regulatory compliance.
• The transactions related to stock options when the price has been pre-determined.
• The transactions as a part of a trading plan submitted and approved.

3. Voluntary Information Disclosure Mechanism

This mechanism has been introduced through the amendment in PIT regulations to promote a whistleblower mechanism with a reward of 10% of the amount disgorged upon monetary sanctions. The main ingredients of this mechanism are as follows:

• The individual who has the knowledge of insider trading can voluntarily notify the SEBI in Voluntary Information Disclosure Form (“VIDF”) either by himself or through a legal representative.
• The informer required to disclose the source of information.
• An office in Informant Protection (“OIP”) on receiving the VIDF checks its authenticity and correctness.
• OIP will send the recommendation to SEBI to take action.
• After the action is taken and recover the monetary sanctions at least twice the amount of reward.
• Interim reward not exceeding ten lakh rupees or such higher sum that SEBI may decide.
• If VIDF is submitted by 2 informants, then reward will be divided equally.
• The reward will be paid out from Investor Protection & Education Fund.
• The informant is required to submit an Informant Reward Claim Form (“IRCF”) to SEBI.
• OIP will maintain the confidentiality of the informant identity as well as the information.
• No immunity is to be provided to informants for violation of securities law.

4. Trading Plan:

As stated in Regulation 5 of PIT Regulations, every entity shall prepare and update the trading plan. Such plans provide the trading in securities without prohibiting the regulations which are controlled, declared and within the prescribed regulations. Investing by declaring in securities is beneficial than caught upon breach of the regulations.

5. Penalties Applicable:

Penalty as per Section 15G of SEBI Act, 1992, if any insider who either on his own behalf or on behalf of any other person, deal in securities or communicates any non-published price-sensitive to any person, shall be liable to a penalty of twenty-five crores rupees or three times the amount of profit made out of insider trading, whichever higher.

To conclude, Prohibition of insider trading lead to boost the confidence of domestic investor and attract the international investors and preventing insider trading is necessary to comply with the capital market and also stop the company for becoming inefficient.

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Also Read: Niryat Bandhu Scheme

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