The 15-member committees report, released by capital market regulator Sebi, on Wednesday, also recommends that even connected persons or any individual in possession of unpublished price-sensitive information (UPSI) be considered as an insider. A connected person is one who is in possession of UPSI and is associated with the trade concerned at the time of occurrence or during the six months prior to the trade concerned, in any capacity.
The panel sad all trades by the promoters, employees, directors and their immediate relatives (which would cover close relatives who are either financially dependent or consult the insider in connection with their trading) would need to be disclosed and recorded by the company. These new norms will also apply to mutual funds and trusts issuing securities or schemes that get listed on stock exchanges.
Simply put, the proposed regulations entail a prohibition on trading by insiders in securities when in possession of UPSI, thus obtaining an unfair advantage, the report stated.
This is the first time that public servants in possession of price-sensitive information will be also considered as a connected party.
The definition of the term connected person has been changed to explicitly include public servants who handle UPSI relating to listed companies, said Sebi in its 74 page report.
Sandeep Parekh, founder, Finsec Law Advisors observed that bringing public servants under the purview of insider trading norms is a good initiative as government officials do have access to a lot of insider information. In fact, the definition will also bring Sebi officials, who may be in possession of sensitive company information, under its purview, Parekh said.
Senior corporate lawyer Baljit Singh Kalla pointed out that government officials are privy to confidential information on deals. While the public knows that decisions on deals like Jet-Etihad are pending, officials exactly know when these would be taken. Likewise, including the family members of the senior mangement is also welcome, Kalla said.
Insider trading refers to buying or selling of securities of a listed entity by individuals with access to unpublished price sensitive information about the particular entity. The panel said that insider trading is not only a tort, that is a civil wrong but also a crime. Insider trading is difficult to prove and the initial burden to bring home a charge could be heavy. However, where the charge is indeed established, the delinquent should be dealt with severely and in an exemplary manner in accordance with the rule of law, the panel noted. Such an approach would send a proper signal to the market about the seriousness of the issue, and about the approach of the regulator within the parameters of what can be justified in law, it added. Diljit Titus, founding partner of corporate law firm Titus & Co, observed that Sebi has attempted to bring insider trading norms at part with international norms in US and Europe while trying to address special Indian characteristics. It has also tried to nip in the bud problems which may arise in the future, Titus said.
The high-level committee also said that every company, listed or to be listed, should be required to frame a code of fair disclosure, requiring disclosure of events and circumstances that would impact price discovery of its securities. The new norms will require companies to appoint a compliance officer, and seek details of holdings of all employees and related parties.
Sebi is changing the regulations pertaining to insider trading similar to what it did to the Takeover Code. What this essentially means is that instead of putting patches and bandages on the old regulations, Sebi is making new regulations on insider trading based on the learning and experiences over the last 21 years, said a partner of a Delhi-based corporate law firm.
The new norms also entail outlawing communication of UPSI by any insider except where such communication is legitimately necessary for performance of duties or discharge of legal obligations. Keeping in view of materiality and relevance, the panel has proposed to rationalise the trades disclosure threshold at a value of Rs 10 lakh or more in a quarter.
At present, any trade of above a value of above Rs 5 lakh falls within public disclosure, while public disclosure is also mandatory regardless of value if the securities traded are more than 2,500 in number, or if the shares represent more than 1% of the total share capital. In March this year, Sebi constituted a 15-member committee to review its 21-year old insider trading norms, in order to keep pace with the global developments and regulations on insider trading as well as deter the practice of insider trading in the securities of listed companies.
The committee was headed by headed by NK Sodhi, retired Chief Justice of Karnataka High Court and former presiding officer of the Securities Appellate Tribunal (SAT), and included experts from various sectors of Indias financial markets.