The new insider trading norms proposed by a Sebi-appointed committee are likely to add to the compliance cost of companies, especially small and mid-sized firms. Experts also pointed out that while the norms are a step in the right direction, enforceability will be a challenge.
“The new norms will definitely add to the compliance and procedural costs as the companies will have to monitor the trades and have a dedicated compliance team to adhere to the regulations. They will also need to have a contractual agreement with third parties, which will be a challenge for the management,” said Rupali Sharma, senior resident partner, Kochhar & Co. According to the new norms, companies will require third-party connected persons, who are not employees, to disclose their trading and holdings in securities of the company. Also, every listed company and market intermediary will need to prepare a code of conduct to regulate, monitor and report trading in securities by its employees and other connected persons.
“These norms seem to be rigorous and the provisions will be difficult to comply with. I am not so sure how many companies will opt for such trading plans under the current guidelines,” said a partner in a lawyer firm. “The implementation will be slightly complicated,” added Sandeep Parekh, founder, Finsec Law Advisors. “For example,” he says, “if a person plans to sell ‘X’ amount of shares under the trading plan and the stock price falls by 30%, the concerned person will be reluctant to sell these shares. In that case, how do you stick to the plan or is there a way out?”
According to the new norms, insiders liable to possess unpublished price sensitive information (UPSI) have the option to formulate pre-scheduled trading plans. “In such cases, the new UPSI that may come into their possession without having been with them when formulating the plan would not impede their ability to trade. Trading plans would, however, be required to be disclosed to the stock exchanges and have to be strictly adhered to,” the new guidelines said. “There is no clarity on how much information will have to disclosed to the exchanges with regard to the trading plan in terms of volumes, specific trades, etc,” said Sharma.
Under the new norms, due diligence for companies not under an obligation to make an open offer under the Takeover Regulations would be permitted if the diligence findings constituting UPSI are made available prior to the proposed trading. “Disclosures can work against the company, especially if used by competitors,” said Parekh.
“The new norms are a step in the right direction, but enforcement is the key. They will only act as a deterrent if there is conviction in a few high-profile cases,” said Shriram Subramanian, founder and managing director, InGovern, a corporate governance research firm. “Even in the US, proving insider trading is always a challenge even when the authorities resort to measures such as tapping phone wires.”