The new insider trading guidelines, the one that overhauls a 23-year-old framework, comes into effect today that has far stricter provisions in certain areas while largely rising at par with the standards set in major developed financial markets such as the US and UK.

Capital markets regulator, the Securities and Exchange Board of India (Sebi) has allowed the use of ‘prearranged trading plans’ prevalent in the US, but any person deemed an “insider” or “connected person” cannot revoke the plan or have multiple or over-lapping trading plans.

“Sebi’s approach is more conservative. In the US, you can write and later cancel that plan,” said Somasekar Sundaresan, partner, J Sagar Associates law firm where he heads the Securities Law and Financial Sector regulatory practice.

Sundaresan was one of the 18 member-High-Level Committee to review and draft new regulations governing insider trading in India. “I think it is an innovation, it will need some time before the idea becomes a success. Opting a trading plan is voluntary but following it is mandatory without any alterations. The benefit is your trade is legitimate and will not be tainted by the possession of UPSI  but there are market risks attached to it too,” Sundaresan added.

Legal experts also highlighted certain challenges with applying a six-month blanket ban on sale of employee stock ownership plans (ESOPs) as well as share pledge by bringing every share pledge by an insider under the purview of the new law.

The earlier model code had specific carve-outs for ESOP “exersales” and for specific situations, and the draft report wanted every board of the company to devise its own periods of such bans. However the final set of regulations states that any contra trade within six months has been banned.

In addition to the blanket ban, an person deemed insider will be required to seek an approval from the compliance officer from exercising his ESOPs. If the approval lapses, an insider will be required to seek approval. During the window of closure, one will not be allowed to exercise ESOPs.

“As currently drafted, there appears to be a restriction on employees from exercising their ESOPs and selling the shares within a six month period. Hopefully, the regulator may offer some clarifications,” said Sandip Bhagat, partner and co-founder, S&R Associates law firm.

Experts also said that new norms will be difficult to impose on commodities and real estate. Even MF units are excluded from the purview on insider trading. As also, communication aspects has practical problems and leaves ambiguity in interpretation of “generally available information”.

Insider trading refers to dealing in securities after having access to unpublished price sensitive information and such practices provide unfair advantage to the entity who has privy to such details.

January this year, market regulator Sebi notified a stricter set of insider trading norms to check illicit transactions in shares of listed firms by management personnel and ‘connected persons’.

The new norms, which will revamp nearly two-decade old regulations on insider trading will also ensure that genuine trades are not impacted.

Besides, greater clarity on concepts and definitions has been put in place along with a stronger legal and enforcement framework for prevention of insider trading under the new set of norms, to be called the Sebi (Prohibition of Insider Trading) Regulations, 2015.

The tightening of norms assumes significance in the wake of Securities and Exchange Board of India (Sebi) coming across cases of insider trading at not just small companies, but at big corporates as well.

Sebi has expanded the definition of ‘insider’ to include persons connected on the basis of being in any contractual, fiduciary or employment relationship that allows such people access to unpublished price sensitive information (UPSI).

Sebi said that a connected person is one who has a connection with the company that is expected to put him in possession of UPSI. The definition will also bring into its ambit persons who may not seemingly occupy any position in a company but are in regular touch with the company and its  officers and are involved in the know of operations.

Under the new framework, Sebi has defined a connected person in the context of insider trading activities. A connected person would be someone who is or has during the past six months prior to the concerned act has been associated with a company, directly or indirectly.

Besides, immediate relatives of connected persons would also come under the same category unless they prove that they were not privy to unpublished price sensitive information.

The onus of establishing that they were not in possession of UPSI would be with the connected persons.

Ttough strictures from sebi
* Sebi allows use of prearranged trading plans, but person deemed  ‘insider’ or ‘connected person’ cannot revoke plan or have multiple or overlapping trading plans
* Challenges with applying a 6-month blanket ban on sale of ESOPs as well as share pledge by bringing every share pledge by an insider under the purview of the new law
* Earlier model code had specific carve-outs for ESOP ‘exersales’ & specific situations but final norms ban contra trade within 6 months
* Person deemed insider will be required to seek an approval from the compliance officer from exercising his ESOPs.

If the approval lapses, an insider will be required to seek approval
* Experts say new norms tough to impose on commodities & real estate
* MF units excluded from purview of insider trading

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