At first glance it does seem that Sebi has accepted many of the Justice Sodhi panel’s recommendations while finalising the new regulations
The Sebi Board has approved new regulations for the prevention of insider trading as well as for delisting. The decision came almost a year after a High Level Committee, led by Justice Sodhi, made recommendations on changes to the Prohibition of Insider Trading regulations, 1992. Based on the information in the Sebi press release, it seems the regulator has adopted many of the Committee’s recommendations, but to what extent and in what language will be clear only when the text of the regulations is published.
The new anti-insider trading regulations seem to be more stringent and have several new features. In this article I have identified the five big changes and offered a comparison to the 1992 regulations and the Committee recommendations.
1. The definition of ‘insider’ and ‘connected person’ has been widened. It is also a clearer definition now, hopefully making for easier enforcement and more wins at SAT!
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NEW: The definition of ‘insider’ has been made wider by including persons connected on the basis of being in any contractual, fiduciary or employment relationship that allows such person access to unpublished price sensitive information (UPSI). However, directors, employees and all other persons in the deeming category covered under 1992 regulations would continue to be covered. Insider will also include a person who is in possession or has access to UPSI. Now, immediate relatives will be presumed to be connected persons, with a right to rebut the presumption. In the 1992 regulations, the definition of connected person was largely position based.
1992: The Prohibition of Insider Trading Regulations, 1992 (1992 regulations) defined ‘insider’ as
(e) “insider” means any person who,
(i) is or was connected with the company or is deemed to have been connected with the company and is reasonably expected to have access to UPSI in respect of securities of [a] company, or
(ii) has received or has had access to such UPSI.
(c) “connected person” means any person who,
(i) is a director, as defined in clause (13) of section 2 of the Companies Act, 1956, of a company, or is deemed to be a director of that company by virtue of sub-clause (10) of section 307 of that Act, or
(ii) occupies the position as an officer or an employee of the company or holds a position involving a professional or business relationship between himself and the company (whether temporary or permanent) and who may reasonably be expected to have an access to unpublished price sensitive information in relation to that company.
Explanation: For the purpose of clause (c), the words “connected person” shall (mean) any person who is a connected person six months prior to an act of insider trading.
The 1992 regulations also provided a long list of circumstances under which a ‘person is deemed to be a connected person’. That ‘deeming’ complication has hopefully been done away with in these new regulations.
COMMITTEE: (e) “connected person” means any person who is or has during the six months prior to the concerned trade been associated with a company in any capacity including by reason of frequent communication with its officers or being in any contractual, fiduciary or employment relationship and includes any person who is a public servant or occupies a statutory position that allows such person access to unpublished price sensitive information relating to the company or is reasonably expected to allow such access; provided that immediate relatives of connected persons shall be deemed to be connected persons unless such relative can establish absence of access or reasonable expectation of access to unpublished price sensitive information.
(h) “insider” means any person who is:
(i) a connected person; or
(ii) in possession of unpublished price sensitive information.
2. The definition of ‘Unpublished Price Sensitive Information’ has been strengthened. But please note that generally acceptable information is still linked to information available on a stock exchange platform. The Committee had sought to widen the sources of information to other than just stock exchange disclosures.
NEW: (v) UPSI has been defined as information not generally available and which may impact the price. The definition of UPSI has been strengthened by providing a test to identify price sensitive information, aligning it with listing agreement and providing platform of disclosure. Earlier, the definition of price sensitive information had reference to company only; now it has reference to both a company and securities.
(vi) Generally Available Information will be the information that is accessible to the public on a non-discriminatory platform which would ordinarily be stock exchange platform.
1992: (k) “unpublished” means information which is not published by the company or its agents and is not specific in nature.
Explanation: Speculative reports in print or electronic media shall not be considered as published information.
(ha) “price sensitive information” means any information which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of company.
Explanation: The following shall be deemed to be price sensitive information:
(i) periodical financial results of the company;
(ii) intended declaration of dividends (both interim and final);
(iii) issue of securities or buy-back of securities;
(iv) any major expansion plans or execution of new projects;
(v) amalgamation, mergers or takeovers;
(vi) disposal of the whole or substantial part of the undertaking;
(vii) and significant changes in policies, plans or operations of the company.
COMMITTEE: (p) “unpublished price sensitive information” means any information that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities to which it relates and will ordinarily include information relating to the following:
(i) financial results;
(iii) change in capital structure;
(iv) mergers, de-mergers, acquisitions, delistings, disposals and expansion of business and such other transactions; and
(v) changes in key management
(f) “generally available information” means information that is accessible to the public on a non-discriminatory basis and shall include research and analysis based thereon.
3. Here onwards even third parties connected to a company will have to disclose their trading/holding in the company’s securities. This provision did not exist in the 1992 regulations and was proposed by the Committee as a discretion left to the company. Sebi seems to have made it mandatory.
NEW: Companies by law would be entitled to require third-party connected persons to disclose their trading and holdings in securities of the company.
1992: This provision is new and is not in the 1992 regulations.
COMMITTEE: (5) Any company whose securities are listed on a stock exchange may, at its discretion require any other connected person or class of connected persons to make disclosures of holdings and trading in securities of the company in such form and at such frequency as may be determined by the company in order to monitor compliance with these regulations.
4. Sebi now intends to permit investor access to unpublished price sensitive information via due diligence. Because the 1992 regulations prohibited communication of UPSI and prohibited trading when in possession of UPSI, it was construed that an investor, such as a PE investor or a strategic acquirer, could not access any non-public information regarding a company when doing due diligence. This proved to be a hurdle in many deals, or so both sides claimed. The Committee proposed removing this hurdle and allowing access to UPSI for legitimate business transactions, i.e. when a takeover offer is involved. Sebi’s Board seems to agree with that. This provision will make life easier for strategic acquirers. For acquisitions that don’t trigger a takeover offer, conditions apply, i.e. the UPSI has to be disclosed two days before the trade.
NEW: To facilitate legitimate business transactions, UPSI can be communicated with safeguards.
The requirement of communication of UPSI in the case of legitimate business transaction has been recognised in law and a carve-out with safeguards has been provided.
Disclosure of UPSI in public domain has been made mandatory before trading, so as to rule out asymmetry of information in the market, as prevalent in other jurisdictions.
Considering every investor’s interest in securities market, advance disclosure of UPSI at least two days prior to trading has been made mandatory in case of permitted communication of UPSI.
1992: 3. No insider shall:
(i) either on his own behalf or on behalf of any other person, deal in securities of a company listed on any stock exchange 19 (when in possession of) any unpublished price sensitive information; or
(ii) communicate (or) counsel or procure directly or indirectly any unpublished price sensitive information to any person who while in possession of such unpublished price sensitive information shall not deal in securities. Provided that nothing contained above shall be applicable to any communication required in the ordinary course of business (or profession or employment) or under any law.
3A. No company shall deal in the securities of another company or associate of that other company while in possession of any unpublished price sensitive information.
COMMITTEE: (3) Notwithstanding anything contained in this regulation, it shall be legitimate to conduct due diligence on a company in connection with the assessment of any transaction that would:
(i) entail an obligation to make an open offer under the takeover regulations where the board of directors of the company is of informed opinion that the proposed transaction and conduct of due diligence therefore are in the best interests of the company;
(ii) not attract the obligation to make an open offer under the takeover regulations but where the board of directors of the company is of informed opinion that the proposed transaction and conduct of due diligence therefore are in the best interests of the company and the diligence findings that constitute unpublished price sensitive information are disseminated to be made generally available at least two trading days prior to the proposed transaction being effected in such form as the board of directors may determine.
5. For insiders likely to have UPSI all the time, such as a CEO or Chairman … any trade in the company’s shares can be hazardous. But that is an unfair limitation. Hence the Committee had suggested the creation of trading plans, under which insiders can trade at pre-scheduled times. This Committee recommendation has also been accepted by Sebi and features in the new regulations.
NEW: A provision of Trading Plans on the lines of the US has been introduced for insiders with necessary safeguards. Such a plan has to be for bona fide transactions and has to be disclosed on stock exchange platform in advance.
Insiders who are liable to possess UPSI all round the year would have the option to formulate pre-scheduled trading plans. Trading plans would, however, to be disclosed on the stock exchanges and have to be strictly adhered to. Trading plans shall be available for bona fide transactions.
1992: The 1992 regulations had no such provision.
COMMITTEE: 5. (1) An insider shall be entitled to formulate a trading plan and present it to the compliance officer for approval and public disclosure pursuant to which trades may be carried out on his behalf in accordance with such plan.
(2) Such trading plan shall:
(i) not entail commencement of trading on behalf of the insider earlier than six months from the public disclosure of the plan;
(ii) not entail trading for the period between the twentieth trading day prior to the last day of any financial period for which results are required to be announced by the issuer of the securities and the second trading day after the disclosure of such financial results;
(iii) entail trading for a period of not less than twelve months;
(iv) not entail overlap of any period for which another trading plan is already in existence; and
(v) 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, or dates on which such trades shall be effected.
DISCLOSURE: I was a member of the High Level Committee set up by Sebi last year to review the PIT Regulations, 1992. That said, this article is a journalistic effort and not a comment on what the Committee recommended or what Sebi has accepted.
Menaka Doshi is Executive Editor at CNBC TV18. Views are personal.
(Equal & Opposite is a column that explores business practices prompted by legal & regulatory action and vice-versa)