Sebi has promulgated the new Prohibition of Insider Trading Regulations, 2015, replacing the 1992 regulations to provide a framework for prohibiting insider-trading in securities. The new regulations, effective from May 15, 2015, are unique given they carry “legislative notes” as an integral part. These notes are provided at the end of each regulation, explaining the principle of that regulation in brief; this will prove very useful in understanding the legislative intent and scope thereof.
Trading in listed securities while possessing unpublished price-influencing information (UPII) is prohibited. However, the regulations provide certain defences that an insider may use to prove his innocence, like any inter se transactions between promoters who possess the same UPII, any trade in securities pursuant to trading plans.
The definition of “connected person” is extremely important to define an “insider”. The new regulations have widened the definition of “connected person” to include any person associated with a company, directly or indirectly, “in any capacity”, whether by the virtue of frequent communication with the company’s officers or by being in any contractual, fiduciary or employment relationship that allows the said person to access UPII or is reasonably expected to allow such access. This wide definition will bring within its ambit even those who may not hold any position in a company but are in regular touch and communication with the company and its officers and are therefore privy to the company’s operations.
Immediate relatives of a connected person will also be counted as insiders, provided such relatives are financially-dependent on the connected person or seek consultation of the connected person in taking decisions related to their trading in securities.
Interestingly, public servants and persons holding statutory positions (like a secretary in the government or a judge of high court) who are reasonably expected to have access to UPII (originally proposed to be brought within the ambit of the ‘insider’ definition) have been kept outside the purview of the new regulations. Therefore, a secretary in the government engaged in drafting a new policy on a matter that could result in an impact on price of listed securities will not be considered an insider under the new regulations.
The term “generally available information” has been defined to mean information that is accessible to the public on a “non-discriminatory basis”. “Non-discriminatory basis” would mean information that can be accessed by any person without any breach of law. Therefore, any information which is “generally available information” will not constitute UPII. Whether or not information is generally available will always be a question of facts and circumstances.
Units of mutual funds have been specifically excluded from the definition of securities. Therefore, any subscription, buying, selling, dealing or agreeing to subscribe, buy, sell or deal in any units of mutual funds will not attract these regulations.
The ambiguity in selectively sharing UPII with a potential acquirer/investor in transactions like takeovers, mergers and acquisitions, change in control, etc, has been removed. It was always a debatable point if UPII can be shared with a potential acquirer/investor during due diligence.
The regulations now make it absolutely clear that UPII may be communicated or allowed access to or procured in connection with any transaction which would result in an open offer under the takeover regulations, provided the board of directors of the target company is of the informed opinion that the transaction is in the best interests of the company. Even for transactions which do not attract an open offer under the takeover regulations, UPII can be communicated, allowed access to or procured provided that such UPII is made generally available to public at least 2 trading days prior to the proposed transaction being effected. The UPII has to be disseminated well before the proposed transaction is effected to rule out any information asymmetry in the market. Additionally, irrespective of the fact whether or not the open offer gets responses, in the situations described above, the parties involved in takeovers, mergers and acquisitions and change in control transactions will have to execute a confidentiality-agreement and they should not trade in securities of the company during the time the parties are in possession of UPII.
A new concept of “trading plans” has been introduced. An insider is permitted to draw up a trading plan and have it approved by the compliance officer and then disseminate to the general public by disclosing it to the stock exchanges. The trading plans will enable an insider to plan his trades to be executed in future. Any trading in securities pursuant to such approved and publicly disclosed trading plan will not make the insider guilty of contravening the insider trading regulations. Trading plans are intended to provide an option to the persons who are perpetually in possession of UPII and enable them to trade in securities without violating the regulations. However, there are stringent conditions with regards to such trading plans. An insider will not be permitted to trade in securities earlier than 6 months from the public disclosure of the plan; there will be restriction of trading between the 20th trading day prior to closure of the financial period and up to the second trading day after the disclosure of financial results upon close of the said financial period; trading plans should be made for at least 12 months and there shouldn’t be multiple trading plans operating at the same time. It is important to note that trading plan once approved will become irrevocable and the insider will have to mandatorily implement the plan without any deviation and without executing any trade in securities in any manner other than what is set out in the plan.
Like the 1992 regulations, the new regulations also provide for disclosures by promoters, KMP, directors and employees. The regulations also provide for codes of fair disclosure and conduct.
By Lalit Kumar
The author is a partner with J Sagar Associates. Views are personal