By Vaneesa Agrawal
Insider trading is trading on the basis of unpublished price sensitive information (UPSI) that is not generally available to everyone. Insider trading is prohibited since it allows certain individuals with access to UPSI to profit from information asymmetry. In recent times, SEBI has stepped up the regulation of insider trading. In 2015, SEBI had put in place a new framework for prohibition of insider trading based on the report of an expert committee. Subsequently, SEBI set up another committee in 2017 under the chairmanship of TK Viswanathan to review the 2015 regulations. Based on the recommendation of this committee, SEBI made significant amendments to the 2015 regulations on the last day of 2018. To allow market participants to realign their internal procedures, SEBI has made these amendments effective from April 1, 2019.
Widening the ambit
The recent amendments have broadened the applicability of the regulations. The requirement for reporting trades and seeking pre-clearance before trading in the company’s shares has been extended to senior employees of material subsidiaries and promoters of listed companies. The new requirements mandate that listed companies have to maintain records of personal information (including PAN, mobile number) of their directors, employees and their immediate relatives, and persons with whom such employees share a material financial relationship. The inclusion of persons with whom employees have material financial relationship is a much-needed inclusion. However, SEBI has decided to drop the requirement of disclosures about persons staying at the same address, as was recommended by the committee, based on public comments.
These records, especially mobile number, will make it easier for SEBI to establish a connection between the company and the person who trades, and provide valuable inputs during the investigation of leakages of UPSI. While SEBI already has access to call data records, it has now decided to send a proposal to seek power to intercept calls and electronic communication to the government. SEBI has also used Facebook to establish connections between insiders in certain cases. With the use of these records, technology and SEBI’s sophisticated surveillance systems, we can expect a much higher possibility of insider trading complaints being more effectively investigated.
Crackdown on leaks
These amendments come on the heels of several directions passed by SEBI against listed companies (including Axis Bank, Tata Motors, HDFC Bank) to ascertain leakage of confidential financial results in private WhatsApp groups ahead of their official announcements to the respective stock exchanges. The recent amendments make it clear that the regulator is rightly concerned about leakage of sensitive information and difficulty in identifying the origin of such leaks.
To assist in identifying the source of leaks, listed companies are now required to have internal controls for identifying inside information and maintain lists of employees and other persons with whom such information is shared. They are also required to periodically review their internal processes to evaluate effectiveness of internal controls. Listed companies are required to intimate the persons receiving UPSI of their obligations towards preventing misuse of such information for insider trading, by way of an advance notice.
The latest amendments require boards of listed companies to put additional policies in place, including a policy for determining what constitutes legitimate purpose, whistle-blower policy for reporting leaks of UPSI and inquiry policy for determining the source of leaks. These policies are aimed at monitoring the flow of UPSI and encouraging employees to inform the company about any suspected leaks of UPSI. It will be interesting to see how effective the whistle-blower policy for reporting leaks turns out to be and whether internal investigations by listed companies are able to identify the source of leaks.
In the 2015 regulations, SEBI included a provision that in case of connected persons, the onus of establishing that they were not in possession of UPSI will be on such connected persons, whereas in all other cases it will be on the regulator. SEBI has now inserted an explanation clarifying that when a person who has traded is in possession of UPSI, his trades will be presumed to be motivated by such UPSI.
In its efforts to increase ease of doing business, SEBI has added certain defences to the charge of insider trading such as any transaction that is carried out in pursuance of a statutory or regulatory requirement. SEBI has also included exercise of stock options at a predetermined price as an exception. The defence available for off-market inter se transfers between promoters, who were in possession of the same UPSI, has been extended to all insiders. A similar defence has been included for trades carried out through the block deal window mechanism.
These amendments have far-reaching consequences for everyone who deals with UPSI of listed companies. SEBI has signalled its intent to clamp down on leakage of UPSI, and is clearly trying to change the social culture of casually discussing UPSI. While the unauthorised communication of UPSI has always been illegal, these new amendments are likely to make it easier to identify the source of leakages. In the future, we can expect orders penalising insiders for leaking UPSI, even if they do not trade on it themselves. Incidentally, the charge against Rajat Gupta in the US was one of unauthorised communication of UPSI, not trading. In view of these recent amendments, listed companies should be far more careful in designing internal controls for handling UPSI and conduct regular training of their employees to ensure UPSI is handled in a responsible manner.
(The author is a former SEBI official and founder of Thinking Legal)