I bet most of us have watched the 2018 Bollywood movie, Bazaar, which was based on Insider Trading of Unpublished Price Sensitive Information (hereinafter referred to as “UPSI”) of certain fictitious Indian Companies listed on the Indian Stock Exchange. Primarily, the movie enumerates how a top-notch diamond merchant and trader, Shakun Kothari, trades shares and makes handsome profits by obtaining UPSI. So, is making profits via trading a crime? No, but trading on the basis of UPSI which ultimately leads to manipulation of the prices of shares to incur profits is certainly prohibited by law and you may be surprised to find out how often this happens in the world of Share Market. This is essentially known as ‘Insider Trading’. In this Article, we will be discussing the Regulations concerning Insider Trading in India.
What is Insider Trading?
The act of disclosing UPSI in order to manipulate the shares of a listed company is known as insider trading. Therefore, the information exchanged must not be known to the public, if the information is already public knowledge, then the trade made on the basis of such information would not deem to be insider trading. Consequently, in order to understand the concept of insider trading, we must make an attempt to define and understand the meaning of UPSI.
What is Unpublished Price Sensitive Information?
UPSI has been defined in section 2 (1) (n) of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (hereinafter known as “Regulations”). As per the aforementioned section, UPSI is the kind of unpublished information that is related to the securities of the company or the company that upon disclosure would materially affect the price of securities. Such UPSI shall be related to, but not restricted to material events in accordance with the listing agreement, financial results, dividends, change in capital structure, mergers, de-mergers, acquisitions, delistings, disposals and expansion of business, and such other transactions and changes in key managerial personnel. The term UPSI can be widely interpreted to include the minutest detail. This owing to the fact that any information that is not known to the public or has not been disclosed to the necessary authorities or the public at large and is likely to cause a material change in the price of the securities of a listed company could be regarded as UPSI. For instance, disclosing the financial statements on social media before intimating
When can Unpublished Price Sensitive Information be disclosed?
Where the communication is for legitimate purposes, performance of duties or discharge of lawful obligations, UPSI may be communicated, provided, allowed access to or procured, in connection with a transaction that would involve an obligation to make an open offer under the takeover regulations whereby the board of directors (hereinafter referred to as “BOD”) of the listed company are of informed opinion that sharing of UPSI is in the best interests of the said company.
What is Regulation 3 of SEBI (Prohibition of Insider Trading) Regulations, 2015 and why is it so important?
Regulation 3 is one of the most important regulations as it enumerates restrictions on communication or procurement of UPSI. As per 3 (1) of the Regulations, an insider is refrained from communicating, providing, or giving access of a company’s UPSI or of a security that is listed or going to be listed, to any person including any other insiders. This can only be acceptable where the aforesaid communication of UPSI is for some legitimate purposes, discharge of some kind of legal obligation or performance of duties. Regulation 3 (2) is quite similar to 3 (1) as it states that nobody is entitled to obtain the UPSI as mentioned in Regulation 3 (1). Therefore, restricting unlawful procurement of UPSI.
Nonetheless, one may procure UPSI when it is in relation to a transaction that consists of an open offer as per takeover regulations and it is in the informed opinion of the BOD that sharing the said UPSI is in the company’s best interest. Regulation 3 (3) states that in case the transaction does not have an obligation to make an open offer, but it is in the informed opinion of the BOD that sharing the said UPSI is in the company’s best interest and the UPSI is made available 2 trading days before the transaction coming into effect in a way that is fair and adequate to entail all the material facts. The Parties would then be required to sign a confidentiality agreement by the BOD and would have to keep the information private and confidential except in the manner prescribed in Regulation 3 (3).
Further, they would be prohibited from trading in securities as long as they possess the said UPSI. Regulation 3 (5) mandates maintenance of a structured Digital Database. The said database would contain all such persons’ or entities’ names who are in possession of the UPSI. It would also include their PAN. Where PAN is not available, it would include any other unique identifier authorized by law. Since it would contain the nature of UPSI, it is to be maintained internally and not outsourced. All the necessary measures like time stamping and audit trails must be carried out to ensure that no data contained in the database has been tampered with.
Can an insider trade while in possession of USPI?
It is quite obvious that an insider who is in possession of a UPSI cannot trade securities that are listed or proposed to be listed in the market. Nonetheless, trading whilst in possession of UPSI is permitted where there is an off-market inter-se transfer between insiders in possession of the same UPSI, or where the transaction is through the block deal window mechanism between persons knowing the same UPSI, provided the parties have made informed trade decision and that such information was not obtained by contravening Regulation 3. Further, it is pertinent for such insiders to inform the Company within two working days. Post obtaining the aforesaid information, the Company is required to disclose this information to the stock exchange within two working days after the receipt of the information.
What is Chapter III A of SEBI (Prohibition of Insider Trading) Regulations, 2015?
An amendment was made to the Regulations in 2019 and Chapter IIIA was added. The said amendment was called SEBI (Prohibition of Insider Trading (Third Amendment) Regulations, 2019. The said Chapter gave impetus to rewarding and providing incentives to the informants who made Voluntary Information Disclosure related to any alleged insider trading that has occurred, may occur or is occurring. The informant is required to submit a form as set out in Schedule D either by a legal representative or may be asked to appear in person in order to ascertain his identity and the said information. Such information is to be submitted to the Office of Informant Protection of SEBI. The informant should expunge such information from the form that would reveal his or her identity.
What are Principles of fair Disclosure?
The following are Principles of fair disclosure:
- The public disclosure of UPSI should be prompt.
- The UPSI shall be disseminated in a uniform and universal manner in order to avoid selective disclosure of UPSI.
- The aforesaid disclosure and dissemination shall be dealt with by a Chief Investor Relations Officer. Such a Chief Investor Relations Officer should be a Senior Officer.
- Prompt dissemination of UPSI that gets disclosed selectively, inadvertently or otherwise to make the UPSI generally available.
- The UPSI should be handled on a need–to–know basis.
- It shall be ensured that UPSI is not being shared with analysts and research personnel.
- Inculcating practices like making transcripts or records of proceedings of meetings with analysts on the website to make sure that documentation of the disclosures is being made.
What are some of the minimum standards for Code of Conduct?
The following are some of the minimum standards for Code of Conduct.
- Trading in securities by the designated person and their relatives is prohibited once the trading window closes.
- The Compliance Officer is mandated to close the trading window when he notices that a designated person or class of designated person is in possession of UPSI.
- Internal Codes of Conduct governing dealing in Securities shall be applicable to all designated person and their relatives.
- The Compliance Officer is to determine the re-opening of the trading window after taking various factors into consideration like the UPSI being generally available and being capable of assimilation by the market, which in any event shall not be earlier than 48 hours after the UPSI is made generally available.
In 1992, SEBI introduced a regulation governing insider trading in India and it was called the Prohibition of Insider Trading Regulation, 1992, also known as the PIT Regulation. Since it had certain deficiencies, the present Regulations were framed and brought into play. It can be observed that the Regulations are fairly detailed. With recent amendments to the Regulations, it has become even more fairly worded and concrete than before. Notwithstanding the contents of this Article, the Regulations cover a wide range of topics and concepts that include, but are not limited to the institutional mechanism for prevention of insider trading, bifurcation of disclosure trading plan, and lists down the penalties for violations of the Regulations.
- Securities Laws and Capital Markets Module by ICSI.