Author: Vaishali Bhadouria, Jiwaji University
People who are in the management of the company or are close to them on the basis of undisclosed price sensitive information regarding the working of the company, which they possess but which is not available to others.
Insider Trading generally means trading in the shares of a company by the concept of Insider Trading in India started fermenting in the 80’s and 90’s and came to be known and observed extensively in the Indian Securities market. The rapidly advancing Indian securities market needed a more comprehensive legislation to regulate the practice of Insider Trading, thus relating in the were amended in the year 2002 after the discrepancies observed in1992, regulation in the cases like Hindustan levers ltd. V. SEBI, Rakesh Agarwal V. SEBI, etc. to remove the lacunae existing in the regulations of 1992.
The amendment in 2005 came to be known as the SEBI (Prohibition of Insider Trading) Regulations, 2005.
Insider Trading is illegal and the same is liable to huge penalties. Under the SEBI Act,1992 [Section 15G] an insider shall be liable to a penalty which shall not be less than Rs. 10 lakh but which may extend to Rs. 25 crore or 3 times of profits out of insider trading, whichever is higher.
As per the Insider Trading Regulations of SEBI Act1992, Insider Trading is the trading of a public company’s stock or other securities by individuals with formulation of the SEBI (Insider Trading) regulation in the year 1992, which access to non- public information about the company. In various countries, trading based on insider Information is illegal.
Thus, in insider trading an insider takes undue advantage of ‘Price Sensitive Information’ for his personal benefits.
As per the Insider Trading Regulation 2(g), an Insider means any person who is:
(i) A connected person or
(ii) In possession of or having access to unpublished price sensitive information.
As per the Insider Trading Regulation 2(d) (i) Connected person means –
· Any person who is or has during the 6 months prior to the connected act has been associated with a company, directly or indirectly, in any capacity including by reason of frequent communication with its officers or an by being in any contractual, fiduciary or employment relationship or by being a director, officer, or an employee of the company or holds any position including a professional or business relationship between himself and the company whether temporary or permanent, that allows such persons, directly or indirectly, access to unpublished price sensitive information or is reasonably expected to allow such access.
DEEMED TO BE CONNECTED PERSONS
As per the Insider Trading Regulation 2(d) (ii) Connected person means –
· An immediate relative of connected persons specified in clause (i) of Regulation 2(d) or
· A holding company or associate company or subsidiary company or
· An intermediary as specified in Section 12 of the SEBI Act,1992 or an employee or director
· An investment company, trustee company, AMC or an employee or director thereof or
· An official of the stock exchange or of clearing house or corporation or
· A member of board of trustee of a mutual fund or a member of board of directors of the AMC of a mutual fund or is an employee thereof or
· A member of board of directors or an employee of public financial institution or
· An official or an employee of a self- regulatory organization recognized or
· A banker of the company or
· A concern, firm, trust, HUF, company or AOP wherein a director of a company relative or his immediate relative or banker of the company, has more than 10% of the holding or interest.
UNPUBLISHED PRICE SENSITIVE INFORMATION
As per the Regulation 2(n) of the SEBI Act,1992, Unpublished price sensitive information means any information, relating to the company or its securities, directly or indirectly, that is not generally available and which upon becoming generally available, is likely to materially affect the price of the securities and ordinarily includes information relating to the following:
(a) Financial results
(c) Change in capital structure
(d) Mergers, demergers, acquisitions, de-listings, disposals, and expansion of business and such other transactions
(e) Changes in KMP and
(f) Material events in accordance with the listing agreement.
In the matter of MR. VIDYADHAR D VARDAM, M/S. AVENUE SUPERMARTS LIMITED AND MS. ASHU GUPTA v. SEBI:
Issue: Whether Avenue Supermarts Limited was guilty of violating Regulation7 (2)(a) and Regulation7(2)(b) of the SEBI Act, 1992 Regulations?
SEBI find that the allegations of violation of Regulation 7(2)(a) of the PIT Regulations against the Notice 1, for making delayed disclosures on five (5) occasions stands established. SEBI also finds that the allegation of violation of Regulation7(2)(b) of the PIT Regulations against the Notice 2 and allegations of violation of Regulation 9(3) read with 7(2) of the PIT Regulations against the Notice 3 for making delayed disclosures on (1) occasion stands established. Having considered all the facts and circumstances of the case, the material available on record, the submission made by the Noticees and also the factors mentioned in the Section 15J of the SEBI Act and in exercise of the powers conferred under section 15-I of the SEBI Act with Rule 5 of the Adjudication Rules, SEBI hereby impose penalties on Noticees namely Mr. Vidyadhar d vardam, Avenue Supermarts Limited, Ms. Ashu Gupta Rs. 2,00,000/-, Rs. 3,00,000/-,Rs. 1,00,000/- respectively, under the provisions of Section 15A (b) of the SEBI Act.
RESTRICTIONS ON COMMUNICATION OR PROCUREMENT OF UNPUBLISHED PRICE SENSITIVE INFORMATION
(1) Insider shall not communicate, provide or allow access to any unpublished price sensitive information relating to the company or its securities to any person. However, there is prohibition to communicate where such communication is in
· Furtherance of legitimate purposes
· Performance of duties
· Discharge of legal obligations
(2) A person shall not procure from the insider of unpublished price sensitive information.*
· Furtherance of legitimate purposes.
· Performance of duties
· Discharge of legal obligations
(3) An unpublished price sensitive information may be communicated provided, allowed or procured, in connection with the following transactions:
· ‘Open offer’ under the takeover regulations if the board of the directors is of the opinion that the proposed transaction is in the best interests of the company.
· Transactions that do not entail an open offer obligation under the takeover regulations if it is in the best interests of the company. The board of directors, however, would cause public disclosures of such unpublished price sensitive information well before the proposed transaction to rule out any information asymmetry in the market.
(4) The board of directors shall require the parties to execute agreements to contract confidentiality and non- disclosure obligations and parties shall keep the information received confidential and shall not otherwise trade in securities when in possession of unpublished price sensitive information.
*Mr.Prannoy Roy and Mrs. Radhika Roy vs. Securities and Exchange Board of India.
DISCLOSURES OF TRADING INSIDERS
· Every promoter, KMP and director of a listed company shall disclose his holding of securities to the company within 30 days of these regulations taking effect.
· Every person on appointment as KMP or a director of the company or upon becoming a promoter shall disclose his holding of securities of the company within 7 days of his appointment as KMP, director or becoming a promoter.
· Every promoter, employee and director of every company shall disclose to the company the number of securities acquired or disposed of within 2 trading days if the value of securities traded over any calendar quarter exceeds Rs.10 lakh or such other value as may be specified.
· On receipt of above information, the company shall notify the same to the stock exchange within 2 trading days of receipt information or from becoming aware of such information.
DISCLOSURES BY OTHER CONNECTED PERSONS:
A listed company may at its discretion require any other connected person to make disclosures of holding and trading in securities in such form and at such frequency as may be determined by the company in order to monitor compliance.
CODE OF FAIR DISCLOSURE
The board of directors of every listed company shall formulate and publish on its website a code of practices and procedures for fair disclosure of unpublished price sensitive information. Such code of practices should adhere to the principles set out in Schedule A.
CODE OF CONDUCT
The board of directors of every listed company and market intermediary shall formulate a code of conduct to regulate, monitor and report trading by its employees and other connected persons towards achieving compliance with insider trading regulations. Such code of conduct should be formulated adopting the minimum standards set out in Schedule B.
The Insider Trading Regulations have substituted the 1992 Regulation and have tried to address the problem of insider trading fully. SEBI has significantly amended the regulations and the framework related to insider trading in India and has widened the scope and definition of an ‘insider’ and ‘connected person’. SEBI has adopted a ‘zero-tolerance approach’ for the cases involving trading based on UPSI.
(Mr.Prannoy Roy and Mrs. Radhika Roy vs. Securities and Exchange Board of India)