Sebi panel proposes stricter insider trading norms

Panel wants to bring public servants under its purview,put onus on insiders to prove innocence.

Written by PTI | Mumbai | Published: December 11, 2013 8:33 pm

In wide-ranging reforms of insider trading norms,a Sebi-appointed panel today proposed bringing in public servants handling share price-sensitive information under its purview and put the onus on the insiders to prove they have not breached any law.

The new norms,which would also apply to mutual funds and trusts issuing securities or schemes that get listed on stock exchanges,would also require companies to seek entire holdings of all employees and third-party connected persons.

Besides,all trades by promoters,employees,directors and their immediate relatives (which would cover close relatives who are either financially dependent or consult the insider in connection with their trading) would be required to be disclosed to the company.

“Simply put,the Proposed Regulations entail a prohibition on trading by insiders in securities when in possession of UPSI (Unpublished Price Sensitive Information),thus obtaining an unfair advantage,” the panel said in its 74-page report submitted to Sebi.

The panel,chaired by N K Sodhi,Former Chief Justice of Kerala and Karnataka and a Former Presiding Officer of the Securities Appellate Tribunal,was set up by Sebi in March this year to review nearly two decade-old insider trading norms and included experts from various sectors.

The new norms also “entail outlawing communication of UPSI by any insider except where such communication is legitimately necessary for performance of duties or discharge of legal obligations.”

Besides,definition of the term ‘connected person’ has been changed to “explicitly include public servants who handle UPSI relating to listed companies”.

Among other proposals,whether an insider who has traded in securities is a connected person,the onus of establishing that he was not in breach of the prohibition will be on him.

Besides,the companies would be required to keep record of all holdings by all employees,while third-party connected persons,who are not employees,will also need to disclose their trading and holdings in securities of the company.

At the same time,the threshold beyond which public disclosure is mandated has been materially enhanced.

Currently,any trade of above a value of above Rs five lakh falls within public disclosure,while public disclosure is also mandatory regardless of value if the securities traded are more than 2,500 in number,or if the share represent more than one per cent of the total share capital.

In view of “materiality and relevance”,it has been recommended to rationalise the trades disclosure threshold at a value of Rs 10 lakh or more in a quarter.

The panel also said that every company,listed or to be listed,should be required to frame a “code of fair disclosure”,requiring disclosure of events and circumstances that would impact price discovery of its securities.

Besides,all listed firms and market intermediaries would be required to formulate a code of conduct to regulate,monitor and report trading by staff and connected persons.

All other persons who handle Unpublished Price Sensitive Information may also be required to frame similar codes of conduct.

Insider trading-dealing in securities with prior access to unpublished price-sensitive information — has been attracting regulatory attention worldwide.

However,certain outdated provisions of existing norms have been misused by the offenders to escape regulatory action,thus requiring a review of the regulations.

“In India,insider trading is not only a tort,that is a civil wrong but also a crime,” the panel said.

“The Committee feels that by its very nature,insider trading is difficult to prove and the initial burden to bring home a charge could be heavy. However,where the charge is indeed established,delinquent should be dealt with severely and in an exemplary manner in accordance with the rule of law.

“Such an approach would send a proper signal to the market about the seriousness of the issue,and about the approach of the regulator within the parameters of what can be justified in law,” it said.

The Securities and Exchange Board of India (Sebi) said that trading in listed securities,while in possession of UPSI would be prohibited except in certain situations.

“Insiders are prohibited from communicating,providing or allowing access to UPSI unless required for discharge of duties,” Sebi said.

Sebi said that insiders who are liable to possess unpublished price sensitive information round the year are permitted to formulate trading plans with appropriate safeguards.

“Insiders who are liable to possess UPSI all round the year would have the option to formulate pre-scheduled trading plans. In such cases,the new UPSI that may come into their possession without having been with them when formulating the plan would not impede their ability to trade,” Sebi said.

“Trading plans would,however,be required to be disclosed to the stock exchanges and have to be strictly adhered to,” it added.

The regulator said: “Conducting due diligence on listed companies is permissible for purposes of transactions entailing an obligation to make an open offer under the Takeover Regulations.”

In all other cases,due diligence would be permissible subject to making the diligence findings that constitute UPSI generally available prior to the proposed trading.

Besides,the board of directors would need to opine that permitting the conduct of due diligence is in the best interests of the company,and would also have to ensure execution of non-disclosure and non-dealing agreements.

The regulator asked board of directors of every company to formulate and publish on its official website,a code of practices and procedures for fair disclosure of material information that they would follow in order to adhere to each of the principles.

It also asked listed companies to designate a senior officer as a chief investor relations officer to deal with dissemination of information and disclosure of material information.

The Sebi’s panel has sought public comments on the new insider trading norms by December 31,2013.

The panel has made a range of recommendations to the legal framework for prohibition of insider trading in the country and has focused on making this area of regulation more predictable,precise and clear by suggesting a combination of principles-based regulations and rules that are backed by principles.

“The committee has also suggested that each regulatory provision may be backed by a note on legislative intent,” Sebi said in a statement.

It said that every listed company and market intermediary is required to formulate a code of conduct to regulate,monitor and report trading in securities by its employees and other connected persons.

“All other persons such as auditors,law firms,accountancy firms,analysts,consultants,etc,who handle UPSI in the course of business operations may formulate a code of conduct and the existence of such a code would evidence the seriousness with which the organisation treats compliance requirements,” the panel said.

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