MUMBAI, AUG 12: Beware insider traders, the regulator is closing in on with a new set of rules and regulations. If the draft insider-trading rules released by the Securities and Exchange Board of India (SEBI) last week is accepted by its board, every company, institution and mutual fund will have to set up a compliance department. The SEBI group which looked into the issue of insider-trading (trading in the shares using price sensitive information which is not known to others), highlights the need for adequate internal procedures and guidelines for companies and other entities backed by a regulatory mandate. The draft report has set out the basic principles for ensuring fairness and transparency in markets and prevention of insider-trading. This is the second effort by the SEBI to formulate clear-cut norms to curb insider-trading. Although the SEBI had issued guidelines against insider-trading four years ago, the menace was continuing in view of several loopholes in the system. ``It is to be seen whether the new rules will be effective in the Indian system,'' said a corporate analyst. The panel has said a senior employee has to be designated as compliance officer reporting to the managing director. The compliance department would be responsible for the preservation of confidential information, pre-clearing of all employee and their dependents trades, monitoring of trades and the implementation of the code of conduct under the overall supervision of the company's board. All transaction in securities by the employees/directors should be reported to the compliance department. Mutual funds, banks, financial institutions and credit rating agencies are among the entities to be governed by the insider-trading regulation, in addition to the companies and other intermediaries, according to the draft. Another important recommendation is the confidentiality agreement which requires all employees/directors to sign a confidentiality agreement undertaking an obligation to protect the confidentiality of information obtained while working with the company. The obligation would continue for six months after the employee leaves the company. The draft rules seeks to set up a `trading window' or a limited trading period for trading in the company's securities. The period prior to declaration of price sensitive information is a particularly sensitive for transactions in the company's securities. This sensitivity is due to the fact that employees/ directors will, during that period, often possess unpublished price sensitive information. The trading window should be sensitive to, but not limited to financial results; declaration of dividends; issue of securities by way of public/rights/bonus etc.; any major expansion plans or execution of new projects; amalgamation, mergers and takeovers; disposal of whole or substantially whole of the undertaking; any changes in policies, plans or operations of the company. Essentially, during such sensitive times, the trading window will be closed and the employees/directors will have to forego the opportunity to trade in the company's securities in such period. All employees/ directors of the company are expected to conduct all their dealings in the securities of the company only in a valid trading window and are advised not to engage in any transaction involving the purchase or sale of the company's securities during sensitive periods as indicated above or during any other sensitive period as may be notified by the company from time to time. Besides, employees/whole-time directors shall execute their securities transactions only through designated broker approved by the compliance department. The report also recommends a lock-in for employees/whole-time directors' holding in order to be considered as being held for investment purposes. The lock-in will also apply to purchases in the primary market. In the case of IPOs, the lock-in will commence when the securities are actually allotted.The compliance department will not pre-clear any trade that would cause short-term profit. The draft report has suggested sweeping powers for regulation of short-swing profits by insiders. "The liability of an insider for short-swing profits, however, is not dependent upon a proven or actual use of inside information and may be imposed regardless of good faith." Short-swing profits may arise out of volatility or something that is very short-term in nature. Regulations in other jurisdictions also provide for strict liability on insiders who purchase and sell the company's stock within a period of six months, says the report. All insiders are liable to return to the company any "profits" made on "short-swing" transactions in the company's securities. The purpose of this regulation is to prevent the unfair use of information about the company, which may have been obtained by insiders by virtue of their position. This provision will be introduced after debate and comments, adds the report.
