Regulating Insider Trading: An Overview

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The Insider Trading subsists of those securities transactions wherein any person connected with the company have such confidential information though unpublished, having the tendency to impact on the company’s market price utilize such for their personal benefits. India being the 9th largest economy as the market capitalization recently exceeded U.S $ 1.6 trillion, has also recognized the detrimental impact of insider trading on the financial markets and the rights of the public shareholders. Thus, Securities and Exchange Board of India (SEBI) notified Prohibition for Insider Trading Regulations 2015 which replaced past two decades old insider trading norms, i.e.SEBI, 1992regulations.

Further, SEBI formulated an 18 member committee for framing the regulations on the basisof its member’s recommendations. This committee was headed by the Chief Justice (former) of the Kerala High Court. The recommendations have been incorporated in the regulations.To boost investor’s certainty to maintain the impetus, SEBI has been focusing on progressing and regulating the Indian Capital market. There were considerable insufficiencies in the 1992 regulations with regard to the interpretation, method of drafting and its outreach. In addition to these, SEBI introduced numerous amendments in the 1992 regulations to cover up the loop hole. Nevertheless, peer reviews were required in the old regime and stipulate a better and robust mechanism that runs parallel to the global standards to curb the insider trading.

Insider trading leads to ‘charge’ that has been extended and suggested to be listed on the stock exchange. Therefore the 2015 regime was an expansion of the 1992 regulation which was applicable exclusively for the companies listed on the stock exchange. There has been reinforcement in these regulations about the concept of who is an ‘insider’.

The domain of connected persons as per the regulations has been expanded for the purpose of including people connected with company, whether it is a contractual employment fiduciary relationship. The regulations features the constitution of ‘unpublished price sensitive information’, and if the information is available or not. Further, its definition has been enlarged applying to both, companies and securities.Provisions under the regulations are accompanied with utility laying the intention of the legislature. The specific notes help in specifyingand capturing the soul of the legislation with regard to its execution. Numerous restrictions have been placed on insider trading which includes transmission of the unpublished price sensitive information, obtainment of such information and also trading in securities while being in the possession of such unpublished information.

The dealing in securities while being inpossession of unpublished price sensitive information was prohibited in the 1992 Regulations. Thereby, the meaning of the term ‘dealing’ got replaced with ‘trading’ with regard to securities. The regulations (1992) have provided exclusions as per which the charge of insider trading would not be applicable, for the matters in case of any off market transactions done between the promoters, who have the possession of the information on the same regard, and thereby to frame conscious decision. Further, in case of any off Due Diligence, conceivement and communication of any information with regard to the transactions involving private investment in public equity and Merger &Acquisitions, subjected to certain conditions.The matters relating to Non Individual Insiders includes those individuals, in possession of unpublished price sensitive information different from such individuals who are involved in decisions based on trade, and were not involved in the possession of unpublished price sensitive information.

Instances where trade gets executed without any leakage of information or while pursuing the trading plans andrecognizing the notion of ‘Chinese walls’ with regard to enormous organizations. It is assured that the over hopeagainst any individuals who are deemed to be connected as repulsive as per the regulations. The above said provision is akin for the over hoping existing against the people conceiving a similar objective for the purpose of acquisition. These are the persons acting as per the SEBI regulations, 2011. With these, the disclosure promises as per the regulations are limited to insiders. Promoters can only be responsible for executing initialdisclosures of trading. All the promoters, directors and employers are empowered to carry the continual disclosures, in the case of the value of trade exceeds the threshold amounting to Rupees 10 Lacs, done quarterly in a year. Once the continual disclosures happen, the company shall accordingly inform the stock exchange within two trading days.

The trading plans have been a novel concept in India. The provisions have been introduced on trading plans, eventually entitles to execute the trades pursuingearly determined trading plans. A comprehensive qualification features have been made for a compliance officer. The compliance officer shall be reporting to the board of directors or the present head of the company. The purpose of compliance officer establishes the importance of his role. The added role of the compliance officer shall be responsible for monitoring and trading. The regulations, has not prescribed separate penalties. For the purpose of setting a penalty, reference drawn from the SEBI Act, 1992. Under the act, insider trading has been made punishable by invoking a penalty of INR 25 crores, a three times the profit made by the business of insider trading, or whichever is higher. SEBI can declare the violation transactions as void for the purpose of prohibiting any insider from investing or dealing in securities. In addition to it, SEBI can also order for the return of securities.

These regulations coveredan explicit horizon of people for the purpose of connected persons and also, public servants, judges, bureaucrats, who might not have any relationship on professional front with the concerned company, but they get aware about their policies and thereby, impact the company’s share. It hascreated a large set of responsibilities on the compliance officer that could be an uphill task. There might be confusions whether a person, being the director of the company shall be allowed to trade in entity. Since, trading is not allowed while being in possession of insiderknowledge. With regard to the new regulations, an individual can frame the trading plans and could get the approval from compliance officer but it gets necessary to ensure that the insider information does not get robust.

These findings recommend that the regulations have prohibited dealing in securities but also procuring of any insider information except when there is a ‘legitimate purpose’, but the ‘legitimate purpose’ has not been defined which makes it unclear and vague for which purpose, SEBI might need to clarify those issues before the rules get kicked in. There is a hope that since, the re-regulation has been ambiguously interpreted by the court in an advanced manner and periodic classification shall be issued by the market regulations.

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