Thursday, 22 June 2017

SEBI Prohibition Acts of Insider Trading

The malpractice of ’insider trading’ affects the innocent investors. 

In simple terms ‘Insider Trading’ means selling or buying in securities on the basis of price sensitive unpublished information of a listed corporate which if published could lead to a fall or rise in the prices of shares of the corporate.

To tackle the problem of insider trading, SEBI issued the SEBI (Insider Trading) Regulations 1992. These regulations were further made stringent through amendments in 2015 and they were notified as the SEBI (Prohibition of Insider Trading) Regulations 2015.

The important definitions used in the regulations are:

(i) Dealing in securities means an act of subscribing, buying, selling or agreeing to subscribe, buy, sell or deal in any securities by any person either as principal or agent.

(ii) Insider means any person who, is or was connected with the company or is deemed to have been connected with the company, and who is reasonably expected to have access to unpublished price sensitive information in respect of securities of a company, or who has received or has had access to such unpublished price sensitive information.

(iii) A connected person means any person who:

(a) is a director, as defined in the Companies Act, 2013 of a company, or is deemed to be a director of that company by virtue of that Act, or

(b) occupies the position as an officer or an employee of the company or holds a position involving a professional or business relationship between himself and the company whether temporary or permanent and who may reasonably be expected to have an access to unpublished price sensitive information in relation to that company.

(iv) A person is deemed to be a connected person if such person:

(a) is a company under the same management or group or any subsidiary company thereof within the meaning of of the Companies Act, 2013 or sub-clause (g) of section 2 of the Monopolies and Restrictive Trade Practices Act, 1969 as the case may be; or

(b) is an intermediary as specified in section 12 of SEBI Act, 1992, Investment company, Trustee Company, Asset Management Company or an employee or director thereof or an official of a stock exchange or of clearing house or corporation;

(c) is a merchant banker, share transfer agent, registrar to an issue, debenture trustee, broker, portfolio manager, investment advisor, sub-broker, investment company or an employee thereof, or, is a member of the board of trustees of a mutual fund or a member of the board of directors of the asset management company of a mutual fund or is an employee thereof who have a fiduciary relationship with the company;

(d) is a member of the board of directors, or an employee, of a public financial institution as defined in the Companies Act, 2013;

(e) is an official or an employee of a self regulatory organisation recognised or authorised by the Board of a regulatory body;

(f) is a relative of any of the aforementioned persons;

(g) is a banker of the company.

(h) relative of the connected person.

(v) Price sensitive information means any information which is related directly or indirectly to a company and which if published is likely to materially affect the price of securities of a company. It includes only such information which if published is likely to materially affect the price of securities of a company. The following is deemed to be price sensitive information:

(a) periodical financial results of the company;
(b) intended declaration of dividends (both interim and final);
(c) issue of securities or buy-back of securities;
(d) any major expansion plans or execution of new projects;
(e) amalgamation, mergers or takeovers;
(f) disposal of the whole or substantial part of the undertaking;
(g) significant changes in policies, plans or operations of the company.

(vi) Unpublished information means information which is not published by the company or its agents and is not specific in nature. However, speculative reports in print or electronic media are not considered as published information.

A) Prohibition on Dealing, Communicating or Counseling

Under this regulation, no insider should:

(a) either on his own behalf or on behalf of any other person, deal in securities of a company listed on any stock exchange when in possession of any unpublished price sensitive information;

(b) communicate, counsel or procure, directly or indirectly, any unpublished price sensitive information to any person who while in possession of such unpublished price sensitive information should not deal in securities. This is however, not applicable to any communication required in the ordinary course of business or profession or employment or under any law.

The regulations require that no company should deal in the securities of another company or associate of that other company while in possession of any unpublished price sensitive information.

B) Investigation
If SEBI suspects any person of having violated the provisions of insider regulation, it may make inquiries with such person or with the stock exchanges, mutual funds, other persons associated with the securities market, intermediaries and self-regulatory organisation in the securities market to form a prima facie opinion as to whether there is any violation of insider regulations.

Image result for sebi regulations on insider tradingWhere SEBI forms a prima facie opinion that it is necessary to investigate and inspect the books of accounts, either documents and records of an insider or the stock exchanges, mutual funds, other persons associated with the securities market, intermediaries and self-regulatory organisation in the securities market, it may appoint an investigating authority for the purpose.

The investigating authority has to submit its report to SEBI, after completion of investigations in accordance with the provisions of the regulations.

After considering the report, SEBI is required to communicate its findings to the suspected person and seek a reply from such person. Such suspected person is required to reply to the findings within 21 days to SEBI. After receipt of the reply, SEBI may take such measures to safeguard and protect the interest of investors, securities market and for due compliance with the insider trading regulations.

SEBI also has powers to appoint an auditor to investigate into the books of accounts or the affairs of the insider or the stock exchanges, mutual funds, other persons associated with the securities market, intermediaries and self-regulatory organisation in the securities market.

C) Disclosures and Internal Procedure for Prevention of Insider Trading
All listed companies and organisations associated with securities markets such as intermediaries, asset management company, trustees of mutual funds, self regulatory organisations recognised by SEBI, recognised stock exchanges, clearing house or corporations, public financial institutions and professional firms such as auditors, accountancy firms, law firms, analysts, consultants, etc., assisting or advising listed companies, are required to frame a code of internal procedures and conduct as per the prescribed format provided in SEBI (Prohibition of Insider Trading) Regulations without diluting it any manner and ensure compliance of the same.

The regulations require certain disclosures to be made by directors, officers and substantial shareholders in listed companies. These are:

(i) Initial Disclosure:
(a) Any person who holds more than 5% shares or voting rights in any listed company should disclose to the company in prescribed form, the number of shares or voting rights held by such person, on becoming such holder, within 2 working days of:
(i) the receipt of intimation of allotment of shares; or
(ii)
the acquisition of shares or voting rights, as the case may be.
(b) Any person who is a director or officer of a listed company should disclose to the company in prescribed form, the number of shares or voting rights held by such person, within 2 working days of becoming a director or officer of the company.

(ii) Continual Disclosure

(a) Any person who holds more than 5% shares or voting rights in any listed company should disclose to the company in prescribed form the number of shares or voting rights held and change in shareholding or voting rights, even if such change results in shareholding falling below 5%, if there has been change in such holdings from the last disclosure and such change exceeds 2% of total shareholding or voting rights in the company.

(b) Any person who is a director or officer of a listed company, should disclose to the company in prescribed form, the total number of shares or voting rights held and change in shareholding or voting rights, if there has been a change in such holdings from the last disclosure made and the change exceeds Rs. 5 lakh in value or 25,000 shares or 1% of total shareholding or voting rights, whichever is lower. The disclosure mentioned above should be made within 2 working days of:
(i) the receipt of intimation of allotment of shares, or
(ii) the acquisition or sale of shares or voting rights, as the case may be.
(iii) Disclosure by Company to Stock Exchanges

Every listed company, within two days of receipt, should disclose to all stock exchanges on which the company is listed, the information relating to continual and initial disclosure given above. The disclosures required under this regulation may also be made through electronic filing in accordance with the system devised by the stock exchanges. Further, the SEBI Act, which inter-alia, prescribes the penalty for insider trading (Section 15G), was amended in 2002 to increase the penalty for insider trading to Rs 25 crore or three times the amount of profits made out of insider trading, whichever is higher.

No comments:

Post a Comment