Market regulator Sebi today notified a stricter set of insider trading norms to check illicit transactions in shares of listed firms by management personnel and ‘connected persons’.
The new norms, which will revamp nearly two-decade old regulations on insider trading and come into effect after four months, would also ensure that genuine trades are not impacted.
Besides, greater clarity on concepts and definitions has been put in place along with a stronger legal and enforcement framework for prevention of insider trading under the new set of norms, to be called the Sebi (Prohibition of Insider Trading) Regulations, 2015.
The tightening of norms assumes significance in the wake of Securities and Exchange Board of India (Sebi) coming across cases of insider trading at not just small companies, but at big corporates as well.
Sebi has expanded the definition of ‘Insider’ to include persons connected on the basis of being in any contractual, fiduciary or employment relationship that allows such people access to unpublished price sensitive information (UPSI).
Sebi said that a connected person is one who has a connection with the company that is expected to put him in possession of UPSI. The definition will also bring into its ambit persons who may not seemingly occupy any position in a company but are in regular touch with the company and its officers and are involved in the know of operations.
“It is intended to bring within its ambit those who would have access to or could access unpublished price sensitive information about any company or class of companies by virtue of any connection that would put them in possession of unpublished price sensitive information,” Sebi said.
Under the new framework, Sebi has defined a connected person in the context of insider trading activities.
A connected person would be someone who is or has during the past six months prior to the concerned act has been associated with a company, directly or indirectly.
Besides, immediate relatives of connected persons would also come under the same category unless they prove that they were not privy to unpublished price sensitive information.
The onus of establishing that they were not in possession of UPSI would be with the connected persons.
The regulator has decided to remove the requirement for repeated disclosures and ease compliance burden.
To protect the interest of investors, companies would be now mandatorily be required to disclose UPSI at least two days prior to trading in case of permitted communication of such information.
Besides, communication of such information is prohibited except in instances of legitimate purposes or discharge of legal obligations.
Insider trading refers to dealing in securities after having access to unpublished price sensitive information and such practices provide unfair advantage to the entity who has privy to such details.
Sebi has come across various instances of insider trading activities not just at small companies but also at larger ones.
The definition of UPSI has been strengthened by “providing a test to identify price sensitive information, aligning it with listing agreement and providing platform of disclosure”.
Earlier, the definition of price sensitive information had reference to company only, now it has reference to both a company and securities.
Companies by law would be entitled to require third-party connected persons to disclose their trading and holdings in securities of the company.
In line with the new Companies Act, prohibition on derivative trading by directors and key managerial personnel on securities of the company has been provided.
Disclosure of UPSI in public domain has been made mandatory before trading, so as to rule out asymmetry of information in the market.
To provide clarity, generally available information has been defined as information that is accessible to public on a non-discriminatory platform such as stock exchange.
Meanwhile, insiders who are liable to possess UPSI all round the year would have the option to formulate pre-scheduled trading plans.
Among others, principle-based Code of Fair Disclosure and Code of Conduct has been prescribed.
The latest norms have been prepared after taking into consideration recommendations of Sodhi panel and suggestions from various other quarters.
After extensive deliberations, a panel headed by former Justice N K Sodhi had submitted its report on insider trading norms in December 2013. Sodhi was former Chief Justice of Karnataka and Kerala High Courts.