The High Level Committee to Review the SEBI (Prohibition of Insider Trading) Regulations, 1992 constituted under the Chairmanship of Justice N.K. Sodhi on 7 December 2013 submitted its report to SEBI Chairman, UK Sinha at Chandigarh. Justice N.K. Sodhi has been the former chief justice of Karnataka and Kerala High Courts and has been the former presiding officer of the Securities Appellate Tribunal.
The Committee has made many recommendations to the legal framework for prohibition of insider trading in India. It has also 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.
Some features of the proposed regulations are:
• While enlarging the definition of "insider", the term “connected person” has been defined more clearly and immediate relatives are presumed to be connected persons, with a right to rebut the presumption. The term “immediate relative” would cover close relatives, who are either financially dependent or consult an insider in connection with trading in securities.
• Insiders would be prohibited from communicating, providing or allowing access to UPSI unless required for discharge of duties or for compliance with law.
• The regulations would bring greater clarity on what constitutes unpublished price sensitive information (UPSI) by defining what constitutes generally available information (essentially, information to which non-discriminatory public access would be available). A list of types of information that may ordinarily be regarded as price sensitive information has also been provided.
• Trading in listed securities when in possession of UPSI would be prohibited except in certain situations provided in the regulations.
• 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. Trading plans would, however, be required to be disclosed to the stock exchanges and have to be strictly adhered to.
• Conducting due diligence on listed companies would be 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. In all cases, 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.
• Trades by promoters, employees, directors and their immediate relatives would need to be disclosed internally to the company. Trades within a calendar quarter of a value beyond 10 lakh rupees or such other amount as SEBI may specify, would be required to be disclosed to the stock exchanges.
• Every entity that has issued securities, which are listed on a stock exchange or which are intended to be so listed would be required to formulate and publish a Code of Fair Disclosure governing disclosure of events and circumstances that would impact price discovery of its securities.
• 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 organization treats compliance requirements.
• Companies would be entitled to require third-party connected persons who are not employees to disclose their trading and holdings in securities of the company.