Insider Trading and the new SEBI Regulations

Insider trading is defined as a malpractice wherein trade of a company’s securities is undertaken by people who by virtue of their work have access to the otherwise non public information which can be crucial for making investment decisions.

SEBI has promulgated the new Prohibition of Insider Trading Regulations, 2015, replacing the 1992 regulations to provide a framework for prohibiting insider-trading in securities. The new regulations, effective from May 15, 2015.

What is in the new legislation?

The new regulations have widened the definition of “connected person” to include any person associated with a company, directly or indirectly, in any capacity, whether by the virtue of frequent communication with the company’s officers or by being in any contractual, or employment relationship that allows the said person to access unpublished price influencing information (UPII) or is reasonably expected to allow such access.

Immediate relatives of a connected person will also be counted as insiders, provided such relatives are financially-dependent on the connected person or seek consultation of the connected person in taking decisions related to their trading in securities.

Interestingly, public servants and persons holding statutory positions (like a secretary in the government or a judge of high court) who are reasonably expected to have access to UPII (originally proposed to be brought within the ambit of the ‘insider’ definition) have been kept outside the purview of the new regulations. Therefore, a secretary in the government engaged in drafting a new policy on a matter that could result in an impact on price of listed securities will not be considered an insider under the new regulations.

The term “generally available information” has been defined to mean information that is accessible to the public on a “non-discriminatory basis”. “Non-discriminatory basis” would mean information that can be accessed by any person without any breach of law. Therefore, any information which is “generally available information” will not constitute UPII.

Units of mutual funds have been specifically excluded from the definition of securities. The ambiguity in selectively sharing UPII with a potential acquirer/investor in transactions like takeovers, mergers and acquisitions, change in control, etc, has been removed

UPII may be communicated or allowed access to or procured in connection with any transaction which would result in an open offer under the takeover regulations. Even for transactions which do not attract an open offer under the takeover regulations, UPII can be communicated, provided that such UPII is made generally available to public at least 2 trading days prior to the proposed transaction being affected.

A new concept of “trading plans” has been introduced. An insider is permitted to draw up a trading plan and have it approved by the compliance officer and then disseminate to the general public by disclosing it to the stock exchanges. The trading plans will enable an insider to plan his trades to be executed in future. Any trading in securities pursuant to such approved and publicly disclosed trading plan will not make the insider guilty of contravening the insider trading regulations. However such trading is bound by certain restriction.

Insider trading is an unfair practice, wherein the other stock holders are at a great disadvantage due to lack of important insider non-public information.

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