New, stricter insider trading norms take effect

A host of companies had either changed or were in the process of initiating steps to recast their insider trading norms, following the new code issued by the markets regulator that took effect Friday with a hefty penalty against violators.

As per information available with the Securities and Exchange Board of India (SEBI), several companies have undertaken to replace their existing insider trading code with the revised one.

The code prescribes that a person who violates the code can be asked by the regulator to pay a penalty that shall not be less than Rs.10 lakh but may extend to Rs.25 crore or three times the amount of profits made out of insider trading, whichever is higher

The code defines insiders as those who are have in their possession, or have access to, unpublished price sensitive information. It includes connected people.

"A 'connected person' includes anyone who is or has during the six months prior to the concerned act of insider trading been associated with the Company, directly or indirectly in any capacity. Immediate relatives are also construed as 'connected persons'," says the new code.

They are restricted from:

- Disseminating unpublished price sensitive information

- Procuring unpublished price sensitive information from insiders

- If they have such information, then restricted from trading in that company's shares.

"Trading in the security of the company is not permitted when trading window is closed on account of a unpublished price sensitive information. Further, pre-clearance is required for a trade exceeding Rs. 10 lakhs, even if the trading window is not closed."

The trading window is supposed to close for a company upon certain event like declaration of financial results and opened upon cooling-off period of 48 hour of relevant information becoming generally available.

The management, in addition to the penalty by the regulator, can also initiate disciplinary action against violators with steps that can include wage freeze, suspension, ineligibility for future participation in stock options and withholding of promotions.