Getting insider trading norms right

New Sebi guidelines seek customised codes of conduct, doing away with a tick-the-box approach

The new insider trading norms, which replaced the prohibition of insider trading norms of 1992, kicked in on May 15. These mandate every listed firm, registered intermediary, law firm and audit firm to have their own model code of conduct to prevent insider trading.

The Securities and Exchange Board of India (Sebi) guidelines clearly state companies have to come out with specific customised codes of conduct, based on guiding principles provided by the regulator. The regulations stipulate a company draft a minimum standard and principle-based code of conduct and have fair disclosures to prevent insider trading by employees or the management.

"It is a very important departure from the prevention of insider trading regulations of 1992. In the earlier regime, the regulator had defined the model conduct of conduct. Now, however, Sebi has defined minimum standards that need to be followed to regulate insider trading, as well as principles to be followed for fair disclosure of material information," says Lalit Kumar, partner, J Sagar Associates.

This ensures companies have to follow the model code of conduct guidelines devised by them, against a tick-the-box approach earlier.

"Unlike the previous insider trading regulatory regime wherein the vast majority of listed companies and market intermediaries would simply replicate the model code of conduct prescribed in the regulations, the new regulations require them to be more creative in drafting their own codes, while following certain basic standards and governance principles," says Tejesh Chitlangi, partner, IC Legal.

But even after 15 days of the new norms kicking in, many listed firms and other entities are yet to have a code of conduct with the new insider trading regulations in place. While some claim ignorance of the fact that they need to have a company-specific code, others are waiting for contemporaries to start the process.

"Out of ignorance or due to lack of deterrence in the absence of precedents wherein strict actions have been taken for violation of non-maintenance of such codes of conduct, the number of listed companies and market intermediaries that have already complied with the new requirements seems to be low," said Chitlangi.

A consultant who interacts with companies on insider trading regulations pointed to the fact that companies largely in line with the new regulations might not want to revisit their code of conduct to prevent insider trading.

Vaneesa Abhishek, advocate in the Bombay High Court, says, "As a good corporate governance practice, companies should revisit their code of conduct and tailor these according to the new requirements and profile of the company. This will help minimise the risk of individuals inadvertently indulging in insider trading."

Some privy to the developments say companies are yet to realise the importance of complying with the new regulations and having a code of conduct in place. For instance, the recent order by the markets regulator against the Murugappa Group chief and three others on charges of insider trading was an ex-parte order - it didn't require all parties to be present.

"The regulator is going to increase its enforcement action against cases of insider trading. It won't only attach assets equivalent to the trade, but also include penalties," said a source.

At a recently concluded Sebi international advisory board meeting, it was sought the regulator step up enforcement on cases of insider trading.

With stringent regulations in place and the regulator's intent to boost enforcement, it is imperative that companies tailor-make their codes of conduct. Companies could also consider roping in lawyers to brief employees on what construes as insider trade, as well as the disclosures needed to prevent such practices.

MUTUAL FUNDS TO BE CHARGED UNDER FRONT-RUNNING

The new insider trading regulations do not consider mutual funds as securities. However, the regulator will charge any purchase and sale of a security on prior knowledge that an asset management company intends to trade in the same security under front running, as part of mutual fund regulations. "To ascertain that the employee had no prior knowledge of the mutual fund's intended transactions, the compliance officer may take a declaration in this regard from the employee," the mutual fund regulations state.

SEBI'S INSIDER TRADING CODE OF CONDUCT CHECKLIST

• A compliance officer has to be designated; he will report to the board of directors
  

 

The compliance officer will put in place policies and enforce these to preserve price-sensitive information
 

He will formulate and publish (on the company's official website), a code of practices and procedures for fair disclosure of unpublished price-sensitive information
 

He will define all the relevant terms in conformation with new prohibition of insider trading norms; these terms include securities, insiders and unpublished price-sensitive information
 

The officer has to ensure the senior management reports transactions in securities