Insider Trading: New rules confound India Inc

There has been a virtual freeze in communication when it comes to price-sensitive information under the changed rules

Six months into the new insider trading regime, India Inc is still grappling with the strictures and stipulations. The biggest grey area has been the dos and don'ts on price-sensitive information.

The Securities and Exchange Board of India (Sebi) now expects companies to adopt a 'need to know' strategy while communicating on key business issues. "While drafting these regulations, we want companies to themselves determine what needs to be communicated and what shouldn't be," said a regulatory official.

However, the regulatory intent has not been able to put across the message. Some in corporate circles and the legal fraternity are touting some of the stipulations in the insider trading code as too restrictive, leading to a virtual freeze in communication.

TACKLING INSIDER TRADING

• 1992: Sebi drafted the Prohibition of Insider Trading (PIT) regulations
   
• 2002: Regulations amended to ask companies to draft a model code of conduct
   
• 2008: Regulations amended to widen the definition of an insider
   
• 2012: Sebi forms committee headed by ex-judge N K Sodhi to re-look at the regulations
   
• 2013: The report prescribes stricter norms
   
• 2014: Sebi clears insider trading regulations
   
• 2015: New regulations come into effect

The Sebi insider trading code of 2015 has deemed close relatives, members of the board of directors and people connected with a decision (that is price-sensitive) as 'connected persons'. The regulations bar any form of communication of such information by these people.

The bar on communication by itself without any trading or wrong committed has been brought in the new regulations. This restriction could even be unconstitutional. If a husband shares some information with his wife, and she does nothing to misuse it, both would still fall afoul of the new rule. "If one were to analyse it from the perspective of criminal law jurisprudence, there is neither any intent nor any action to commit a wrong, yet an offense is caused," said Sandeep Parekh, founder, Finsec Advisors.

Finding merit in the argument that the requirement is onerous, Arpinder Singh, partner at EY India, said actions of individuals would now come under greater scrutiny. The presumption of having utilised price-sensitive information to conduct trade would mean that actions of individuals would be open to greater scrutiny than before. The new regulations widen the definition of persons or individuals with access to unpublished price-sensitive information but legal experts feel legitimate communication should not be hampered. "An onerous requirement is now transferred to the individual who will have to establish that the price-sensitive information has not been misused," said Singh.

Legal experts add that companies would need to maintain a record of information to refute any allegations of misuse of such information. "Organisations would now need to be far more diligent in identifying employees who might have access to unpublished and price-sensitive information, and ensure they do enough to sensitise these individuals on how to handle such information," says Singh.

Another area of regulations that has been questioned is the due-diligence clause for deals that do not trigger an open offer of equity. The issue is that Sebi has outlined the treatment for deals that culminate but the regulator has been silent for deals that fail to happen.

Sometimes on the basis of unfavourable findings in the due-diligence, intending acquirers do not proceed further with an acquisition. In this situation, the question arises as to what will happen to the "unpublished price-sensitive information" that has been shared with the potential acquirer in such an aborted transaction.

"There is a protection given to some deals (open-offer related). However, it does not mean conversely that if a deal is of a non-takeover type or if a takeover deal is not fructified, that the sharing of information would automatically be considered illegitimate," said Parekh. Having said that, it is important to share information in a due-diligence process with care, so that there is no allegation of preferential treatment of information that has the possibility of getting misused, he adds.

An official with the market regulator adds that the regulations lay greater emphasis on companies adopting best practices. "The regulations cannot be wished away and corporates would need to work with these," he said.

Some do agree with the market regulator's view. "Businesses outside India have developed risk intelligence in their business conduct and adopted due-diligence practices to facilitate legitimate business practices within the regulatory purview," said Anurag Jain at Thomson Reuters India. These aspects of regulations are in line with global best practices and corporate India will have to learn to live with these, he felt.