Insider trading: Employees will have to be more careful

To further tighten gaps in the erstwhile insider trading norms, the Securities and Exchange Board of India (Sebi) has revamped the more-than-two-decades old insider regulations, replacing it with the Sebi (Prohibition of Insider Trading) Regulations, 2015. Penal actions for prohibited transactions, enlarged scope of definitions and new concepts are some features.

While trading in securities, those with access to unpublished price-sensitive information have an unfair advantage over innocent investors. This can be any information in the market with the potential to materially affect the price of securities. Some examples are financial results, dividends, change in capital structure, merger, de-merger and acquisitions. The new regulations could be more effective in curbing the malpractices in the securities market and creating a level environment for investors. The code of conduct is applicable not only on listed entities and intermediaries but on every other person required to handle unpublished price-sensitive information in the course of business operations.

Scope of connected person expanded
Insider means a person in possession of or in access of unpublished price-sensitive information or a connected person. Connected person means:

• Any person currently associated with the company or was associated during the past six months in any capacity, including as an employee, director, officer or having business relationship with the company that allows such person to have access to unpublished price-sensitive information. This can bring accountancy firms, audit firms, law firms, any other consultants under the ambit of connected person;
   
• Immediate relative of the person mentioned above;
   
• Holding/associate/subsidiary company;
   
• Intermediary such as stock broker, merchant banker, underwriter;
   
• Investment company, trustee company, asset management company or any employee/director thereof;
   
• Official of stock exchange/clearing house;
   
• Member of board of trustees of a mutual fund/board of asset management company or employee thereof;
   
• Director or employee of public financial institution;
   
• Official or employee of a self-regulatory organisation recognised or authorised by the board;
   
• Banker of the company;
   
• Concern/firm/trust/HUF/company/AOP wherein director or immediate relative or banker has more than 10 per cent holding or interest.

Employees need to be cautious, too
Under the code of conduct, a company provides the time when the trading window is closed. Employees shall refrain themselves from trading in securities when the window is closed, as well as sharing any unpublished price-sensitive information.

In the earlier regulations, disclosure requirement was applicable on any officer with five per cent holding. Officer was defined under the Companies Act, 1956, to include any director, manager or secretary or any person under whose instructions the board is accustomed to act. Under the new regulations, any employee trading in securities having value of Rs 10 lakh or more in one or more transactions in a calendar quarter has to disclose this to the company within two working days.

The earlier regulations seem to cover only designated employees in top three tiers of the management. Under the new regime, by enlarging the scope of connected person, Sebi intends to cover every person deemed to have access to unpublished price-sensitive information.

Option to formulate a trading plan
Every insider, including an employee, is entitled to formulate a trading plan and send it to the compliance officer for approval and public disclosure. Upon approval, the compliance officer shall notify the trading plan to the stock exchanges, where the securities are listed. The intention of giving this option is to enable persons who could be perpetually in possession of unpublished price-sensitive information and would like to trade on pre-decided dates. A very important thing to highlight here is that once the trading plan is submitted and approved by the compliance officer, it cannot be withdrawn and shall be implemented mandatorily, according to the code of conduct.

The author is managing partner, Nangia & Co