February 11, 2015
On January 15, 2015, the Securities and Exchange Board of India, the securities market regulator in India ("SEBI"), announced the Securities and Exchange Board of India (Prohibition of Insider Trading Regulations) 2015 ("2015 Regulations"). The 2015 Regulations replace the earlier regulations governing insider trading in India — the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 ("1992 Regulations"). The 2015 Regulations will become effective on May 15, 2015, i.e., four months after their notification.
The 2015 Regulations seek to (a) address the inadequacies of the 1992 Regulations; (b) establish a legal structure which conforms to global best practices and the changes brought about by the Companies Act, 2013; and (c) consolidate the changes effected by circulars, notifications, amendments of enactments and judicial precedents concerning securities laws in India since 1992.
This Client Advisory highlights the key changes effected by the 2015 Regulations to the current insider trading regime, and various related key concepts, including "connected persons", "unpublished price sensitive information" ("UPSI") and "insider". The 2015 Regulations have also introduced certain new measures including a more comprehensive code of conduct and fair disclosure along with trading plans for lawful trading by insiders.
The following are some of the key changes that have been implemented by the 2015 Regulations:
- Scope: While the 1992 Regulations were applicable to listed companies only, the 2015 Regulations apply to listed companies as well as companies that are proposed to be listed on a stock exchange. There is no clarity as to which companies would fall in the category of ‘proposed to be listed’, i.e., is it a company that has filed a draft red herring prospectus?
- Connected Person: The definition of "connected person" has been significantly widened. The term now includes, among others (a) immediate relatives; (b) persons associated with the company in a contractual, fiduciary or employment relationship; and (c) persons who are in frequent communication with the company’s officers within the definition of a connected person. This widens the definition under the 1992 Regulations, which was solely based on positions and designations of persons in relation to the relevant company. The 2015 Regulations now raise a presumption that connected persons are in possession of UPSI unless they prove otherwise.
- Insider: The revised definition of connected persons has resulted in the related widening of the definition of an "insider". The 2015 Regulations specify that the definition of insider includes both (a) "connected persons" (by virtue of their relationship with the company) and (b) those who are in possession of UPSI (by virtue of mere possession of UPSI). However, the 2015 Regulations permit the person having possession or access to the UPSI to prove that he was not in such possession or that he has not traded while in possession of the UPSI.
- Generally Available Information: The 2015 Regulations now define "generally available information". This makes it easier to identify UPSI which is any information that is not generally available information. If the information is accessible to the public on a non-discriminatory platform, like a stock exchange website, it will be construed as generally available information.
- Unpublished Price Sensitive Information: UPSI now includes price sensitive information relating to the company or its securities that is not generally available. The 1992 Regulations did not include information relating to securities in the definition of UPSI. The 2015 Regulations now provide a definitive legal test to determine UPSI which is in harmony with the listing agreement, while specifying a platform for lawful disclosure, i.e., the stock exchange website. There is an explicit prohibition on the communication and procurement of UPSI, except for legitimate purposes, due performance of duties (for example, by employees of the company who are in possession of UPSI) and the discharge of legal obligations. Consequently, communication and procurement of UPSI has become a distinct offence, other than for expressly exempted purposes.
- Disclosure Requirements: The 2015 Regulations mandate that a person in possession of UPSI who intends to trade in securities discloses such UPSI two days prior to trading. This is to ensure that such information is made available to the public for an adequate period of time before trading. The 2015 Regulations permit a company to seek disclosures from connected persons regarding their ownership of the company’s securities and trading of such securities to ensure compliance with the 2015 Regulations. The 2015 Regulations also require that companies formulate a code of fair disclosure that they should adhere to, based on certain objective principles stated in the 2015 Regulations.
- Derivative Trading: In order to conform to the Companies Act, 2013, key management personnel and directors have been prohibited from engaging in derivative trading of the securities of the company.
- Safeguards: The 2015 Regulations have established safeguards to protect legitimate business transactions. The 2015 Regulations include safeguard exclusions for communication and procurement of UPSI in pursuance of transactions relating to private investment in public equity, mergers and acquisitions and off-market promoter transactions, provided that the disclosure requirements (discussed above) are complied with. These exclusions also protect trades undertaken in the absence of leaked information, recognizing Chinese walls within a company. Further, trades pursuant to a trading plan (discussed below) do not constitute an offence under the 2015 Regulations. This is an important amendment; now a due diligence of a listed company will enable a prospective purchaser to have wider access to information without any risk of it being construed as an offence under the 2015 Regulations.
- Trading Plan: The 2015 Regulations have formally recognized the concept of trading plans in India. The 2015 Regulations permit trading by persons who may continuously be in possession of UPSI so that they are able to lawfully trade in securities in accordance with a pre-determined trading plan for a period of at least one year. Trading plans have to comply with the 2015 Regulations and are required to be approved by the designated compliance officer. The 2015 Regulations further restrict the trading plan from including trades that are to be made twenty days prior to the end of a financial period for which results are to be declared by the concerned company.
Compliance Officer: The 2015 Regulations provide for the appointment of a compliance officer, who is required to be supervised by the board of directors of the company. The board of directors is required to formulate a code of conduct based on principles of fair disclosure (set out in a schedule to the 2015 Regulations) to regulate, monitor and report trading by insiders. The compliance officer must approve trading plans and monitor their execution as well as monitor trading activity by all employees and connected persons to ensure compliance with the 2015 Regulations.