The time has come for listed companies and other market participants, intermediaries and service providers to revisit their internal codes of conduct under the Insider Trading Regulations.
The Securities and Exchange Board of India (“SEBI”) has vide notification dated 15th January 2015 published the SEBI (Prohibition of Insider Trading) Regulations 2015 (“New PIT Regulations”) replacing the erstwhile SEBI (Prohibition of Insider Trading) Regulations, 1992.
The New PIT Regulations are set to come into effect from May 15, 2015 being 120 days from the date of notification thereof in the Official Gazette. This 120 day window offers listed companies an opportunity to get geared up for compliance with the New PIT Regulations.
The New PIT Regulations have made certain conceptual changes. The focus of this update is however on the changes that are required to be made by corporations to their policies and difference in the nature of compliance as compared to the previous regime.
CODE OF FAIR DISCLOSURE
Disclosure of UPSI
The board of directors of every listed company would be required to establish and adhere to certain norms for disclosure of unpublished price sensitive information (UPSI) for due diligence etc in respect of certain transactions whether or not there is an open offer. The board of directors now has the discretion of determining whether or not disclosure of UPSI for a transaction is necessary and what those parameters should be.
Further dissemination of UPSI within the time frames provided should also be made the responsibility of the compliance officer of the Company to be overseen by the Board.
Conducting Trades while in possession of UPSI
The New PIT Regulations envisage certain scenarios in which trading may be permitted while the insider entity / individual is in possession of UPSI. The Board is required to prescribe standards and requirements towards this end.
The New PIT Regulations requires the board of directors to formulate and publish on its official website a code of practices and procedures for fair disclosure of UPSI. This code shall set out principles to be adhered to by the company and the board in compliance with the New PIT Regulations.
CODE OF CONDUCT
The Board of every listed company and market intermediary shall formulate a code of conduce to regulate, monitor and report trading by its employees and other connected persons towards achieving compliance with the New PIT Regulations. The New PIT Regulations set out the minimum standards to be applied by the listed entity without diluting any provision thereof.
The previously established code of conduct identifying the trading window closure as well as other compliance requirements will require to be replaced by a policy geared towards pre-approval of trading plans and monitoring compliance with such trade plans. The New PIT Regulations also stipulate mandatory trading window closures to be strictly regulated by the compliance officer.
In a move towards self-regulation by listed corporates, the compliance officer is required to assess whether the trading plan submitted for approval has an potential for contravening the provisions of PIT Regulations and suggesting undertakings to enable such assessment and to approve and monitor the implementation of the plan. The board of directors would be required to set out procedures and safeguards to be enforced by compliance officer.
Advisers and Other Connected Persons
Professional entities such as auditors, accountancy firm, law firm, analysts, consultants etc, assisting or advising listed companies and/or market intermediaries and /or other capital market participants are also required to comply with minimum safeguards provided and formulate code of conduct to be adhered to by such organizations. Listed enterprises must ensure that the professional firms with whom they interact also have in place sufficient safeguards for dissemination of unpublished price sensitive information.
PENALTIES FOR NON-COMPLIANCE
In India, insider trading is a serious criminal office. The New PIT Regulations state that any contravention of the regulations shall be dealt with in the manner provided in the SEBI Act, 1992. Section 15G of SEBI Act imposes a penalty of Rs 25 crore or 3 times the amount of profits made out of insider trading, whichever is higher. Section 24 of SEBI Act criminalizes insider trading with imprisonment of up to 10 years, or with fine of up to Rs. 25 crores, or both.
Similarly under the new Companies Act, Section 195(2) provides that a person shall be punishable with imprisonment for a term which may extend to 5 years or with fine which shall not be less than Rs 5 lakh but which may extend to Rs 25 crores or three times the amount of profits made out of insider trading, whichever is higher.
As per the New PIT Regulations:
a) Every company whose securities are listed on a stock exchange shall formulate a code of practices and procedures for fair disclosure of material information in line with all the principles set out therein; anad
b) Every listed company, market intermediary and any other person who is required to handle UPSI in the course of its business operation shall formulate a code of conduct to regulate, monitor and report trading by its employees and other connected persons after adopting minimum standards set out therein.
And all this prior to the deadline of May 15th this year.