Insider trading means the illegal practice of trading securities (such as stocks, bonds, or derivatives) based on material, non-public information about the company that would affect the value of those securities. In India, insider trading is governed by the Securities & Exchange Board of India (SEBI) through the SEBI (Prohibition of Insider Trading) Regulations, 2015.
The SEBI (Prohibition of Insider Trading) Regulations, 2015 define insider trading and prohibit the buying, selling, or dealing in securities while possessing unpublished price-sensitive information (UPSI). It also bans communication, procurement, or counseling of UPSI and the tipping of such information to others.
The regulations define certain entities and individuals as “insiders” who must comply with the prohibition on insider trading. These include directors, key managerial personnel, employees, and connected persons with access to UPSI. Promoters and substantial shareholders are also considered insiders.
SEBI has established a framework to prevent insider trading in India. It includes various measures such as installing a code of conduct for listed companies, requiring them to disclose UPSI to stock exchanges, mandating the maintenance of a structured digital database of persons with access to UPSI, and implementing mechanisms for monitoring and reporting insider trading activities.
SEBI has the power to investigate suspected instances of insider trading and take appropriate enforcement actions. Penalties for insider trading can include fines, disgorgement of illegal gains, restrictions on trading, and even imprisonment.
Meaning of Unpublished Price Sensitive Information
SEBI (Prohibition of Insider Trading) Regulations- 2015, under regulation 2 (1) (n), defines Unpublished Price Sensitive Information (UPSI), which includes specific information such as financial results, dividends, changes in capital structure, mergers, demergers, and acquisition. It means any internal matter that is not generally available related to the company but is likely to affect the stock market if it becomes available.
For instance, a private individual or a firm auditing the company’s documents, KMPs/directors taking decisions, etc. The knowledge of this UPSI in the hands of persons linked to the companies puts them in a better position over the general public. Such information can also be used to make gains by purchasing shares at a cheaper rate, anticipating that they might rise, or selling them before the prices fall. Availability of such UPSI might lead to one of the most severe charges in relation to the securities market, i.e., insider trading.
The case of Hindustan Lever Limited Vs. SEBI 1998 18 SCL is the term “Unpublished Price Sensitive Information” genesis. Two weeks after the merger between HLL and another subsidiary, HLL purchased 8 lakh shares from the Unit Trust of India. Upon the investigation by SEBI, they found that at the time of the purchase of shares, HLL was insider trading under section 2(e) of the 1992 regulation. SEBI filed an appeal to the appellate authority, and they confirmed the order of SEBI by rejecting the arguments of HLL. After this case, SEBI made an amendment and added and defined the term Unpublished.
Evolution of Insider Trading
The development of insider trading regulations in India can be traced back to 1978 when the Sachar Committee acknowledged that certain company personnel, such as board members, accountants, and company secretaries, might possess sensitive information that could influence stock prices and impact market sentiments. The committee recommended amendments to The Companies Act 1956 to prevent such practices.
In 1986, the Patel Committee proposed amendments to the Securities Contracts (Regulation) Act 1956 aimed at curbing insider trading through supervisory mechanisms. Subsequently, in 1989, the Abid Hussein Committee suggested imposing civil & criminal penalties for insider trading. It emphasized the need for SEBI to establish guidelines and regulations to prevent such practices.
Based on the recommendations of these committees, SEBI formulated the SEBI (Prohibition of Insider Trading) Regulations in 1992. These regulations require all listed companies and market intermediaries to comply with the specified directives to prevent insider trading.
Presently, insider trading is governed by the Securities & Exchange Board of India (SEBI) through the SEBI (Prohibition of Insider Trading) Regulations, 2015, which is based on N K Sodhi’s report dated December 7, 2013.
Conditions when communication and procurement of UPSI are permitted
Communication or Procurement of UPSI, whether oral or written, shall be termed as an offense if done for an illegitimate purpose. There are certain conditions mentioned in regulations 3 (3) of SEBI Regulations, 2015 when communication or procurement of UPSI is allowed, which are as follows:
An open offer is triggered – Unpublished Price Sensitive Information is communicated or procured or allowed to access related to transactions which make an available offer under takeover regulation where, according to the board of directors of the listed company, sharing of information is in the company’s best interest.
An open offer is not triggered – Unpublished Price Sensitive Information is communicated, procured, or allowed access related to the transaction even if it does not make an open offer under takeover regulation. Still, according to the board of directors, such news can be made available at least two days before the proposed transaction in such form, which covers all relevant and material facts.
Responsibility of the Company in handling UPSI
The company’s Significant duty is preserving Unpublished Price Sensitive Information. The Chief Executive Officer, Managing Director, Compliance officer, or any other analogous person of a listed company, intermediary, or fiduciary need to put in place ample and effective system of internal controls to restrict insider trading and to ensure compliance with the SEBI (Prohibition of Insider Trading) Regulations, 2015’s requirements. In managing UPSI, the company is accountable for the following:
1)To avoid insider trading, all personnel with access to UPSI are designated employees. No private individual or non-employee should be permitted access to a board meeting, especially a board of directors member.
2)We are educating all insiders about the importance of keeping information private and limiting disclosures to those who genuinely need to know.
3)Create a code of conduct policy for the chosen individuals, their immediate family members, and the preservation of data for insider trading.
4)Change the Code of Fair Disclosures to incorporate a procedure for determining the proper uses of UPSI sharing.
5)Maintain an organized digital database containing information on the people or organizations with access to UPSI.
6)When UPSI occurs, the Compliance Officer must immediately close the trading window. When the Compliance Officer finds that a Designated Person or class of Designated Persons can reasonably be expected to have UPSI, the trading window will be closed.
7)According to the SEBI (Prohibition of Insider Trading) Regulations, 2015, reasonable limitations must be put on disseminating or acquiring UPSI.
8)A list of all workers and other people with whom UPSI is shared must be kept, and anybody with whom it is shared must sign a confidentiality agreement or get the notification.
9)The Regulations also specify other pertinent conditions that must be followed.
10)It is required to do a routine process review to gauge how well these internal controls are working.
Companies must conduct proper investigations into any UPSI leaks or suspected leaks and notify SEBI.
Disclosure of Information
The fundamental rule governing insider trading, or UPSI, is that once it is known to the company’s management, it must be properly announced and disclosed without delay. The management of the company should make sure that the information is kept confidential until any such disclosure is made and no insider of the company trades based on it. Various laws and regulations, including those listed below, govern and regulate insider trading:
By SEBI, primarily through Section 15G of the SEBI Act, 1992, Regulation 8 in Chapter IV of the SEBI (Prohibition of Insider Trading) Regulation, 2015 (PIT Regulations), & the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 which states punishment for violation of insider trading.
Insider trading by a director or key managerial individual is forbidden by Section 195 of the Companies Act, 2013.
Section 458 of the Companies Act delegates powers to SEBI to prosecute insider trading in securities of the listed companies and also the companies that intend to get their securities listed.
Unpublished Price Sensitive Information (UPSI) plays a significant role in regulating insider trading in India. Currently, research was conducted by SEBI in collaboration with stock exchanges; it was discovered that listed companies misclassified unpublished price-sensitive information in 92 percent of cases. SEBI examined 1,100 press releases and identified 227 instances where the released information caused a price movement of 2 percent, considering the index adjustments.
This depicts that even after strict rules and regulations concerning insider trading and UPSI, companies can bypass the law. To halt the companies from misusing the law, SEBI has proposed certain amendments. As per the proposed amendment, the disclosures required under Regulation 30 of LODR be brought under the ambit of UPSI, which will bring clarity and transparency to listed entities’ compliances.
It is essential to acknowledge that eliminating all instances of insider trading and using UPSI may be challenging, given the complex and dynamic nature of financial markets. However, the regulatory framework and enforcement mechanisms aim to minimize such occurrences and maintain market integrity.
Market participants, including listed companies, investors, and intermediaries, are responsible for adhering to the regulations, maintaining proper internal controls, and promoting a culture of transparency and compliance. This collective effort contributes to a healthier, more trustworthy securities market environment in India.