Regulations prohibiting Insider Trading
Insider trading is known as malpractice relating to the trade in the company’s securities undertaken by the people who by virtue of their work have access to the otherwise nonpublic information. It has been a serious issue for quite some time now hampering the promotion of fair-trading in the market against the interests of the common investors, which, in turn, lowers the reputation and integrity of the company in the eyes of the potential investors.
The basis of public participation and infusion of public funds in a company is a fiduciary duty that the management and the promoters of the company owe to the public shareholders. This has led to the enactment of stringent regulations, from the market regulator, Securities and Exchange Board of India (SEBI), which clarify the distinction between the legal and illegal share trading activities. The distinction between legal and illegal share trading by insiders should be understood. The presumption that an insider who is involved in the management or affairs of a public company would have access to privileged information is but natural. However, that cannot absolutely preclude insiders from acquiring or alienating any securities. Such a blanket prohibition would not be reasonable, would be in violation of the legal rights of insiders, and would defy the logic of freely tradable securities. FDI in retail
While the legal regime including the enforcement mechanism relating to insider trading is still evolving. Cases like the recent conviction of corporate bigwigs like Mr Rajat Gupta and Mr Rajaratnam in the US prove that the prohibition on insider trading is not toothless legislation. A prohibition may not even be practically viable as it would be irrational to stop promoters of a company from dealing in their securities. Different jurisdictions have adopted varied measures of checking the aggravation of this issue. The important measures taken across the world are as under:
- Disclosure: There has to be a mandated procedure for the identification of material and non-public information. Disclosures made categorized as “Initial disclosure and continual disclosures”.The former is for preventing while the later for revealing insider-trading activities.
- Information relating to the company:
- Access to information: the access to all relevant material information must be restricted to its employees only on a need-to-know basis
- Inquiries from third parties: All inquiries should be directed to the appropriately designated person by their management.
- Limit on access to the company information: Procedures are laid down to limit the open-access of confidential information to the concerned persons
- Avoidance of aggressive or speculative trading: The employees, directors or their dependents should not directly or indirectly be involved in any unfair trading practices.
- Appointment of a compliance officer: There should be a compliance officer appointed to monitor the trading activities of the company.
- Trading window: The trading of the companies’ securities has to be done within the designated period and only by the designated persons.
- Reporting requirements: The confidential information should be reported only by the authorized personnel of the company as per the company’s individual disclosure protocol.
- Trading restriction: The trading window should remain shut for the insiders for a certain period immediately after the disclosure of the material information. This will ensure effective dissemination of the disclosed material information before the insiders jump into action.
- Pre-clearance of trades– By this measure, the company has full control over the company’s security dealings through a system of getting prior approval for all transactions by the employees.
- Reporting Requirements – Disclosures are made to the Compliance Officer and are categorized as “Initial disclosure and continual disclosures”. The compliance officer preserves those records for the prescribed time, and then reports at regular intervals to the management for the pre-clearance
Since the enactment of the first Securities Exchange Act,1934, there have been quite a few changes in the laws relating to the regulation of insider trading in India. It is important to note that the recommendations of Sachar Committee, Patel Committee and Abid Hussain Committee have been prima facie responsible for the formulation of the SEBI regulations as of today.
The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 has been enforced repealing the earlier act of 1992 for providing a framework for the prohibition of insider trading in securities and to strengthen the existing legal framework as per the provisions of the Companies Act, 2013.
Imperative changes including widening the scope of ‘connected persons’, strengthening the definition of an ‘insider’, rationalising disclosure events, removing redundant provisions, among others, have been introduced. From a bird’s eye view, the new regulations appear progressive. However, on probing deep, one finds that some of the changes proposed and new concepts introduced by the new regulation lack definitive clarity, much needed to make them acceptable and effective.
On reading the New regulations it appears that SEBI has tried to do all it could to curb insider trading at every level, but then the question arises, that from a regulatory perspective whether ‘more’ is always good or would ‘less’ be better. The answer lies in the future.