This article has been authored by Indranil Chakravorty who is a fourth-year law student studying at the National University of Study and Research in Law, Ranchi.
Insider trading can be defined as the selling of or dealing in securities of a company by a director or employee of the company, or any individual such as advisor, analyst etc. who is in possession of knowledge vis-à-vis substantive information which is unavailable to general public. Since, the initial matters of insider trading via online messaging, insider trading in the digital era has reached unprecedented heights.
The insider trading regime has undergone major transition with the arrival of the SEBI (Prohibition of Insider Trading) Regulations, 2015. SEBI introduced the Securities and Exchange Board of India (Prohibition of Insider Trading) (Amendment) Regulations, 2020 to strengthen its grip on insider trading in India.
The Prevention of Insider Trading Amendment, approved by SEBI at its Board Meeting held on June 25, 2020, indicates some key changes. The first is, the enlargement of the structured digital database for the purpose of collecting and storing details of individuals sharing Unpublished Information which is Sensitive In Nature (hereinafter referred to as “UPSI”). The second is the automatic upgradation of shareholding disclosures and alterations as per reporting authority, for the primary purpose of making disclosures of PIT violations by listed companies or corporations, fiduciaries, etc. The third one was the introduction of Additional Transactional Mechanism which was added as an exception to trading window restrictions as per SEBI.
i. Structured digital database
In today’s world, data has evolved as one of the most crucial assets. All the intricate details vis-à-vis an individual or company have become of increasing significance since many years.
Prior to this Amendment, it was mandatory on the part of the Board of Directors of a listed company to prepare and maintain a structured digital database comprising of names and Permanent Account Number (“PAN”) only. The manner in which listed entities had to record these details was often subjected to a lot of queries. This was primarily due to the fact that listed companies often interact with them especially when the UPSI recipient comprised an intermediary or fiduciary. On a brighter note, SEBI has always cleared its stand regarding this apparent ambiguity that in matters where UPSI has been shared with any fiduciary or intermediary, it would be mandatory on the part of listed company to maintain details of the recipient entity and the list of individuals having access to UPSI. This needs to be in consonance with PIT Regulations vis-à-vis clarifications regarding the regulations published in November 2019. This amendment has made an attempt to make the level of compliance even more stringent than before. Hence, all entities managing UPSI are instructed to facilitate and maintain a structured digital database. The SEBI has also put efforts to ensure that additional details including names of persons who are responsible for sharing it with others are also included.
From an internal administrative perspective as well, SEBI has incorporated some necessary amendments. The structured digital database needs to be maintained even after their relevant transaction, precisely for eight years. However, the matters pending or in process of investigation have been exempted by SEBI. This was unlike the regulatory requirement as per Section 128 of Companies Act, but it would be effective in removal of obstacles in collecting information during such investigations. The outsourcing maintenance of internal database has been strictly restricted by SEBI especially when it comes to third party service providers. The above-mentioned database would comprise of personal details of UPSI providers/recipients accompanied by listed entities’ own UPSI. This is primary reason due to which the maintenance of the concerned database would be highly sensitive in nature and hence the outsourcing of the same has been restricted by SEBI.
ii. Reporting of violations of the Code of Conduct
The violation of code of conduct regulating insider trading has always been one of the crucial aspects when it comes to the functioning of the entity. SEBI’s approach has been extremely stringent regarding a breach of such code of conduct. In furtherance to this, SEBI has always ensured that such laws are always inclined towards encouraging reports being filed for such a breach. In 2019, the format and procedure of reporting of such violations was also established by SEBI.
The July 17th, 2020 Circular marks some evident modifications in the formatting standard of July 2019 vis-à-vis reporting matrix. As per the latest amendment, every listed entity, fiduciary, intermediary, etc is required to submit the standard format with a view of pointing out the violations to the stock exchange instead of securities market regulator especially where there is a trade of concerned securities.
The transition in approach of SEBI doesn’t seem to be in consonance with the interests of all the parties, as many of them may not be dealing with the stock exchange (unlike listed companies). Another noteworthy observation is that there has not been any circular or guidance issued by the Stock Exchanges themselves in this matter.
As per the PIT Amendment, there is a pertinent lack of clarity with respect to the mechanism for reporting such information to stock exchanges and also with regard to whether the intimation needs to be disclosed or only be maintained by the stock exchange. The violations reported to SEBI previously were not required to be furnished in the public domain.
iii. Trading Window Restrictions
Trading Window can be defined as trading in Company's securities. This includes trading of securities by the directors, designated employees, etc. Prohibition of Insider Trading Amendment, 2019 categorized certain transactions under Schedule B which would act as an exception from trading window restrictions. The above-mentioned transactions as exceptions include the defenses against allegations of insider trading. These include majorly those aspects which are mentioned in the Regulation 4 of the PIT Regulations as well as public offer or offering of shares in an open offer. The regulations in Schedule B constitute a restrictive list and cannot be extended. As per the 2020 amendment, SEBI has allowed offer for sale and rights entitlement transactions even when the trading window is closed. This amendment is another step towards considering an additional categories of transactions as an exemption to the restrictions regarding the closure of trading window.
With all these significant amendments, SEBI has worked on the degree and magnitude of control exercised by Stock Exchanges vis-à-vis listed and unlisted entities. SEBI, by augmenting the digital database, has provided significant support to the investigation procedure. However, as outsourcing to a third party is no longer permitted, the task of maintenance of such voluminous data would be extremely challenging. The overall impact of this amendment would be quite significant and also be subject to scrutiny at multiple levels of operation.