The 19-member N. K. Sodhi Committee on insider trading has put the onus on the person accused to absolve himself.

The committee report, released on Wednesday, expands the definition of an insider by stating that anyone in possession of unpublished price sensitive information (UPSI) is an ‘insider’.

Insider trading is the act of buying/selling securities armed with information that is unpublished and price sensitive.

UPSI normally means having information on financial results, dividends, change in capital structure, mergers, de-mergers, acquisitions, de-listings, disposal and expansion of business, and changes in key management personnel before the information becomes public.

Connected persons

Public servants who handle UPSI of listed firms have been brought under the definition of connected persons. Any person associated with a company in any capacity that would allow such person access to UPSI relating to the company or whose association is reasonably expected to allow such access would be a connected person.

According to Yogesh Chande, Advocate, Economic Laws Practice, “A non-executive director on the board of a listed company and who is, for example, also holding directorship or is a promoter of, say, an investment company, will have to be more careful while dealing in securities of the listed company through such an investment company.

“Demonstrating that the information in his possession was not UPSI is going to be more difficult for the defence.”

Tejesh Chitlangi, Partner, IC Legal, said: “ The regulations proposed by the Committee are a marked improvement over the existing SEBI regulations on insider trading, which have had their share of challenges arising out of ambiguous drafting and misinterpretations.

“The recommended regulations are comprehensive and clear, which would assist in reducing ambiguity and enable SEBI and the courts to arrive at a clearer view, less prone to challenges and injustice.”

Trading plans

Under the proposed regulations, promoters have to publicly disclose a trading plan at least six months in advance which is approved by the company’s compliance officer. Trading plans are required to be in place for at least twelve months and cannot entail trading during the silent period and cannot overlap with another trading plan.

Arun Kejriwal, Director, KRIS Research, however, said: “Asking an insider to submit a trading plan is akin to asking a commitment that an act will be performed irrespective of evolving conditions.

“The right given to promoters to do 5 per cent creeping acquisition every year stands defeated if this trading plan is to be implemented. There is also this question of whether the insider should be forced to execute a trading plan if the price moves adversely.”

The proposed regulations will cover securities listed or proposed to be listed on stock exchanges.

Due diligence

The report has allowed conducting due diligence on listed companies for purposes of transactions entailing an obligation to make an open offer under the takeover regulations. In other cases, due diligence would be permissible subject to the UPSI being made public two days prior to the trading date.

The company’s board of directors have been made responsible to give the go ahead if they feel that the due diligence exercise is in the company’s best interests.

The exemptions

Trading in shares of a listed company while possessing UPSI has been prohibited. However, exceptions have been provided if such trading happens to be contrary to UPSI (such as selling of shares by an insider before the good news expected to take share prices up is publicly disclosed) or the insider being an innocent recipient of UPSI or placed reliance on information not believed to be UPSI.

Exemption has been given when the buyer and the seller have access to the same UPSI. Other exemptions include exercise of stock options entailing a predetermined price; the trades were decided upon and executed by authorised persons/agents of a ¯blind trust without access to the UPSI that the insider had and the trades were pursuant to a trading plan compliant with the requirements of the regulations.

Immediate relatives

Trades by promoters, employees, directors and their immediate relatives are required to be disclosed to the company. High-value trades are required to be disclosed in the made public domain and the company has to keep records of all holdings by all employees and ensure third-party connected persons who are not employees to disclose their trading and holdings in securities of the company.

Listed companies, market intermediaries, and all others handling UPSI have to formulate codes of disclosure and conduct. Currently, insider trading is punishable with imprisonment of up to ten years, or with fine of up to Rs 25 crore, or both.

>raghavendrarao@thehindu.co.in

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