SEBI’s newly introduced insider-trading norms raise the bar on unpublished price-sensitive information

PALAK SHAH | | Updated on: Apr 21, 2019
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Companies and promoters will have to be more cautious in dealing with unpublished price-sensitive information (UPSI) from this month, as SEBI’s new insider-trading norms will hold them responsible if they hold on to UPSI without any ‘legitimate purpose’.

SEBI’s recent amendment has widened the applicability of its insider-trading norms.

The regulator has now extended the requirement for reporting trades, and seeking clearance before trading in the company’s shares, even to senior employees of material subsidiaries and promoters of listed companies.

Flow of UPSI

It has also clarified that if the person who has traded is in possession of an UPSI, his trades will be presumed to be motivated by the UPSI.

Companies will have to formulate policies to determine what constitutes ‘legitimate purpose’, whistle-blower norms for reporting leaks of UPSI and inquiry norms for determining the source of leaks. These policies are aimed at monitoring the flow of UPSI and encouraging employees to inform the company about any suspected leaks.

SEBI has specified that the term ‘legitimate purpose’ will include the sharing of UPSI in the ordinary course of business by an insider with partners, collaborators, lenders, customers, suppliers, merchant bankers, legal advisors, auditors, insolvency professionals or other advisers or consultants, provided that such sharing has not been carried out to evade or circumvent the prohibitions of these regulations. The norms, which came into force from April, also stress upon listed companies to maintain a record of personal information such as PAN, mobile number of their directors, employees and immediate relatives, and persons with whom such employees share material financial relationships.

The records like mobile number are likely to make it easier for SEBI to establish a connection between the company and the person who trades, and provide valuable inputs during investigations about UPSI leakages, experts say.

WhatsApp circulation

In some recent cases, SEBI had found that key financial details of a company were circulated on WhatsApp, but it could not pin down the source of information as the UPSI was available with many senior employees and board members.

The markets regulator decided to amend insider trading rules after it passed several directions against various companies, including Axis Bank, Tata Motors and HDFC Bank, to ascertain leakage of confidential financial results in private WhatsApp groups ahead of their official announcement.

Companies are now required to have internal controls for identifying inside information and maintain lists of employees and other persons with whom such information is shared.

They are also required to periodically review their internal processes to evaluate the effectiveness of internal controls and intimate the persons receiving UPSI of their obligations towards preventing misuse of such information for insider-trading by advance notice.

SEBI’s defence available for off-market inter se transfers between promoters, who were in possession of UPSI, has been extended to all insiders. A similar defence will be available for block deals, the regulator has said.

Published on April 21, 2019

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