Insider trading is prohibited and is considered an offence vide SEBI (Insider Trading) Regulations, 1992.
The definitions of some of the important terms are given below :
‘Dealing in securities’ means an act of subscribing, buying, selling or agreeing to subscribe, buy, sell or deal in any securities by any person either as principal or agent.
‘Insider’ means any person who, is or was connected with the company or is deemed to have been connected with the company, and who is reasonably expected to have access to unpublished price sensitive information in respect of securities of a company, or who has received or has had access to such unpublished price sensitive information.
A “connected person” means any person who-
(i) is a director, as defined in clause (13) of section 2 of the Companies Act, 1956 of a company, or is deemed to be a director of that company by virtue of sub-clause (10) of section 307 of that Act, or
(ii) occupies the position as an officer or an employee of the company or holds a position involving a professional or business relationship between himself and the company whether temporary or permanent and who may reasonably be expected to have an access to unpublished price sensitive information in relation to that company.
A person is ‘deemed to be a connected person’ if such person-
(i) is a company under the same management or group or any subsidiary company thereof within the meaning of section (1B) of section 370, or sub-section (11) of section 372, of the Companies Act, 1956 or subclause (g) of section 2 of the Monopolies and Restrictive Trade Practices Act, 1969 as the case may be; or
(ii) is an intermediary as specified in section 12 of SEBI Act, 1992, Investment company, Trustee Company, Asset Management Company or an employee or director thereof or an official of a stock exchange or of clearing house or corporation;
(iii) is a merchant banker, share transfer agent, registrar to an issue, debenture trustee, broker, portfolio manager, Investment Advisor, sub-broker, Investment Company or an employee thereof, or, is a member of the Board of Trustees of a mutual fund or a member of the Board of Directors of the Asset Management Company of a mutual fund or is an employee thereof who have a fiduciary relationship with the company;
(iv) is a member of the Board of Directors, or an employee, of a public financial institution as defined in Section 4A of the Companies Act, 1956;
(v) is an official or an employee of a self regulatory organisation recognised or authorised by the Board of a regulatory body;
(vi) is a relative of any of the aforementioned persons;
(vii) is a banker of the company.
(viii) Relatives of the connected person; or
(ix) is a concern, firm, trust, Hindu Undivided Family, company or association of persons wherein any of the connected persons mentioned in sub-clause (i) of clause (c) of this regulation or any of the persons mentioned in sub-clauses (vi), (vii) or (viii) of this clause have more than 10% of the holding or interest
“Price sensitive information” means any information which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of that company.
The following shall be deemed to be price sensitive information: -
(i) periodical financial results of the company;
(ii) intended declaration of dividends (both interim and final);
(iii) issue of securities or buy-back of securities;
(iv) any major expansion plans or execution of new projects;
(v) amalgamation, mergers or takeovers;
(vi) disposal of the whole or substantial part of the undertaking;
(vii) any significant changes in policies, plans or operations of the company. Unpublished means information which is not published by the company or its agents and is not specific in nature. Speculative reports in print or electronic media shall not be considered as published information.
Prohibition on dealing, communicating or counselling (Regulation 3)
No insider shall–
- · either on his own behalf or on behalf of any other person, deal in securities of a company listed on any stock exchange when in possession of any unpublished price sensitive information;
- · communicate, counsel or procure, directly or indirectly, any unpublished price sensitive information to any person who while in possession of such unpublished price sensitive information shall not deal in securities; Provided that nothing contained above shall be applicable to any communication required in the ordinary course of business or profession or employment or under any law.
No company shall deal in the securities of another company or associate of that other company while in possession of any unpublished price sensitive information.
Violation of provisions relating to insider trading
Any insider, who deals in securities in contravention of the provisions of regulation 3 or 3A shall be guilty of insider trading (regulation 4). If SEBI suspects any person of having violated the provisions of insider regulation, it may make inquiries with such person or with the stock exchanges, mutual funds, other persons associated with the securities
market, intermediaries and self-regulatory organisation in the securities market to form a prima facie opinion as to whether there is any violation of insider regulations. Where SEBI forms a prima facie opinion that it is necessary to investigate and inspect the books of accounts, either documents and records of an insider or the stock exchanges, mutual funds, other persons associated with the securities market, intermediaries and self-regulatory organisation in the securities market, it may appoint an investigating authority for the following purpose
i) to investigate into the complaints received from investors, intermediaries or any other person on any matter having a bearing on the allegations of insider trading; and
ii) to investigate sou moto upon its own knowledge or information in its possession to protect the interest of investors in securities against breach of insider trading regulations.
A reasonable notice has to be given to the insider before undertaking any investigation. Such notice is not required to be given if SEBI is satisfied that it is in the public interest or in the interest of the investors. During such investigation and inspection of the books of accounts, the insider or the stock exchanges, mutual funds, other persons associated with the securities market, intermediaries and self-regulatory organisation in the securities market shall be bound to discharge their obligations as provided in the regulations. The investigating authority has to submit his report to SEBI within reasonable time.
SEBI after considering the report shall communicate its findings to the suspected person and seek a reply from such person. Such suspected person shall reply to the findings within 21 days to SEBI. After receipt of such reply, SEBI may take such measures to safeguard and protect the interest of investors, securities market and for due compliance with the insider trading regulations.
SEBI also has powers to appoint an auditor to investigate into the books of accounts or the affairs of the insider or the stock exchanges, mutual funds, other persons associated with the securities market, intermediaries and self-regulatory organisation in the securities market.
To protect the interest of investor and securities market and for due compliance of the insider trading regulations, SEBI may issue order as per Regulation 11 in accordance with SEBI(Prohibition of Insider Trading) Regulations, 1992 , or initiate criminal prosecution under Section 24 or any action under Chapter VIA of the Securities and Exchange Board of India Act, 1992
Policy on disclosures and internal procedure for prevention of insider trading:
Chapter IV of the Regulations deals with policy on disclosures and internal procedure for prevention of insider trading. Accordingly, all listed companies and organisations associated with securities markets including:
(a) the intermediaries as mentioned in section 12 of the Act, asset management company and trustees of mutual funds;
(b) the self regulatory organisations recognised or authorised by the Board;
(c) the recognised stock exchanges and clearing house or corporations;
(d) the public financial institutions as defined in Section 4A of the Companies Act, 1956; and
(e) the professional firms such as auditors, accountancy firms, law firms, analysts, consultants, etc., assisting or advising listed companies, shall frame a code of internal procedures and conduct as near there to the Model Code specified in Schedule I of these Regulations.
Disclosure of interest or holding by directors and officers and substantial shareholders in listed companies –
(1) Any person who holds more than 5% shares or voting rights in any listed company shall disclose to the company in Form A, the number of shares or voting rights held by such person, on becoming such holder, within 4 working days of:-
(a) the receipt of intimation of allotment of shares; or
(b) the acquisition of shares or voting rights, as the case may be.
(2) Any person who is a director or officer of a listed company, shall disclose to the company in Form B, the number of shares or voting rights held by such person, within 4 working days of becoming a director or officer of the company.
(3) Any person who holds more than 5% shares or voting rights in any listed company shall disclose to the company in Form C the number of shares or voting rights held and change in shareholding or voting rights, even if such change results in shareholding falling below 5%, if there has been change in such holdings from the last disclosure made under sub-regulation (1) or under this sub-regulation; and such change exceeds 2% of total shareholding or voting rights in the company.
(4) Any person who is a director or officer of a listed company, shall disclose to the company in Form D, the total number of shares or voting rights held and change in shareholding or voting rights, if there has been a change in such holdings from the last disclosure made under sub-regulation (2) or under this sub-regulation, and the change exceeds Rupees 5 lakh in value or 25000 shares or 1% of total shareholding or voting rights, whichever is lower.
(5) The disclosure mentioned in sub-regulations (3) and (4) shall be made within 4 working days of :
(a) the receipt of intimation of allotment of shares, or
(b) the acquisition or sale of shares or voting rights, as the case may be.
Disclosure by company to stock exchanges
(6) Every listed company, within five days of receipt, shall disclose to all stock exchanges on which the company is listed, the information received under sub-regulations (1), (2),(3) and (4) of Regulation 13.
Code of Ethics
SEBI has advised stock exchanges to adopt the Code of Ethics for their directories and functionaries with effect from 31st May 2001. This is aimed at improving the professional and ethical standards in the functioning of exchanges thereby creating better investors confidence in the integrity of the market.