Securities and Exchange Board of India (``SEBI``) last week approved SEBI (Prohibition of Insider Trading) Regulations, 2014 (``New Regulations``). This update will briefly examine the revisions proposed by SEBI in its New Regulations.

Background: SEBI constituted a committee under the chairmanship of Justice N K Sodhi (``Committee``) to strength the regulatory framework in dealing with the insider trading regulations in India. The Committee in December 2013 submitted a comprehensive report and recommend a new set of insider trading regulations. SEBI last week in its board meeting broadly approved the recommendation of the Committee and substituted old regulations with New Regulations. While the text of the New Regulations is still to be published and notified, following are the key changes approved by the SEBI Board.

Key Changes in the New Regulations

  • Definition of Insider: The definition of `Insider` has been widened to include person connected on the basis of being in any a) contractual; b) fiduciary or c) employment relationship that allows such a person to access unpublished price sensitive information (UPSI). Further, Insider will also include a person who is in possession or has access to UPSI
  • Immediate Relatives: Immediate relatives will be presumed to be connected persons, with a provision of right to challenge this presumption. SEBI in past has faced several difficulties in showing evidence for passing of UPSI to an immediate relative. With this proposed amendment, the burden of proof will now shift on the immediate relative to prove that he or she did not hold UPSI before trading the securities.
  • UPSI Strengthened: UPSI under the old regulations was been defined as information not generally available and which may impact the price. The New Regulations strengthens the definition of UPSI by providing a test to identify price sensitive information, aligning it with listing agreement and providing platform of disclosure. Earlier, the definition of price sensitive information had reference to company only; now it has reference to both a company and securities. Further, generally available information means information that is accessible to the public on a non‐discriminatory platform which would ordinarily be stock exchange platform.
  • Legitimate Business Transaction:: Aligning insider trading norms with international practices and facilitate legitimate business transaction, SEBI now intends to permit access of UPSI though due‐diligence with appropriate safe guards. This provision will make it easier for private equity and strategic investors for accessing UPSI during their due diligence. However to maintain the information cemetery, UPSI must be disclosed at least 2 days before the trading.
  • Management holding UPSI: Insiders who are liable to possess UPSI all round the year i.e. CEO, CFO and senior management of the company, would now have the option to formulate pre‐scheduled trading plans. Trading plans would, however, will be required to be disclosed on the stock exchanges and have to be strictly adhered to.
  • Ease of Compliance Burden: Repeated disclosures have been removed so as to ease compliance burden and to align with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (``Takeover Code``). Disclosure of any change of 2% for persons holding more than 5% shares or voting rights has been removed as they are prescribed under Takeover Code.

MHCO Comment

Broadly, the changes proposed by SEBI are significant. It primarily endeavours to provide a good legal system and broadening the definition of insider to curtailing any person from wrong trading in securities who has advantage of having asymmetrical access to unpublished information. However, we will have wait for wordings of the New Regulations for its true interpretation.

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