On May 15, 2015, the SEBI (Prohibition of Insider Trading) Regulations, 2015 ('Regulations') came in to effect and replaced the erstwhile SEBI (Prohibition of Insider Trading) Regulations, 1992 ('Erstwhile Regulations'). Insider trading regulations in India underwent a significant change after a period of 20 years and for this reason there has been significant debate and discussion on the Regulations. Many listed entities are slightly apprehensive of the Regulations. In particular, certain listed entities are uncomfortable with the fact that the ambit of persons affected by these regulations has been widened and there are larger monitoring and compliance requirements on entities.
Wide interpretation of Definitions:
The widening of key definitions has been one of the reasons for the discomfort expressed by certain entities. For instance, the term 'insider' now also includes a connected person as well as any other person who, irrespective of the source, has access to any price sensitive information of a company. A connected person is said to be a person who is or has during the six months prior to the act been associated with a company, directly or indirectly, in any capacity, including by reason of frequent communication with its officers or by being in any contractual, fiduciary or employment relationship or by being a director, officer or employee?. It must be noted that 'connected persons' may include company's bankers, financial and legal advisers, among others. This has meant that compliance teams of companies are now required to report trades executed by all classes of connected persons, in addition to their own employees. Needless to say, many Companies consider this to be a burdensome obligation and are yet unclear as to how they will monitor the trades of connected persons.
Further the Regulations are now applicable on listed companies as well as on companies that are proposed to be listed. However, there exists an ambiguity about what "proposed to be listed" implies. Whether a company that has filed a draft red herring prospectus or that has already proposed an Initial Public Offering are included in this phrase is unclear.
The Regulations have also brought about a change in the definition of the term unpublished price sensitive data ('UPSD'). UPSD had previously been defined as that information which relates to the company and if published will affect the price of the security. However, the new regulation widens the ambit of the data that falls under this category by including any information related not only to the company but also its securities, which is not generally available and will affect the price of the security. The new regulation also provides the definition of generally available information and further gives a non-exhaustive list of matters information related to which would come under the purview of this definition. The expansion of the scope of the definition has not only made its meaning more clear and precise but will also tighten the ropes of insider trading prohibition.
Restrictions on exercising ESOPs
Companies seem to have been most affected by the restrictions imposed by the Regulations on exercise of employee stock options ("ESOPs").The employees of a company are fettered by restrictions contained in the Regulations while exercising their rights on ESOP. The Regulations now include employees in the ambit of an insider and hence an employee is subject to the same trading restrictions when he is in possession of UPSI. Further the employees intending to trade in the securities of the company have to comply with the complex procedural requirements under that of a trade plan and the code of conduct. The employees now fall under the definition of "designated persons" and hence these employees or their immediate relatives cannot trade with their securities during the 45 days period when the trading window is shut and further until 48 hours after the results are published. There are further restrictions put on the employees and employees cannot amend or change the trading plan in this period. These provisions will not only curtail the liberty of the employees while trading but will also take away the core benefits that were enjoyed by them under the ESOP Scheme.
The Regulations impose an obligation on every promoter, employee and director of a listed company to disclose to the company and stock exchanges, details of securities traded by them. Under the Erstwhile Regulations such a disclosure obligation was only on the promoters, directors and officers of the company. Hence the word officer has been replaced by the word employee and thus added a significant obligation on the employees of a listed entity.
The Regulations now require an insider to formulate and submit investment trading plans to the compliance officer. This option could be availed by those insiders who are expected to be perpetually in possession of unpublished price sensitive information (UPSI). Such a submission of the trading plan will allow the insiders to implement their pre-decided trades without any presumption of possession of UPSI. It seems that the intention of the regulators is to ensure that unintentional trading during window closure period does not create any liability for the insiders under the Regulation. However there is still some ambiguity with respect to the term 'person perpetually in possession of UPSI' as it has not been defined under the Regulations and hence it is difficult to categorize the persons who would be entitled to formulate trading plans.
There is no doubt that India required a more robust and up to date legislation to deal with insider trading and in that respect the implementation of the Regulations is a welcome step. However SEBI needs to reconsider certain onerous compliance requirements which are causing hardships to certain stakeholders in companies like the employees. Till the time further clarifications are obtained from SEBI the vagueness with respect to certain provisions in the Regulations may cause hardships to listed entities.
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