India: Amendments To India's Insider Trading Regulations Come Into Effect

Last Updated: 15 May 2019
Article by Majmudar & Partners

On December 31, 2018, the Securities and Exchange Board of India (the "SEBI") introduced several changes to the SEBI (Prohibition of Insider Trading Regulations), 2015 (the "Regulations"), which became effective on April 1, 2019. They were introduced pursuant to the report of the Committee on Fair Market Conduct which advocated for tighter norms to prevent insider trading. This update discusses the impact of the amendments to the Regulations.

Aspects of the Regulations targeted by the SEBI

The SEBI amended the Regulations to address the following key issues:

(a) While certain employees and other connected persons were required to make disclosures under the Regulations, the SEBI was not always able to establish the link between the insiders having access to unpublished price sensitive information ("UPSI") and the persons trading by using such UPSI. As a result, many insider trading incidents slipped through the SEBI's radar.

(b) While the Regulations permitted listed companies to communicate UPSI in furtherance of "legitimate purposes," the exact meaning of this phrase was unclear. As a result, listed companies were not able to clearly identify the advisors with whom such information could be shared.

(c) Although the Regulations are fairly recent, the dynamic nature of the securities market and drafting ambiguities had created uncertainty among market participants with respect to certain provisions.

Changes to curb Insider Trading

  1. In order to track the flow of UPSI more effectively and to prevent insider trading transactions, the amended Regulations require "designated persons" (who must be determined by the board of directors or other analogous body (the "BOD") of every listed company, fiduciary and intermediary (a "Market Entity") on the basis of each person's role, function and the access to UPSI that such role and function would provide and must include employees, employees of material subsidiaries of listed companies, promoters, senior level officers and support staff) to disclose the following information:
  • names of their educational institutions;
  • names of their past employers;
  • names, Permanent Account Numbers (issued by Indian tax authorities) or any other "identifier" authorized by law ("Legal Identifiers"), and phone numbers of their immediate relatives; and
  • names, Legal Identifiers and phone numbers of persons with whom they share a material financial relationship (if a person receives a payment equivalent to at least 25% of the payer's annual income during the immediately preceding twelve (12) months.)

By introducing the concept of "designated persons," the SEBI has extended the disclosure obligations way beyond the erstwhile category of "employees and connected persons." While the SEBI's goal of tracking the flow of information is admirable, it does not account for several practical difficulties. For instance, Market Entities will need to constantly update their databases to keep the information relevant, notwithstanding the fact that tracking such changes may be a challenge in itself given the wide characterization.

By demanding such broad and indiscriminate disclosures, the SEBI has increased the compliance burden on all Market Entities, while the measure itself may prove to be of little benefit.

  1. Each listed, or proposed to be listed, company is required to maintain a digital database containing the names and Legal Identifiers of all persons or entities who receive the company's UPSI.

Every listed or to be listed company has to maintain a digital database, and every person or entity who receives such a company's UPSI has to give his/her personal details to the company regardless of the remoteness of his/her relationship with the company. In our view, the SEBI appears to be overreaching in its data collection diktats, which are in sharp contrast to practices in countries like the US, where the law focuses on post-incident enforcement more than pre-incident data gathering.

Further, in case of non-residents, global data privacy laws may also impact the SEBI's data collection initiative. For instance, under the EU's General Data Protection Regulation, persons residing in the EU will have to expressly consent to the disclosure of their personal information with Indian companies and the relevant Indian authorities. It is unclear whether the amended Regulations will prevail over EU regulations if consent is not forthcoming.

  1. All Market Entities are required to formulate a revised model code of conduct as specified under Schedule B and Schedule C of the Regulations.
  1. The Chief Executive Officer, Managing Director or any other analogous person of the Market Entity is required to institute an effective system of internal controls, which ensures that:
  • employees with access to UPSI are identified as designated persons;
  • the UPSI's confidentiality is maintained as required by the Regulations;
  • adequate restrictions are placed on communication of UPSI;
  • a list of persons with access to UPSI is created; and
  • a periodic review is conducted to evaluate the internal controls.

Additionally, audit committees must review the adequacy of the Market Entity's internal controls and their compliance with the Regulations at least once every financial year. In addition, every company is required to formulate whistleblower policies and policies to conduct inquiries into leaks of UPSI.

In delegating the responsibility of ensuring compliance with the Regulations to the Market Entities, the SEBI has succeeded in creating a chain of accountability. However, it remains to be seen whether the Market Entities will adequately enforce the requirements of the Regulations.

Information sharing for "legitimate purposes"

The SEBI has allowed the BOD of the Market Entities to define their own policy to determine "legitimate purposes." Additionally, the SEBI has provided an indicative list of persons with whom the UPSI can be shared which includes partners, collaborators, lenders, customers, suppliers, merchant bankers, legal advisors, auditors and insolvency professionals, as long as the sharing of UPSI is not carried out to evade or circumvent the prohibitions of the Regulations. Apart from sharing information for legitimate purposes, listed companies can only share UPSI if the BOD believes such sharing of UPSI is in the best interests of the company and the information shared is made publicly available within two (2) days.

Other Changes

Recognizing that all information relating to material events may not necessarily be price sensitive, the SEBI has removed such information from the scope of UPSI. Further, if a person trades in the securities of a company while in possession of UPSI of that company, the amended Regulations create a presumption of guilt on such person. Lastly, the amended Regulations have permitted block deals between persons in possession of UPSI as long as both parties have made a conscious and informed trade decision.

Our Comments

In allowing the BOD to determine the scope of "designated persons" and "legitimate purposes", in our view, the SEBI has recognized that determining the appropriate recipients of UPSI is necessarily a subjective decision best left to the BOD. In fact both, the Report of the Committee on Corporate Governance in October 2017 and the Report of the Committee on Fair Market Conduct in August 2018, had advocated for the delegation of such power to the BOD. In pairing this power with the duty to act in the best interests of the listed company, the SEBI has attempted to create a transparent but flexible framework for the disclosure of UPSI. Given this, in our view, the SEBI has brought considerable clarity to the Regulations and eased the doing of business in India.

At the same time, in mandating the creation of databases and the disclosure of a broad range of information, the SEBI has acted overzealously and significantly increased the compliance burden for all Market Entities. Moreover, it remains to be seen whether the SEBI is able to adequately enforce these obligations and achieve the desired result.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions