SEBI Regulations and their attempt to limit Insider Trading

SEBI Regulations and their attempt to limit Insider Trading

News:

SEBI lays down mechanism to prevent insider trading on the recommendations of the TK Viswanathan committee

Important Facts:

What is Insider Trading

• Insider trading is the buying or selling of a security by someone who has access to nonpublic information about the security. Insider trading can be illegal or legal depending on when the insider makes the trade. It is illegal when the material information is still nonpublic.
• The term ‘insider’ has been defined under Regulation 2(e) of SEBI (Prohibition of Insider Trading) Regulations, 1992. Basically, the term ‘insider’ can be classified into three broad categories, which are:
  • Persons who are connected to the company,
  • Persons who were connected with the company,
  • Persons who are deemed to be connected to the company.

In order to become an insider a person has to fulfil three elements:

• The person should be a natural person or legal entity;
• The person should be connected person or deemed to be connected;
• Acquisition of the unpublished price sensitive information by virtue of such connection.

Mechanism to prevent insider trading

• According to SEBI Promoters will be held responsible for violation of insider trading norms, if they possess unpublished price-sensitive information (UPSI) regarding the company without any “legitimate purpose“.
• Legitimate purpose – Sharing of the UPSI by an insider with partners, collaborators, lenders, customers, suppliers, merchant bankers, legal advisors, auditors, insolvency professionals or other advisors or consultants, provided that such sharing has not been carried out to evade or circumvent the prohibitions of these regulations.
• The board of directors to maintain digital database containing the names of such persons or entities with whom the information is shared.
• A promoter who does not hold any position on the board will not be considered a person having “Legitimate Purpose” to hold UPSI.
• Advisors who need access to UPSI, needs to be informed that the information shared with them is insider information and they should apply it only for the purpose meant.
• Identification data of recipients must be maintained.

Cases under spotlight

• Cyrus Mistry, the former Chairman of Tata Sons, had alleged that information related to Tata group companies was being shared with Ratan Tata.

Recommendation of Kotak committee

• Committee has recommended flow of unpublished price sensitive information (UPSI) shall be considered for ‘legitimate purpose’, and not an offence under the SEBI (Insider Trading) for those who:
  • Is part of the promoter group.
  • Has a nominee director on the board.
  • The information should be pursuant to a formal agreement in accordance with the regulations.
  • Communication of information must comply with the Insider Trading Regulations.