Securities
and Exchange Board of India (SEBI) formulated new regulations on the concept of
insider trading to create a strong legal framework. These regulations named
SEBI (Prohibition of Insider Trading) Regulations, 2015 (Regulations, 2015) were
published on January 15, 2015 but are awaiting enforcement which is to begin
120 days after its publication in the official gazette i.e. May 15, 2015.
and Exchange Board of India (SEBI) formulated new regulations on the concept of
insider trading to create a strong legal framework. These regulations named
SEBI (Prohibition of Insider Trading) Regulations, 2015 (Regulations, 2015) were
published on January 15, 2015 but are awaiting enforcement which is to begin
120 days after its publication in the official gazette i.e. May 15, 2015.
Insider
Trading relates to unpublished price sensitive information (UPSI) i.e.
information which is not generally available and has the potential to affect
the price of a security, which is available to a ‘Connected Person’, who
communicates, provides or allows access of it to any other person. This was and
continues to be a prohibited act. The new regulations have just increased the
ambit within which these were applied along with a few other changes. The SEBI
(Prohibition of Insider Trading) Regulations, 2015 has tailored the framework
in accordance to the emerging needs by following three different methods: –
Trading relates to unpublished price sensitive information (UPSI) i.e.
information which is not generally available and has the potential to affect
the price of a security, which is available to a ‘Connected Person’, who
communicates, provides or allows access of it to any other person. This was and
continues to be a prohibited act. The new regulations have just increased the
ambit within which these were applied along with a few other changes. The SEBI
(Prohibition of Insider Trading) Regulations, 2015 has tailored the framework
in accordance to the emerging needs by following three different methods: –
A. Increasing scope of Definitions: –
|
Definition
|
Regulations
1992 (Existing Regulation) |
Regulation
2015 (New Regulation) |
|
Connected
Person |
Regulation
2 (c) refers towards the position holders in a company like Directors, officers, employees etc. rather than applying practically as to the persons who possess UPSI. Also the act of procuring UPSI was not covered. |
In
regulation 2 (d) of the Regulations, 2015 the definition of a connected person has been simplified. A connected person now means to include any person who has a connection with the company wherein he possesses or accesses UPSI or allows procurement by any other person.
Section
2 (d) (ii) provides a list of persons deemed to be connected but who can establish the contrary including: – i. immediate relatives,
ii.
holding or associate or a subsidiary company,
iii.
intermediary or its employee or director,
iv.
investment or trustee or asset management company including their employees and directors,
v.
official of the exchange or clearing house or corporation,
vi.
member of board of trustees of a mutual fund,
vii.
Board of Directors (BoD) or employee of a financial institute,
viii.
official or employee of a self regulatory organization which is recognized or authorized by the BoD,
ix.
a banker of the company,
x.
firm/trust/HUF/company/association of persons where a director or his immediate relative or banker has more than 10 % of the holding of interest. |
|
Relative
|
It
was defined as per Section 6 of the Companies Act, 1956 and included the members of a HUF, spouses, and the list given in Schedule 1A therein |
The
new regulations modified the word “relative” to “immediate relatives” and defines it in regulation 2 (f) as a spouse, parent, sibling, child of the connected person or the spouse, any of whom is either dependant financially on such person or consults such person in taking decisions relating to trading in securities.
Though
this is a rebuttable presumption that the immediate relatives are also connected persons in lieu of their being covered by this definition. |
|
Insider
|
In
regulation 2 (e), the words used are quite ambiguous like persons reasonably expected to possess UPSI, persons deemed to be connected with the company, which was further explained in terms of the list of persons deemed to be connected as per section 2 (d) (ii) of Regulation 2015. |
Regulation
2 (g) streamlines the previous definition and does away with the ambiguous words by simply stating that an Insider is any person who is: –
i.
a connected person or
ii.
in possession of or has access to a UPSI
So,
even if a person does not hold a formal position with the company, he/she still can be covered under the definition of an Insider due to their having any type of an access to a UPSI. |
|
UPSI
|
Defined
in two parts, the first part is in regulation 2 (ha) where ‘price sensitive information’ is referred to as the information relating to the company which if published would materially affect the price of the securities of the company.
The
second part containing the definition of ‘unpublished’ is in regulation 2 (k) as any information which is not published by the company or its agents and is not specific in nature. |
Regulations,
2015 combined these two parts and define UPSI under regulation 2 (n) as any information relating to a company as well as to its securities that is not generally available (definition has been inserted in Regulation, 2015) which upon becoming so generally available be likely to materially affect the price of the securities. |
|
Compliance
Officer |
In
schedule 1, table A, 1.0, compliance officer has been defined as a senior level employee who reports to the Managing Director/CEO of the company. |
Regulation
2 (c) defines a compliance officer as a senior officer, designated as a compliance officer who reports to the Board of Directors of a company or to the head of the organization. |
B. Other Changes: –
|
Particular
|
Regulations
1992 |
Regulation
2015 |
|
Change
of the term ‘Dealing’ to ‘Trading’ |
The
word used in regulation 2 (d) is dealing. This definition was specifically for any person either principal or agent. |
The
word used in regulation 2 (l) is trading, there has been no change in the definition except that the specification of ‘any person either principal or agent’ has been deleted. |
C. New Insertions: –
|
Particular
|
Regulations
1992 |
Regulation
2015 |
|
Definition
of ‘Generally Available Information’ |
Did
not exist. |
Regulation
2 (e) defines generally available information as any information that is accessible to the public at a non-discriminatory basis. |
|
Trading
Plan |
Did
not exist.
Instead
of this concept, there was another concept of trading window. The time period was specified as the trading period wherein the trading window was open which allowed the directors/officers/employees of a company to trade in securities but the window was kept closed before declaration of financial results, dividends, or issue of securities, any major expansion or amalgamation, merger, takeover, disposal of undertaking or changes in policies or plans of the company.
This
time period was also left for being decided by the company.
These
dealings in the open trading window had to be given a pre-clearance by the Compliance Officer as per the procedure given in Schedule 1, part A and part B, 3 |
As
per regulation 5, an insider may trade in securities by formulating a single trading plan for the whole year and present it to the compliance officer for approval and public disclosure at least six months prior to commencing any trading which should not be at a period around the declaration of financial results.
The
trading plan should set out either the value of trades to be effected or the number of securities to be traded along with the nature of the trade and the intervals at which such trade shall be effected.
The
compliance officer can ask for any undertakings that he/she deems fit to save the purpose of this regulation.
Also,
implementation of the trading plan will not be allowed to commence if any UPSI in possession of the insider at the time of formulation of the trading plan has not become generally available at the time of commencement of implementation.
The
compliance officer after approving the trading plan shall notify it to the stock exchange.
The
trading plan once approved will have to be compulsorily complied with, hence the insider cannot deviate, change or trade outside the scope of the trading plan.
Also,
the above compliances of formulating and implementing the trading plan do not grant absolute immunity to the insider. |
|
Unpublished
Price Sensitive Information (UPSI) |
|
Two
new insertions have been made to its definition by including that ‘changes in key managerial personnel’ and ‘material events in accordance with the listing agreement’ are also within the scope of UPSI. |
Frequently Asked Questions (FAQ’s)
Question 1 : Would
a lawyer, advocate or law firm providing investment advice to its clients be
considered an Investment Advisor under the SEBI (Investment Advisers)
Regulations, 2013?
a lawyer, advocate or law firm providing investment advice to its clients be
considered an Investment Advisor under the SEBI (Investment Advisers)
Regulations, 2013?
Answer: No, on a
perusal of regulation 3 (application for grant of certificate of investment advisor)
and regulation 4 (exemption from registration) of the SEBI (Investment
Advisers) Regulations, 2013 it becomes clear that any advocate, solicitor or
law firm, who provides investment advice to their clients, incidental to their
legal practise will not be covered in the definition of an Investment Advisor.
perusal of regulation 3 (application for grant of certificate of investment advisor)
and regulation 4 (exemption from registration) of the SEBI (Investment
Advisers) Regulations, 2013 it becomes clear that any advocate, solicitor or
law firm, who provides investment advice to their clients, incidental to their
legal practise will not be covered in the definition of an Investment Advisor.
Question 2 : What
is the punishment for the contravention of Regulations, 2015?
is the punishment for the contravention of Regulations, 2015?
Answer: Regulation 10
of the Regulations, 2015 provides that any contraventions of the regulations
will be dealt by the Securities and Exchange Board of India (SEBI) in
accordance to the SEBI Act, 1992.
of the Regulations, 2015 provides that any contraventions of the regulations
will be dealt by the Securities and Exchange Board of India (SEBI) in
accordance to the SEBI Act, 1992.
The
SEBI Act, 1992 under section 15G states that the penalty for insider trading shall
not be less than Rs. 10 lakhs (ten lakh) but which may extend to Rs. 25 crore (twenty-five
crore) or 3 (three) times the amount of profits made out of insider trading, whichever
is higher.
SEBI Act, 1992 under section 15G states that the penalty for insider trading shall
not be less than Rs. 10 lakhs (ten lakh) but which may extend to Rs. 25 crore (twenty-five
crore) or 3 (three) times the amount of profits made out of insider trading, whichever
is higher.
In
Addition to Penalty: In section 24 (1) of the SEBI Act,
1992 it is stated that, ‘without prejudice to any award of penalty by the
adjudicating officer under this Act, if any person contravenes or attempts to
contravene or abets the contravention of the provisions of this Act or of any
rules or regulations made there under, he shall be punishable with imprisonment
for a term which may extend to 10 (ten) years, or with fine, which may extend
to Rs. 25 crore (twenty-five crore) or with both.’
Addition to Penalty: In section 24 (1) of the SEBI Act,
1992 it is stated that, ‘without prejudice to any award of penalty by the
adjudicating officer under this Act, if any person contravenes or attempts to
contravene or abets the contravention of the provisions of this Act or of any
rules or regulations made there under, he shall be punishable with imprisonment
for a term which may extend to 10 (ten) years, or with fine, which may extend
to Rs. 25 crore (twenty-five crore) or with both.’
If
Penalty is Not Paid: In section 24 (2) it states, ‘if any
person fails to pay the penalty imposed by the adjudicating officer or fails to
comply with any of his directions or orders, he shall be punishable with
imprisonment for a term which shall not be less than 1 (one) month but which
may extend to 10 (ten) years, or with fine, which may extend to Rs. 25 crore (twenty-five
crore) or with both.’
Penalty is Not Paid: In section 24 (2) it states, ‘if any
person fails to pay the penalty imposed by the adjudicating officer or fails to
comply with any of his directions or orders, he shall be punishable with
imprisonment for a term which shall not be less than 1 (one) month but which
may extend to 10 (ten) years, or with fine, which may extend to Rs. 25 crore (twenty-five
crore) or with both.’
Compounding
of Offence: Section 24A states that, ‘Notwithstanding
anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), any
offence punishable under this Act, not being an offence punishable with
imprisonment only, or with imprisonment and also with fine, may either before
or after the institution of any proceeding, be compounded by a Securities
Appellate Tribunal or a court before which such proceedings are pending.
of Offence: Section 24A states that, ‘Notwithstanding
anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), any
offence punishable under this Act, not being an offence punishable with
imprisonment only, or with imprisonment and also with fine, may either before
or after the institution of any proceeding, be compounded by a Securities
Appellate Tribunal or a court before which such proceedings are pending.
Question 3 : What
is the law laid down in Companies Act, 2013 for insider trading?
is the law laid down in Companies Act, 2013 for insider trading?
Answer: The Companies
Act, 1956 was silent on this regard but Section 195 of the Companies Act, 2013 states
that, ‘No person including any director or key managerial personnel of a
company shall enter into insider trading’. The definitions of ‘Insider Trading’
and ‘Price Sensitive Information’ mean the same as are defined in the
Regulation, 1992 and the Regulation, 2015.
Act, 1956 was silent on this regard but Section 195 of the Companies Act, 2013 states
that, ‘No person including any director or key managerial personnel of a
company shall enter into insider trading’. The definitions of ‘Insider Trading’
and ‘Price Sensitive Information’ mean the same as are defined in the
Regulation, 1992 and the Regulation, 2015.
The
punishment laid down under the Companies Act, 2013 for contravention by any
person is for imprisonment for a term which may extend to 5 (five) years or
with fine from a minimum of Rs. 5 lakh (five lakh) up to Rs 25 crore (twenty-five
crore) or three times the amount of profit made out of such insider trading,
whichever is higher, or with both.
punishment laid down under the Companies Act, 2013 for contravention by any
person is for imprisonment for a term which may extend to 5 (five) years or
with fine from a minimum of Rs. 5 lakh (five lakh) up to Rs 25 crore (twenty-five
crore) or three times the amount of profit made out of such insider trading,
whichever is higher, or with both.
Question 4 : Which
act/regulation/rules would be attracted on the non-efficiency or malafide
actions of a Compliance Officer?
act/regulation/rules would be attracted on the non-efficiency or malafide
actions of a Compliance Officer?
Answer: The
Regulation, 2015 confer upon the compliance officer a wide range of powers and
duties. The question is what if the compliance officer himself/herself is
inefficient or does not do his/her duties in accordance to the regulations or
what if he/she becomes an insider and start trading on the same lines?
Regulation, 2015 confer upon the compliance officer a wide range of powers and
duties. The question is what if the compliance officer himself/herself is
inefficient or does not do his/her duties in accordance to the regulations or
what if he/she becomes an insider and start trading on the same lines?
The
regulation regulating the conduct of a compliance officer is laid down under
the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating
Officer) Rules, 1995.
The procedure laid down under these rules is: –
regulation regulating the conduct of a compliance officer is laid down under
the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating
Officer) Rules, 1995.
The procedure laid down under these rules is: –
1.
SEBI conducts investigation under
section 15-I of the SEBI Act, 1992 upon suspicion or complaint of misconduct of
compliance officer.
SEBI conducts investigation under
section 15-I of the SEBI Act, 1992 upon suspicion or complaint of misconduct of
compliance officer.
2.
Based on the findings, SEBI appoints
an Adjudicating Officer (AO).
Based on the findings, SEBI appoints
an Adjudicating Officer (AO).
3.
The AO issues a show cause notice to
the compliance officer who is under investigation as to why such investigation
should not take place.
The AO issues a show cause notice to
the compliance officer who is under investigation as to why such investigation
should not take place.
4.
On the reply of the compliance
officer, the AO decides the course of action. If the inquiry is held then the
compliance officer is given an opportunity by way of personal presence to
defend himself/herself.
On the reply of the compliance
officer, the AO decides the course of action. If the inquiry is held then the
compliance officer is given an opportunity by way of personal presence to
defend himself/herself.
5.
Thereafter, the AO considers the
issues, evidence and findings of the inquiry.
Thereafter, the AO considers the
issues, evidence and findings of the inquiry.
6.
If the compliance officer is found
guilty then the penalty levied is specified under section 15 HB of the SEBI
Act, 1992[1]
If the compliance officer is found
guilty then the penalty levied is specified under section 15 HB of the SEBI
Act, 1992[1]
7.
The copy of the final order is sent to
the compliance officer and SEBI.
The copy of the final order is sent to
the compliance officer and SEBI.
8.
An appeal from such order lies within
45 days of receiving such order to the Securities Appellant Tribunal as per
section 15T of the SEBI Act, 1992.
An appeal from such order lies within
45 days of receiving such order to the Securities Appellant Tribunal as per
section 15T of the SEBI Act, 1992.
9.
An appeal from the Securities
Appellant Tribunal shall lie to the Supreme Court of India under section 15Z
within 60 days of communication of such decision for resolving a question of
law.
An appeal from the Securities
Appellant Tribunal shall lie to the Supreme Court of India under section 15Z
within 60 days of communication of such decision for resolving a question of
law.
An
example of such a proceeding being held for inquiring the actions of compliance
officer was in the case of Satyam Computer Services Limited, wherein an order
was passed in 2011, for Mr. G. Jayaram who was the compliance officer of the
company, who was found guilty and was levied a fine of Rs. 5 lakh.
example of such a proceeding being held for inquiring the actions of compliance
officer was in the case of Satyam Computer Services Limited, wherein an order
was passed in 2011, for Mr. G. Jayaram who was the compliance officer of the
company, who was found guilty and was levied a fine of Rs. 5 lakh.
Question 5: In
the definition of ‘connected person’, aren’t the words ‘including by reason of
frequent communication with its officers’ and ‘reasonably expected to allow
such access’ too wide?
the definition of ‘connected person’, aren’t the words ‘including by reason of
frequent communication with its officers’ and ‘reasonably expected to allow
such access’ too wide?
Answer: Yes, these
terms may be defined as too wide to include almost anybody who has even the
remotest link to an officer who is in possession of UPSI. The burden of proof
is on such connected person to prove otherwise.
terms may be defined as too wide to include almost anybody who has even the
remotest link to an officer who is in possession of UPSI. The burden of proof
is on such connected person to prove otherwise.
Question 6: What
is the scope of regulations 3 and 4 of the Regulation, 2015. Is a procurer of
UPSI included in the scope of regulation 4?
is the scope of regulations 3 and 4 of the Regulation, 2015. Is a procurer of
UPSI included in the scope of regulation 4?
Answer: Regulation 3
(1) & (2) read together bar an insider to communicate, provide or allow
access to any UPSI of any person including other insiders and also bars all other
persons from procuring or causing communication of UPSI by any insider. Hence,
it seeks to bar not only the insider but also any other person from procuring a
UPSI. An exception to this bar is if such communication, procurement or
permission flows from the furtherance of legitimate purposes, performance of
duties or discharging of legal obligations.
(1) & (2) read together bar an insider to communicate, provide or allow
access to any UPSI of any person including other insiders and also bars all other
persons from procuring or causing communication of UPSI by any insider. Hence,
it seeks to bar not only the insider but also any other person from procuring a
UPSI. An exception to this bar is if such communication, procurement or
permission flows from the furtherance of legitimate purposes, performance of
duties or discharging of legal obligations.
Regulation
4 bars only insiders from trading in securities when they are in possession of
UPSI. The instances whereupon the insider may be discharged are if all the
parties to a transaction were conscious of the existence of a UPSI and took an
informed trade decision or the persons holding UPSI were different from the
persons taking the trading decision who did not possess any UPSI at the time
they took the decision or arrangements of such a nature were in place that
ensured the compliance under these regulations, 2015 were not violated or the
trades were in lieu of the trading plan set up in accordance to these
regulations, 2015.
4 bars only insiders from trading in securities when they are in possession of
UPSI. The instances whereupon the insider may be discharged are if all the
parties to a transaction were conscious of the existence of a UPSI and took an
informed trade decision or the persons holding UPSI were different from the
persons taking the trading decision who did not possess any UPSI at the time
they took the decision or arrangements of such a nature were in place that
ensured the compliance under these regulations, 2015 were not violated or the
trades were in lieu of the trading plan set up in accordance to these
regulations, 2015.
So,
a procurer of a UPSI who may be barred under regulation 3 shall not be so
barred in regulation 4 of the regulation, 2015.
a procurer of a UPSI who may be barred under regulation 3 shall not be so
barred in regulation 4 of the regulation, 2015.
Question 7:
What is the meaning of the words, ‘Securities listed or proposed to be listed
on the Exchange’ used in the Regulations, 2015?
What is the meaning of the words, ‘Securities listed or proposed to be listed
on the Exchange’ used in the Regulations, 2015?
Answer: These
regulations cover companies whose securities are listed or proposed to be
listed. A company whose securities are not listed will not be covered under
these regulations. The words ‘proposed to be listed’ apply to securities of a
company which are proposed to be listed provided that the company is already
listed.
regulations cover companies whose securities are listed or proposed to be
listed. A company whose securities are not listed will not be covered under
these regulations. The words ‘proposed to be listed’ apply to securities of a
company which are proposed to be listed provided that the company is already
listed.
Question 8:
‘Insider may prove his innocence’ – too vague a word to be used?
‘Insider may prove his innocence’ – too vague a word to be used?
Answer: Yes, a better
choice of words could have been used like ‘defences taken by an insider’ or ‘insider
may shift burden of proof’ etc.
choice of words could have been used like ‘defences taken by an insider’ or ‘insider
may shift burden of proof’ etc.
Question 9: Chapter
III relating to investigation by SEBI in regulations, 1992 has been removed
from the regulations, 2015 so now what will be the procedure for investigation
by SEBI?
III relating to investigation by SEBI in regulations, 1992 has been removed
from the regulations, 2015 so now what will be the procedure for investigation
by SEBI?
Answer: Chapter III
of the regulations, 1992 expressly stated the procedure for investigation by SEBI.
In the regulations, 2015 the whole chapter has been deleted. So, now the investigation
procedure given in section 11C of the SEBI Act, 1992 will be followed.
of the regulations, 1992 expressly stated the procedure for investigation by SEBI.
In the regulations, 2015 the whole chapter has been deleted. So, now the investigation
procedure given in section 11C of the SEBI Act, 1992 will be followed.
Question 10:
Regulation 5 of regulations, 2015 states that, ‘an insider shall be entitled to
formulate a trading plan’, the meaning of which is not very clear as to whether
it is a mandatory requirement or not?
Regulation 5 of regulations, 2015 states that, ‘an insider shall be entitled to
formulate a trading plan’, the meaning of which is not very clear as to whether
it is a mandatory requirement or not?
Answer: If we go by
the meaning of the word ‘entitled’, it means ‘right to a particular privilege
or benefit, granted by law or custom’. In the present question, the right is to
formulate a trading plan, the privilege is that even as an insider, the person
may trade in securities and reap the benefits of it granted by the law
established by these regulations, 2015.
the meaning of the word ‘entitled’, it means ‘right to a particular privilege
or benefit, granted by law or custom’. In the present question, the right is to
formulate a trading plan, the privilege is that even as an insider, the person
may trade in securities and reap the benefits of it granted by the law
established by these regulations, 2015.
Hence,
an insider is not barred from trading in securities completely, he/she may do
so if they follow the route of formulating a trading plan and going by it as
laid down under regulation 5 of regulations, 2015.
an insider is not barred from trading in securities completely, he/she may do
so if they follow the route of formulating a trading plan and going by it as
laid down under regulation 5 of regulations, 2015.
Question 11:
Regulation 5 states that, ‘a trading plan shall be presented to the compliance
officer for approval and public disclosure pursuant to which trades may be
carried out’, would that not amount to disclosure of UPSI to the public? Why is
there a need for any public disclosure?
Regulation 5 states that, ‘a trading plan shall be presented to the compliance
officer for approval and public disclosure pursuant to which trades may be
carried out’, would that not amount to disclosure of UPSI to the public? Why is
there a need for any public disclosure?
Answer: The answer to
this question probably lies in the definition of ‘generally available
information’ under regulation 2 (1) (e) of regulations, 2015. The sole purpose
for this public disclosure seems to be adequate to make any UPSI as generally
available to public. If any information upon which a trading plan was
formulated is generally available to the public on a non-discriminatory basis,
it ceases to give any special or secretive privilege to the actual holder of
such UPSI. Upon a public disclosure, everybody knows of the existence of the
information upon which the trading plan was formulated. This ensures a free,
unbiased decision making.
this question probably lies in the definition of ‘generally available
information’ under regulation 2 (1) (e) of regulations, 2015. The sole purpose
for this public disclosure seems to be adequate to make any UPSI as generally
available to public. If any information upon which a trading plan was
formulated is generally available to the public on a non-discriminatory basis,
it ceases to give any special or secretive privilege to the actual holder of
such UPSI. Upon a public disclosure, everybody knows of the existence of the
information upon which the trading plan was formulated. This ensures a free,
unbiased decision making.
Question 12: What
does ‘not entail trading in securities for market abuse’ mean in regulation 5(vi)?
does ‘not entail trading in securities for market abuse’ mean in regulation 5(vi)?
Answer: Formulating a
trading plan by an insider who wants to trade in securities would not grant
him/her absolute immunity from being prosecuted for market abuse. If upon an
investigation it is discovered that the release of the trading plan was such
that it led to the circumvention of regulation 4 of regulations, 2015, the
insider would be prosecuted for fraud under regulation 2 (1) (c) (9) of SEBI
(Prohibition of Fraudulent and Unfair Trade Practices Relating to the
Securities Market) Regulations, 2003 which states that, ‘Fraud is the act of an
issuer of securities giving out misinformation that affects the market price of
the security, resulting in investors being effectively misled even though they
did not rely on the statement itself or anything derived from it other than the
market price’ and also under regulation 4 (2) (a) and (f) which state that, ‘Dealing
in securities shall be deemed to be a fraudulent or an unfair trade practice if
it involves fraud and may include all or any of the following, namely: (a)
indulging in an act which creates false or misleading appearance of trading in
the securities market’ and (f) publishing or causing to publish or reporting or
causing to report by a person dealing in securities any information which is
not true or which he does not believe to be true prior to or in the course of
dealing in securities’.
trading plan by an insider who wants to trade in securities would not grant
him/her absolute immunity from being prosecuted for market abuse. If upon an
investigation it is discovered that the release of the trading plan was such
that it led to the circumvention of regulation 4 of regulations, 2015, the
insider would be prosecuted for fraud under regulation 2 (1) (c) (9) of SEBI
(Prohibition of Fraudulent and Unfair Trade Practices Relating to the
Securities Market) Regulations, 2003 which states that, ‘Fraud is the act of an
issuer of securities giving out misinformation that affects the market price of
the security, resulting in investors being effectively misled even though they
did not rely on the statement itself or anything derived from it other than the
market price’ and also under regulation 4 (2) (a) and (f) which state that, ‘Dealing
in securities shall be deemed to be a fraudulent or an unfair trade practice if
it involves fraud and may include all or any of the following, namely: (a)
indulging in an act which creates false or misleading appearance of trading in
the securities market’ and (f) publishing or causing to publish or reporting or
causing to report by a person dealing in securities any information which is
not true or which he does not believe to be true prior to or in the course of
dealing in securities’.
Question 13: As
per regulation 5 (4), doesn’t the mandatory application of a formulated and
approved trading plan seem harsh and an impractical suggestion?
per regulation 5 (4), doesn’t the mandatory application of a formulated and
approved trading plan seem harsh and an impractical suggestion?
Answer: A trading
plan would specify all the dealings in securities of an insider for the whole
year, also once it is approved it will have to be compulsorily complied with by
the insider which seems impractical based on the fact that presupposing the
market conditions or even one’s own condition in the market for such a long period
of time is not possible.
plan would specify all the dealings in securities of an insider for the whole
year, also once it is approved it will have to be compulsorily complied with by
the insider which seems impractical based on the fact that presupposing the
market conditions or even one’s own condition in the market for such a long period
of time is not possible.
Having
said that, the purpose for which this period was decided to be an year long was
because it seemed undesirable to SEBI that there are frequent announcements of
trading plan for short periods of time which would in turn render meaningless
the defence of a reasonable time gap between the decision to trade and the
actual trade for which the reasonable time was decided to be of one year. Also,
allowing deviation from the trading plan would negate the intent behind the
regulation itself. There can also not be two or more trading plans for the same
time period which may create an overlap.
said that, the purpose for which this period was decided to be an year long was
because it seemed undesirable to SEBI that there are frequent announcements of
trading plan for short periods of time which would in turn render meaningless
the defence of a reasonable time gap between the decision to trade and the
actual trade for which the reasonable time was decided to be of one year. Also,
allowing deviation from the trading plan would negate the intent behind the
regulation itself. There can also not be two or more trading plans for the same
time period which may create an overlap.
Question 14: As per regulation 5 (5), after
approval of the trading plan by the compliance officer, the compliance officer
shall inform the same to the stock exchange. Why?
approval of the trading plan by the compliance officer, the compliance officer
shall inform the same to the stock exchange. Why?
Answer: Allowing an insider who
possesses UPSI to trade in securities by formulating a trading plan is an
exception to the bar in regulation 4 of the regulation, 2015. The compliances
for the trading plan are to ensure that such a trading plan is publicly
disseminated. When the compliance officer informs the stock exchange about the
existence of a trading plan of an insider, the investors in the market at large
can take the potential factors of such a trading plan into view and assess the
securities with the knowledge as to how the insiders perceive the prospects or
approach the securities in their trading plans.
Authors: Shreya Seth, Saman Naseem
[1] Section 15HB of
the SEBI Act, 1992 states, ‘Penalty for contravention where no separate penalty
is provided- may extend from Rs. 1 lakh to Rs. 1 crore’. While deciding the
penalty the AO takes into consideration section 15J of the SEBI Act, 1992 i.e.
the amount of disproportionate gain or unfair advantage, wherever quantifiable,
made as a result of the default; (b) the amount of loss caused to an investor
or group of investors as a result of the default; and (c) the repetitive nature
of the default.”
the SEBI Act, 1992 states, ‘Penalty for contravention where no separate penalty
is provided- may extend from Rs. 1 lakh to Rs. 1 crore’. While deciding the
penalty the AO takes into consideration section 15J of the SEBI Act, 1992 i.e.
the amount of disproportionate gain or unfair advantage, wherever quantifiable,
made as a result of the default; (b) the amount of loss caused to an investor
or group of investors as a result of the default; and (c) the repetitive nature
of the default.”
