Mumbai, Dec. 11: India’s insider trading rules have been tightened just over two decades after they were first framed — raising the prospect that the country will soon have its own gallery of rogues who have made oodles of money by trading on information that only they were privy to.
On Tuesday, a committee appointed by market regulator Sebi overhauled insider trading regulations that were framed in 1992 by widening the definition of the term insider trader. For the first time, public servants, judges and immediate relatives of company insiders have been brought within the ambit of the definition.
The committee, headed by former Chief Justice of Kerala and Karnataka High Courts N.K. Sodhi, today came out with a 74-page report that defined terms such as insider trading, connected persons and unpublished price-sensitive information but admitted that it might still be hard to prove the charges. “The initial burden to bring home a charge could be heavy,” the report prophesied.
An insider means all “connected persons” and those who are in possession of unpublished price-sensitive information (UPSI).
Under the present norms, a connected person is a director, officer, employee or an individual who has a professional or business relationship with the company. Similarly, an insider is a person who is connected with the company and who is reasonably expected to have access to unpublished price-sensitive information in respect of its securities.
The Sodhi panel has enlarged the scope of an “insider”. According to the report, even those persons who are in frequent communications with officers of the company would also be deemed to be connected persons.
The committee also widened the definition of what is considered to be “generally available information” or information that is not considered UPSI. Earlier, this largely meant disclosures put out by a company on the stock exchange. The panel said that information that was accessible to the public on a non-discriminatory basis would now be considered to be generally available information. Apart from information obtained from the stock exchange, analysis and research conducted by organisations (such as brokerages) would also constitute generally available information even if these have been paid for.
One of the most significant recommendations in the report is that promoters and key management personnel, who would naturally be in possession of UPSI, should be forced to publicly disclose a trading plan six months in advance of any trade that they may wish to make.
No trading plan should entail trading for the period between the 20th trading day prior to the last date of a financial period for which results are to be announced and until the third day after the disclosure of the results. Trading plans will have to be in place for at least 12 months. No two trading plans should overlap and a trading plan should be reviewed and approved by the compliance officer of the company and then publicly disclosed after which it must be implemented, the committee said.
The committee said it wanted to test the concept of the trading plan in India even though it was aware of the “literature in the United States about the alleged abuse of the trading plan whereby trades may be pre-determined but the making of UPSI generally available may be timed to profit the insider”.
Further, it recommended that the trading plan once approved shall be irrevocable and the insider shall mandatorily have to implement the plan, without being entitled to either deviate from it or to execute any trade in the securities outside the scope of the plan.
The committee also came out with detailed rules on trading disclosures by insiders such as promoters, employees, directors or their immediate relatives. It said that every promoter, employee and director of every company whose securities are listed on any recognised stock exchange shall disclose to the company his holding of securities of the company.
Further, every person on appointment as an employee or a director of the company or upon becoming a promoter shall disclose to the company, within seven days of such appointment, his holding of securities of the company.
It also recommended that every such person shall disclose to the company if the value of the securities traded, whether in one transaction or a series of transactions over any calendar quarter, aggregates to a traded value in excess of Rs 10 lakh.
At present, any trade of above a value of above Rs 5 lakh falls within public disclosure, while public disclosure is also mandatory regardless of value if the securities traded are more than 2,500 in number, or if the share represents more than 1 per cent of the total share capital.
The committee said when facing an insider trading charge, the onus of establishing that he was not in breach of the regulations would be on the accused person.
The committee did not spell out any penalties which could be decided after an independent assessment and settled principles mandated in the law being followed.
But it did add: “Insider trading is not only a tort (a civil wrong) but is also a punishable crime that could lead to an insider being imprisoned for a period of up to 10 years. Therefore, a charge of insider trading should be clear, precise and reasonable.”
The committee also posited two interesting hypothetical situations. Suppose a CEO suffers a heart attack in the reception area of a doctor’s clinic. He calls up his broker and asks him to sell the stock. Now of someone present there trades on this information. The report said this would not be considered an insider trade since the event took place in a public area and anyone seeing the event could have reacted to it.
Conversely, if a CEO has a heart attack during a small meeting with colleagues in his office — and he makes a similar call to his broker. Now if a person present at the meeting trades on the event, he would be violating the insider trading rules since he had obtained the information in the line of duty and the information of the CEO’s ill-health was not generally available.