Analysis of prohibitions on insider trading under new sebi regulations and the new Companies Act 2013 (2024)

1. Insider trading is one of the sins of the corporate existence which is extremely difficult to restrict. In simple terms it will involve illegal gains through dealings in the listed securities of a company by those persons who are in the know of the internal workings of that company.
2. It is a well known phenomenon that the stock markets move up and down in response to various information and decisions emanating from a company, whether such information is disseminated through the official route or revealed through unofficial mode by rumours, perceptions, etc.
3. To take a concrete example, suppose a rumour is spread in the market that a company has been or will be awarded a major profitable business project or an official intimation is given to this effect, the price of its shares in market in anticipation will respond positively. Now if a person, an insider of the company, who is in the know of this internal decision much before the market comes to know of the issue, purchases the shares, he gets those shares at a price which has obviously not factored in the good news and therefore the prices have not gone up. He gets the shares at a lower price. Subsequently, when the prices go up based on the news of the project, he can sell the shares at a profit. He has, therefore, been a wrongful gainer as compared to a member of the public who was not in the know of this information. In a reverse situation the insider already holds shares and coming to know of an internal fact that the performance of the company has drastically fallen which may adversely affect the price of the shares, sells off his shares before such bad news reach the market, and thereby avoids a likely loss. This person falls under the category of “insider” of the Company as per the insider trading regulations. He could be any person, from a director to an employee or who may have some link with the company.

1. Insider trading is a complex white collar offence, difficult to track and curb but efforts are being made to make the law have more teeth to deal with this menace. SEBI (Prohibition of Insider Trading) Regulations, 1992, has been brought in the statute book decades ago but amendments had been taking place from time to time.
2. In a nutshell, the existing SEBI Regulations applicable to listed companies, provide that insider of a company (i.e. directors/promoters/designated employees, etc.) who are connected with the company are prohibited from trading/ dealing in securities of the company based on unpublished price sensitive information. Neither can they communicate, counsel or procure such sensitive information to any person. They can however trade/deal when Trading Window is open and they are not in possession of any unpublished price sensitive information or information is no longer unpublished.
3. Trading Window means the period during which trading of shares of a company is permitted to take place, this is generally most of the time. However, trading cannot take place during the period/s, when the Window is closed, which are specified and limited. The Window has to be closed by a company, among others, when the Board of Directors of that company, take vital and price sensitive decisions like adoption of financial results, declaration of interim/final dividends, decides to issue securities, approves major expansion plans, amalgamations/takeovers, buy-back, disposal of undertaking, etc. The Trading Window will be re-opened 24 hours after the information of above decisions is made public by the company by intimation to stock exchanges/publication in newspapers/otherwise.
4. Significantly, when Trading Window is open, directors/officers/ designated employees of the company will require prior approval from the Compliance Officer of the Company (which may be the Company Secretary) for trading in securities of the company. This will be required where the number of shares/securities to be traded is above the minimum threshold limit fixed by the company.
5. The Regulations also requires a Code of Conduct, meant for disclosure and internal procedure for prevention of insider trading, to be framed based on model code of conduct and approved by the Board of a listed company. It was held that code of conduct as mandated by Regulations, for all practical purpose is to be treated as a part of Regulations, and any violation of code of conduct is punishable by SEBI as violation of Regulations { Ref case: [[Manmohan Shetty v. Securities & Exchange Board of India [2011] 11 taxmann.com 282 (SAT - Mum.)}. Pertinently violation of Insider Trading Regulations needs a guilty mind on the part of the offender. It was held in the case of Rakesh Agarwal v SEBI {2003} 57 CLA 173 {SAT} that guilty mind or mens rea is to be proved for offence of insider trading.

To ensure that the regulatory framework dealing with insider trading in India is further strengthened, SEBI recently has issued SEBI (Prohibition of Insider Trading) Regulations, 2015. {new SEBI Regulations}

On reading and analysing the provisions the following emerge:-

1. Both listed companies and companies that are ‘proposed to be listed’ are covered.
2. The definition of “Insider” has been made wider by including any person connected with the company.
3. The Insider will also be any person in possession of or having access to “unpublished price sensitive information” {UPSI} relating to a company or its securities.
4. The “connected person” would mean any person currently or during past specified period, associated in any capacity with the company including through frequent communication with its officers, or on the basis of contractual, fiduciary or employment relationship, or as a director etc. This association allows or reasonably expects him to allow access to UPSI of the company. Moreover, the association can be direct or indirect. There are specified categories of persons who shall be deemed to be connected person unless contrary is established.
5. In the case of connected person the onus of establishing, that they are not in possession of UPSI, shall be on such person. Immediate relative the connected person is also covered as connected person with a right to rebut the presumption.
6. Companies would be entitled to require third-party connected persons to disclose their trading and holdings in securities of the company.
7. “Unpublished price sensitive information” (UPSI) has been defined as information not generally available and which may materially affect the price of securities on coming into public domain. Illustrative guidance of UPSI has been given aligning with listing agreement and providing platform of disclosure. Earlier, the definition of UPSI had reference to company only. The new Regulations cover both the company and its securities. Also in line with Companies Act, 2013, prohibition on derivative trading on securities of a company has also been provided.
8. The concept of “trading” has replaced the concept of “dealing” thus giving a broad and inclusive definition. Trading includes subscribing, buying, selling, dealing, agreeing to subscribe, buy, etc. This is to cover transactions done by insiders which are not strictly buying, selling etc, such as pledging etc based on and when in possession of UPSI.
9. “Generally Available Information” will be that which is accessible to the public on a non-discriminatory basis and on a platform which is ordinarily a stock exchange.
10. Disclosure of UPSI in public domain has been made mandatory before trading, so as to rule out asymmetry of information in the market.
11. A new concept of giving “note” against many provisions to explain them has been introduced. These appear to give statutory interpretations to the Regulations.
12. There is prohibition on (i) communicating, providing or allowing access of UPSI, (ii) procurement of UPSI; except for legitimate purposes, performance of duties or discharge of legal obligations.
13. UPSI is permitted to be communicated etc to make an open offer under SEBI Takeover Regulations, moreover for substantial transactions, such as, mergers and acquisitions involving trading in securities and change of control to assess a potential investment. It should be in the best interest of the company.
14. UPSI is permitted to be communicated etc also for transactions that do not entail an open offer if it is in the best interests of the company. The public disclosure of such unpublished price sensitive information has to be made well before the proposed transaction, to obviate any information asymmetry in the market.
15. For the purposes of communication etc of UPSI, the company must require third parties, who are likely to obtain access to UPSI, to enter with it confidentiality & non-disclosure agreements.
16. Prohibition is also in trading in securities when in possession of UPSI. In certain circ*mstances an insider is permitted to prove his innocence.
17. Pertinently it is not relevant while charging an insider for violations, the reason for the transaction or the purpose to which he applies the proceeds of the transaction. That he has traded when in possession of UPSI is what would need to be established at the outset to bring a charge. The insider is permitted to prove his innocence by demonstrating the circ*mstances statutorily provided.
18. Insiders who are liable to possess UPSI all round the year would have the option to formulate pre-scheduled irrevocable & mandatory Trading plan which cannot be deviated. It has to be approved by the compliance officer of a company and can be put into action only six months after receiving the approval. Trading plan has to be disclosed on the stock exchanges and to be strictly adhered to. Such plan shall be available for bona fide transactions. Basically the Plan provides an exception to the general rule that insider should not trade when in possession of UPSI. It however does not confer complete immunity.
19. Disclosure of trade in securities has to be made not only by the person executing it but also by his immediate relatives and other persons for whom the concerned person takes trading decisions.
20. Obligation of initial disclosure of holding of securities in a company is on the promoters, directors and key managerial personnel. Every promoter, employee and director of a company is required to make certain continuing disclosures to a company if the value of securities traded over a calendar quarter breaches the specified threshold. Disclosures by other connected persons have also been provided at the discretion of the company.
21. However there is no requirement of disclosures by public shareholders.
22. Every company shall have a code of practices and procedures for fair disclosure of ‘unpublished price sensitive information’ and a code of conduct to regulate, monitor and report trading by its employees and other connected persons. Principle based Code of Fair Disclosure and Code of Conduct has been prescribed.
23. Strict implementation of the need-to-know principle has been provided.
24. The concept of trading window norms has been provided in the code during which employees and connected persons {designated persons} in the organisation may execute trades subject to preclearance by compliance officer.
25. The trading window shall be required to be closed when designated persons can reasonably be expected to possess UPSI. No trading is permitted by such persons or their immediate relatives during closure period.

Insider trading prohibitions in this Section are consolidating the law of Insider Trading of SEBI.

Pertinently SEBI regulations apply to securities of only listed companies, or companies whose securities are proposed to be listed, the restrictions of insider trading through this section have been made applicable to securities of those companies i.e. whether private companies or a public companies securities of which are neither listed nor proposed to be listed .

1. The prohibition is on a person including any director or key managerial personnel of a company to enter into insider trading of securities of the company. The use of the word ”including” denotes wider coverage of persons who are prohibited.
2. The term “person” has been used here and not defined in the Companies Act 2013, but the General Clauses Act 1897 defines "person" to include any company or association or body of individuals, whether incorporated or not.
3. Moreover, it is clear that any director, whether he/she is an ordinary director, a managing director, whole time director, independent director or a nominee director shall come under the ambit of the provision.
4. The term “Key managerial personnel” has been defined in section 2 {51} of the Companies Act 2013 and they are unambiguously covered.
5. From the use of the term “person” which is an inclusive definition and the definition of “insider trading” it is also clear that these restrictions will also cover any other officer of the company. Section 2 {59} of the Companies Act 2013, defines the terms “ officer” to include, inter alia, any person in accordance with whose directions or instructions the Board or any director/s is or are accustomed to act.
6. Interestingly the term “Insider” has not been defined in this section in line with new SEBI Regulations although the prohibition on the insider herein has similar effect.

1. However, there is an exception to this prohibition. This shall not apply to any communication required in the ordinary course of:-
   • Business, or
   • Profession, or
   • Employment, or
   • Under any law.
2. There can be any type of communication, verbal or written, and such communication should be in the ordinary course of said specified activities or under any law.
3. In case of allegations of violations, the applicability of the exception will have to be established by the errant parties by facts, circ*mstances and justification. In such circ*mstances it may be held that there is no violation of insider trading provisions.
4. As per new SEBI Regulations exceptions are for legitimate purposes, performance of duties or discharge of legal obligations.

1. The Explanation given in sub section {1} provides the definition to mean, for purposes of this section an act of -
   • subscribing,
   • buying,
   • selling,
   • dealing
   • or agreeing to subscribe, buy, sell or deal

     in any securities of the company, by the following:-

     1. any director, or
     2. key managerial personnel, or
     3. any other officer of a company

     either as the:-

     1. principal, or
     2. agent,

     if such director or key managerial personnel or any other officer of the company is reasonably expected to have access to any non-public price sensitive information in respect of securities of company.

2. Here, not only the actual act of subscribing, buying etc of securities have been covered but also the acts of agreeing to subscribe, buy, etc., have been roped in.
3. As regards the acting as a principal or agent is concerned, the law of agency in the Indian Contract Act 1872 shall have to be the kept in view.
4. It is important to note that the director, etc., should reasonably expected to have access to securities related any non-public price sensitive information. These provisions can be understood and invoked only on a case to case basis and no definition is possible.
5. The term “securities” has been defined in section 2 (81) as:- “securities” mean the securities as defined in section (h) of section 2 of the Securities Contracts (Regulation) Act, 1956”.
6. In the said Explanation, Insider Trading is also defined to mean for the purposes of this section an act of:-
   1. giving counsel about, directly or indirectly, any non public price sensitive information to any person, or
   2. procuring, directly or indirectly, any non public price sensitive information to any person,
   3. communicating, directly or indirectly, any non public price sensitive information to any person.
7. The term “any person” used here should also have wider coverage in compliance with the purposes of the provisions.
8. As per new SEBI Regulations the term “trading “has been defined. It is in line with this section. However the Regulations, though providing for procuring or communicating of non public price sensitive information, there is no mention of “counselling”.

1. The term “price sensitive information” has been used here and defined to mean any information which relates, directly or indirectly, to a company and which if published is likely to materially affect the price of securities of the company.
2. The new SEBI Regulations have defined the term “Unpublished price sensitive information” in a similar line and covers both the company and its securities. These also lay down illustrative guidance of unpublished price sensitive information as follows:—
   1. financial results;
   2. dividends;
   3. change of capital structure;
   4. mergers, de-mergers, acquisitions, de- listings, disposals and expansion of business and such other transactions;
   5. changes in key managerial personnel; and
   6. material events in accordance with the listing agreement
3. The use of term “non-public” before “price sensitive information” in the section will indicate that the information is not in public domain. SEBI Regulations use the term “Unpublished” having similar connotation.
4. The words “…..likely to materially affect the price of securities….” used here are also used in the new SEBI Regulations. These have not been defined but would appear to mean that critical information which has the potential to bring about significant increase or decrease in the price of securities.
5. It was held in the case of Gujarat NRE Mineral Resources Ltd. v. SEBI [2011] 16 taxmann.com 99 (SAT – Mum.) that in case of any normal activity of a company, every decision by it in respect of that activity would have no effect, much less material, on the price of its own securities. If that were so, then no company would be able to function because every time it does normal activity, it would have to make disclosures to the stock exchange(s) where its securities are listed. Hence it appears that the activity should not be in the realm of normal activity and it should be so significant which could materially affect the price of securities in the market.

From the foregoing discussions it will be seen that section 195 of the Companies Act 2013 has limited provisions as compared to new SEBI Regulations. This is understandable as Regulations cover UPSI relating to a company or its listed/ proposed to be listed securities having wide public impact and transactions whereas section 195 has limited coverage. However since both laws are in the same field of prohibition of insider trading it may not be out of context to read these laws together for interpretations of difficult facts and compliances.

Disclaimer: The views expressed in this article are solely the opinion of the author.