Insider Trading Regulations to Undergo Further Amendments

Readers may recall that the SEBI (Prohibition of Insider Trading) Regulations, 1992 underwent detailed amendments in 2002. This was primarily to plug several loopholes in the law, some of which were exposed in the few insider trading cases that came up for hearing under the original regulations, the Hindustan Lever Case being the more prominent among them. Thereafter, earlier this year, SEBI proposed to introduce the “short swing profits” regulations, a matter we covered earlier.

SEBI yesterday issued a consultative paper containing further amendments to the regulations. The key changes proposed are:

– Harmonization of disclosure requirements under the Insider Trading Regulations and the Takeover Regulations. As of now, companies have to make disclosures under both the regulations, and the requirements somewhat vary making it cumbersome to companies. This harmonization would streamline the disclosure process.

– Restrictions on trading during the period when the window is closed will be eased. For example, harmless transactions are to be excluded from the prohibition—bonus shares do not affect price of the stock, and hence information regarding a bonus share issuance should not prevent trades by insiders. SEBI proposes to follow a principles-based approach rather than a rule-based approach.

– Time period for execution of pre-cleared trades will be enhanced from the present one-week time frame to up to four weeks.

– The regulations are proposed to cover a wider class of securities such as derivatives, rather than just “shares” that the present regulations largely encompass.

– A recipient of information (popularly known as a tippee) is presently to captured fully within the regulations. The impact is largely on insiders. Hence, the present regulations seek to capture tippees too within the prohibitions on insider trading. This is an important extension of the concept of insider trading to persons outside the company as well.

In all, while there is an effort to ease the restrictions on insider trading on the procedural aspects (such as disclosures, reporting and pre-clearance), the proposed amendments seek to widen the scope of the regulations on a few important substantive counts (such as in the case of derivatives, and tippee liability).

Comments are due on the consultative paper by March 27, 2008.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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