SAT on Insider Trading and the Role of the Compliance Officer

A couple
of years ago, we had discussed
the order of SEBI’s adjudicating officer imposing a penalty of Rs. 5 lakhs (Rs.
0.5 million) on the compliance officer of Satyam Computer Services Limited. We
had noted that this imposed a somewhat unduly onerous obligation on compliance
officers and wondered “whether a different outcome would ensue if the
compliance officer in Satyam’s case were to go on appeal”.
As it
happens, the compliance officer did prefer an appeal but a different outcome did
not ensue, as earlier this week the Securities Appellate Tribunal passed an order
confirming the findings of SEBI’s adjudicating officer. The background to the
role of the compliance officer under the SEBI (Prohibition of Insider Trading)
Regulations, 1992 (the “PIT Regulations”) and the more detailed facts of the case
are set out in the previous post discussing SEBI’s order. To summarise, the
primary issue is whether the compliance officer had a duty to close the trading
window in Satyam’s shares, which he failed to discharge. On December 6, 2008,
the compliance officer was informed by the chairman of the company about the
potential acquisition of two other companies. On December 13, 2008, notices
were sent to the board members scheduling a meeting on December 16, 2008 to
discuss the acquisition proposal. In this background, SAT notes:
15. Short question, therefore, to be
considered herein is, whether information relating to acquisition of two
infrastructure companies by Satyam disclosed by Chairman Mr. Ramalinga Raju to
appellant on December 6, 2008 was a price sensitive information warranting
closure of trading window by appellant as Compliance Officer and if so, for failing
to close the trading window when in possession of such price sensitive
information, whether, imposition of penalty of ` 5 lac upon appellant is
found an obligation on the compliance officer to close the trading window on December
6, 2008 upon receipt of information regarding the fact that the company was
considering the acquisition proposal. This was despite the premature nature of
the proposal, which was only tentative at that stage and was yet to be
considered by the board, which may or may not have approved the proposal at the
scheduled board meeting. SAT states:
18. … Model Code contained in PIT
Regulations further requires Compliance Officer to keep the trading window
closed during the period when information referred to in para 3.2.3 is
unpublished. Object of keeping the trading window closed under para 3.2.3 of
Model Code in addition to prohibition contained in regulation 3 of PIT
Regulations is to doubly ensure that directors/officers and designated
employees of the Company do not misuse ‘Price Sensitive Information’ and trade
in securities of the Company while in possession of such unpublished price
sensitive information. Therefore, Compliance Officer is mandatorily obliged under
Model Code to keep the trading window closed when in possession of price sensitive
information specified in para 3.2.3 of Mode Code. If Compliance Officer fails
to close the trading window inspite of being in possession of price sensitive
information, then he would be violating PIT Regulations. In such a case,
whether any employee/director by taking undue advantage has traded in
securities of that company or not, Compliance Officer would be liable for
violating PIT Regulations.

The onerous nature of responsibilities imposed by SEBI have been
confirmed by the SAT, which therefore requires careful consideration of
situations in which compliance officers must act in order to close the trading
window so as to not fall afoul of their obligations under the PIT Regulations.

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.

1 comment

  • Offhand: Ref.the concluding para- The caution rightly given for future conduct of a 'compliance officer' of any company is, in the context herein, confined/addressed to the governing SEBI rules. To extend the same rationale / logic, there appears to be no rhyme or reason why the view taken should not be regarded and made a serious note of , as sufficient caution, also to any officer or other person appointed/assigned / entrusted by a company, with the duties and responsibilities statutorily attached to / expected to be discharged as a 'Secretary', whatever be his designation. To put it differently, the point to be noted is, – in a case where cause of action arises by reason or as a consequence of dereliction of duties by company secretary (in-house or external), he should be imp-leaded as a necessary party to dispute / litigation.

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