a series of capital market reforms. These relate to insider trading, delisting,
enforceability of the listing agreement and several other matters. In this
post, I briefly examine the implications of the reforms on regulations
pertaining to insider trading.
approved a new set of regulations dealing with insider trading. While the text
of the regulations are awaited, here I discuss some of the broad reforms
announced. The impetus for reforms in this area came from the report of the
SEBI appointed committee that was issued in December 2013 (as previously
In the current reforms, SEBI has broadly adopted the recommendations of the
committee on several aspects, but it has either not adopted others or made
“insider” has been widened to include “persons connected on the basis of being
in any contractual, fiduciary or employment relationship that allows such
person access to unpublished price sensitive information (UPSI).” It expands the nature of connections a person
may have with the company so as to fall within the scope of an insider. Also,
any person who is in possession of or has access to UPSI would also be an
insider. At the same time, some proposals of the committee in this behalf have
not been accepted, such as the inclusion of a public servant with access to
UPSI as a connected person.
presumed to be connected persons, with the burden shifted on to them to show
that they were not in possession of UPSI. The evidentiary aspects of insider
trading have been given great importance given the difficulties SEBI has faced
in the past to establish that a person was in possession of UPSI. While the use
of circumstantial evidence has worked in some cases, in others it has failed.
This burden shifting effort may end up being somewhat crucial in SEBI’s efforts
to curb insider trading.
certain allowance has been made for “legitimate purposes, performance of duties
or discharge of legal obligations”. These has been a substantial discussion
about the need for communication of UPSI in genuine commercial or investment
transactions, such as due diligence for a private equity investments, which
fell within the scope of the prohibition under the existing regime. The new
regime makes some leeway for such genuine transactions (with some conditions)
that may benefit the company and its investors more generally.
permitted, such as in the case of due diligence discussed above, the UPSI must
be disclosed to the markets at least 2 days prior to the trading in the
securities. This is necessitated so that information symmetry is created in the
market such that no investor has any undue advantage.
“publication” have been clarified. For example, for information to be generally
available (so as to fall outside the scope of UPSI), such information must be
accessible to the public on a non-discriminatory platform which would
ordinarily be the stock exchange platform. In other words, dissemination
through the stock exchange is considered the preferred channel of publication.
Furthermore, the definition of UPSI has been aligned with the information and
disclosure requirements under the listing agreement.
the changes are indeed significant, given the mixed success of the present
insider trading regime. However, as is usually the case, a lot will lie in the
wording of the regulations and their interpretation.