[Ambika Mehrotra is a Manager at Vinod Kothari & Company and can be contacted at [email protected]]
Background of the Regulations
The strong and decisive steps taken by the Securities and Exchange Board of India (SEBI) with respect to insider trading have attracted a great deal of attention over the last couple of months. The modifications to the existing SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’) were substantially introduced by way of the SEBI (Prohibition of Insider Trading) Amendment Regulations, 2018, which became effective from 1 April 2019. Another amendment to the PIT Regulations with respect to the disclosure requirements by the members of promoter group was brought in through the SEBI (Prohibition of Insider Trading) Amendment Regulations, 2019 which came into effect from 21 January 2019. These amendments were the result of the TK Vishwanathan Committee Report on Fair Market Conduct (‘Report’) which was released in August 2018.
The requirements and the intent of the amendment
The broad purpose of the amendment to the PIT Regulations was to revise the prevailing framework and to deal with serious concerns pertaining to market abuse in order to ensure a fair conduct in the securities market. The intent of the recommendations of the Report was to strengthen the surveillance, investigation and enforcement mechanisms being undertaken by the entities so as to protect the market integrity as well as the interest of investors from market abuse.
By way of compliance with the PIT Regulations, companies are required to take a number of measures to fortify their internal control mechanisms, including fixing various responsibilities on the board of directors, audit committee, CEO, and the compliance officer. The penalty prescribed by section 15G of SEBI Act, 1992, for any non-compliance of PIT Regulations is an amount which can extend to twenty-five crore rupees or three times the amount of profits made out of insider trading. That apart, the companies also have to face negative impact on their goodwill and reputation and also resultant effect on the market price of their shares. Further, it is to be noted that the burden of proof under the PIT Regulations lies on the insider to establish innocence, if the insider is a “connected person”.
According to the PIT Regulations, the term insider includes “Any person in receipt of unpublished price sensitive information” within its wide ambit. Accordingly, the large set of people within or outside the organization who may be handling unpublished price sensitive information (‘UPSI’) may not be expected to be aware of such severe repercussions while trading in the securities. It is pertinent to realize the fact that merely putting a code in place or amendments therein or framing large set of documentations or manuals and setting up technical databases may not serve the real purpose of bringing the true essence of implementation of the PIT Regulations, unless the same is sensitized across the organization and brought to the notice of the target audience, be it the designated persons of the highest authority or the support staff handling such UPSI.
Each and every employee within the organization needs to be minutely informed of the implications of the PIT Regulations on a recurring basis, so that they handle any UPSI consciously in accordance with the Regulations. This post deals with the broad parameters which the companies should consider while carrying out such sensitization.
Why is sensitization required?
Owing to the various amendments made in the PIT Regulations and considering the short time frame of 90 days provided to the companies for their implementation, which includes the amendment in the exiting codes, adoption of the amended codes by the board and setting up of a mechanism to create and maintain a structured digital database with respect to sharing of UPSI, the effective implementation of the revised PIT Regulations is surely a challenge for companies. The efforts of companies will see desired result only when the purport of the PIT Regulations is percolated deep within and across the organization and any abuse of market can be prevented.
The intent of the PIT Regulations will be realized only when even the blue-collared staff is sensitized about the Regulations and the severe repercussions of any non-compliance. In real life, most non-compliances of insider trading regulations occur not because of intended breaches; most of the breaches happen out of ignorance. Although the board and the management of the companies may have set up a proper framework and mechanism to prevent insider trading, the junior employees in the hierarchy cannot be expected to be well versed with the requirements and the implications of the PIT Regulations. Therefore, in order to avoid such unforeseen consequences that might take place due to such lack of awareness, it is of utmost importance for companies to sensitize the employees regarding the same. Furthermore, it is important for employees to understand the significant ramifications that can result from using or disclosing material nonpublic information to anyone (including co-workers, family members, or others).
Thus, sensitization is an essential element which is required in order to inculcate the ethical values to be followed within the organization and to promote ethical behavior on a day-to-day basis and create a corporate culture of trust, honesty, integrity, transparency, accountability by prohibiting directors and employees from using the inside information to their own investment advantage and also being cautious while disclosing such information for use by outsiders. Even if individuals are intending to be ethical, breaches of insider trading regulations may be purely technical and procedural.
Who is to be sensitized?
As we know, there are two codes relating to UPSI, viz, Code of Conduct for Prohibition of Insider Trading (for companies and intermediaries respectively) and Code of Practice and Procedures for Fair Disclosure of Unpublished Price Sensitive Information. The audience for the codes is different (although they may be overlapping). The entire gamut of audience of all the codes, which range from the chairperson of the company to the auditor and banker of the company, are required to be sensitized about the nitty gritty of the PIT Regulations including the codes. The group of the personnel who are the spokespersons of the company need to be sensitized about the quality and quantity of information shared by them at each press conference or like event. With “insiders” being a wide term in itself, including any person who have access to UPSI, they need to be sensitized about the need for confidentiality of unpublished information.
As mentioned earlier, the ambit of “insider” is wide enough to cover any person who has access to UPSI. Therefore, each and every person who has access to UPSI shall be expected to have the required awareness of the restrictions on them while holding such price sensitive information. Herein, it is pertinent to note that these insiders would not only include the designated persons in the organization but also all those to whom the information may flow during the course of operation. The chain of information flow will also be extended to trainees, interns, support staff and even outsiders who have access to UPSI.
What is to be sensitized?
The insiders need to be sensitized at least about the following:
- what is considered as a price sensitive and confidential information;
- when is a piece of information said to be published;
- how to handle UPSI;
- what are the pre-requisites of sharing any UPSI;
- when is a person considered to be a designated person;
- when can a person trade or not trade in securities;
- what is to be done in case a person obtains access to any UPSI;
- what is to be done in case the person becomes aware about, or suspects, any leak of UPSI;
- provisions with respect to blowing of whistle in case of leak or suspected leak of UPSI;
- what are the penal provisions relating to market abuse;
- how the insider trading laws are interpreted by courts and tribunals.
What is the mode of sensitization?
Sensitization is a means of making persons familiar and responsive to certain ideas, events, or situations that require their intervention. The intent behind such sensitization is providing them an experience or knowledge of the requirements and restrictions brought in by the regulations, so that they may be able to understand and comprehend it in a better manner. This can be brought about by the means of appropriate sharing of every related event and information with its detailed components minutely with the concerned persons time and again. The first step to sensitization is entering into a non-disclosure or confidentiality agreement with the employees and making the parties aware of the necessity of the same. The mode of such sharing shall be the simplest channels of communications including:
- workshops on recent updates;
- interactive sessions within the departments or team;
- orientation and familiarization programmes; and
- induction and trainings
for the employees working at various levels in the organization. Companies should conduct training programs regarding their insider trading policies periodically with employees for ongoing monitoring and updating, and effectively communicating any updates to these policies to their employees. Training and awareness programs should also effectively communicate the consequences that the employees and the company could face for violations of insider trading regulations. Also, periodic mailers may be sent to such target audience in order to avoid any inadvertence or negligence of the same.
When shall the sensitization be done?
Sensitization, rather than being a one-time activity, is actually a periodic event which needs to be taken care of the by the organization at regular intervals. With the change in the employees at different levels of the hierarchy and change in the regulations occurring, the organization should endeavor to keep its employees abreast of the requirement and repercussion of any failure to comply with the PIT Regulations.
The idea of establishing any policy for a company can only be successful once it is implemented in spirit. The codes framed under PIT Regulations and the other advanced mechanisms being adopted by the companies in this regard will bear the desired results only once the same idea is spread in an interactive manner across organization. Not all the audience of the codes are expected to be conversant with legal documents, leave apart the provisions of the Regulations. Accordingly, efforts should be taken to disseminate the same in an audience-friendly medium.
Also, as a matter of concern, insider trading has been taken quite seriously by various other countries globally. They are implementing laws and regulations to deter illegal insider trading to enable the uninformed public to have equal access to the trading platform and curb the instances of exploitation of inside information which may occur due to lack of awareness and education, which is a result of lack of resources and measures undertaken to combat the same.
– Ambika Mehrotra