28 Jul

Compliance Issues and Challenges in the Insider Trading Regulation

The insider trading regulation in India underwent a significant change after a period of two decades as the market regulator SEBI on January 15-2015 came up with a new regulation revamping its 1992 regulation on insider trading. The SEBI (Insider Trading) Regulation 2015 along with addressing the lacunas of the 1992 regulation, has given rise to larger monitoring and compliance requirements on Corporates.

What is meant by Insider Trading?

Insider trading means trading by an insider of a Company in the securities of a Company. Insider trading is per se not illegal however it becomes so when such a trading by an insider is done on the basis of unpublished price sensitive information to the exclusion of others as it halts investors trust and confidence in the market which has a very adverse effect upon the Companies, therefore, it is of high risk to the Companies’s governance. The Companies Act 2013 (here in referred as “The Act”) which was incorporated to bring more of good governance into the Companies straight away prohibits insider trading under section 195 of the Act.

Key Changes in the Insider Trading Regulation 2015

Under the SEBI (Insider Trading) Regulation 2015, firstly the most important change which has been brought in is by broadening the applicability of the regulation, now it is applicable to listed as well as to “proposed to be listed Companies”.However SEBI has not provided any clarification on who shall be included within the expression “proposed to be listed”.

Secondly, the term insider is now much wider as it includes any “Connected Person” who is in possession of such Unpublished Price Sensitive Information irrespective of its source and not only trading based on such information is prohibited, now communication and procurement of such information without any reasonable cause is barred. Further, the Directors have to get a confidential agreement signed from the third parties who gets the access to any Unpublished Price Sensitive Information. With this, the term connected person has also been widened and now a Companies has to maintain a list of such connected person time to time and now the compliance teams of Companies shall be required to report trades executed by all classes of connected persons in addition to their own employees.

Thirdly the concept of dealing has been replaced by trading and a trading plan has to be submitted by the insider if he wants to do insider trading mandatorily with the Compliance Officer seeking his approval for the same. Further, every employee, promoter, and director are required to make certain continuing disclosures to a Companies, however, SEBI has not provided any clarification on the rationale behind such disclosures.

Increased Compliances under the Insider Trading Regulation 2015

Due to the increase in the scope of the insider trading legislation now the Companies which were earlier not within the ambit of the 1992 regulation will come within its ambit hence there will be an increase in compliance and further disclosure requirements in the part of connected persons will also increase.

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Conclusion

Overall the new regulation is a welcome step, it has made it mandatory for every Companies to have a proper code of practice and fair disclosures to be made of the Unpublished Price Sensitive Information. Due to its broader and wider ambit, there is more of compliance and monitoring which will be complex and time-consuming at the same time this will also prove to be less of illegal insider trading.

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