SEBI released the much awaited SEBI (Prohibition of Insider Trading) Regulations, 2015 (“2015 Regulations”) which restructures the existing legal regime on the prohibition of insider trading. The following table highlights some of the significant changes in the 2015 Regulations vis-à-vis the SEBI (Prohibition of Insider Trading) Regulations, 1992 (“1992 Regulations”) and contains a brief analysis of the change.
1992 Regulations
2015 Regulations
Definition of ‘connected persons’ broadened
No provision specifically included persons who frequently communicate with officials.Persons who frequently communicate with the company officials having access to UPSI included in the definition of ‘connected persons’.There is a conceptual expansion of people who are deemed to insiders under the 2015 Regulations. It provides a list of persons deemed to be connected and confers a right to rebut the presumption. Whereas under the 1992 Regulations it was mainly relationship based, under the 2015 Regulations it is more access based.
Communication of UPSI
Prohibition on insider from communicating UPSI to any person who is prohibited from dealing in securities while in possession of such UPSIMere communication of UPSI is an offence, even in absence of any trading in securities. Communication only permissible when in furtherance of legitimate purpose.Under both the 1992 and 2015 Regulations, mere communication of UPSI attract sanctions. Insider trading must involve actual trading of securities when in possession of UPSI and imposition of sanctions on mere communication in absence of any trade is improper and unjust. Idle talk between people has been criminalised, rather than substantive action or harm.
Due Diligence
Permissibility of conducting due diligence prior to investment was unclearDue diligence is permissible if the board of the company believes that it is in the best interest of the company. In cases where open offer is not triggered by the proposed transaction, an additional obligation to disclose all UPSI at least 2 days prior to the proposed transaction.2015 Regulations provide clarity on the issue of due diligence which was not dealt by 1992 Regulations. This is a great development as the new law outlaws abuse of power rather than a legitimate commercial transaction. But SEBI could have extended this protection to transactions relating to preferential allotment of securities to insiders because any purchase of securities by the promoters by way of preferential allotment of securities would be covered under the definition of insider trading, which will make it difficult for promoters to infuse fresh capital into the listed company.Also, SEBI will have to relook at the impact of advance disclosure requirement on proprietary and confidential information which may become available to competitors and would thus harm the company.
Trading Plan
No concept of trading plan was providedAn insider may carry out trades pursuant to a trading plan which is approved and disclosed to the public.The 2015 regulations allow persons to engage in regular divestments in relation to the company without attracting the sanctions in relation to insider trading. However, the issues related with this immunity might make it impractical. For instance, the trading plan would be disclosed to the public in advance, therefore it would be easy for investors to front run the insider and artificially increase or decrease the price of the scrip before the expected date of trading. The concept of trading plan may only be practical where the scrip of the company is highly liquid and/or where the trading plan is not for large quantities of the shares.
Unpublished Price Sensitive Information
Definition of UPSI included all information that was not published by the company or its agents.There is a shift to the threshold of ‘generally available information’ which includes information that is accessible to the public on a non-discriminatory basis. Any information that is not ‘generally available information is defined as UPSI.It is unclear whether unconfirmed information that is generally available would be seen as UPSI. According to 2015 Regulations, information will be considered published only if made on the stock exchanges. This may unnecessarily reduce the flow of information because dissemination of information by way of any other medium would not be considered as wide and concurrent distribution of information than the information available on the stock exchange’s website.
Defences
The regulations provide defences to dealing in securities of one company by another company while in possession of UPSI in certain situations.Any insider who has traded while in possession of UPSI may adopt certain defences.This is a hugely positive development. The 2015 Regulations provide substantive defences to legitimate commercial transactions or where no harm to the market would result. For instance two insiders with privileged information could trade between themselves or in an organisation those with access and those who trade are people who are unconnected with sufficient procedures to ensure that regulations are not violated.
