Insider Trading

Definition of an insider

An “insider” means any person (i) is or was connected with the company or is deemed to have been connected with the company and is reasonably expected to have access to unpublished price sensitive information in respect of securities of a company, or (ii) has received or has had access to such unpublished price sensitive information.

The definition of an “insider” has been simplified to mean any person who is a “connected person” and those in possession of “unpublished price sensitive information” (“UPSI”).

To bring about a clarity to the existing definition so as to reduce ambiguity.

Definition of Connected Person

The definition of a “connected person” under the Existing Regulations means (i) a director or any person deemed to be a director of a company, or (ii) officer, employee or any person who holds a position involving a professional or business relationship between himself and the company who may reasonably be expected to have an access to UPSI in relation to that company; six months prior to the act of insider trading.

(i) any person who is or has during the six months prior to the concerned act been associated with a company, directly or indirectly, in any capacity including by reason of frequent communication with its officers or by being in any contractual, fiduciary or employment relationship or by being a director, officer or an employee of the company or holds any position including a professional or business relationship between himself and the company whether temporary or permanent, that allows such person, directly or indirectly, access to unpublished price sensitive information or is reasonably expected to allow such access. (ii) Without prejudice to the generality of the foregoing, the persons falling within the following categories shall be deemed to be connected persons unless the contrary is established, – (a). an immediate relative of connected persons specified in clause (i); or (b). a holding company or associate company or subsidiary company; or (c). an intermediary as specified in section 12 of the Act or an employee or director thereof; or (d). an investment company, trustee company, asset management company or an employee or director thereof; or (e). an official of a stock exchange or of clearing house or corporation; or (f). a member of board of trustees of a mutual fund or a member of the board of directors of the asset management company of a mutual fund or is an employee thereof; or (g). a member of the board of directors or an employee, of a public financial institution as defined in section 2 (72) of the Companies Act, 2013; or (h). an official or an employee of a self-regulatory organization recognised or authorized by the Board; or (i). a banker of the company; or (j). a concern, firm, trust, Hindu undivided family, company or association of persons wherein a director of a company or his immediate relative or banker of the company, has more than ten per cent. of the holding or interest;

Increased scope; inclusion of relevant public servants who have access; test of reasonable expectation.

UPSI and Available Information

Under the Existing Regulations, information which is not published by the company or its agents and is not specific in nature is considered “unpublished”. Also, the definition of “price sensitive information” contains an explanation which provides that the (i) periodical financial results of the company (ii) intended declaration of dividends (both interim and final) (iii) issue of securities or buy-back of securities (iv) any major expansion plans or execution of new projects (v) amalgamations, mergers or takeovers (vi) disposal of the whole or substantial part of the undertaking; (vii) and significant changes in policies, plans or operations of the company shall necessarily be deemed to be considered “price sensitive information”. The Proposed Regulations have done away with this deeming fiction.

Under the Proposed Regulations the definition of UPSI has been substantially modified. UPSI has been defined to mean any information that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities to which it relates and will ordinarily include information relating to the following – (i) financial results (ii) dividends (iii) change in capital structure (iv) mergers, demergers, acquisitions, delisting, disposals and expansion of business and such other transactions; and (v) changes in key management personnel.

Generally Available information not a part of UPSI; logical disassociation.

Trading with possession of Information

The charging provision, Regulation 3 of the Existing Regulations prohibits dealing in securities of a company listed on any stock exchange when in possession of UPSI.

‘Dealing in securities’ typically means an act of subscribing, buying, selling or agreeing to subscribe, buy, sell or deal in any securities by any person either as principal or agent.

The term ‘dealing’ has been replaced with ‘trading’ for the purposes of the charging provision i.e., Regulation 4 of the Proposed Regulations. Under the Proposed Regulations, no insider shall trade in securities that are listed on a stock exchange when in possession of UPSI.

Trading’ under the Proposed Regulations has been defined as transacting in securities whether by way of acquisition or disposal.

Disclosure Obligations

The Existing Regulations stipulate initial and continual disclosure requirements by any person holding more than 5 % shares/ voting rights in any listed company and by a director or an officer of a listed company to be made to the company. A director or an officer is obligation to additionally disclose the particulars of his trades in case there has been a change in his shareholding/voting rights exceeding Rs. 5.00 lakhs in value or 25,000 shares or 1% of the total shareholding/voting rights of the company as the case may be, to the stock exchange where the securities are listed.

Every listed company is required to notify all such initial and continual disclosures to the stock exchange in a particular format in any case.

The disclosure requirements have sought to be made applicable to promoters, employees and directors under the Proposed Regulations. Under Regulation 7 (3), every such person would have to necessarily disclose the number of such securities acquired or disposed of within two transaction days of such transaction if the value of the securities traded, whether in one transaction or a series of transactions over any quarter aggregates to a traded value in excess of Rs. 10.00 lakhs.

The reference to voting rights as a threshold for disclosures as under the Existing Regulations has been removed under the Proposed Regulations.