CORPORATE LAW

Understanding Insider Trading

Basic Definitions

Insider trading (“Insider Trading”) is a method to make profit at the expense of the other. It leads to loss of confidence of investor in stock market. The process corrupts the level playing field. It is easier to identify the beneficiary of Insider Trading but difficult to assess the loss to the general investor. The basic definitions to understand the concept are discussed herein below.

1. Insider: The definition of an “Insider”[1] is provided within the meaning of the SEBI (Prohibition of Insider Trading) Regulations, 1992 (“Regulations”). An Insider is a person who is or even was connected with the company. Those persons whoa are deemed to be connected with the company are included as Insider. Such a person is reasonably expected to have access to/have received/has had received the company’s Unpublished Price Sensitive Information (UPSI) with respect to the securities of the company. The Insider basically has access to the information that is not known to the general public. An Insider can trade in an UPSI only after it is made public and the information is disseminated to public.

2. Connected Person[2]: Any person who

·      Is a director under 2(13)[3] of the Companies Act, 1956

·      Is deemed to be a director under section 307(10)[4] of the Companies Act, 1956

·      Is an officer or an Employee

·      Holds a position involving professional relationship or a business relationship

which may be temporary or permanent but give an access to UPSI. Such a person should mean” connected” six months prior to the act of Insider Trading.

4. Person Deemed to be connected: Clause 2(h) of the Regulation states that a person is deemed to be connected when-

·      Companies under same management/group/subsidiary

·      All intermediaries/employees/directors

·      Investment/Trustee/Asset Management Company, employees and their Director

·      Officials of Stock Exchange/Clearing House/Corporations

·      Board of Trustee Members &Directors of Mutual Funds

·      Public Financial Institutions, its employees and directors

·      Relative of any aforementioned person any concern/firm/trust/HUF/ Company/AOP in which Directors/Deemed Directors/Relatives of connected/Deemed Connected Person/Company Banker having more than 10% of the holding interest.

·      Bankers of the company

5. Pre-Sensitive Information (PSI): Clause 2(ha) of the Regulations provides that PSI includes any information which relates directly or indirectly to a company and which if published likely to materially affect the price of the securities of company. The PSI as per clause 36 of the Listing Agreement includes

·      Change in general character or nature of the business

·      Disruptions of operations due to natural calamity

·      Commencement of Commercial production/operations

·      Litigations/dispute in a material impact

·      Revisions in ratings

Any other information having bearing on the operations/performance of the company as well as PSI which includes but not limited to:

·      Change in market lot/subdivision

·      Voluntary delisting by company

·      Forfeiture of shares/alteration in terms of securities

·      Information regarding securities issued abroad

·      Cancellation of  dividends/rights/bonus

6. Deemed Price Sensitive Information: Clause 2 (ha) of the Regulations provides that the following information would be treated as Deemed Price Sensitive Information (DPSI):

·      Periodical Financial Results

·      Intended Declarations of Dividends

·      Issues of Securities or buy back of securities

·      Expansion Plans/New Projects

·      Amalgamations/Mergers/Takeovers

·      Disposal of Undertakings

·      Change in Policies

7. Listing Agreement: When the shares of the company are listed in any stock exchange, the basic document that is executed between the company and the stock exchange is known as the Listing Agreement. By way of Listing Agreement, SEBI ensures good corporate governance.

Governing Provisions

1. SEBI Insider Trading Regulations, 1992

2. SEBI Insider Trading (Amendment Regulations), 1992

3. SEBI (Prohibition of Insider Trading) (Second Amendment) Regulations, 2002

This blog is work of a Solicitor and Consultant Partner of Legal Imperials, Jyoti who is a litigation and arbitration expert and does lot of Corporate Advisory work.

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[1] Clause 2(e) of the SEBI (PIT) Regulations, 1992 (“Regulation”).

[2] Clause 2(c) of the Regulations.

[3] Any person occupying the position of a director, by whatever name he is called.

[4] For the purposes of this section-

(a) Any person in accordance with whose directions or instructions the Board of directors of a company is accustomed to act, shall be deemed to be a director of the company; and

(b) A director of a company shall be deemed to hold, or to have an interest or a right in or over, any shares or debentures, if a body corporate other than the company holds them or has that interest or right in or over them, and either-

(i) That body corporate or its Board of directors is accustomed to act in accordance with his directions or instructions; or

(ii) He is entitled to exercise or control the exercise of one- third or more of the total voting power exerciseable at any general meeting of that body corporate.