Insider Trading : Analysis of Provisions, Offences and Penalties

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Insider Trading-Analysis of Provisions, Offences and Penalties: A presentation at Indian Institute of Corporate Affairs by Mr. Manoj Kumar, Assistant Vice President, Corporate Professionals.
Key Highlights: Who is and Insider?, Insider Regulation 2(e), explanation to connected person, regulation 2(h), What Is Price Sensitive Information, OFFICER OF A COMPANY – REGULATION 2(g), Procedure for Investigation…

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Insider Trading : Analysis of Provisions, Offences and Penalties

  1. 1. [ICLS Mid Career Training Programme] Analysis of 07.01.2013 | Session II Provisions, SEBI Prohibition of Insider Trading Offences Regulations & By MANOJ KUMAR Penalties Assistant Vice President Corporate Professionals Capital Private Limited
  2. 2. Agenda • Key Terms • Prohibition on dealing, communicating or counseling • Investigation • Procedure for Investigation • Direction by SEBI • Action in case of Default • Disclosures to be made • Model Code of Conduct
  3. 3. WHAT IS INSIDER TRADING???? INSIDER TRADING means dealing in the securities by an Insider, who has the knowledge of material “inside” information of the company which is not available in the Public domain.
  4. 4. Who Is an INSIDER ?????
  5. 5. INSIDER - REGULATION 2(e) Any Person Who(i) OR is was connected with the company OR deemed to have been connected with the company AND is expected to have access to UNPUBLISHED PRICE SENSITIVE INFORMATION OR (ii) Has Received OR Has Had Access TO UNPUBLISHED PRICE SENSITIVE INFORMATION
  6. 6. CONNECTED PERSON Any Person Who is a director under section 2(13) of the Companies Act, 1956, or deemed to be a director of that company under section 307(10) of the Act OR Holds the position Involving or or Professional Business an officer an employee relationship relationship Whether TEMPORARY or PERMANENT AND may reasonably to have an access to Unpublished Price Sensitive Information
  7. 7. EXPLANATION TO CONNECTED PERSON “CONNECTED PERSON” 6 Shall mean any person who is a connected person6 6 SIX MONTHS prior to an act of insider trading 6
  8. 8. PERSON DEEMED TO BE CONNECTED -REGULATION 2(h) Company under the same Management/ Group/Subsidiary; Intermediary, IC, TC, AMC, or employee or director or official of Stock Exchange or Clearing House; MB, STA, RTA, DT, Broker, sub-broker, PM, IA, IC, or employee; Member of the Board of MF or member of BOD of the AMC of a MF or is an employee who have a fiduciary relationship with the company; Member of Board of Directors or employee of PFI;
  9. 9. PERSON DEEMED TO BE CONNECTED -REGULATION 2(h) Official or an employee of a Self-regulatory Organization; Relative of any of the aforementioned persons; Banker of the company; Relatives of the connected person; Any Concern / Firm / trust / HUF/ Company / AOP in which connected person or person mentioned in clause (vi), (vii) or (viii) of this clause Have More than 10% of the holding or Interest
  10. 10. What Is Price Sensitive Information ?????
  11. 11. PRICE SENSITIVE INFORMATION- REGULATION 2(ha) Price Sensitive Information means: information which relates directly or indirectly to a company AND which if published is likely to materially affect the price of securities of company.
  12. 12. DEEMED PRICE SENSITIVEINFORMATION Periodical financial results of the company; Intended declaration of dividend; Issue of securities or buy back of securities; Major expansion plan OR Execution of new projects; Amalgamations, merger, takeovers; Disposal of whole or substantial part of the undertaking; Changes in policies, plans or operations
  13. 13. PRICE SENSITIVE INFORMATION- ASPER CLAUSE 36 LISTING AGREEMENTChange in the general character or nature ofbusiness.Disruption of operations due to naturalcalamity.Commencement of Commercial Production/Commercial Operations.Litigations/ dispute with a material Impact.Revisions in Ratings.
  14. 14. PRICE SENSITIVE INFORMATION- ASPER CLAUSE 36 LISTING AGREEMENT Any other information having bearing on the operation/ performance of the Company as well as price sensitive information which includes but not restricted to; • Change in market lot / sub-division ; • Voluntary delisting by the company ; • Forfeiture of shares; • Alteration in terms of any securities ; • Information regarding securities issued abroad ; • Cancellation of dividend/ rights/ bonus etc.
  15. 15. OFFICER OF A COMPANY – REGULATION 2(g) OFFICER OF A COMPANY Means Includes Person defined in Section 2(30) of the Companies Auditor of the Company Act, 1956 Section 2(30) : "officer" includes any director, manager or secretary, or any person in accordance with whose directions or instructions the Board of directors or any one or more of the directors is or are accustomed to act.
  16. 16. UNPUBLISHED -REGULATION 2(k)Information which is not published by thecompany or its agents and is not specificin nature.ExplanationSpeculative reports in print or electronicmedia shall not be considered as publishedinformation.
  17. 17. DEALING IN SECURITIES -REGULATION 2(d) “Dealing In Securities” meansan act of Subscribing, Buying, selling or agreeing to subscribe, buy, sell or deal in any securities by any person either as principal or agent;
  18. 18. PROHIBITION ONDEALING, COMMUNICATING ORCOUNSELLING
  19. 19. PROHIBITION ON INSIDER-REGULATION 3 NO INSIDER shall Either on his own behalf or On Other’s behalf DEAL IN SECURITIES OF THE COMPANY when IN POSSESSION OF ANY UPSI or COMMUNICATE / COUNSEL / PROCURE Directly or Indirectly ANY UPSI TO ANY PERSON
  20. 20. EXCEPTION TO REGULATION 3 Any communication which is required in the Ordinary course of business, OR Profession, OR Employment, OR Under any law.
  21. 21. PROHIBITION ON COMPANY- REGULATION 3A NO COMPANY SHALL Deal in Securities of Associate of that Other company or other company WHEN IN POSSESSION OF ANY UNPUBLISHED PRICE SENSITIVE INFORMATION
  22. 22. NON APPLICABILITY OF REGULATION 3A The decision of Proper arrangement in place to transaction or agreement block the dissemination of was not taken by officer or employee UPSI; AND of the company who is in possession of UPSI; AND The acquisition was in line with the SEBI Takeover Regulations Adequate Procedures are in place to The information was demarcate the persons not so communicated and having UPSI & persons dealing in securities; AND no such advice was so given; OR.
  23. 23. PROVISIONS RELATING TOVIOLATION – REGULATION 4 Any insider, who deals in securities in contravention of the provisions of Regulation 3 or 3A shall be guilty of Insider Trading..
  24. 24. INVESTIGATION
  25. 25. POWER TO MAKE INQUIRIES ANDINSPECTION- REGULATION 4A If the Board Suspects any person has violated the provisions of these Regulations It may Make enquiries, or appoint person to inspect books & records of such persons Form a prima facie opinion , whether there is violation of these regulations
  26. 26. BOARD’S RIGHT TO INVESTIGATE -REGULATION 5 Where the Board, is of prima facie opinion that it is necessary to investigate and inspect books of account, documents of an insider or any personOn the basis of compliant received form investors, intermediaries or any other person, Or suo-motu upon its own knowledge, to protect the interest of investors, it may appoint an INVESTIGATING AUTHORITY
  27. 27. PROCEDURE FOR INVESTIGATION
  28. 28. REGULATION 6 to 9 On Appointme InvestigatiComplaints nt of Notice on Issued/ Suo-moto Invtg. Auth. Started On To provide Findings to Shall Reply Conclusion all suspected within 21 Report to assistance person days Board Board will Issue directions
  29. 29. DIRECTIONS BY SEBI
  30. 30. REGULATION 6 to 9Not to deal in securities ;Not to dispose of any of the securities acquired in violation of theseregulations;Not to communicate or counsel any person to deal in securities;Declaring the transaction(s) in securities as null and void;Deliver the securities back to the seller :To transfer proceeds to the investor protection fund of a recognized stockexchange.
  31. 31. Action in case of default
  32. 32. REGULATION 14 • Action under Section 11 of SEBI Act, 1992 • Directions under Section 11(4) (suspension of Trading & debarment) • Directions under section 11B of the SEBI Act • Cease and desist order in proceedings under section 11D of the Act; • Penalty for failure to furnish information, return etc. under section 15A of the SEBI Act, 1992 • Monetary penalties under section 15G of SEBI Act, 1992 (upto 3X or Rs. 25 Cr. whichever is higher) • Criminal prosecution under section 24 of the SEBI Act (ten year imprisonment or fine upto Rs. 25 cr.)
  33. 33. DISCLOSURE TO BE MADE
  34. 34. DISCLOSURE REQUIREMENTRegulatio Particulars By whom To whom Time Form n No. limit 13(1) On the acquisition of >5% Any Person Company 2 A working days 13(2) Disclosure of shares or voting rights held Director or Company 2 B and positions taken in derivatives by such officer working person and his dependents (as defined by days the company) on becoming the Director or officer 13(2A) Disclosure of shares or voting rights on Promoter or Company 2 B becoming the promoter or part of person working promoter group belonging to days promoter group 13(3) Change in shareholding of (±) >2% from Persons already Company 2 C the last disclosure made under sub holding more working regulation (1) or under this sub regulation. than 5% days
  35. 35. DISCLOSURE REQUIREMENTRegulatio Particulars By whom To whom Time Form n No. limit 13(4) Change in holding in excess of Rs.5 Lakh in Director or Company as 2 D value or 25,000 shares or 1% of total officer well as Stock working shareholding or voting rights from the last Exchange days disclosure made under sub regulation (2) or under this sub regulation. 13(4A) Change in holding in excess of Rs.5 Lakh in Promoter or Company as 2 D value or 25,000 shares or 1% of total person well as Stock working shareholding or voting rights from the last belonging to Exchange days disclosure made under Listing Agreement promoter or under sub regulation (2A) or under this group sub regulation. 13(6) On the receipt of disclosure under 13(1), Company Stock 2 A or B 13(2), 13(2A), 13(3), 13(4) and 13(4A) Exchange working or C or days D as the case may be
  36. 36. Model code of conduct
  37. 37. CODE OF CONDUCT TO BE ABIDE BYALL LISTED COMPANIESOrganizations Associated with Securities Marketsincluding:• All intermediaries• AMC and trustees of mutual funds;• The Self Regulatory Organizations;• The Stock Exchanges / Clearing House / Corporations;• The Public Financial Institutions• The Professional Firms Such as Auditors, Accountancy Firms, Law Firms, Analysts, Consultants, etc., assisting or Advising Listed Companies
  38. 38. SCHEDULES – MODEL CODE OFCONDUCT SCHEDULE I MODEL CODE OF CONDUCT FOR PREVENTION OF INSIDER TRADING PART A - FOR LISTED COMPANIES PART B – FOR OTHER ENTITIES SCHEDULE II CODE OF CORPORATE DISCLOSURE PRACTICES FOR PREVENTION OF INSIDER TRADING
  39. 39. IMPORTANT TERMS- NEED TO KNOW • PSI should be disclosed only to those within the company who need the information to discharge their duty. • Limited access to confidential information • Files containing confidential information shall be kept secure. • Computer files must have adequate security of login and pass word etc.
  40. 40. PRE CLEARANCE OF TRADES • All D/O/E of the Co and their dependants as defined by the company who intend to deal in the securities beyond a limit should pre-clear the transactions. • An application to the Compliance officer indicating • The estimated number of securities that the D/O/E and their dependants intends to deal in, • The details as to the depository with which he has a security account, • The details of securities in such depository mode. • Other details as may be required by any rule made by the company in this behalf.
  41. 41. TRADING WINDOW • Company shall specify a trading period, to be called "Trading Window", for trading in the company’s securities. • The trading window shall be closed during the time the Price Sensitive information is un-published. • When the trading window is closed, the D/ E shall not trade in the companys securities in such period. • The trading window shall be opened 24 hours after the Price Sensitive Information is made public.
  42. 42. RESTRICTED /GREY LISTTo restrict trading in certain securities and designate such list as restricted / greylist.Client Companies for which any assignment or appraisal report or credit ratingassignments are going on.Any security which is purchased or sold by the organisation / firm on behalf of itsclients / schemes of mutual funds, etc. shall be put on the restricted / grey list.As the restricted list itself is a highly confidential information, It shall be maintainedby CO.
  43. 43. CHINESE WALL • "Chinese Wall" policy demarcates “inside areas” from "public areas". • Those areas having access to confidential information, considered “inside areas” and areas which deal with sales / marketing / investment considered "public areas". • The employees in the inside area shall not communicate any PSI to anyone in public area. • In exceptional circumstances employees from the public areas may be brought "over the wall" and given confidential information on the basis of "need to know" criteria, under intimation to the CO
  44. 44. COMPLIANCE OFFICER (CO)  Compliance Officer means „Senior Level Employee‟ who shall report to the MD / CEO.  The CO shall be responsible for - setting forth policies, procedures - monitoring adherence to the rules for the preservation of “PSI”, - pre-clearing of designated employees‟ and their dependents‟ trades - monitoring of trades and the implementation of the code of conduct under the overall supervision of the Board of the listed company.  The CO shall maintain a record of the designated employees and any changes made in the list of designated employees.  To Provide clarifications regarding the SEBI (Prohibition of Insider Trading) Regulations, 1992 & the companys code of conduct to the Company‟s employees.
  45. 45. Lastly………….It is easier to identify the beneficiaries of insider dealing But the extent of losses occurred to the general investor is impossible to calculate
  46. 46. Thanking you … Manoj Kumar Assistant Vice President Corporate Professionals Capital Private Limited D-28, South Extension –I, New Delhi-110 049 Ph: +91.11.40622200; Fax: +91.11.40622201; E: Manoj@indiacp.com | M: +91.9910688433

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