The Chartered Accountants contribution in protecting minority interest for th...
FKSPL Presentation on Insider Trading ANMI
1. Fiscal Solutions Powered by Law…
The Inside of Trading
- An Industry Perspective
By
Suresh Viswanathan
Founder Director & Chief Consultant
Finteglaw Knowledge Solutions Private Limited
3. The Regulatory View - Globally
A company's confidential information
– Qualifies as property to which the company has a right of
exclusive use.
Divulging UPSI by an insider is violation of a fiduciary
duty
– Constitutes fraud akin to embezzlement
– Has criminal implications
Misappropriation of UPSI amounts to theft
– Use of UPSI for ones benefit amounts to dishonesty and
cheating
– Has criminal implications
May 6, 2015
4. Insider trading a crime in US
U.S. insider trading prohibitions are based on
English and American common law
– Governed by prohibitions against fraud
A director, who bought his company’s stock
when he knew it was about to jump up in
price, committed fraud by buying while not
disclosing his inside information
– The US Supreme Court ruling in 1909
– Well before the SEC Act, 1934,
May 6, 2015
6. Corrupting Effects
Corrupts the ‘Level
Playing Field’
Profit made out of the
loss of other investors
Leads to loss of
confidence in stock
market
Easier to identify the
beneficiaries
– Extent of losses suffered
impossible to calculate.
May 6, 2015
7. SEBI Investigations
3
11
12
43
86
2
14
10
52
41
6
13
16
6
67
6
13
16
12
73
0 10 20 30 40 50 60 70 80 90 100
Takeovers
Insider Trading
Miscellaneous
Issue Related
Manipulations
Market
Manipulations
2013-14
Investigations
Completed
2013-14
Investigations
Taken up
2012-13
Investigations
Completed
2012-13
Investigations
Taken up
May 6, 2015
9. ‘The Unwinnable War’
A.M. Louis in his book ‘The Unwinnable War
on Insider Trading,’ asserts that:
– Of all the issues that have confronted regulators
of the securities markets, the regulation of insider
dealing has proved among the most intractable’
Very true of Indian stock market
– The Indian stock market practically runs on
unpublished price sensitive information
May 6, 2015
11. New Powers
Section11(2)(ia) - Calling for
information and records from any
– person
– Including any bank or any other
authority or board or corporation
• established or constituted by or
under any Central or State Act
Relevant to any investigation or
inquiry by SEBI in respect of any
transaction in securities
– In the opinion of SEBI
Implications
Enables collection of call
recording data from any
Telecom provider
Enjoys courts’ powers for
– discovery and production of
books of account and other
documents
– Summoning and enforcing
attendance
The provisions have powers
over-riding other laws
SEBI Act Amended - 2014
May 6, 2015
12. Search and Seizure
Power to search
– Places and Buildings
– Vessel, vehicle or aircraft
– Persons
– Computers
Powers to
– Inspect
– Seize
– Place identification mark
– Make copy
– Record statement
May 6, 2015
14. SEBI’s Tentacles
SEBI has installed an advanced
surveillance software
– This monitors abnormal patterns of
trading in all scrips
– Detailed information sought from
Exchanges on such trades
– Exchange in turns to the Members
for client information
Surveillance systems still not
able to cope with the
malpractices
– HDFC Mutual Fund case, the
information was voluntarily shared
with SEBI
May 6, 2015
15. The Odds
Very wide definition of connected
persons
Onus on the Connected Person to prove
innocence
– Guilty unless proved innocent
– Contrary to established principles of law
New powers acquired by SEBI
– Search & Seizure powers
– Power to procure Call records data
Heavy penalties (Rs. 10 Lakh to 25 Crore)
and disgorgement
Unlisted intermediaries could face
prosecution under Companies Act also
PIT violations outside Settlement
process
May 6, 2015
16. S 447 of Companies Act 2013
“any person who is found to be guilty of fraud, shall be punishable with imprisonmentfor
a term which shall not be less than six monthsbut which may extend to ten
yearsand shall also be liable to fine which shall not be less than the amount
involved in the fraud, but which may extend to three times the amount
involved in the fraud”
– Provided that where the fraud in question involves public interest, the term of
imprisonment shall not be less than three years.
“fraud” includes any act, omission, concealment of any fact or abuse of position
committed by any person or any other person with the connivance in any manner, with
intent to deceive, to gain undue advantage from, or to injure the interests of,
the company or its shareholders or its creditors or any other person, whether or not
there is any wrongful gain or wrongful loss
– “wrongful gain” means the gain by unlawful means of property to which the person
gaining is not legally entitled
May 6, 2015
17. S 195 of Companies Act 2013
“No person including any director or key managerial personnel of a company
shall enter into insider trading”
“insider trading” means—
– an act of subscribing, buying, selling, dealing or agreeing to subscribe, buy, sell or deal in any
securities by any director or key managerial personnel or any other officer of a company
either as principal or agent if such director or key managerial personnel or
any other officer of the company is reasonably expected to have access to any non-
public price sensitive information in respect of securities of company
– an act of counselling about procuring or communicating directly or indirectly any non-public
price-sensitive information to any person;
Contravention punishable with imprisonment for a term which may extend to
five years five years or with fine which shall not be less than five lakh
rupees but which may extend to twenty-five crore rupees or three times the
amount of profits made out of insider trading, whichever is higher, or
with both.
S 458 delegates the prosecution powers to SEBI
May 6, 2015
18. Connected Persons (Non Intermediaries)
The Issuer
Company
Director,
Immediate
Relative
Company, Firm,
HUF, AOP
Officer, Employee,
Professional or
Business Partner
Immediate
Relative
Holding, Associa
te & Subsidiary
Investment, Tru
stee & Asset
Management
Companies
Banker of the
Company
Public Financial
Institution, its
Directors &
Employees
If a Director, immediate Relative or
Banker has more than 10% interest
May 6, 2015
19. Connected Persons (Intermediaries)
The Issuer
Company
Any Dealing
Intermediary u/s
12 of SEBI Act
Employees &
Directors of the
Intermediary
Officials of Stock
Exchange &
Clearing House
Immediate
Relative
Member of Board
of Trustees of MF
Director &
Employee of the
AMC of the MF
SEBI Authorised
Self regulatory
Organisations
Officials &
Employees
May 6, 2015
20. “Fig Leaf Cover” for Stock Brokers
Segregate and demonstrate
– Prop dealing from client dealing
desk
– Sales staff from client dealing desk
– Research team from dealing and
sales teams
Maintain documented evidence
– NDA with all concerned including
professionals and business partners
– Rationale for prop trade decisions
– Basis (sources) of research reports
– Authenticated order book/deal
tickets
• even for prop trades
– Call records of the dealer
May 6, 2015
21. Taboo for Stock Brokers
Never ever
– Prop trade
• on stocks of group companies
• based on any insider information
from anyone
– Undertake trades of AMCs, PMS,
AIF etc., belonging to your group
– Allow staff to trade through other
brokers
– Provide unsolicited trading advise
to clients
• other than through an
authenticated published document
May 6, 2015
22. Research Vs. Insider - Wafer thin…
To ask a Maruti employee about
footfall at his location
To have lunch with an ex CFO of a
software company
To talk to doctors who have worked
on past clinical trials of a
pharmaceutical company
To appoint an automobile industry
veteran as a 'source'
To pay a Maruti employee to get a
printout of a sales data
To have lunch with a current CFO of
a software company - on your boat
To pose as a doctor to gain access to
a clinical trial in progress in a
pharmaceutical company
To appoint the brother in law of
Maruti VP as an industry 'source'
May 6, 2015
23. Internal Trade Controls
Effective Employee Securities Dealing
Policy
– To regulate, monitor & report trades
• Automation suggested
– Adherence to Schedule B
– Applicable to Auditors, consultants,
vendors etc. who may have access to
UPSI
– Everyone to appoint a Compliance
Officer
Address Insider Trading as an
Enterprise Risk
– Make this part of corporate culture
Conduct periodic awareness sessions
to all employees
May 6, 2015
24. Trading Plan – An Entitlement
Trading
Plan
Listed Company
Connected
Person
Deemed
Connected
Person
SEBI
Intermediary
Person
Possessing UPSI
Person having
access to UPSI
No trading during 10th
March, June, September
& December till 2 days
after declaration of
results
Minimum Plan period for
12 months
Value of trades or no. of
securities, nature of
trades and intervals, or
dates to be disclosed
No parallel plans allowed.
No scope for market
abuse to be provided
Once approved, cannot
be revoked
Trading not to commence
before 6 months of
disclosure to Stock
Exchange(s)
To be formulated by
the insider
To be reviewed &
approved by the
Compliance Officer
Disclosure to the
Stock Exchange(s)
Plan shall not be implemented if any UPSI is in the possession of the Insider
May 6, 2015
25. Daunting Tasks for Listed Companies
To maintain the dynamic list of
connected persons
– Acting in contractual or fiduciary
relationship
– Professionals
– Business partners
To ensure that UPSI is not shared
with the aforesaid except under
permitted circumstances
To document and prove that UPSI
was not shared with the
aforesaid
To enter into NDA with all the
aforesaid
To approve and operate Trading
Plans
May 6, 2015
27. Role of Compliance Officer Defined!
SEBI Adjudication Order dated July 27, 2012 in
respect of Mr. G Jayaraman in the matter of
Satyam Computer Services Ltd.
– SEBI held the erstwhile compliance officer of
Satyam is liable for not enforcing the safeguards
under the Model Code during the period of
December 2008 – January 2009
– Trading window was not closed after becoming
aware of certain “price sensitive information”
The order further said
– “The duty weighs even more on a person like
Compliance Officer, who is conferred upon with
key responsibilities in a company. Hence, the
violation by the Noticee needs to be viewed
seriously.”
SEBI imposed a penalty of Rs.5,00,000/-
(Rupees Five Lakh only) on Mr. G Jayaraman.
May 6, 2015
28. Onerous role of Compliance Officer
Responsible for Trading Plans and
Employee Security Dealing Policy
– Means he should ensure that nobody is
front running
– Trades by relatives is more onerous to
monitor
Responsible for scrip related
rumours floated by other
employees
Bound to report all cases of Insider
trading to SEBI
Responsible for all reporting to
Exchanges
May 6, 2015
29. Brace up …
Install
– Robust internal control systems for
complying with regulatory
requirements
– Proper Chinese Wall mechanisms
Strengthen
– The ambit of internal audit
– The standards in regulatory
compliance
Automate
– Compliance processes
– Internal controls
– Back up mechanisms
May 6, 2015
31. Awaiting Clarification
Companies whose debt securities
are listed also come under the
ambit of SEBI as a Listed Company,
even though they are closely held
– Will PIT apply to these companies
also?
Does a Trading Plan apply to an
Intermediary also?
– What will happen if an insider goes
bankrupt and not able to continue
trades under the Plan
Post FMC Merger, will
commodities derivatives also come
under the ambit PIT Regulations?
May 6, 2015
32. Finteglaw Knowledge Solutions Private Limited
CIN: U74140MH2008PTC186787
Registered Office: A – 403, Kukreja Centre, Sector 11, CBD Belapur, Navi Mumbai – 400614.
Zonal Office (South) : ‘Reglog’, New No. 17/1, Playground View Road, Nandanam, Chennai – 600 035.
Phone: +91 22 27577315, Website: www.finteglaw.com, email: contact@finteglaw.com
May 6, 2015