India’s stock market regulator Securities and Exchange Board of India, or Sebi, plans to relax its regulations governing insider trading and will remove a provision that provides for criminal action against employees of a company who do not comply with a code of conduct specified in current insider trading laws.
However, their companies may end up paying the price for this.
That is because Sebi also plans to allow markets to punish the companies to which the “insiders” belong. It says imprisonment is a harsh punishment for something that has happened because of lack of processes in the companies concerned. Instead, it wants companies to disclose in their annual report details of their compliance or non-compliance with the code of conduct.
“This will allow the markets to decide whether to economically penalize companies which do not have these process oriented safeguards in place and will take us a step forward towards the efficient capital markets hypothesis,” says a Sebi’s circular titled Consultative Paper on Amendments to Sebi (prohibition of insider trading) Regulations 1992.
It isn’t known whether anyone has gone to jail in India for insider trading or failure to adhere to this code of compliance.
“Insider means any person who is or was connected with the company or is deemed to have been connected with the company, and who is reasonably expected to have access, connection, to unpublished price sensitive information in respect of securities of (a) company, or who has received or has had access to such unpublished price sensitive information,” according to Sebi regulations.
Sebi’s regulations apply to listed companies, Sebi-regulated entities such as asset management companies, self regulatory organizations and stock exchanges. Current laws specify that if Sebi finds a person or entity guilty of insider trading, it can impose a fine of Rs25 crore or three times the gains made from the insider trading. It can also initiate criminal action against the person or entity, resulting in imprisonment up to 10 years. The circular says that these penalties, including imprisonment, will stay.
Another proposal detailed in the circular suggests that companies be given the freedom to decide the time frame within which employees can trade in shares of the company. According to current rules, an employee/director has to get an approval from the company before trading in any shares of it, and such orders have to be completed within a week. If Sebi translates its proposal into a regulation, companies can decide on this time frame through an internal policy and employees will not be exposed to market risk due to a short trading window of one week.
Current regulations also do not impose any penalty on a person who receives a tip about the firm and trades in its shares. The regulator proposes to specify a “tipee liability” or a penalty on such a person.
Among other amendments it proposes in the insider trading regulations, Sebi proposes to include derivatives transactions in mandatory disclosures to be made by companies and “insiders”. Another proposal says that disclosure by employees or directors related to the acquisition or sales of shares in the company under Sebi’s takeover regulations will amount to compliance under insider trading regulations also.
“These proposals attempt to harmonize the disclosure standards. It seems to put more burden on the management to determine when the trading window should be closed and for which set of employees.
As per the existing regulations, one can strictly interpret that all employees of a company, irrespective of the fact that whether they are aware or not, can be held privy (as having access) to price sensitive information.
The new proposal addresses this issue and attempts to demarcate between employees who may not be aware and directors who are bound to have access to such information,” said Siddharth Shah, co-head of corporate and securities practice at law firm Nishith Desai Associates.
Sebi’s circular says that under current laws, in the case of an automobile company that has a secret plan on launching new models every month, all employees are barred from trading in the company’s shares in this period. The new regulations clearly define the scope of activities for which freeze on trading window will be applicable and allows the management of the company to decide on the activities where such freeze will be necessary.
One expert says the regulations, while addressing “theoretical problems faced by employees” still do not cover all possible scenarios. What happens when “prospective acquirer or private equity player during their due diligence about the target company get to know about a price sensitive information or future business plans,” asks Shuva Mandal who works at legal firm AZB Partners.
On 4 March, India’s finance minister P. Chidambaram told members of Parliament that over the past two years, Sebi has initiated action in 39 cases for alleged violation of insider trading regulations.
PTI contributed to this story.