SEBI came out with an amendment which was not long due for SEBI ( Prohibition of Insider Trading) Regulations 2015, for improving the regulations and for a fair market conduct.
The amendment came out with some explanation to words, defences for insider trading and procedures to be followed. Clarity has been given for the word financially literate. For this regulations a person will deemed financially literate if he/she can read and understand basic financial statements, like, balance sheets, profit and loss accounts and cash flow statement.
Unlisted company which filed documents for listing or such unlisted companies getting listed due to merger or acquisition with a listed company also come under the company proposed to be listed under the regulations.
Unpublished price sensitive information was another area where there was confusion.
Much expected clarity has been given for the term legitimated purpose, which can be raised as a defence for insider trading. As the term was not clearly explained about inclusion, created lot of confusion. The present amendment says that the board of a listed company shall now make a policy for determination of legitimate purpose as a part of Code of Fair disclosures and Conduct formulated under regulation 8. This will remove ambiguity and provide clarity.
Under the provisions of this regulations, unpublished price sensitive information shared with a person under a legitimate purpose will be treated as insider and prior information shall also be given to them by the company to maintain confidentiality.
More defences for insider trading also set out by the amended regulations. Some of them are
- Off market transactions between insiders with same unpublished price sensitive information.
- Block trade window trades between persons who possess the same unpublished price sensitive information.
- Trades under stock options under predetermined exercise price.
The amendment casts responsibility of making proper code of conduct for professional firms such as auditors, accountancy firms, law firms, consultants, banks etc who are all assisting and advising listed companies, to the board of directors of such companies to govern trading by their designated persons.
As the chances for leaking unpublished price sensitive informations through social media and messaging platforms, the amendment places a great deal of responsibility on the boards of such intermediaries to formulate code of conduct and create a whistle blower policy. Regulations also say that the designated persons of such intermediaries need to provide details of persons with whom they share material financial relationship equivalent to at least 25% of the payers annual income.
An indicative definition for the term designated persons also given in the amendment which include
- employees of such listed company, intermediary or fiduciary designated on the basis of their role.
- employees of material subsidiaries of such listed companies
- promoters of such listed companies or intermediaries or fiduciaries.
- CEO of such listed companies, intermediaries or fiduciaries.
- any support staff of listed company, intermediaries or fiduciaries.
The amended guidelines provides a refreshed framework with lesser confusion in insider trading. It tries to clear confusions on various provisions, where the chances of litigations were high.