Insider & Insider Trading Defined

Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992, does not directly define the term "insider trading". But it defines the terms-

• "insider" or who is an "insider;

• who is a "connected person";

• what are "price sensitive information".

Obviously an insider, who has deep insight into the affairs of the corporate body and holding knowledge about "price sensitive information" relating to the performance of the corporate body that could have a decided impact on the movement of the price of its equity, is at a vantage position with regards to a prospective trading in the shares of the company to the detriment of the common investors. Taking this fact into account the Regulation prescribes several "do-s" and "don'ts" with reference to these "insiders". The effect of the regulatory measure is to prevent the insider trading in the shares of the company to earn an unjustified benefit for himself and to the disadvantage of the bonafide common shareholders.

According to the Regulations "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or is deemed to have been connected with the company, and who is reasonably expected to have access, connection, to unpublished price sensitive information in respect of securities of a company, or who has received or has had access to such unpublished price sensitive information;

The above definition in turn introduces a new term "connected person". The Regulation defines that a "connected person" means any person who-

1. is a director, as defined in clause (13) of section 2 of the Companies Act, 1956 (1 of 1956) of a company, or is deemed to be a director of that company by virtue of sub-clause (10) of section 307 of that Act or

2. occupies the position as an officer or an employee of the company or holds a position involving a professional or business relationship between himself and the company whether temporary or permanent and who may reasonably be expected to have an access to unpublished price sensitive information in relation to that company;

Explanation: For the purpose of this clause, the words "connected person" shall mean any person who is a connected person six months prior to an act of insider trading.

It is further stipulated that a "person is deemed to be a connected person" if such person-

1. is a company under the same management or group or any subsidiary company thereof within the meaning of section (1B) of section 370, or sub-section (11) of section 372, of the Companies Act, 1956 (1 of 1956) or sub-clause (g) of section 2 of the Monopolies and Restrictive Trade Practices Act, 1969 (54 of 1969) as the case may be; or

2. is an intermediary as specified in section 12 of the Act, Investment company, Trustee Company, Asset Management Company or an employee or director thereof or an official of a stock exchange or of clearing house or corporation

3. is a merchant banker, share transfer agent, registrar to an issue, debenture trustee, broker, portfolio manager, Investment Advisor, sub- broker, Investment Company or an employee thereof, or, is a member of the Board of Trustees of a mutual fund or a member of the Board of Directors of the Asset Management Company of a mutual fund or is an employee thereof who have a fiduciary relationship with the company;

4. is a member of the Board of Directors, or an employee, of a public financial institution as defined in Section 4A of the Companies Act, 1956; or

5. is an official or an employee of a self Regulatory Organisation recognised or authorised by the Board of a regulatory body; or

6. is a relative of any of the aforementioned persons;

7. is a banker of the company.

8. relatives of the connected person;

9. is a concern, firm, trust, Hindu Undivided Family, company or association of persons wherein any of the connected persons mentioned in sub-clause (i) of clause (c), of this regulation or any of the persons mentioned in sub-clauses (vi), (vii) or (viii) of this clause have more than 10% of the holding or interest.

'Price Sensitive Information'
means any information which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of company;

According to the Regulation the following shall be deemed to be price sensitive information: -

1. periodical financial results of the company;

2. intended declaration of dividends (both interim and final);

3. issue of securities or buy-back of securities;

4. any major expansion plans or execution of new projects;

5. amalgamation, mergers or takeovers;

6. disposal of the whole or substantial part of the undertaking;

7. any significant changes in policies, plans or operations of the company.

It can be adduced from the foregoing definitions that "insider trading" is the dealing in the shares/stocks of the company by an "insider" possessing "price sensitive information".

Regulation 3 stipulates that No insider shall -

1. either on his own behalf or on behalf of any other person, deal in securities of a company listed on any stock exchange when in possession of any unpublished price sensitive information; or

2. Communicate, counsel or procure, directly or indirectly, any unpublished price sensitive information to any person who while in possession of such unpublished price sensitive information shall not deal in securities.

    Provided that nothing contained above shall be applicable to any communication required in the ordinary course of business or profession or employment or under any law.

3A. No company shall deal in the securities of another company or associate of that other company while in possession of any unpublished price sensitive information.

1)  In a proceeding against a company in respect of regulation 3A, it shall be a defence to prove that it entered into a transaction in the securities of a listed company when the unpublished price sensitive information was in the possession of an officer or employee of the company, if;

1. the decision to enter into the transaction or agreement was taken on its behalf by a person or persons other than that officer or employee; and

2. such company has put in place such systems and procedures which demarcate the activities of the company in such a way that the person who enters into transaction in securities on behalf of the company cannot have access to information which is in possession of other officer or employee of the company; and

3. it had in operation at that time, arrangements that could reasonably be expected to ensure that the information was not communicated to the person or persons who made the decision and that no advice with respect to the transactions or agreement was given to that person or any of those persons by that officer or employee; and

4. the information was not so communicated and no such advice was so given.

2)  In a proceeding against a company in respect of regulation 3A which is in possession of unpublished price sensitive information, it shall be for the defence to prove that acquisition of shares of a listed company was as per the "Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997."

Any insider, who deals in securities in contravention of the provisions of regulation 3 or 3A shall be guilty of Insider trading.

The Board may without prejudice to its right to initiate criminal prosecution under section 24 or any action under Chapter VIA of the Act, to protect the interests of investors and in the interests of the securities market and for due compliance with the provisions of the Act, Regulations made thereunder issue any or all of the following order, namely: -

1. directing the insider or such person as mentioned in clause (i) of sub-section (2) of section 11 of the Act not to deal in securities in any particular manner;

2. prohibiting the insider or such person as mentioned in clause (i) of sub-section (2) of section 11 of the Act from disposing of any of the securities acquired in violation of these Regulations;

3. restraining the insider to communicate or counsel any person to deal in securities;

4. declaring the transaction(s) in securities as null and void;

5. directing the person who acquired the securities in violation of these regulations to deliver the securities back to the seller;

   Provided that in case the buyer is not in a position to deliver such securities, the market price prevailing at the time of issuing of such directions or at the time of transactions whichever is higher, shall be paid to the seller.

6. directing the person who has dealt in securities in violation of these regulations to transfer an amount or proceeds equivalent to the cost price or market price of securities, whichever is higher to the investor protection fund of a Recognised Stock Exchange.

1. All listed companies and organisations associated with securities markets including:

   1. the intermediaries as mentioned in section 12 of the Act, asset management company and trustees of mutual funds;

   2. the self regulatory organisations recognised or authorised by the Board;

   3. the recognised stock exchanges and clearing house or corporations;

   4. the public financial institutions as defined in Section 4A of the Companies Act, 1956; and

   5. the professional firms such as auditors, accountancy firms, law firms, analysts, consultants, etc., assisting or advising listed companies, shall frame a code of internal procedures and conduct as near there to the Model Code specified in Schedule I of these Regulations.

2. The entities mentioned in sub-regulation (1), shall abide by the Code of Corporate Disclosure Practices as specified in Schedule II of these Regulations. The text of the Code is given in the following two pages.

3. All entities mentioned in sub-regulation (1), shall adopt appropriate mechanisms and procedures to enforce the codes specified under sub-regulations (1) and (2).

4. (4) Action taken by the entities mentioned in sub-regulation (1) against any person for violation of the code under sub-regulation (3) shall not preclude the Board from initiating proceedings for violation of these Regulations.

1. Any person who holds more than 5% shares or voting rights in any listed company shall disclose to the company, the number of shares or voting rights held by such person, on becoming such holder, within 4 working days of:-

   1. the receipt of intimation of allotment of shares; or

   2. the acquisition of shares or voting rights, as the case may be.

2. Any person who is a director or officer of a listed company, shall disclose to the company, the number of shares or voting rights held by such person, within 4 working days of becoming a director or officer of the company.

3. Any person who holds more than 5% shares or voting rights in any listed company shall disclose to the company the number of shares or voting rights held and change in shareholding or voting rights, even if such change results in shareholding falling below 5%, if there has been change in such holdings from the last disclosure made under sub-regulation (1) or under this sub-regulation; and such change exceeds 2% of total shareholding or voting rights in the company.

4. Any person who is a director or officer of a listed company, shall disclose to the company, the total number of shares or voting rights held and change in shareholding or voting rights, if there has been a change in such holdings from the last disclosure made under sub-regulation (2) or under this sub-regulation, and the change exceeds Rupees 5 lac in value or 25000 shares or 1% of total shareholding or voting rights, whichever is lower.

5. The disclosure mentioned in sub-regulations (3) and (4) shall be made within 4 working days of;

   1. the receipt of intimation of allotment of shares, or

   2. the acquisition or sale of shares or voting rights, as the case may be.

Disclosure by Company to Stock Exchanges

6. Every listed company, within five days of receipt, shall disclose to all stock exchanges on which the company is listed, the information received under sub-regulations (1), (2),(3) and (4). Violation of provision relating to disclosure

As per Regulation 14-

1. A person who violates provisions of regulation 12 shall be liable for action under Section 11 or 11 B and/or Section 24 of the Act.

2. A person who violates provisions of regulation 13 shall be liable for action as specified in regulation 11 or Sections 11, 11B or action under Chapter VIA or section 24 of the Act.

Any person aggrieved by an order of the Board made, on and after the commencement of the Securities Laws (Second Amendment) Act, 1999, (i.e., after 16th December 1999), under these regulations may prefer an appeal to a Securities Appellate Tribunal having jurisdiction in the matter

Under Chapter IV of the Regulation SEBI is vested with extensive powers to make inquiries and inspection to form a prima facie opinion as to whether there is any violation of these regulations. The chapter also prescribes the procedure for such investigations.

The regulation also provides-

1. Code of internal procedures and conduct for listed companies and other entities (Chapter V)

2. Model Code of Conduct for Prevention of Insider Trading for Listed Companies (Schedule I -PART: A)

3. Model Code of Conduct for Prevention of Insider Trading for Other Entities (Schedule I -PART: B)