Tag: SEBI

What is the degree of proof required to hold brokers/sub-brokers liable for fraudulent/manipulative practice?

The Supreme Court of India, in its judgement in case of SEBI v. Kishore R. Ajmera delivered on 23 Feb. 2016, dealt with this question.

Facts in brief:
A broker with his sub-broker were allegedly involved in creation of artificial volumes in an illiquid scrip of Malvica Engineering Ltd, who matched volumes for their two related clients. SEBI whole-time member held the broker vicariously liable for conduct of sub-broker and ordered suspension for four months.

Aggrieved Broker filed appeal before Hon’ble Securities Appellate Tribunal (SAT). And SAT by its order dates 05th February 2008 held that in the absence of any direct proof or evidence showing the involvement of the sub-broker in allegedly matching the trades and thereby creating artificial volumes of trading resulting in unnatural inflation of the price of the scrip, the charges are not substantiated. The penalty imposed was accordingly interfered with.

Against this order, SEBI filed appeal before Hon’ble Supreme Court.

The Apex court took up all similar appeals viz. SEBI v. Ess Ess Intermediaries Pvt. Ltd., SEBI v. Rajendra Jayantilal Shah and SEBI v. Rajesh N. Jhaveri where allegations of synchronized trades in Adani Export Ltd. were found and monetary penalties were imposed. And in appeal, SAT had taken the view by order dated 19th June 2013 that the allegations of fraud under the FUTP Regulations, 2003 can be established only on the basis of clear, unambiguous and unimpeachable evidence. The Apex court also took up SEBI v. Networth Stock Broking Ltd.’s appeal, where allegation of circular trading in scrip of G.G. Automotive Gears Ltd. was involved. SEBI held broker liable vide order dated 27th December 2011. In appeal, SAT took the same view as in earlier case.

Applicable legal principle:

The Apex court narrated “It is a fundamental principle of law that proof of an allegation levelled against a person may be in the form of direct substantive evidence or, as in many cases, such proof may have to be inferred by a logical process of reasoning from the totality of the attending facts and circumstances surrounding the allegations/charges made and levelled. While direct evidence is a more certain basis to come to a conclusion, yet, in the absence thereof the Courts cannot be helpless. It is the judicial duty to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded and to reach what would appear to the Court to be a reasonable conclusion therefrom. The test would always be that what inferential process that a reasonable/prudent man would adopt to arrive at a conclusion.”

Held:

Applying above principle of law to facts of the cases before it, Hon’ble Supreme Court opined that while proximity of time between the buy and sell orders may not be conclusive in an isolated case such an event in a situation where there is a huge volume of trading can reasonably point to some kind of a fraudulent/manipulative exercise with prior meeting of minds. Such meeting of minds so as to attract the liability of the broker/sub-broker may be between the broker/sub-broker and the client or it could be between the two brokers/sub-brokers engaged in the buy and sell transactions. When over a period of time such transactions had been made between the same set of brokers or a group of brokers a conclusion can be reasonably reached that there is a concerted effort on the part of the concerned brokers to indulge in synchronized trades the consequence of which is large volumes of fictitious trading resulting in the unnatural rise in hiking the price/value of the scrip(s).

Hon’ble court while agreeing that the screen based trading system keeps the identity of the parties anonymous, however opined that it will be too naive to rest the final conclusions on said basis which overlooks a meeting of minds elsewhere. And it observed that direct proof of such meeting of minds elsewhere would rarely be forthcoming. Hence,

the test is one of preponderance of probabilities so far as adjudication of civil liability arising out of violation of the Act or the provisions of the Regulations framed thereunder is concerned.

However, Prosecution under Section 24 of the SEBI Act for violation of the provisions of any of the Regulations, of course, has to be on the basis of proof beyond reasonable doubt.

Hon’ble Court also observed

“The conclusion has to be gathered from various circumstances like that volume of the trade effected; the period of persistence in trading in the particular scrip; the particulars of the buy and sell orders, namely, the volume thereof; the proximity of time between the two and such other relevant factors.

The fact that the broker himself has initiated the sale of a particular quantity of the scrip on any particular day and at the end of the day approximately equal number of the same scrip has come back to him; that trading has gone on without settlement of accounts i.e. without any payment and the volume of trading in the illiquid scrips, all, should raise a serious doubt in a reasonable man as to whether the trades are genuine. The failure of the brokers/sub-brokers to alert themselves to this minimum requirement and their persistence in trading in the particular scrip either over a long period of time or in respect of huge volumes thereof, in our considered view, would not only disclose negligence and lack of due care and caution but would also demonstrate a deliberate intention to indulge in trading beyond the forbidden limits thereby attracting the provisions of the FUTP Regulations.

The difference between violation of the Code of Conduct Regulations and the FUTP Regulations would depend on the extent of the persistence on the part of the broker in indulging with transactions of the kind that has occurred in the present cases. Upto an extent such conduct on the part of the brokers/sub-brokers can be attributed to negligence occasioned by lack of due care and caution. Beyond the same, persistent trading would show a deliberate intention to play the market. The dividing line has to be drawn on the basis of the volume of the transactions and the period of time that the same were indulged in.”

The transactions were notable in that volume of trading in such scrips was usually minimal. The Court opined in the absence of direct substantive evidence, courts can take note of immediate and proximate facts and circumstances surrounding the events on which the charges are founded to reach a reasonable conclusion. As such, the test would be: “what inferential process that a reasonable/prudent man would adopt to arrive at a conclusion.”

On the facts of the case, though voluminous trading of illiquid scrips was not impermissible per se, the Bombay Stock Exchange had cautioned against the same and asked traders to exercise caution in case of high volume of trading. When over a period of time such transactions had been made between the same set of brokers or a group of brokers a it could be reasonably concluded that there was a concerted effort to indulge in synchronized trades, which resulted in large volumes of fictitious trading, culminating in an unnatural rise in hiking the price of the scrips. By the overall conduct of brokers and their transactions could the court infer not only a lack of due care and caution but also a deliberate intention to indulge in trading beyond forbidden limits.

Accordingly orders of SAT were set aside and orders of SEBI were restored.

Hon’ble Supreme Court observed (Obiter Dicta) “The different Regulations including the Regulations that prescribe the procedural course, namely, SEBI (Procedure for Holding Enquiry by Enquiry Officer and imposing Penalty) Regulations 2002 and the successor Regulation i.e. SEBI (Intermediaries) Regulations 2008 contain identical and parallel provisions with regard to imposition of penalty resulting in myriad provisions dealing with the same situation. A comprehensive legislation can bring about more clarity and certainty on the norms governing the security/capital market and, therefore, would best serve the interest of strengthening and securing the capital market.”

SEBI and insider trading

Gist of provisions of SEBI Act, 1992 dealing with Insider Trading.

  1. Section 12A(d) prohibits, inter alia, engaging in insider trading.
  2. Section 11(2)(g) empower SEBI to take appropriate measures to protect the interest of investors in securities and to promote the development of securities market and to regulate securities market. Such measure of SEBI includes, inter alia, to prohibit insider trading.
  3. Section 11(2A) Where SEBI has reasonable grounds to believe that any listed public company or other public company intending to get its securities listed on any recognised stock exchange (other than market intermediary) has been indulging in, insider trading or FUTP, it (SEBI) may order inspection of books and records of such company.
  4. Proviso to Section 11(4) Where SEBI has reasonable grounds to believe that any listed public company or other public company intending to get its securities listed on any recognised stock exchange (other than market intermediary) has been indulging in, insider trading or FUTP, it (SEBI) may – (i) impound and retain the proceeds or securities in respect of any transaction which is under investigation; (ii) attach, after passing of an order on an application made for approval by the Judicial Magistrate of the first class having jurisdiction, for a period not exceeding one month, one or more bank account or accounts of any intermediary or any person associated with the securities market in any manner involved in violation of any of the provisions of SEBI Act, or the rules or the regulations made thereunder : Provided that only the bank account or accounts or any transaction entered therein, so far as it relates to the proceeds actually involved in violation of any of the provisions of SEBI Act, or the rules or the regulations made thereunder shall be allowed to be attached; or (iii) direct any intermediary or any person associated with the securities market in any manner not to dispose of or alienate an asset forming part of any transaction which is under investigation.
  5. Section 11C(9): SEBI may order investigation, inter alia, in the affairs of any listed public company or other public company intending to get its securities listed on any recognised stock exchange (other than market intermediary) and only in case of insider trading or market manipulation by such company, the Magistrate or Judge of the Designated Court after considering the application and hearing the Investigating Authority may, by order, authorise the Investigating Authority – (a) to enter, with such assistance, as may be required, the place or places where such books, registers, other documents and record are kept; (b) to search that place or those places in the manner specified in the order; and (c ) to seize books, registers, other documents and record, it considers necessary for the purposes of the investigation.
  6. Section 11D:After inquiry, if SEBI finds that any listed public company or other public company intending to get its securities listed on any recognised stock exchange (other than market intermediary) has indulged in insider trading or market manipulation, then SEBI may pass an order requiring such company to cease and desist from committing or causing such violation:
  7. Section 15G:  prescribes penalty for insider trading. If any insider who,—

(i) either on his own behalf or on behalf of any other person, deals in securities of a body corporate listed on any stock exchange on the basis of any unpublished price-sensitive information; or
(ii) communicates any unpublished price-sensitive information to any person, with or without his request for such information except as required in the ordinary course of business or under any law; or
(iii) counsels, or procures for any other person to deal in any securities of any body corporate on the basis of unpublished price-sensitive information,

shall be liable to a penalty which shall not be less than ten 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.

SEBI has framed SEBI (Prohibition of Insider Trading) Regulations – also known as PIT Regulations.

PIT Regulations, 1992 which were brought to force from 19th November 1992 hold ground till 15th May 2015, From 16th May 2015, new PIT Regulations, 2015 is brought to force. Comparison of 2015 and 1992 PIT Regulations is here.

 

SEBI Insider Trading Regulations 2015 and 1992 – comparison

SEBI Prohibition Insider Trading Regulations 2015 and 1992 – comparison

SEBI (Prohibition of Insider Trading) Regulations, 2015 (base w.e.f. 16 May 2015) SEBI (Prohibition of Insider Trading) Regulations, 1992

(w.e.f.19th Nov. 1992 to 15th May 2015)

Comments. (Unless otherwise specified, reference is to 2015 regulations)
2 (1) (b) “Board” means the Securities and Exchange Board of India. Newly introduced.
2 (1) (c) “compliance officer” means any senior officer, designated so and reporting to the board of directors or head of the organization in case board is not there, who is financially literate and is capable of appreciating requirements for legal and regulatory compliance under these regulations and who shall be responsible for compliance of policies, procedures, maintenance of records, monitoring adherence to the rules for the preservation of unpublished price sensitive information, monitoring of trades and the implementation of the codes specified in these regulations under the overall supervision of the board of directors of the listed company or the head of an organization, as the case may be. Newly introduced. Requirement of appointing “Compliance Officer” is applicable not only to companies but also to other form of business organizations.

 

Who can be Compliance officer?

Senior officer, who is financially literate and capable of appreciating legal and regulatory compliance.

 

In case of company, Compliance officer should report to and function under overall supervision of Board of Directors. In other form of business, Compliance officer should report to function under overall supervision of Head of the Organisation.

 

2 (1) (d) “connected person” means,-(i) any person who is or has during the six months prior to the concerned act been associated with a company, directly or indirectly, in any capacity including by reason of frequent communication with its officers or by being in any contractual, fiduciary or employment relationship or by being a director, officer or an employee of the company or holds any position including a professional or business relationship between himself and the company whether temporary or permanent, that allows such person, directly or indirectly, access to unpublished price sensitive information or is reasonably expected to allow such access.

(ii) Without prejudice to the generality of the foregoing, the persons falling within the following categories shall be deemed to be connected persons unless the contrary is established:

(a).an immediate relative of connected persons specified in clause(i); or

(b).a holding company or associate company or subsidiary company; or

(c).an intermediary as specified in section 12 of the Act or an employee or director thereof; or

(d) An investment company, trustee company, asset management company or

an employee or director thereof; or

(e).an official of a stock exchange or of clearing house or corporation; or

(f).a member of 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; or

(g).a member of the board of directors or an employee, of a public financial institution as defined in section 2(72) of the Companies Act, 2013; or

(h) an official or an employee of a self-regulatory organization recognised or

authorized by the Board; or

(i) a banker of the company; or

(j) a concern, firm, trust, Hindu undivided family, company or association of persons wherein a director of a company or his immediate relative or banker of the company, has more than ten per cent. of the holding or interest.

NOTE: It is intended that a connected person is one who has a connection with the company that is expected to put him in possession of unpublished price sensitive information. Immediate relatives and other categories of persons specified above are also presumed to be connected persons but such a presumption is a deeming legal fiction and is rebuttable. This definition is also intended to bring into its ambit persons who may not seemingly occupy any position in a company but are in regular touch with the company and its officers and are involved in the know of the company’s operations. It is intended to bring within its ambit those who would have access to or could access unpublished price sensitive information about any company or class of companies by virtue of any connection that would put them in possession of unpublished price sensitive information.

2(1)(c) “connected person” means any person who—(i) 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

(ii) 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.

Explanation:- For the purpose of clause (c), the words “connected person” shall mean any person who is a connected person six months prior to an act of insider trading;

 

2 (1) (h)person is deemed to be a connected person”, if such person—

(i) is a company under the same management or group, or any subsidiary company thereof within the meaning of sub-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

(ii) 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;

(iii) 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 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;

(iv) 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

(v) is an official or an employee of a Self-regulatory Organisation recognised or authorised by the Board of a regulatory body; or

(vi) is a relative of any of the aforementioned persons;

(vii) is a banker of the company.

(viii) relatives of the connected person; or

(ix) 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-clause (vi), (vii) or (viii) of this clause have more than 10 per cent of the holding or interest;

Scope widened.

Connected person covers any one associated with the company / organization, even by frequent communication with employees, that allows or reasonably expected to allow access to unpublished price sensitive information (‘UPSI’).

New: Deemed to include “immediate relatives”, which is defined.

Under 1992 regulations, it deemed to include ‘relatives’.

Deemed connected person no longer includes companies under the same management or group as per MRTP Act, 1969. Now includes holding company, subsidiary company and associate company.

As regards capital market intermediaries as per section 12A of SEBI Act, under 1992 regulations only employees were treated as deemed to be connected person. Now it covers directors as well.

As regards mutual funds, under 1992 regulations only employees having fiduciary relation with the company were treated as deemed to be connected. Now condition of ‘fiduciary relation’ is dropped. Thus, all employees of mutual fund / asset management company are deemed to be connected person.

2 (1) (e) “generally available information” means information that is accessible to the public on a non-discriminatory basis.

NOTE: It is intended to define what constitutes generally available information so that it is easier to crystallize and appreciate what unpublished price sensitive information is. Information published on the website of a stock exchange, would ordinarily be considered generally available.

Newly introduced. This term is used with reference to UPSI.
2 (1) (f) “immediate relative” means a spouse of a person, and includes parent, sibling, and child of such person or of the spouse, any of whom is either dependent financially on such person, or consults such person in taking decisionsrelating to trading in securities.

NOTE: It is intended that the immediate relatives of a “connected person” too become connected persons for purposes of these regulations. Indeed, this is a rebuttable presumption.

Newly introduced. Not all immediate relatives are covered. Only those who either depend financially or consult for trading in securities.

Term ‘trading’ is defined.

2 (1) (d) “dealing in securities” means an act of subscribing, buying, selling or agreeing to subscribe, buy, sell or deal in any securities by any person either as principal or agent; It is covered under ‘trading’.
2 (1) (g) “insider” means any person who is:

i) a connected person; or

ii) in possession of or having access to unpublished price sensitive information.

NOTE:

Since “generally available information” is defined, it is intended that anyone in possession of or having access to unpublished price sensitive information should be considered an “insider” regardless of how one came in possession of or had access to such information. Various circumstances are provided for such a person to demonstrate that he has not indulged in insider trading. Therefore, this definition is intended to bring within its reach any person who is in receipt of or has access to unpublished price sensitive information. The onus of showing that a certain person was in possession of or had access to unpublished price sensitive information at the time of trading would, therefore, be on the person leveling the charge after which the person who has traded when in possession of or having access to unpublished price sensitive information may demonstrate that he was not in such possession or that he has not traded or he could not access or that his trading when in possession of such information was squarely covered by the exonerating circumstances.

2 (1) (e) “insider” means any person who,(i) is or was connected with the company or is deemed to have been connected with the company and is reasonably expected to have access to unpublished price sensitive information in respect of securities of company, or

(ii) has received or has had access to such unpublished price sensitive information

1. Every connected person is an insider.

2.The person who possess or having access to unpublished price sensitive information.

 

More clarity brought.

For a person to be ‘insider’ should be connected person (defined to cover connection in previous 6 months from act of trading) and is in possession of or having access to UPSI.

Thus, either having access to UPSI or in possession thereof is the key. It is immaterial how he acquired such UPSI or whether he is expected to have access to UPSI.

Earlier, UPSI was restricted to information about the company. Now it includes information about securities of the company as well.

2 (1) (f) “investigating authority” means any officer of the Board or any other person, not being a firm, body corporate or an association of persons, having experience in dealing with the problems relating to the securities market and who is authorised by the Board under Chapter III ;
2 (1) (g) “officer of a company” means any person as defined in clause (30) of section 2 of the Companies Act, 1956 (1 of 1956) including an auditor of the company;
2 (1) (h) “promoter” shall have the meaning assigned to it under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 or any modification thereof. Newly introduced.
2 (1) (i) “securities” shall have the meaning assigned to it under the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or any modification thereof except units of a mutual Fund. Newly introduced.
2 (1) (j) “specified” means specified by the Board in writing. Newly introduced.
2 (1) (k) “takeover regulations” means the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 and any amendments thereto.
2 (1) (l) “trading” means and includes subscribing, buying, selling, dealing, or agreeing to subscribe,buy, sell, deal in any securities, and “trade” shall be construed accordingly.

Notes:

Under the parliamentary mandate, since the Section 12A (e) and Section 15G of the Act employs the term ‘dealing in securities’, it is intended to widely define the term “trading” to include dealing. Such a construction is intended to curb the activities based on unpublished price sensitive information which are strictly not buying, selling or subscribing, such as pledging etc when in possession of unpublished price sensitive information.

Newly introduced.

This is in line with explanation (a) to Section 195(1) of the Companies Act, 2013.

2 (1) (m) “trading day” means a day on which the recognized stock exchanges are open for trading. Newly introduced.
2 (1) (n) “unpublished price sensitive information” means any information ,relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities and shall, ordinarily including but not restricted to, informationrelating to the following: –(i) financial results;

(ii) dividends;

(iii) change in capital structure

(iv) mergers, de-mergers, acquisitions, delistings, disposals and expansion of business and such other transactions;

(v) changes in key managerial personnel; and

(vi) material events in accordance with the listing agreement.

NOTE:

It is intended that information relating to a company or securities, that is not generally available would be unpublished price sensitive information if it is likely to materially affect the price upon coming into the public domain. The types of matters that would ordinarily give rise to unpublished price sensitive information have been listed above to give illustrative guidance of unpublished price sensitive information.

2 (1) (ha) “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.

Explanation.—The following shall be deemed to be price sensitive information :—

(i) periodical financial results of the company;

(ii) intended declaration of dividends (both interim and final);

(iii) issue of securities or buy-back of securities;

(iv) any major expansion plans or execution of new projects.

(v) amalgamation, mergers or takeovers;

(vi) disposal of the whole or substantial part of the undertaking;

(vii) and significant changes in policies, plans or operations of the company;

 

2 (1) k) “unpublished” means information which is not published by the company or its agents and is not specific in nature.

Explanation.—Speculative reports in print or electronic media shall not be considered as published information.

 

2 (1) (i)relative” means a person, as defined in section 6 of the Companies Act, 1956 (1 of 1956);

 

2 (1) (j) “stock exchange” means a stock exchange which is recognised by the Central Government or Securities and Exchange Board of India under section 4 of Securities Contracts(Regulation) Act, 1956 (42 of 1956);

 

Now UPSI includes information not only about the company but also its securities. Use of words ‘directly or indirectly’ in the definition, seems out of context.

However, explanation (b) to Section 195(1) of the Companies Act, 2013 refers to information about company only.

2 (1) (l) “working day” shall mean the working day when the regular trading is permitted on the concerned stock exchange where the securities of the company are listed. Now term ‘trading day’ is used in the regulation.
Words and expressions used and not defined in these regulations but defined in the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Securities Contracts (Regulation) Act, 1956 (42 of 1956), the Depositories Act, 1996 (22 of 1996) or the Companies Act, 2013 (18 of 2013) and rules and regulations made thereunder shall have the meanings respectively assigned to them in those legislation. Hence, several terms like officer, stock exchange not defined, which were defined under 1992 regulations.
CHAPTER-II: RESTRICTIONS ON COMMUNICATION AND TRADING BY INSIDERS
Communication or procurement of unpublished price sensitive information.3 (1) No insider shall communicate, provide, or allow access to any unpublished price sensitive information, relating to a company or securities listed or proposed to be listed, to any person including other insiders except where such communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations.NOTE: This provision is intended to cast an obligation on all insiders who are essentially persons in possession of unpublished price sensitive information to handle such information with care and to deal with the information with them when transacting their business strictly on a need-to-know basis. It is also intended to lead to organisations developing practices based on need-to-know principles for treatment of information in their possession.

 

CHAPTER II: PROHIBITION ON DEALING, COMMUNICATION OR COUNSELLING

3. Prohibition on dealing, Communicating or counselling on matters relating to insider trading.

No insider shall—

(i) 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;

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.

 

 

For trading in securities by ‘insider’ separate provision (regulation 4) in 2015 regulations.

New regulation 3 is more practical as in place of words ‘ordinary course of business’ it uses words ‘in furtherance of legitimate purposes, performance of duties or discharge of legal obligation’.

 

Regulation 3 is a charging provision.

 

Regulation 3(1) defines duties of insider.

 

Compliance officer need to ensure to inform about this regulation to all ‘insiders’. Earlier restriction was on dealing. Now, restriction is also on communication. Restriction on trading is in regulation 4.

 

 

Words ‘relating to a company or proposed to be listed’ prima facie seems unwarranted – as definition of UPSI covers information relating to company or its securities. Probably, by including these words again here (with addition of words ‘or proposed to be listed’) is to make it clear that information relating to securities need not be restricted to only those securities which are listed on stock exchange(s).

 

 

 

(2) No person shall procure from or cause the communication by any insider of unpublished price sensitive information,relating to a company or securities listed or proposed to be listed, except in furtherance of legitimate purposes, performance of duties or discharge of legal obligations.NOTE: This provision is intended to impose a prohibition on unlawfully procuring possession of unpublished price sensitive information. Inducement and procurement of unpublished price sensitive information not in furtherance of one’s legitimate duties and discharge of obligations would be illegal under this provision.

 

Regulation 3(2) provides that no person shall instigate insider to communicate UPSI. It also prohibits every person from procuring UPSI.

Procuring or inducing to procure UPSI from insider could be on (more) count of offence, during prosecution.

Earlier obligation was on ‘insider’ not to counsel UPSI to any person, and such person shall not deal in securities.

Thus, new regulation is more clear and wider in scope.

 

(3) Notwithstanding anything contained in this regulation, an unpublished price sensitive information may be communicated, provided, allowed access to or procured,in connection with a transaction that would:–(i) entail an obligation to make an open offer under the takeover regulations where the board of directors of the company is of informed opinion that the proposed transaction is in the best interests of the company.

NOTE: It is intended to acknowledge the necessity of communicating, providing, allowing access to or procuring UPSI for substantial transactions such as takeovers, mergers and acquisitions involving trading in securities and change of control to assess a potential investment. In an open offer under the takeover regulations, not only would the same price be made available to all shareholders of the company but also all information necessary to enable an informed divestment or retention decision by the public shareholders is required to be made available to all shareholders in the letter of offer under those regulations.

(ii) not attract the obligation to make an open offer under the takeover regulations but where the board of directors of the company is of informed opinion that the proposed transaction is in the best interests of the company and the information that constitute unpublished price sensitive information is disseminated to be made generally available atleast two trading days prior to the proposed transaction being effected in such form as the board of directors may determine.

NOTE: It is intended to permit communicating, providing, allowing access to or procuring UPSI also in transactions that do not entail an open offer obligation under the takeover regulations if it is in the best interests of the company. The board of directors, however, would cause public disclosures of such unpublished price sensitive information well before the proposed transaction to rule out any information asymmetry in the market.

 

Regulation 3 (3)(i): It provides exception to Regulation 3 (1)i.e. cases where insider may communicate UPSI or cases where any person may procure UPSI from insider.While regulation 3(3)(i) provides that the exception would be in case of ‘takeover’ under SEBI Takeover Regulations, note given thereunder also speaks of ‘mergers and acquisitions’! Further note indicates that the instance of takeover under regulation 3(3)(i) is only one of the species, by use of words ‘such as’.

Regulation 3(3)(ii) covers cases where no open offer under Takeover Regulation is required (say in case of mergers and acquisition or change in control) the Board of Directors of company if of opinion that the purpose of transaction (merger and acquisition) is in interest of the company – then UPSI shall be disseminated in such manner as the Board of Directors decides, at least two trading days prior to the proposed transaction. It may be noted that two trading days is minimum time prescribed.

 

(4) For purposes of sub-regulation (3), the board of directors shall require the parties to execute agreements to contract confidentiality and non-disclosure obligations on the part of such parties and such parties shall keep information so received confidential, except for the purpose of sub-regulation (3), and shall not otherwise trade in securities of the company. Regulation 3(4) makes it mandatory in cases covered under Regulation 3(3) to –(a) enter into contract of confidentiality and Non-Disclosure Agreement; and

(b) contracting parties shall (i) keep information confidential; and (ii) not to trade in securities.

 

Trading when in possession of unpublished price sensitive information.4 (1) No insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information:

Provided that the insider may prove his innocence by demonstrating the circumstances including the following : –

(i) the transaction is an off-market inter-se transfer between promoters who were in possession of the same unpublished price sensitive information without being in breach

of regulation 3 and both parties had made a conscious and informed trade decision.

(ii) in the case of non-individual insiders: –

(a) the individuals who were in possess ion of such unpublished price sensitive information were different from the individuals taking trading decisions and such decision making individuals were not in possession of such unpublished price sensitive information when they took the decision to trade; and

(b) appropriate and adequate arrangement s were in place to ensure that these regulations are not violated and no unpublished price sensitive information was communicated by the individuals possessing the information to the individuals taking trading decisions and there is no evidence of such arrangements having been breached.

(iii) the trades were pursuant to a trading plan set up in accordance with regulation 5.

NOTE: When a person who has traded in securities has been in possession of unpublished price sensitive information, his trades would be presumed to have been motivated by the knowledge and awareness of such information in his possession. The reasons for which he trades or the purposes to which he applies the proceeds of the transactions are not intended to be relevant for determining whether a person has violated the regulation. He traded when in possession of unpublished price sensitive information is what would need to be demonstrated at the outset to bring a charge. Once this is established, it would be open to the insider to prove his innocence by demonstrating the circumstances mentioned in the proviso, failing which he would have violated the prohibition.

(2) In the case of connected persons the onus of establishing, that they were not in possession of unpublished price sensitive information, shall be on such connected persons and in other cases, the onus would be on the Board.

(3) The Board may specify such standards and requirements, from time to time, as it may deem necessary for the purpose of these regulations.

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.

Regulation 3A not to apply in certain cases:

3B. (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 :

(a) 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

(b) 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.

(c) 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

(d) 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 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.

Regulation 4 is a charging provision.Regulation 4(1) prohibits insider from trading in securities when in possession of UPSI. Proviso thereto gives three exceptions, when insider can trade in securities, while in possession of UPSI.

Para (ii) of Regulation 4(1) is corresponding to Regulations 3A and 3B of 1992 Regulations.

Trading Plans.5 (1) An insider shall be entitled to formulate a trading plan and present it to the compliance officer for approval and public disclosure pursuant to which trades may be carried out on his behalf in accordance with such plan.

NOTE:

This provision intends to give an option to persons who may be perpetually in possession of unpublished price sensitive information and enabling them to trade in securities in a compliant manner. This provision would enable the formulation of a trading plan by an insider to enable him to plan for trades to be executed in future. By doing so, the possession of unpublished price sensitive information when a trade under a trading plan is actually executed would not prohibit the execution of such trades that he had pre-decided even before the unpublished price sensitive information came into being.

 

As per Regulation 4, insider, who is perpetually in possession of UPSI may not be able to trade. For such insider, relief is given in regulation 5.
(2) Such trading plan shall:–(i) not entail commencement of trading on behalf of the insider earlier than six months from the public disclosure of the plan;

NOTE:

It is intended that to get the benefit of a trading plan, a cool-off period of six months is necessary. Such a period is considered reasonably long for unpublished price sensitive information that is in possession of the insider when formulating the trading plan, to become generally available. It is also considered to be a reasonable period for a time lag in which new unpublished price sensitive information may come into being without adversely affecting the trading plan formulated earlier. In any case, it should be remembered that this is only a statutory cool-off period and would not grant immunity from action if the insider were to be in possession of the same unpublished price sensitive information both at the time of formulation of the plan and implementation of the same.

(ii) not entail trading for the period between the twentieth trading day prior to the last day of any financial period for which results are required to be announced by the issue of securities and the second trading day after the closure of such financial results.

NOTE:

Since the trading plan is envisaged to be an exception to the general rule prohibiting trading by insiders when in possession of unpublished price sensitive information, it is important that the trading plan does not entail trading for a reasonable period around the declaration of financial results as that would generate unpublished price sensitive information.

(iii) entail trading for a period of not less than twelve months.

NOTE

It is intended that it would be undesirable to have frequent announcements of trading plans for short periods of time rendering meaningless the defence of a reasonable time gap between the decision to trade and the actual trade. Hence it is felt that a reasonable time would be twelve months.

(iv) not entail overlap of any period for which another trading plan is already in existence;

NOTE

It is intended that it would be undesirable to have multiple trading plans operating during the same time period. Since it would be possible for an insider to time the publication of the unpublished price sensitive information to make it generally available instead of timing the trades, it is important not to have the ability to initiate more than one plan covering the same time period.

(v) set out either the value of trades to be effected or the number of securities to be traded along with the nature of the trade and the intervals at, or dates on which such trades shall be effected.

NOTE:

It is intended that while regulations should not be too prescriptive and rigid about what a trading plan should entail, they should stipulate certain basic parameters that a trading plan should conform to and within which, the plan may be formulated with full flexibility. The nature of the trades entailed in the trading plan i.e. acquisition or disposal should be set out. The trading plan may set out the value of securities or the number of securities to be invested or divested. Specific dates or specific time intervals may be set out in the plan.

(vi) not entail trading in securities for market abuse.

NOTE

Trading on the basis of such a trading plan would not grant absolute immunity from bringing proceedings for market abuse. For instance, in the event of manipulative timing of the release of unpublished price sensitive information to ensure that trading under a trading plan becomes lucrative in circumvention of regulation 4 being detected, it would be open to initiate proceedings for alleged breach of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Market)Regulations, 2003.

 

Regulation 5(2)(ii) requires that between 20 trading days prior to the last days of any financial period (say 20 trading days prior to 31 March, 30 June, 30 Sept. and 31 Dec.) and 2 trading days after the disclosure of financial results – there shall be no trading by insider even under trading plan. Thus, if financial results for the quarter ending 30 June, no trading shall be done by insiders (even under trading plan) from say 5th June till say 17th July (if financial results for the quarter are declared on 15 July). It may be noted that day of financial closure (30th June in our example) shall not be reckoned in counting 20 trading days, as words used are ‘prior to the last day of any financial period’. So also in counting second trading day, words used are ‘after the closure of such financial results’.

 

In the above example, it is presumed that from 05 June to 29th June, there are 20 trading days and that 16th July and 17th July are also trading days.

(3) The compliance officer shall review the trading plan to assess whether the plan would have any potential for violation of these regulations and shall be entitled to seek such express undertakings as may be necessary to enable such assessment and to approve and monitor the implementation of the plan.

NOTEIt is intended that the compliance officer would have to review and approve the plan. For doing so, he may need the insider to declare that he is not in possession of unpublished price sensitive information or that he would ensure that any unpublished price sensitive information in his possession becomes generally available before he commences executing his trades. Once satisfied, he may approve the trading plan, which would then have to be implemented in accordance with these regulations.

 

Regulation 5 (3) puts obligation on Compliance Officer to review trading plan and also approve the same.

Note under regulation 5(3) suggests that Compliance Officer may obtain declaration from insider that either he is not in possession of UPSI or he would ensure that UPSI becomes generally available before trading in securities! This is against the very purpose of trading plan stated in regulation 5(1) and note thereto!!

(4) The trading plan once approved shall be irrevocable and the insider shall mandatorily have to implement the plan, without being entitled to either deviate from it or to execute any trade in the securities outside the scope of the trading plan.Provided that the implementation of the trading plan shall not be commenced if any unpublished price sensitive information in possession of the insider at the time of formulation of the plan has not become generally available at the time of the commencement of implementation and in such event the compliance officer shall confirm that the commencement ought to be deferred until such unpublished price sensitive information becomes generally available information so as to avoid a violation of sub-regulation (1) of regulation 4.

NOTE

It is intended that since the trading plan is an exception to the general rule that an insider should not trade when in possession of unpublished price sensitive information, changing the plan or trading outside the same would negate the intent behind the exception. Other investors in the market, too, would factor the impact of the trading plan on their own trading decisions and in price discovery. Therefore, it is not fair or desirable to permit the insider to deviate from the trading plan based on which others in the market have assessed their views on the securities.

The proviso is intended to address the prospect that despite the six-month gap between the formulation of the trading plan and its commencement, the unpublished price sensitive information in possession of the insider is still not generally available. In such a situation, commencement of the plan would conflict with the over-riding principle that trades should not be executed when in possession of such information. If the very same unpublished price sensitive information is still in the insider’s possession, the commencement of execution of the trading plan ought to be deferred.

 

Proviso to regulation 5(4) is contrary to reglation 5(4) and note thereto!It may be that there are two categories of insiders. One, having UPSI in possession, perpetually. Two, having UPSI occasionally.

While regulation 5(1) is for former, Regulations 5(3) and (4) are for the later.

However, this aspect is lost site of while drafting regulations 5(3) and (4). And hence, appropriate exception for Regulation 5(1) is required in Regulations 5(3) and (4).

(5) Upon approval of the trading plan, the compliance officer shall notify the plan to the stock exchanges on which the securities are listed.NOTE

It is intended that given the material exception to the prohibitory rule in regulation 4, a trading plan is required to be publicly disseminated. Investors in the market at large would also factor the potential pointers in the trading plan in their own assessment of the securities and price discovery for them on the premise of how the insiders perceive the prospects or approach the securities in their trading plan.

Regulation 5(5) – it is presumed that stock exchanges will disseminate trading plan notified by Compliance Officer to general public (may be by placing it on its website and may be by way of alert on trading terminals).
CHAPTER III General provisions.6 (1) Every public disclosure under this Chapter shall be made in such form as may be specified.

(2) The disclosures to be made by any person under this Chapter shall include those relating to trading by such person’s immediate relatives, and by any other person for whom such person takes trading decisions.

NOTE:

It is intended that disclosure of trades would need to be of not only those executed by the person concerned but also by the immediate relatives and of other persons for whom the person concerned takes trading decisions. These regulations are primarily aimed at preventing abuse by trading when in possession of unpublished price sensitive information and therefore, what matters is whether the person who takes trading decisions is in possession of such information rather than whether the person who has title to the trades is in such possession.

(3) The disclosures of trading in securities shall also include trading in derivatives of securities and the traded value of the derivatives shall be taken into account for purposes of this

Chapter:

Provided that trading in derivatives of securities is permitted by any law for the time being in force.

(4) The disclosures made under this Chapter shall be maintained by the company, for a minimum period of five years, in such form as may be specified.

Disclosure by person, including by his ‘immediate relatives’ and by persons on whose behalf trading decision are taken.
Disclosures by certain persons.7 (1)Initial Disclosures.

(a).Every promoter, key managerial personnel and director of every company whose securities are listed on any recognised stock exchange shall disclose his holding of securities of the company as on the date of these regulations taking effect, to the company within thirty days of these regulations taking effect

(b).Every person on appointment as a key managerial personnel or a director of the company or upon becoming a promoter shall disclose his holding of securities of the company as on the date of appointment or becoming a promoter, to the company within seven days of such appointment or becoming a promoter.

 

Disclosure of interest or holding in listed companies by certain persons – Initial Disclosure]13. (1) Any person who holds more than 5% shares or voting rights in any listed company shall disclose to the company in Form A, the number of shares or voting rights held by such person, on becoming such holder, within 2 working days of :—

(a) the receipt of intimation of allotment of shares; or

(b) 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 in Form B the number of shares or voting rights held and positions taken in derivatives by such person and his dependents (as defined by the company), within two working days of becoming a director or officer of the company.

(2A) Any person who is a promoter or part of promoter group of a listed company shall disclose to the company in Form B the number of shares or voting rights held by such person, within two working days of becoming such promoter or person belonging to promoter group.

 

Continual disclosure.

(3) Any person who holds more than 5% shares for voting rights in any listed company shall disclose to the company in Form C 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 and the stock exchange where the securities are listed in Form D, 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 of such person and his dependents (as defined by the company) from the last disclosure made under sub-regulation (2) or under this sub regulation, and the change exceeds Rs. 5 lakh in value or 25,000 shares or 1% of total shareholding or voting rights, whichever is lower.

(4A) Any person who is a promoter or part of promoter group of a listed company, shall disclose to the company and the stock exchange where the securities are listed in Form D, 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 of such person from the last disclosure made under Listing Agreement or under sub-regulation (2A) or under this sub-regulation, and the change exceeds Rs. 5 lakh in value or 25,000 shares or 1% of total shareholding or voting rights, whichever is lower.

(5) The disclosure mentioned in sub-regulations (3), (4) and (4A) shall be made within two working days of :

(a) the receipts of intimation of allotment of shares, or

(b) 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 two working days of receipt, shall disclose to all stock exchanges on which the company is listed, the information received under sub-regulations (l), (2), (2A), (3), (4) and (4A) in the respective formats specified in Schedule III.

E-filing.

(7) The disclosures required under this regulation may also be made through electronic filing in accordance with the system devised by the stock exchange.

Explanation— For the purposes of sub-regulations (2A) and (4A), the words “promoter” and “promoter group” shall have the same meaning as assigned to them in terms of regulations framed under clause (h) of sub-section (2) of section 11 of the Act.

Regulation 7(1)(a) disclosure on or before 14th June 2015 by: Every promoter, KMP and Directors To: the Company.

Disclosure of holding of securities in the company as on 15th May 2015.

It is a one-time transitory disclosure, to be read with regulation 6(2).

Regulation 7(1)(b): Disclosure upon appointment of KMP or director or upon becoming promoter.

Disclosure by such appointee or promoter to be read with Regulation 6(2).

Disclosure to the Company.

Disclosure of holding of securities as on date of appointment or becoming promoter.

Disclosure shall be made within 7 days.

(2)Continual Disclosures.(a).Every promoter, employee and director of every company shall disclose to the company the number of such securities acquired or disposed of within two trading days of such transaction if the value of the securities traded, whether in one transaction or a series of transactions over any calendar quarter, aggregates to value in excess of ten lakh rupees or such other value as may be specified.

(b).Every company shall notify the particulars of such trading to the stock exchange on which the securities are listed within two trading days of receipt of the disclosure or from becoming aware of such information.

 

Explanation. — It is clarified for the avoidance of doubts that the disclosure of the incremental transactions after any disclosure under this sub-regulation, shall be made when the transactions effected after the prior disclosure cross the threshold specified in clause (a) of sub-regulation (2).

Regulation 7(2) (a) – continual disclosures – by promoter, directors and employees.Disclosure to the company.

Disclosure of number of securities acquired or disposed of.

Disclosure shall be made within 2 trading days if value of trade (including trades made during the quarter) in excess of INR 1 million.

 

Regulation 7(2)(b) – Company shall disclose to the stock exchange(s) within 2 trading days of receipt of disclosure under regulation 7(2)(a) OR within 2 trading days of becoming aware of such information (whichever is earlier).

 

Compliance Officer need to inform all its employees, directors and promoters about this requirement, asap.

 

7 (3) Disclosures by other connected persons.Any company whose securities are listed on a stock exchange may, at its discretion require any other connected person or class of connected persons to make disclosures of holdings and trading in securities of the company in such form and at such frequency as may be determined by the company in order to monitor compliance with these regulations.

NOTE:

This is an enabling provision for listed companies to seek information from those to whom it has to provide unpublished price sensitive information. This provision confers discretion on any company to seek such information.

Newly introduced.
CHAPTER IV CODES OF FAIR DISCLOSURE AND CONDUCT:8 (1) The board of directors of every company, whose securities are listed on a stock exchange, shall formulate and publish on its official website, a code of practices and procedures for fair disclosure of unpublished price sensitive information that it would follow in order to adhere to each of the principles set out in Schedule A to these regulations, without diluting the provisions of these regulations in any manner.

NOTE

This provision intends to require every company

whose securities are listed on stock exchanges to formulate a stated framework and policy for fair disclosure of events and occurrences that could impact price discovery in the market for its securities. Principles such as, equality of access to information, publication of policies such as those on dividend, inorganic growth pursuits, calls and meetings with analysts, publication of transcripts of such calls and meetings, and the like are set out in the schedule.

(2) Every such code of practices and procedures for fair disclosure of unpublished price sensitive information and every amendment thereto shall be promptly intimated to the stock exchanges where the securities are listed.

NOTE:

This provision is aimed at requiring transparent disclosure of the policy formulated in sub-regulation (1)

Part B Schedule IPART B

MODEL CODE OF CONDUCT FOR PREVENTION OF

INSIDER TRADING FOR OTHER ENTITIES

Newly introduced.Though no time frame is prescribed, Board of Directors shall formulate code of fair disclosure and conduct as soon as possible.

And such code shall be –

(a) published on its website; and

(b) intimated to stock exchange(s) promptly.

Formulating the code on priority would be in the interest of the Board of Directors, particularly upon any inquiry by SEBI on ‘insider trading’.

 

Further under Schedule A, para 3, senior officer shall be designated as ‘Chief Investor Relations Officer’, to deal with dissemination and disclosure of UPSI.

This designation may become misleading to investors as they might think such officer as responsible for resolving their grievances relating to securities.

 

Further under Schedule A, para 7, companies are required to develop best practices to make transcripts or records of proceedings of meetings with analysts and other investor relations conferences on the official website to ensure official confirmation and documentation of disclosures made.

Code of Conduct9 (1) The board of directors of every listed company and market intermediary shall formulate a code of conduct to regulate, monitor and report trading by its employees and other connected persons towards achieving compliance with these regulations, adopting the minimum standards set out in Schedule B to these regulations, without diluting the provisions of these regulations in any manner.

NOTE:

It is intended that every company whose securities are listed on stock exchanges and every market intermediary registered with SEBI is mandatorily required to formulate a code of conduct governing trading by its employees. The standards set out in the schedule are required to be addressed by such code of conduct.

(2) Every other person who is required to handle unpublished price sensitive information in the course of business operations shall formulate a code of conduct to regulate, monitor and report trading by employees and other connected persons towards achieving compliance with these regulations, adopting the minimum standards set out in Schedule B to these regulations, without diluting the provisions of these regulations in any manner.

NOTE:

This provision is intended to mandate persons other than listed companies and market intermediaries that are required to handle unpublished price sensitive information to formulate a code of conduct governing trading in securities by their employees. These entities include professional firms such as auditors, accountancy firms, law firms, analysts, consultants etc., assisting or advising listed companies, market intermediaries and other capital market participants. Even entities that normally operate outside the capital market may handle unpublished price sensitive information. This provision would mandate all of them to formulate a code of conduct.

 

CHAPTER IV: POLICY ON DISCLOSURES AND INTERNAL PROCEDURE FOR PREVENTION OF INSIDER TRADING

Code of internal procedures and conduct for listed companies and other entities.

12 (1) All listed companies and organisations associated with securities markets including :

(a) the intermediaries as mentioned in section 12 of the Act, asset management company and trustees of mutual funds.

(b)the self-regulatory organisations recognised or authorised by the Board;

(c)the recognised stock exchanges and clearing house or corporations;

(d) the public financial institutions as defined in section 4A of the Companies Act, 1956; and

(e) 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 thereto the Model Code specified in Schedule I of these Regulations without diluting it in any manner and ensure compliance of the same.

(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.

(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) 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.

 

 

Every listed company, market intermediary and other persons formulating a code of conduct shall identify and designate a compliance officer to ensure proper compliance of code of conduct. Apart from company every person who is handling unpublished price sensitive information shall also formulate a code of conduct and report the same to the compliance officer so appointed.In particular, companies need to note the following:

(i) Schedule B – Para 3 – Employees and connected persons designated on the basis of their functional role (“designated persons”) in the organisation shall be governed by an internal code of conduct governing dealing in securities.

The board of directors shall in consultation with the compliance officer specify the designated persons to be covered by such code on the basis of their role and function in the organisation. Due regard shall be had to the access that such role and function would provide to unpublished price sensitive information in addition to seniority and professional designation.

(ii) Schedule B – para 5 – ‘Trading window’ shall also be applicable to any person having contractual or fiduciary relation with the company, such as auditors, accountancy firms, law firms, analysts, consultants etc., assisting or advising the company.

(iii) Schedule B – para 6 (trading by designated persons during trading window), para 9 (execution of pre-cleared trades within not more than 7 days by designated persons) and para 10 (no contra trade by designated person within atleast 6 months).

 

(3) Every listed company, market intermediary and other persons formulating a code of conduct shallidentify anddesignate a compliance officer to administer the code of conduct and other requirements under these regulations.NOTE

This provision is intended to designate a senior officer as the compliance officer with the responsibility to administer the code of conduct and monitor compliance with these regulations.

 

Regulation 9(3) – identify and designate ‘Compliance Officer’ asap.
CHAPTER V – MISCELLANEOUSSanction for violations.

10. Any contravention of these regulations shall be dealt with by the Board in accordance with the Act.

 

 

Violation of provisions relating to insider trading.4. Any insider who deals in securities in contravention of the provisions of regulation 3 or 3A shall be guilty of insider trading.

 

CHAPTER III

INVESTIGATION

Power to make inquiries and inspection.

4A. (1) If the Board suspects that any person has violated any provision of these regulations, it may make inquiries with such persons or any other person as mentioned in clause (i) of sub-section (2) of

section 11 as deemed fit, to form a prima facie opinion as to whether there is any violation of these regulations.

(2) The Board may appoint one or more officers to inspect the books and records of insider(s) or any other persons as mentioned in clause (i) of sub-section (2) of section 11 for the purpose of subregulation (1).

 

Board’s right to investigate.

5. (1) Where the Board, is of prima facie opinion that it is necessary to investigate and inspect the books of account, either records and documents of an insider 30[or any other person mentioned in clause (i) of sub-section (1) of section 11 of the Act] for any of the purposes specified in subregulation (2), it may appoint an investigating authority for the said purpose.

(2) The purpose referred to in sub-regulation (1) may be as follows:

(a) to investigate into the complaints received from investors, intermediaries or any other person on any matter having a bearing on the allegations of insider trading; and

(b) to investigate suo-motu upon its own knowledge or information in its possession to protect the interest of investors in securities against breach of these regulations.

 

Procedure for investigation.

6. (1) Before undertaking any investigation under regulation 5, the Board shall give a reasonable notice to insider for that purpose.

(2) Notwithstanding anything contained in sub-regulation (1), where the Board is satisfied that in the interest of investors or in public interest no such notice should be given, it may by an order in writing direct that the investigation be taken up without such notice.

(3) On being empowered by the Board, the investigation authority shall undertake the investigation and inspection of books of account and the insider against whom an investigation is being carried out an insider or any other person mentioned in clause (i) of sub-section (1) of section 11 of the Act shall be bound to discharge his obligations as provided in regulation 7.

 

Obligations of insider on investigation by the Board.

7. (1) It shall be the duty of every insider, who is being investigated or any other person mentioned in clause (i) of sub-section (1) of section 11 of the Act, to produce to the investigating authority such books, accounts and other documents in his custody or control and furnish the authority with the statements and information relating to the transactions in securities market within such time as the said authority may require.

(2) The insider or any other person mentioned in clause (i) of sub-section (2) of section 11 of the Act shall allow the investigating authority to have reasonable access to the premises occupied by such insider and also extend reasonable facility for examining any books, records, documents and computer data in the possession of the stock-broker or any other person and also provide copies of documents or other materials which in the opinion of the investigating authority are relevant.

(3) The investigating authority, in the course of investigation, shall be entitled to examine or record statements of any member, director, partner, proprietor and employee of the insider or any other person mentioned in clause (i) of sub-section (2) of section 11 of the Act.

(4) It shall be the duty of every director, proprietor, partner, officer and employee of the insider to give to the investigating authority all assistance in connection with the investigation, which the insider or any other person mentioned in clause (i) of sub-section (2) of section 11 of the Act may be reasonably expected to give.

 

Submission of Report to the Board.

8. The investigating authority shall, within reasonable time of the conclusion of the investigation, submit an investigation report to the Board.

 

Communications of findings, etc.

9. (1) The Board shall, after consideration of the investigation report communicate the findings to the person suspected to be involved in insider trading or violation of these regulations.

(2) The person to whom such findings has been communicated shall reply to the same within 21 days; and

(3) On receipt of such a reply or explanation, if any, from such person, the Board may take such measures as it deems fit to protect the interests of the investors and in the interests of the securities

market and for the due compliance of the provisions of the Act, the regulations made thereunder including the issue of directions under regulation 11.

 

Appointment of Auditor.

10. Notwithstanding anything contained in 40[regulation 4A and] regulation 5, the Board may appoint a qualified auditor to investigate into the books of account or the affairs of the insider or any other person mentioned in clause (i) of sub-section (1) of section 11 of the Act:

Provided that, the auditor so appointed shall have the same powers of the inspecting authority as stated in regulation 5 and the insider shall have the obligations specified in regulation 7.

 

Directions by the Board.

11. 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 investor and in the interests of the securities market and for due compliance with the provisions of the Act, regulation made thereunder issue any or all of the following order, namely :

(a) 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;

(b) 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;

(c) restraining the insider to communicate or counsel any person to deal in securities;

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

(e) 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;

(f) 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.

 

Manner of service of summons and notice issued by the Board.

11A. A summons or notice issued by the Board under these regulations may be served in the manner provided in regulation 22 of the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002.

 

Action in case of default.

14. Without prejudice to the directions under regulation 11, if any person violates provisions of these regulations, he shall be liable for appropriate action under Sections 11, 11B, 11D, Chapter VIA and Section 24 of the Act.

 

Appeal to the Securities Appellate Tribunal.

15. Any person aggrieved by an order of the Board under these regulations may prefer an appeal to the Securities Appellate Tribunal.

Newly introduced under these regulations.
Power to remove difficulties.11. In order to remove any difficulties in the interpretation or application of the provisions of these regulations, the Board shall have the power to issue directions through guidance notes or circulars:

Provided that where any direction is issued by the Board in a specific case relating to interpretation or application of any provision of these regulations, it shall be done only after

affording a reasonable opportunity of being heard to the concerned persons and after recording reasons for the direction.

 

SEBI may issue directions through guidance notes or circulars to remove any difficulties in the interpretation or application of the provisions of these regulations.Such directions may be general or in a specific case.
Repeal and Savings.12 (1) The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 are hereby repealed.

(2) Notwithstanding such repeal,—

(a) the previous operation of the repealed regulations or anything duly done or suffered thereunder, any right, privilege ,obligation or liability acquired, accrued or incurred under the repealed regulations, any penalty, forfeiture or punishment incurred in respect of any offence committed against the repealed regulations, or any investigation, legal proceeding or remedy in respect of any such right, privilege, obligation, liability, penalty, forfeiture or punishment as aforesaid, shall remain unaffected as if the repealed regulations had never been repealed; and

(b) anything done or any action taken or purported to have been done or taken including any adjudication, enquiry or investigation commenced or show-cause notice issued under the repealed regulations prior to such repeal, shall be deemed to have been done or taken under the corresponding provisions of these regulations.

(3) After the repeal of Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992, any reference thereto in any other regulations made, guidelines or circulars issued thereunder by the Board shall be deemed to be a reference to the corresponding provisions of these regulations

Newly introduced.
SCHEDULE A[See sub-regulation (1) of regulation 8]

Principles of Fair Disclosure for purposes of Code of Practices and Procedures for Fair Disclosure of Unpublished Price Sensitive

Information

1. Prompt public disclosure of unpublished price sensitive information that would impact price discovery no sooner than credible and concrete information comes into being in order to make such information generally available.

2. Uniform and universal dissemination of unpublished price sensitive information to avoid selective disclosure.

3. Designation of a senior officer as a chief investor relations officer to deal with dissemination of information and disclosure of unpublished price sensitive information.

4. Prompt dissemination of unpublished price sensitive information that gets disclosed selectively, inadvertently or otherwise to make such information generally available.

5. Appropriate and fair response to queries on news reports and requests for verification of market rumours by regulatory authorities.

6. Ensuring that information shared with analysts and research personnel is not unpublished price sensitive information.

7. Developing best practices to make transcripts or records of proceedings of meetings with analysts and other investor relations conferences on the official website to ensure official confirmation and documentation of disclosures made.

8. Handling of all unpublished price sensitive information on a need-to-know basis.

SCHEDULE II[See under regulation 12(2)]

CODE OF CORPORATE DISCLOSURE PRACTICES FOR PREVENTION OF INSIDER TRADING

1.0 Corporate Disclosure Policy

1.1 To ensure timely and adequate disclosure of price sensitive information, the following norms shall be followed by listed companies:—

2.0 Prompt disclosure of price sensitive information

2.1 Price sensitive information shall be given by listed companies to stock exchanges and disseminated on a continuous and immediate basis.

2.2 Listed companies may also consider ways of supplementing information released to stock exchanges by improving Investor access to their public announcements.

3.0 Overseeing and co-ordinating disclosure

3.1 Listed companies shall designate a senior official (such as compliance officer) to oversee corporate disclosure.

3.2 This official shall be responsible for ensuring that the company complies with continuous disclosure requirements. Overseeing and co-ordinating disclosure of price sensitive information to stock exchanges, analysts, shareholders and media and educating staff on disclosure policies and procedure.

3.3 Information disclosure/dissemination may normally be approved in advance by the official designated for the purpose.

3.4 If information is accidentally disclosed without prior approval, the person responsible may inform the designated officer immediately, even if the information is not considered price sensitive.

4.0 Responding to market rumours

4.1 Listed companies shall have clearly laid down procedures for responding to any queries or requests for verification of market rumours by exchanges.

4.2 The official designated for corporate disclosure shall be responsible for deciding whether a public announcement is necessary for verifying or denying rumours and then making the disclosure.

5.0 Timely Reporting of shareholdings/ownership and changes in ownership

5.1 Disclosure of shareholdings/ownership by major shareholders and disclosure of changes in ownership as provided under any Regulations made under the Act and the listing agreement shall be made in a timely and adequate manner.

Disclosure/dissemination of Price Sensitive Information with special reference to Analysts,

Institutional Investors

6.0 Listed companies should follow the guidelines given hereunder while dealing with analysts and institutional investors:—

(i) Only Public information to be provided – Listed companies shall provide only public

information to the analyst/research persons/large investors like institutions. Alternatively, the information given to the analyst should be simultaneously made public at the earliest.

(ii) Recording of discussion – In order to avoid misquoting or misrepresentation, it is desirable that at least two company representative be present at meetings with Analysts, brokers or Institutional Investors and discussion should preferably be recorded.

(iii) Handling of unanticipated questions – A listed company should be careful when dealing with analysts’ questions that raise issues outside the intended scope of discussion. Unanticipated questions may be taken on notice and a considered response given later. If the answer includes

price sensitive information, a public announcement should be made before responding.

(iv) Simultaneous release of Information – When a company organises meetings with analysts, the company shall make a press release or post relevant information on its website after every such meet. The company may also consider live webcasting of analyst meets.

7.0 Medium of disclosure/dissemination

(i) Disclosure/dissemination of information may be done through various media so as to achieve maximum reach and quick dissemination.

(ii) Corporates shall ensure that disclosure to stock exchanges is made promptly.

(iii) Corporates may also facilitate disclosure through the use of their dedicated Internet website.

(iv) Company websites may provide a means of giving investors a direct access to analyst briefing material, significant background information and questions and answers.

(v) The information filed by corporates with exchanges under continuous disclosure requirement may be made available on the company website.

8.0 Dissemination by stock exchanges

(i) The disclosures made to stock exchanges may be disseminated by the exchanges to investors in a quick and efficient manner through the stock exchange network as well as through stock

exchange websites.

(ii) Information furnished by the companies under continuous disclosure requirements, should be published on the website of the exchange instantly.

(iii) Stock exchanges should make immediate arrangement for display of the information furnished by the companies instantly on the stock exchange website.

Newly introduced.
SCHEDULE B[See sub-regulation (1) and sub-regulation (2) of regulation 9]

Minimum Standards for Code of Conduct to Regulate, Monitor and Report Trading by Insiders.

1.The compliance officer shall report to the board of directors and in particular, shall provide reports to the Chairman of the Audit Committee, if any, or to the Chairman of the board of directors at such frequency as may be stipulated by the board of directors.

2. All information shall be handled within the organisation on a need-to-know basis and no unpublished price sensitive information shall be communicated to any person except in furtherance of the insider’s legitimate purposes, performance of duties or discharge of his legal obligations. The code of conduct shall contain norms for appropriate Chinese Walls procedures, and processes for permitting any designated person to “cross the wall”.

3. Employees and connected persons designated on the basis of their functional role (“designated persons”) in the organisation shall be governed by an internal code of conduct governing dealing in securities. The board of directors shall in consultation with the compliance officer specify the designated persons to be covered by such code on the basis of their role and function in the organisation. Due regard shall be had to the access that such role and function would provide to unpublished price sensitive information in addition to seniority and professional designation.

4. Designated persons may execute trades subject to compliance with these regulations.

Towards this end, a notional trading window shall be used as an instrument of monitoring trading by the designated persons. The trading window shall be closed when the compliance officer determines that a designated person or class of designated persons can reasonably be expected to have possession of unpublished price sensitive information. Such closure shall be imposed in relation to such securities to which such unpublished price sensitive information relates. Designated persons and their immediate relatives shall not trade in securities when the trading window is closed.

5. The timing for re-opening of the trading window shall be determined by the compliance officer taking into account various factors including the unpublished price sensitive information in question becoming generally available and being capable of assimilation by the market, which in any event shall not be earlier than forty-eight hours after the information becomes generally available. The trading window shall also be applicable to any person having contractual or fiduciary relation with the company, such as auditors, accountancy firms, law firms, analysts, consultants etc., assisting or advising the company.

6. When the trading window is open, trading by designated persons shall be subject to pre-clearance by the compliance officer, if the value of the proposed trades is above such thresholds as the board of directors may stipulate. No designated person shall apply for pre-clearance of any proposed trade if such designated person is in possession of unpublished price sensitive information even if the trading window is not closed.

7. The compliance officer shall confidentially maintain a list of such securities as a “restricted list” which shall be used as the basis for approving or rejecting applications for pre-clearance of trades.

8. Prior to approving any trades, the compliance officer shall be entitled to seek declarations to the effect that the applicant for pre-clearance is not in possession of any unpublished price

sensitive information. He shall also have regard to whether any such declaration is reasonably capable of being rendered inaccurate.

9. The code of conduct shall specify any reasonable timeframe, which in any event shall not be more than seven trading days, within which trades that have been pre-cleared have to be executed by the designated person, failing which fresh pre-clearance would be needed for the trades to be executed.

10. The code of conduct shall specify the period, which in any event shall not be less than six months, within which a designated person who is permitted to trade shall not execute a contratrade. The compliance officer may be empowered to grant relaxation from strict application of such restriction for reasons to be recorded in writing provided that such relaxation does not violate these regulations. Should a contra trade be executed, inadvertently or otherwise, in violation of such a restriction, the profits from such trade shall be liable to be disgorged for remittance to the Board for credit to the Investor Protection and Education Fund administered by the Board under the Act.

11. The code of conduct shall stipulate such

formats as the board of directors deems necessary for making applications for pre-clearance, reporting of trades executed, reporting of decisions not to trade after securing pre-clearance, recording of reasons for such decisions and for reporting level of holdings in securities at such intervals as may be determined as being necessary to monitor compliance with these regulations.

12. Without prejudice to the power of the Board under the Act, the code of conduct shall stipulate the sanctions and disciplinary actions, including wage freeze, suspension etc., that may be imposed, by the persons required to formulate a code of conduct under sub-regulation (1) and sub-regulation(2) of regulation9, for the contravention of the code of conduct.

13. The code of conduct shall specify that in case it is observed by the persons required to formulate a code of conduct under

sub-regulation (1) and sub-regulation (2) of regulation 9, that there has been a violation of these regulations, they shall inform the Board promptly.

SCHEDULE I[Under regulation 12(1)]

PART A

MODEL CODE OF CONDUCT FOR PREVENTION OF INSIDER TRADING FOR LISTED COMPANIES

1.0 Compliance Officer

1.1 The listed company has appointed a Compliance Officer senior level employee who shall report to the Managing Director/Chief Executive Officer.

1.2 The compliance officer shall be responsible for setting forth policies, procedures, monitoring adherence to the rules for the preservation of “Price Sensitive Information”, pre-clearing; of designated employees’ and their dependents’ trades (directly or through respective department heads as decided by the company), monitoring of trades and the implementation of the code of conduct

under the overall supervision of the Board of the listed company.

Explanation : For the purpose of this Schedule, the term ‘designated employee’ shall include :—

(i) officers comprising the top three tiers of the company management;

(ii) the employees designated by the company to whom these trading restrictions shall be

applicable, keeping in mind the objectives of this code of conduct.

1.3 The compliance officer shall maintain a record of the designated employees and any changes made in the list of designated employees.

1.4 The compliance officer shall assist all the employees in addressing any clarifications regarding

the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 and

the company’s code of conduct.

2.0 Preservation of “Price Sensitive Information”

2.1 Employees/directors shall maintain the confidentiality of all Price Sensitive Information.

Employees/Directors shall 67[not] pass on such information to any person directly or indirectly by

way of making a recommendation for the purchase or sale of securities.

2.2 Need to know

2.2-1 Price Sensitive Information is to be handled on a “need to know” basis, i.e., Price Sensitive Information should be disclosed only to those within the company who need the information to discharge their duty.

2.3 Limited access to confidential information

2.3.1 Files containing confidential information shall be kept secure. Computer files must have adequate security of login and password etc.

3.0 Prevention of misuse of “Price Sensitive Information”

3.1 All directors/officers and designated employees of the company shall be subject to trading restrictions as enumerated below.

3.2 Trading window

3.2.1 The 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 information referred to in para 3.2.3 is unpublished.

3.2.2 When the trading window is closed, the employees/directors shall not trade in the company’s securities in such period.

3.2.3 The trading window shall be, inter alia, closed at the time :—

(a) Declaration of financial results (quarterly, half-yearly and annually).

(b) Declaration of dividends (interim and final).

(c) Issue of securities by way of public/rights/bonus etc.

(d) Any major expansion plans or execution of new projects.

(e) Amalgamation, mergers, takeovers and buy-back.

(f) Disposal of whole or substantially whole of the undertaking.

(g) Any changes in policies, plans or operations of the company.

 

3.2.3A The time for commencement of closing of trading window shall be decided by the company.

3.2-4 The trading window shall be opened 24 hours after the information referred to in para 3.2.3 is made public.

3.2-5 All directors/officers/designated employees of the company shall conduct all their dealings in the securities of the Company only in a valid trading window and shall not deal in any transaction

involving the purchase or sale of the company’s securities during the periods when trading window is closed, as referred to in para 3.2.3 or during any other period as may be specified by the Company from time to time.

3.2-6 In case of ESOPs, exercise of option may be allowed in the period when the trading window is closed. However, sale of shares allotted on exercise of ESOPs shall 69[not] be allowed when trading window is closed.

3.3 Pre-clearance of trades

3.3.1 All directors/officers/designated employees of the company and their dependents as defined by the company who intend to deal in the securities of the company (above a minimum threshold

limit to be decided by the company) should pre-clear the transaction as per the pre-dealing procedure as described hereunder.

3.3.2 An application may be made in such form as the company may notify in this regard, to the Compliance Officer indicating the estimated number of securities that the designated employee/officer/director intends to deal in, the details as to the depository with which he has a security account, the details as to the securities in such depository mode and such other details as may be required by any rule made by the company in this behalf.

3.3.3 An undertaking shall be executed in favour of the company by such designated

employee/director/officer incorporating, inter alia, the following clauses, as may be applicable :

(a) That the employee/director/officer does not have any access or has not received “Price Sensitive Information” upto the time of signing the undertaking.

(b) That in case the employee/director/officer has access to or receives “Price Sensitive Information” after the signing of the undertaking but before the execution of the transaction he/she shall inform the Compliance Officer of the change in his position and that he/she would completely refrain from dealing in the securities of the company till the time such information becomes public.

(c) That he/she has not contravened the code of conduct for prevention of insider trading as notified by the company from time to time.

(d) That he/she has made a full and true disclosure in the matter.

4.0 Other restrictions

4.1 All directors/officers/designated employees and their dependents (as defined by the company) shall execute their order in respect of securities of the company within one week after the approval of pre-clearance is given. If the order is not executed within one week after the approval is given, the employee/director must pre-clear the transaction again.

4.2 All directors/ officers/ designated employees who buy or sell any number of shares of the company shall not enter into an opposite transaction i.e. sell or buy any number of shares during the next six months following the prior transaction. All directors/ officers/ designated employees shall also not take positions in derivative transactions in the shares of the company at any time.

In the case of subscription in the primary market (initial public offers), the above mentioned entities shall hold their investments for a minimum period of 30 days. The holding period would commence when the securities are actually allotted.

4.3 In case the sale of securities is necessitated by personal emergency, the holding period may be waived by the compliance officer after recording in writing his/her reasons in this regard.

5.0 Reporting Requirements for transactions in securities

5.1 All directors/officers/designated employees of the listed company shall be required to forward following details of their securities transactions including the statement of dependent family members (as defined by the company) to the Compliance Officer:

(a) all holdings in securities of that company by directors/officers/designated employees at the time of joining the company;

(b) periodic statement of any transactions in securities (the periodicity of reporting may be defined by the company. The company may also be free to decide whether reporting is required for trades where pre-clearance is also required); and

(c) annual statement of all holdings in securities.

5.2 The Compliance Officer shall maintain records of all the declarations in the appropriate form

given by the directors/officers/designated employees for a minimum period of three years.

5.3 The Compliance Officer shall place before the Managing Director/Chief Executive Officer or a committee specified by the company, on a monthly basis all the details of the dealing in the securities by employees/director/officer of the company and the accompanying documents that such persons had executed under the pre-dealing procedure as envisaged in this code.

6.0 Penalty for contravention of code of conduct

6.1 Any employee/officer/director who trades in securities or communicates any information for trading in securities in contravention of the code of conduct may be penalised and appropriate action may be taken by the company.

6.2 Employees/officers/directors of the company who violate the code of conduct shall also be subject to disciplinary action by the company, which may include wage freeze, suspension, ineligible for future participation in employee stock option plans, etc.

6.3 The action by the company shall not preclude SEBI from taking any action in case of violation of SEBI (Prohibition of Insider Trading) Regulations, 1992.

7.0 Information to SEBI in case of violation of SEBI (Prohibition of Insider Trading)

Regulations, 1992

7.1 In case it is observed by the company/Compliance Officer that there has been a violation of SEBI (Prohibition of Insider Trading) Regulations, 1992. SEBI shall be informed by the company.

 

 

Newly introduced.
PART BMODEL CODE OF CONDUCT FOR PREVENTION OF

INSIDER TRADING FOR OTHER ENTITIES

1.0 Compliance Officer

1.1 The organisation/firm has a Compliance Officer (senior level employee) reporting to the

Managing Partner/Chief Executive Officer.

1.2 The Compliance Officer shall be responsible for setting forth policies and procedures and

monitoring adherence to the rules for the preservation of “Price Sensitive Information”, pre-clearing of all designated employees and their dependents trades (directly or through respective department heads as decided by the organisation/firm), monitoring of trades and the implementation of the code of conduct under the overall supervision of the partners/proprietors.

1.3 The Compliance Officer shall also assist all the employees/directors/partners in addressing any clarifications regarding SEBI (Prohibition of Insider Trading) Regulations, 1992 and the organisation/firm’s code of conduct.

1.4 The Compliance Officer shall maintain a record of the designated employees and any changes made in the list of designated employees.

2.0 Preservation of “Price Sensitive Information”

2.1 Employees/directors/partners shall maintain the confidentiality of all Price Sensitive Information. Employees/directors/partners must not pass on such information directly or indirectly by way of making a recommendation for the purchase 76[or] sale of securities.

2.2 Need to know

2.2.1 Price Sensitive Information is to be handled on a “need to know” basis, i.e., Price Sensitive Information should be disclosed only to those within the organisation/firm who need the information to discharge their duty and whose possession of such information will not give rise to a conflict of interest or appearance of misuse of the information.

2.3 Limited access to confidential information

2.3-1 Files containing confidential information shall be kept secure. Computer files must have adequate security of login and password etc.

2.4 Chinese Wall

2.4.1 To prevent the misuse of confidential information the organisation/firm shall adopt a “Chinese

Wall” policy which separates those areas of the organisation/firm which routinely have access to confidential information, considered “inside areas” from those areas which deal with sale/marketing/investment advise or other departments providing support services, considered

“public areas”.

2.4.2 The employees in the inside area shall not communicate any Price Sensitive Information to any one in public area.

2.4.3 The employees in inside area may be physically segregated from employees in public area.

2.4.4 Demarcation of the various departments as inside area may be implemented by the organisation/firm.

2.4.5 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 compliance officer.

3.0 Prevention of misuse of Price Sensitive Information

3.1 Employees/directors/partners shall not use Price Sensitive Information to buy or sell securities of any sort, whether for their own account, their relative’s account, organisation/firm’s account or a client’s account. The following trading restrictions shall apply for trading in securities.

3.2 Pre-clearance of trades

3.2.1 All directors/officers/designated employees of the organisation/firm who intend to deal in the securities of the client company (above a minimum threshold limit to be determined by the organisation/firm) shall pre-clear the transactions as per the pre-dealing procedure as described hereunder.

3.2.2 An application may be made in such form as the organisation/firm may specify in this regard, to the Compliance Officer indicating the name and estimated number of securities that the designated employees/director/partner intends to deal in, the details as to the depository with which he has a security account the details as to the securities in such depository mode and such other details as may be required by any rule made by the organisation/firm in this behalf.

3.2.3 An undertaking shall be executed in favour of the organisation/firm by such designated employee/partners/directors incorporating, inter alia, the following clauses, as may be applicable:

(i) That the designated employee/director/partner does not have any access or has not received any “Price Sensitive Information” upto the time of signing the undertaking.

(ii) That in case the designated employee/director/partner has access to or receives “Price Sensitive Information” after the signing of the undertaking but before the execution of the transaction he/she shall inform the Compliance Officer of the change in his position and that he/she would completely refrain from dealing in the securities of the client company till the time such information becomes public.

(iii) That he/she has not contravened the code of conduct for prevention of insider trading as specified by the organisation/firm from time to time.

(iv) That he/she has made a full and true disclosure in the matter.

4.0 Restricted/Grey list

4.1 In order to monitor chinese wall procedures and trading in client securities based on inside information, the organisation/firm shall restrict trading in certain securities and designate such list as

restricted/grey list.

4.2 Security of a listed company shall be put on the restricted/grey list if the organisation/firm is handling any assignment for the listed company or is preparing appraisal report or is handling credit rating assignment and is privy to Price Sensitive Information.

4.3 Any security which is being purchased or sold or is being considered for purchase or sale by the organisation/firm on behalf of its clients/schemes of mutual funds, etc. shall be put on the restricted/grey list.

4.4 As the restricted list itself is a highly confidential information it shall not be communicated directly, or indirectly to anyone outside the organisation/firm. The Restricted List shall be

maintained by Compliance Officer.

4.5 When any securities are on the Restricted List-trading in these securities by designated employees/directors/partners may be blocked or may be disallowed at the time of pre-clearance.

5.0 Other restrictions

5.1 All directors/designated employees/partners shall execute their order within one week after the approval of pre-clearance is given. If the order is not executed within one week after approval is given the employee/director/partners must pre clear the transaction again.

5.2 All directors/officers/designated employees/partners shall hold their investments for a minimum period of 30 days in order to be considered as being held for investment purposes.

5.3 The holding period shall also apply to purchases in the primary market (IPOs). In the case of IPOs, the holding period would commence when the securities are actually allotted.

5.4 In case the sale of securities is necessitated by personal emergency, the holding period may be waived by the Compliance Officer after recording in writing his/her reasons in this regard.

5.5 Analysts, if any, employed with the organisation/firm while preparing research reports of a client company(s) shall disclose their shareholdings/interest in such company(s) to the Compliance Officer.

5.6 Analysts who prepare research report of a listed company shall not trade in securities of that company for thirty days from preparation of such report.

6.0 Reporting Requirements for transactions in securities

6.1 All directors/designated employees/partners of the organisation/firm shall be required to forward following details of their securities transactions including the statement of dependent family members (as defined by the organisation/firm) to the Compliance Officer:—

(a) all holdings in securities by directors/officers/designated employees/partners at the time of

joining the organisation;

(b) periodic statement of any transactions in securities (the periodicity of reporting may be defined by the firm or organisation. The organisation/firm may also be free to decide whether reporting is required for trades where pre-clearance is also required;

(c) annual statement of all holdings in securities.

6.2 The Compliance Officer shall maintain records of all the declarations given by the

directors/designated employees/partners in the appropriate form for a minimum period of three years.

6.3 The Compliance Officer shall place before the Chief Executive Officer/Partner or a committee notified by the organisation/firm, on a monthly basis all the details of the dealing in the securities by designated employees/directors/partners of the organisation/firm and the accompanying documents that such persons had executed under the pre-dealing procedure as envisaged in this code.

7.0 Penalty for contravention of code of conduct

7.1 Any employee/partner/director who trades in securities or communicates any information or counsels any person trading in securities, in contravention of the code of conduct may be penalised and appropriate action may be taken by the organisation/firm.

7.2 Employees/partners/directors of the organisation/firm who violate the code of conduct may also be subject to disciplinary action by the company, which may include wage freeze, suspension, etc.

7.3 The action by the organisation/firm shall not preclude SEBI from taking any action in case of violation of SEBI (Prohibition of Insider Trading) Regulations, 1992.

8.0 Information to SEBI in case of violation of SEBI (Prohibition of Insider Trading)

Regulations

8.1 In case it is observed by the organisation/firm/compliance officer that there has been a violation of these Regulations, SEBI shall be informed by the organisation/firm.

9.0 Listed intermediaries to comply with both Parts A and B of Schedule I

9.1 The intermediaries such as credit rating agencies, Asset Management Companies, or broking companies etc. whose securities are listed in recognised stock exchange shall comply with both Part A and Part B of this Schedule in respect of its own securities and client’s securities.

 

Section 24 Power of Securities and Exchange Board to regulate issue and transfer of securities, etc.

CHAPTER III
PROSPECTUS AND ALLOTMENT OF SECURITIES
[Sections 23 to 42]

Provisions of the Companies Act, 2013:
Section 24: Power of Securities and Exchange Board to regulate issue and transfer of securities, etc.
For this provision, no rules are prescribed the Companies Rules, 2013.
[Section 24 is brought to force with effect from September 12, 2013].

Corresponding provisions of the Companies Act, 1956:
Section 55A.

Corresponding provisions of the English Companies Act, 2006:
No such provision.

Applicability:
This section is sets jurisdiction of Securities and Exchange Board of India (SEBI) and the Central Government (i.e. Ministry of Corporate Affairs or MCA).

Legal provisions relating to issue of securities, transfer of securities and non-payment of dividend as contained in Sections 25 to 42, 43 to 72 and section 127 of the Companies Act 2013 shall be administered as under:
(a) in case of listed companies or those companies which intend to get their securities listed on any recognised stock exchange in India, be administered by SEBI by making regulations in this behalf (SEBI shall frame regulations so far as the Companies Act 2013 do not contain provisions in this regard); and
(b) in case of other companies, by MCA.

All powers relating to all other matters (other than issue of securities, transfer of securities and non-payment of dividend) relating to prospectus, return of allotment, redemption of preference shares and any other matter specifically provided in this Act, shall be exercised by MCA, the Tribunal or the Registrar, as the case may be ((Explanation to Section 24(1) )).

SEBI shall, in respect of issue of securities, transfer of securities, non-payment of dividend ((section 24(1) )) and forward dealing and insider trading ((delegated to SEBI under proviso to sub-section (1) of section 458)), exercise the powers conferred upon it under sub-sections (1), (2A), (3) and (4) of section 11, sections 11A, 11B and 11D of the Securities and Exchange Board of India Act, 1992 ((Section 24(2) )).