SEBI (Prohibition of Insider Trading) Regulations, 2015

What this chapter covers

This chapter carries 6 per cent of the III-A examination.

LEARNING OBJECTIVES. After studying this chapter, you should know about:

• Prohibition on dealing, communication or counselling in securities when in possession of insider information.
• Disclosures and internal procedure for prevention of insider trading.
• Code of conduct for prevention of insider trading.
• Preservation of Price Sensitive Information.
• Trading plan.
• Reporting requirements for transaction in securities.

7.1 Why the regulations exist

Any dealing/trading done by an insider based on information which is not available in the public domain gives an undue advantage to insiders and affects market integrity. This is not in line with the principle of fair and equitable markets. Put simply, the insider plays with the cards face up. Everyone else plays blind.

The regulations mainly provide for who can be insiders, what is prohibited for them and the systemic provisions/ fair conduct policy which needs to be laid down and followed by listed companies as well as intermediaries.

The second review question captures the three prohibitions. Insiders are barred from dealing, communicating and counselling alike.

Insider and connected person

The regulations define "insider" as any person who is a connected person or in possession of or having access to unpublished price sensitive information.

Two routes in — connection, or possession. Neither requires the other.

Who is a connected person? In plain words, it is anyone close enough to the company to get UPSI, now or in the last six months. The full definition is long:

Connected person means: any person who is or has been, during the six months prior to the concerned act, associated with a company, in any capacity, directly or indirectly, 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, whether temporary or permanent, with the company, that allows such a person, directly or indirectly, access to unpublished price sensitive information or is reasonably expected to allow such access.

Six months, and access is the test.

Twelve deemed categories, each deemed to be connected persons unless the contrary is established:

• (a) a relative of connected persons.
• (b) a holding company or associate company or a subsidiary company.
• (c) an intermediary as specified in section 12 of the Act or an employee or director thereof.
• (d) an investment company, trustee company, asset management company or an employee or director thereof.
• (e) an official of a stock exchange or clearing house or corporation.
• (f) a member of the board of trustees of a mutual fund or a member of the board of directors of the asset management company of a mutual fund or is an employee thereof.
• (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.
• (h) an official or an employee of a self-regulatory organization recognized or authorized by the SEBI.
• (i) a banker of the company.
• (j) a concern, firm, trust, Hindu undivided family, company or association of persons wherein a director of a company or his relative or banker of the company, has more than ten per cent of the holding or interest.
• (k) a firm or its partner or its employee in which a connected person... is also a partner.
• (l) a person sharing household or residence with a connected person.

But the presumption can be answered. 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.

The purpose is stated. This definition is also intended to bring into its ambit persons who may seemingly not 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.

Key definitions

Compliance officer — Regulation 2(c). He is any senior officer, designated so and reporting to the board of directors or head of the organization in case the board is not there. He must be one who is financially literate and is capable of appreciating requirements for legal and regulatory compliance under these regulations. He 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.

And "financially literate" is defined. It means a person who has the ability to read and understand basic financial statements i.e., balance sheet, profit and loss account, and statement of cash flows.

Generally available information — Regulation 2(e). It is information that is accessible to the public on a non-discriminatory basis and shall not include unverified event or information reported in print or electronic media.

The fourth review question quotes this definition. Also, information published on the website of a stock exchange would ordinarily be considered generally available.

Immediate relative — Regulation 2(f). It is 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 decisions relating to trading in securities.

Note the qualifier. A parent, sibling or child counts only if dependent financially or if he consults such person. A spouse is included unconditionally.

Where does the burden lie? It moves in two steps. First, 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... be on the person leveling the charge. Then the person who has traded... may demonstrate that he was not in such possession or that he has not traded or he could not access or that his trading... was squarely covered by the exonerating circumstances.

UPSI — Regulation 2(n)

UPSI is price-moving news that the public does not yet have. The definition: 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. It ordinarily includes:

• (i) financial results.
• (ii) dividends.
• (iii) change in capital structure.
• (iv) mergers, de-mergers, acquisitions, delisting, disposals and expansion of business, award or termination of order/contracts not in the normal course of business.
• (v) changes in key managerial personnel, other than due to superannuation or end of term, and resignation of a Statutory Auditor or Secretarial Auditor.
• (vi) change in rating(s), other than ESG rating(s).
• (vii) fund raising proposed to be undertaken.
• (viii) agreements... which may impact the management or control of the company.
• (ix) fraud or defaults by the company, its promoter, director, key managerial personnel, or subsidiary or arrest of key managerial personnel, promoter or director... whether occurred within India or abroad.
• (x) resolution plan/ restructuring or one-time settlement in relation to loans/borrowings from banks/financial institutions.
• (xi) admission of winding-up petition... and admission of application by the Tribunal... for initiation of corporate insolvency resolution process... under the Insolvency and Bankruptcy Code, 2016.
• (xii) initiation of forensic audit... for detecting mis-statement in financials, misappropriation/ siphoning or diversion of funds and receipt of final forensic audit report.
• (xiii) action(s) initiated or orders passed within India or abroad, by any regulatory, statutory, enforcement authority or judicial body.
• (xiv) outcome of any litigation(s) or dispute(s) which may have an impact on the company.
• (xv) giving of guarantees or indemnity or becoming a surety... not in the normal course of business.
• (xvi) granting, withdrawal, surrender, cancellation or suspension of key licenses or regulatory approvals.

Sixteen heads. Two carve-outs are worth noting. Changes in KMP count other than due to superannuation or end of term. Rating changes count other than ESG rating(s).

Regulation 3 — communication and procurement

Regulation 3(1). An insider shall not 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, the performance of duties or discharge of legal obligations.

Note "including other insiders" — being an insider does not entitle you to be told.

The principle behind it. Organisations must develop practices based on "need-to-know" principles for treatment of confidential information in their possession.

Which is the third review question — need to know.

Regulation 3(2). No person shall procure from or cause the communication by any insider of unpublished price sensitive information... except in furtherance of legitimate purposes, the performance of duties or discharge of legal obligations.

One prohibition on giving; one on taking.

Regulation 3(2A) requires the board to make a policy for the determination of "legitimate purposes" as a part of "Codes of Fair Disclosure and Conduct" formulated under regulation 8. What is a legitimate purpose? The term shall include sharing of unpublished price sensitive information in the ordinary course of business by an insider with partners, collaborators, lenders, customers, suppliers, merchant bankers, legal advisors, auditors, insolvency professionals or other advisors or consultants. There is a catch. It applies only provided that such sharing has not been carried out to evade or circumvent the prohibitions of these regulations.

Regulation 3(2B). Any person in receipt of unpublished price sensitive information pursuant to a "legitimate purpose" shall be considered an "insider"... and due notice shall be given to such persons to maintain the confidentiality.

Receiving legitimately makes you an insider too.

Regulation 3(3) permits sharing in two kinds of deal.

Two trading days of prior disclosure where there is no open offer.

Regulation 3(4) requires agreements to contract confidentiality and non-disclosure obligations. The parties must keep the information confidential and must not otherwise trade.

The structured digital database

Regulation 3(5). Think of it as a logbook of who knew what. The board of directors or head(s) of the organization of every person required to handle unpublished price sensitive information shall ensure that a structured digital database is maintained. It contains:

• the nature of unpublished price sensitive information.
• the names of such persons who have shared the information.
• the names of such persons with whom information is shared under this regulation along with the Permanent Account Number (PAN) or any other identifier authorized by law.

And its integrity. Such databases shall not be outsourced and shall be maintained internally with adequate internal controls and checks such as time stamping and audit trails to ensure non-tampering of the database.

Not outsourced, time-stamped, audit-trailed.

Timing. Entry of information, not emanating from within the organisation, in structured digital database may be done not later than 2 calendar days from the receipt of such information.

Retention — Regulation 3(6). The data is preserved for not less than 8 years after completion of the transaction. And in the event of any investigation or enforcement proceedings, relevant information in the structured digital database shall be preserved till the completion of proceedings.

Regulation 4 — trading

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.

And a presumption. 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.

Six exonerating circumstances:

(i) an off-market inter-se transfer between insiders 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. This holds provided the UPSI was not obtained under regulation 3(3). Such off-market trades shall be reported by the insiders to the company within two working days. The company shall then notify the particulars of such trades to the stock exchange... within two trading days from receipt of the disclosure.

(ii) a transaction... carried out through the block deal window mechanism on the same conditions.

(iii) the transaction in question was carried out pursuant to a statutory or regulatory obligation to carry out a bona fide transaction.

(iv) the transaction... undertaken pursuant to the exercise of stock options in respect of which the exercise price was pre-determined in compliance with applicable regulations.

(v) in the case of non-individual insiders — the individuals who were in possession of such unpublished price sensitive information were different from the individuals taking trading decisions. Also, appropriate and adequate arrangements were in place, with no evidence of such arrangements having been breached.

That is the Chinese wall defence, available only to non-individuals.

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

Regulation 5 — trading plans

An insider shall be entitled to formulate a "Trading Plan" and present it to the compliance officer for approval and public disclosure.

The plan shall:

• not entail commencement of trading on behalf of the insider earlier than one hundred and twenty calendar days from the public disclosure of the plan.
• not entail overlap of any period for which another trading plan is already in existence.
• set out following parameters for each trade. These are listed below.
• not entail trading in securities for market abuse.

The parameters for each trade:

• Either the value of trade to be effected or the number of securities to be traded.
• Nature of the trade.
• Either specific date or time period not exceeding five consecutive trading days.
• A price limit, that is an upper price limit for a buy trade and a lower price limit for a sell trade.

The price limit must sit within a set range:

120 days, five trading days, twenty per cent.

The compliance officer shall review the Trading Plan to assess whether the plan would have any potential for violation. He may seek such express undertakings as may be necessary. Two reliefs follow. First, pre-clearance of trades shall not be required for a trade executed as per an approved trading plan. Second, trading window norms shall not be applicable for trades carried out in accordance with an approved trading plan.

Irrevocability. Once approved, there is no turning back. The Trading Plan once approved shall be irrevocable and the insider shall mandatorily have to implement the plan, without being entitled to either execute any trade in the securities outside the scope of the trading plan or to deviate from it except due to permanent incapacity or bankruptcy or operation of law.

Three excuses only — permanent incapacity, bankruptcy, operation of law.

Two conditions on execution. First, implementation 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. Second, where a price limit is set, the insider shall execute the trade only if the execution price of the security is within such limit. If price of the security is outside the price limit set by the insider, the trade shall not be executed.

Approval timeline. The compliance officer shall approve or reject the trading plan within two trading days of receipt of the trading plan. He must also notify the approved plan to the stock exchanges... on the day of approval.

Informants — Regulations 7A to 7K

An informant is a whistle-blower who tips off SEBI. 'Informant' means an individual(s), who voluntarily submits to the SEBI a Voluntary Information Disclosure Form relating to an alleged violation of insider trading laws that has occurred, is occurring or has a reasonable belief that it is about to occur... regardless of whether such individual(s) satisfies the requirements, procedures and conditions to qualify for a reward.

The regulations cover:

• Submission (7B).
• SEBI's action (7C).
• Eligibility for a reward (7D).
• Determination of the amount (7E).
• Application and rejection (7F and 7G).
• Informant confidentiality (7H).

Protection against retaliation — 7I. Every person required to have a Code of Conduct must ensure it provides for suitable protection against any discharge, termination, demotion, suspension, threats, harassment, directly or indirectly or discrimination against any employee who files a Voluntary Information Disclosure Form. This applies irrespective of whether the information is considered or rejected by the SEBI or he or she is eligible for a Reward.

Protected acts include:

• Filing the form.
• Testifying in, participating in, or otherwise assisting or aiding the Board.
• Breaching any confidentiality agreement or provisions of any terms and conditions of employment or engagement solely to prevent any employee from cooperating with the Board.

"Employee" means any individual who during employment may become privy to information relating to violation of insider trading laws and files a Voluntary Information Disclosure Form. He must be a director, partner, regular or contractual employee, but does not include an advocate.

The employee need not show that the Board has taken up any enforcement action. Nor must he show that the information qualifies as Original Information.

Remedies. The informant may approach the competent court or tribunal for appropriate relief. An employer who violates the chapter may be liable for penalty, debarment, suspension, and/or criminal prosecution by the Board. But nothing in these regulations will require the Board to direct reinstatement or compensation by an employer.

Void agreements — 7J. Any term in an agreement (oral or written) or Code of Conduct, is void in so far as it purports to preclude any person, other than an advocate, from submitting to the Board information relating to the violation of the securities laws. No person shall by way of any threat or act impede an individual from communicating with the Board. And no employer shall require an employee to notify him of any Voluntary Information Disclosure Form filed with the Board or to seek its prior permission or consent.

Regulation 8 — Code of Fair Disclosure

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. It must follow the principles in Schedule A. And every amendment thereto shall be promptly intimated to the stock exchanges.

Schedule A principles:

• Prompt public disclosure of unpublished price sensitive information that would impact price discovery no sooner than credible and concrete information comes into being.
• uniform and universal dissemination... to avoid selective disclosure.
• designation of a senior officer as a chief investor relations officer.
• prompt dissemination of unpublished price sensitive information that gets disclosed selectively, inadvertently or otherwise.
• appropriate and fair response to queries on news reports and requests for verification of market rumours by regulatory authorities.
• ensuring that information shared with analysts and research personnel is not unpublished price sensitive information.
• developing best practices to make transcripts or records of proceedings of meetings with analysts and other investor relations conferences on the official website.
• handling of all unpublished price sensitive information on a need-to-know basis.

7.2 Regulation 9 — Code of Conduct

The board of directors of every listed company and the board of directors or head(s) of the organisation of every intermediary shall ensure that the chief executive officer or managing director shall formulate a code of conduct with their approval. Its job is to regulate, monitor and report trading by its designated persons and immediate relatives of designated persons. It adopts Schedule B (in case of a listed company) and Schedule C (in case of an intermediary).

A listed intermediary uses both. It applies Schedule B with respect to trading in their securities and Schedule C with respect to trading in other securities.

Regulation 9(2) extends the duty to every other person who is required to handle unpublished price sensitive information in the course of business operations. They adopt Schedule C. Professional firms such as auditors, accountancy firms, law firms, analysts, insolvency professional entities, consultants, banks etc., assisting or advising listed companies shall be collectively referred to as fiduciaries.

Regulation 9(3). Every such person shall identify and designate a compliance officer to administer the code of conduct.

Regulation 9(4) — who are designated persons? They are chosen on the basis of their role and function in the organisation and the access that such role and function would provide to unpublished price sensitive information in addition to seniority and professional designation. They shall include:

• (i) Employees... designated on the basis of their functional role or access to unpublished price sensitive information.
• (ii) Employees of material subsidiaries on the same basis.
• (iii) All promoters of listed companies and promoters who are individuals or investment companies for intermediaries or fiduciaries.
• (iv) Chief Executive Officer and employees up to two levels below Chief Executive Officer... irrespective of their functional role in the company or ability to have access to unpublished price sensitive information.
• (v) Any support staff... such as IT staff or secretarial staff who have access to unpublished price sensitive information.

Note (iv). The top three tiers are designated automatically, whatever their access.

Regulation 9A — institutional mechanism

The Chief Executive Officer, Managing Director or such other analogous person... shall put in place an adequate and effective system of internal controls.

Six internal controls:

• all employees who have access to unpublished price sensitive information are identified as a designated person.
• all the unpublished price sensitive information shall be identified and its confidentiality shall be maintained.
• adequate restrictions shall be placed on communication or procurement.
• lists of all employees and other persons with whom unpublished price sensitive information is shared shall be maintained and confidentiality agreements shall be signed or notice shall be served.
• all other relevant requirements... shall be complied with.
• periodic process review to evaluate the effectiveness of such internal controls.

Oversight. The board shall ensure that the Chief Executive Officer or the Managing Director... ensures compliance. Then the Audit Committee of a listed company or other analogous body for intermediary or fiduciary shall review compliance... at least once in a financial year. It shall verify that the systems for internal control are adequate and are operating effectively.

Leak inquiries — 9A(5). Every listed company shall have written policies and procedures for inquiry in case of leak of unpublished price sensitive information or suspected leak, approved by the board. It shall inform the Board promptly of such leaks, inquiries and results of such inquiries.

Whistle-blowing — 9A(6). The listed company shall have a whistle-blower policy and make employees aware of such policy to enable employees to report instances of leaks.

And cooperation — 9A(7). The relevant intermediaries and fiduciaries shall co-operate with the listed company in connection with such inquiry.

Schedule B — key standards

The compliance officer shall report to the board of directors. In particular, he shall provide reports to the Chairman of the Audit Committee... at such frequency as may be stipulated by the board of directors but not less than once in a year.

All information shall be handled within the organisation on a need-to-know basis, with norms for appropriate Chinese Walls procedures and processes for permitting any designated person to "cross the wall".

The trading window. Picture a shop shutter the compliance officer pulls down. A notional trading window shall be used as an instrument of monitoring the 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 UPSI. Designated persons and their immediate relatives shall not trade in securities when the trading window is closed.

A fixed closure applies around results. Trading restriction period shall be made applicable from the end of every quarter till 48 hours after the declaration of financial results. The gap between clearance of accounts by the audit committee and board meeting should be as narrow as possible and preferably on the same day to avoid leakage of material information.

Exceptions to the window restriction. Three kinds of trade may go ahead:

• The exonerating transactions in clauses (i) to (iv) and (vi) of the proviso to sub-regulation (1) of regulation 4.
• A pledge of shares for a bonafide purpose such as raising of funds, subject to pre-clearance by the compliance officer.
• Transactions under SEBI regulations such as acquisition by conversion of warrants or debentures, subscribing to rights issue, further public issue, preferential allotment or tendering of shares in a buy-back offer, open offer, delisting offer.

Re-opening. The compliance officer decides the date, which in any event shall not be earlier than forty-eight hours after the information becomes generally available.

Pre-clearance. 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.

The first review question quotes this — True.

Before approving, 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 must also have regard to whether any such declaration is reasonably capable of being rendered inaccurate.

Execution window. It is not more than seven trading days, within which trades that have been pre-cleared have to be executed... failing which fresh pre-clearance would be needed.

Contra trade. A contra trade is a reverse trade — selling soon after buying, or buying soon after selling. The period shall not be less than six months, within which a designated person who is permitted to trade shall not execute a contra trade. Relaxation is possible for reasons to be recorded in writing. If the rule is breached, 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. But this shall not be applicable for trades pursuant to the exercise of stock options.

Sanctions. The code shall stipulate the sanctions and disciplinary actions, including a wage freeze, suspension recovery, clawback etc. Amounts collected are remitted to the Board for credit to the Investor Protection and Education Fund.

Reporting violations. Where a violation is observed, the company shall promptly inform the stock exchange(s) where the concerned securities are traded.

Annual disclosures by designated persons. They give names and Permanent Account Number or any other identifier of:

• a) immediate relatives.
• b) persons with whom such designated person(s) shares a material financial relationship.
• c) Phone, mobile and cell numbers which are used by them.

They also give, on a one-time basis, the names of educational institutions from which designated persons have graduated and the names of their past employers.

Material financial relationship means a relationship in which one person is a recipient of any kind of payment such as by way of a loan or gift from a designated person during the immediately preceding twelve months, equivalent to at least 25% of the annual income of such designated person. It shall exclude relationships in which the payment is based on arm's length transactions.

And a process point. Listed entities shall have a process for how and when people are brought 'inside' on sensitive transactions.

Schedule C — intermediaries and fiduciaries

Broadly the same, with three differences worth noting.

A restricted list. 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.

Pre-clearance without a trading window. Schedule C has no notional trading window clause. Instead, trading by designated persons shall be subject to pre-clearance by the compliance officer(s) if the value of the proposed trades is above such thresholds as the board of directors or head(s) of the organisation may stipulate.

A shorter contra trade period for mutual fund units. The general period is not less than six months for a designated person who is a connected person of the listed company. But in case of dealing in the units of mutual funds, the code of conduct shall specify the period, which in any event shall not be less than two months.

7.3 The compliance officer

The Compliance Officer is required to maintain all the documents as required under these Regulations. He is also required to frame a code of fair disclosure and conduct in line with the model code specified under Schedule A. Listed intermediaries adopt Schedule B with respect to trading in their own securities and in Schedule C with respect to trading in other securities. And every compliance specified in the Regulations is normally the responsibility of the Compliance Officer.

SEBI's FAQs were first issued on April 29, 2021. They were revised and updated on March 31, 2023. They are grouped under ten headings:

The cases

Case 7.1 — Palred Technologies. Two UPSI periods were alleged, over a slump sale and a special dividend. SEBI narrowed both. The NDA signified only the commencement of the due diligence process, there was every possibility of the deal being scrapped anytime. So UPSI I began not at the NDA but on May 9, 2013. UPSI II began on October 4, 2013, not on the date of the preliminary decision.

Findings varied by person. The Chairman cannot be held to have violated Regulation 3(i)... as he has not traded using inside information. A relative who purchased only 17,500 shares worth little over 2 lakhs was cleared. The reason: considering her financial capacity and the pattern of her trading... it cannot be said that the acquisition is on account of UPSI.

The Khwaja group was held liable. A co-promoter relationship in another company created a business relationship with PTL. As SEBI put it, one cannot distinguish between the company and its promoter. And the overall pattern of trading... wherein a short period of two and half months, the group invested more than Forty-Nine Lakh rupees for 3,24,001 shares... confirms the distinct likelihood of the trades being based on the communication of UPSI.

A finance department employee was held liable. An independent director was not. The board agenda was circulated on October 7, 2013, and nothing showed earlier knowledge. A Facebook acquaintance was cleared too, because although facebook-connection backed by trading patterns raises a cloud of suspicion, this by itself is not sufficient to hold someone guilty of a serious violation like Insider Trading.

Order. Debarment for a period of three years from the market and from association with any listed company, with disgorgement by several noticees.

Case 7.2 — Shruti Vora (SAT). Quarterly results were circulated on WhatsApp before official disclosure. This led to search and seizure operations of 26 entities and about 190 devices. A penalty of Rs 15 lakhs followed under Section 15G. SAT set it aside for three reasons. First, despite great efforts by SEBI to find out the source of information, no information could be recovered. Second, the messages may have originated in a brokerage house or from platforms of Bloomberg which are in public domain. Third, SEBI failed to prove any preponderance of probabilities that the impugned messages were unpublished price sensitive information, that the appellant knew that it was unpublished price sensitive information and with the said knowledge they or any of them had passed the said information to other parties.

Case 7.3 — Piramal Enterprises (SAT). There were two charges. One was sharing information with persons not required to know. The other was failing to close the trading window. On the first, SAT found the information was given only on a 'need to know' basis. The recipient was a promoter and a "deemed to be connected person" who had to give an undertaking relating to multiple Clauses in the BTA like non-compete provision for 8 years.

On the second, the breach was established. The trading window had to remain closed for 24 hours further to the disclosure to the stock exchange but at no point of time, the trading window was closed. PEL argued that only the compliance officer was responsible. That failed: the sale of a division of a company is not a routine matter... the PEL has to decide the trigger point in such matters. Once, the PEL decides the trigger date then the onus can be passed on to the Compliance Officer.

But the penalty was set aside as disproportionate. Even though the trading window was not closed, there was no trading of the scrips by any of the designated employees of the PEL nor any pre-clearance requests were received. So PEL ensured compliance with the substance of the Model Code. SAT's formulation: SEBI is the watchdog and not a bulldog. If there is an infraction of a rule, remedial measures should be taken in the first instance and not punitive measures. The imposition of penalty is converted into one of warning.

Case 7.4 — the compliance officer of Kwality. Promoters and directors traded without disclosures. They executed contra trades within six months and traded during trading window closure. Profits were not remitted to the fund. The compliance officer had received weekly information from the RTA and analysed the same. But he did not take any action on various violations of the code of conduct by the promoter, directors and designated persons.

His defence was that he reported to the managing director. It was rejected: when the promoter and managing director, to whom he was reporting, non-executive director and designated persons of the Company were themselves non-compliant, prudently and ethically, Mr Srivastava could have brought the non-compliances observed by him to the attention of the Company board or independent director or committee of independent directors or stock exchange or SEBI.

Penalty: Rs 2 lakh.

The chapter's review questions confirm four points:

• Pre-clearance applies when the trading window is open and the trade value exceeds the board's threshold — True.
• The regulations prohibit dealing, communicating and counselling alike.
• Organisations must work on a need to know basis.
• Generally available information means information accessible to the public on a non-discriminatory basis.