SEBI (Prohibition of Insider Trading) Regulations, 2015

What this chapter covers

This chapter carries about 6 per cent of the III-C 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. In order to protect the integrity of the market, the SEBI (Prohibition of Insider Trading) Regulations have been put in place.

These regulations aim to put in place a framework for the prohibition of insider trading in securities and to strengthen the legal framework. 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.

Three things are prohibited — dealing, communicating and counselling. That is the second review question, answered All of the above.

Who is an insider?

The regulations define "insider" as any person who is a connected person or in possession of or having access to unpublished price sensitive information.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 limbs, and either suffices. A person may be an insider by connection, or simply by possession.

The first limb of the definition is long. In short, it catches anyone whose link with the company, in the last six months, gives access to UPSI.

Six months back, and by any capacity, direct or indirect — including frequent communication with its officers.

Then twelve deemed categories. 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) a relative of connected persons specified in clause (i); or

(b) a holding company or associate company or a 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 clearing house or corporation; or

(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; 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 recognized or authorized by the SEBI; 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 relative or banker of the company, has more than ten per cent of the holding or interest; or

(k) a firm or its partner or its employee in which a connected person specified in sub-clause (i) of clause (d) is also a partner; or

(l) a person sharing household or residence with a connected person specified in sub-clause (i) of clause (d).

"Unless the contrary is established" — the presumption is rebuttable. As the Regulations explain, 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.

And the purpose: 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... 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.

Who bears the burden? 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... 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.

SEBI must show possession first; then the trader may rebut.

Three definitions to know exactly

Compliance officer — Regulation 2(c). In plain terms, he is a senior, financially literate officer who reports to the board and runs the insider trading controls. The full wording:

And "financially literate" shall mean 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). "Generally available information" means 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.

That is the fourth review question — generally available information.

And a useful example: information published on the website of a stock exchange would ordinarily be considered generally available.

Note the exclusion — unverified event or information reported in print or electronic media does not count. A newspaper rumour does not make information public.

Immediate relative — Regulation 2(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 decisions relating to trading in securities.

The spouse is always included; the others only if financially dependent or if they consult the person on trading.

Unpublished price sensitive information — Regulation 2(n)

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, information relating to the following:

(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 and such other transactions;

(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, by whatever name called, 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 of the company, 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 filed by any party /creditors and admission of application by the Tribunal filed by the corporate applicant or financial creditors for initiation of corporate insolvency resolution process against the company as a corporate debtor, approval of resolution plan or rejection thereof under the Insolvency and Bankruptcy Code, 2016;

(xii) initiation of forensic audit, by whatever name called, by the company or any other entity 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 against the company or its directors, key managerial personnel, promoter or subsidiary, in relation to the company;

(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, by whatever named called, for any third party, by the company not in the normal course of business;

(xvi) granting, withdrawal, surrender, cancellation or suspension of key licenses or regulatory approvals.

Sixteen heads, and the list is "ordinarily including but not restricted to" — illustrative, not exhaustive.

Two exclusions are worth marking. In (v), a change in KMP other than due to superannuation or end of term — a routine retirement is not UPSI. And in (vi), a rating change other than ESG rating(s).

Regulation 3 — communication and procurement

Regulation 3(1) is the rule on passing information. 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. There is one exception. Sharing is allowed where such communication is in furtherance of legitimate purposes, the performance of duties or discharge of legal obligations.

Even to other insiders — the prohibition is not confined to outsiders.

Its purpose: 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 ensure that organisations develop practices based on "need-to-know" principles for treatment of confidential information in their possession.

That is the third review question — need to know.

Regulation 3(2) states that 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.

So both ends are caught — giving under 3(1), and taking under 3(2). 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(2A) requires the board of a listed company to make a policy for the determination of "legitimate purposes" as a part of "Codes of Fair Disclosure and Conduct" formulated under regulation 8. 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. But there is a condition: provided that such sharing has not been carried out to evade or circumvent the prohibitions of these regulations.

Regulation 3(2B) then closes the loop: any person in receipt of unpublished price sensitive information pursuant to a "legitimate purpose" shall be considered an "insider" for purposes of these regulations and due notice shall be given to such persons to maintain the confidentiality.

Receiving it lawfully makes you an insider too.

Regulation 3(3) permits communication in connection with transactions that would:

(i) entail an obligation to make an open offer under the takeover regulations where the board of directors of the listed company is of informed opinion that the sharing of such information is in the best interests of the company;

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

Note the difference. Where an open offer is triggered, no advance dissemination is required. Where it is not, the information must be made public at least two trading days prior.

Regulation 3(4) requires the board to require the parties to execute agreements to contract confidentiality and non-disclosure obligations, and such parties shall keep information so received confidential... and shall not otherwise trade in securities of the company when in possession of unpublished price sensitive information.

The structured digital database

Regulation 3(5) requires a structured digital database. The board of directors or head(s) of the organisation of every person required to handle UPSI must ensure it is maintained. It records:

• 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.
• Their Permanent Account Number (PAN) or any other identifier authorized by law where PAN is not available.

And: 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.

A two-day rule for outside information: 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.

Regulation 3(6) specifies that a structured digital database is required to be 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.

Eight years, extended by any proceedings.

Regulation 4 — the prohibition on trading

As per Regulation 4, 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 follows: 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.

However, the insider may prove his innocence by demonstrating the circumstances including the following:

(i) The transaction is 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. But such unpublished price sensitive information was not obtained under sub-regulation (3) of regulation 3. And such off-market trades shall be reported by the insiders to the company within two working days. Every company shall notify the particulars of such trades to the stock exchange on which the securities are listed within two trading days from receipt of the disclosure or from becoming aware of such information.

(ii) The transaction was carried out through the block deal window mechanism between persons who were in possession of the unpublished price sensitive information without being in breach of regulation 3 and both parties had made a conscious and informed trade decision — again provided the UPSI was not obtained... under sub-regulation (3) of regulation 3.

(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 in question was 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, two conditions must both be shown:

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

Six defences. Limb (v) is the Chinese wall defence for institutions — and note that it requires both the separation and evidence that the arrangements held.

Regulation 5 — trading plans

(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.

(2) Such Trading Plan shall:

i. 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;

ii. not entail overlap of any period for which another trading plan is already in existence;

iii. set out following parameters for each trade to be executed; (i) either the value of trade to be effected or the number of securities to be traded; (ii) nature of the trade; (iii) either specific date or time period not exceeding five consecutive trading days; (iv) price limit, that is an upper price limit for a buy trade and a lower price limit for a sell trade, subject to this range:

a. for a buy trade: the upper price limit shall be between the closing price on the day before submission of the trading plan and upto twenty per cent higher than such closing price;

b. for a sell trade: the lower price limit shall be between the closing price on the day before submission of the trading plan and upto twenty per cent lower than such closing price.

iv. not entail trading in securities for market abuse.

One hundred and twenty calendar days of cooling-off; five consecutive trading days per trade; twenty per cent price bands.

(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. And two exemptions follow: pre-clearance of trades shall not be required for a trade executed as per an approved trading plan, and trading window norms shall not be applicable for trades carried out in accordance with an approved trading plan.

(4) 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 escapes only — permanent incapacity or bankruptcy or operation of law.

Two further conditions. 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 if the insider has set a price limit for a trade... 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.

(5) The compliance officer shall approve or reject the trading plan within two trading days of receipt of the trading plan and notify the approved plan to the stock exchanges on which the securities are listed, on the day of approval.

Two trading days to decide; same-day notification to the exchanges.

Informants — Regulations 7A to 7K

"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 scheme runs across the regulations. 7B specifies the procedure for submission of original information; 7C requires SEBI to examine the same and initiate necessary action; 7D deals with eligibility of an informant for a reward; 7E with determination of the amount of reward; 7F and 7G with application/rejection of claim for reward; 7H with informant confidentiality; and 7I with protection against retaliation and victimization.

Regulation 7I(1) requires every Code of Conduct to protect employees who help SEBI. The protection is against any discharge, termination, demotion, suspension, threats, harassment, directly or indirectly or discrimination. It covers any employee who files a Voluntary Information Disclosure Form, irrespective of whether the information is considered or rejected by the SEBI or he or she is eligible for a Reward. The protection applies where the action is by reason of:

• Filing the Form.
• Testifying in, participating in, or otherwise assisting or aiding the Board in any investigation.
• 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... and is a director, partner, regular or contractual employee, but does not include an advocate.

And the protection is unconditional: nothing in this regulation shall require the employee to establish that, (i) the Board has taken up any enforcement action in furtherance of information provided by such person; or (ii) the information provided fulfils the criteria of being considered as Original Information.

The informant keeps every other remedy. Nothing in these regulations shall prohibit any Informant who believes that he or she has been subject to retaliation or victimisation by his or her employer, from approaching the competent court or tribunal for appropriate relief. But nothing in these regulations will require the Board to direct reinstatement or compensation by an employer.

And an employer who retaliates is exposed: any employer who violates this chapter may be liable for penalty, debarment, suspension, and/or criminal prosecution by the Board.

Regulation 7J — void agreements. 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, including enforcing or threatening to enforce, a confidentiality agreement. 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 or guidance of any person engaged by the employer before or after such filing.

Regulation 8 — code of fair disclosure

Every listed company must publish a fair disclosure code. 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. The code must adhere to each of the principles set out in Schedule A to these regulations, without diluting the provisions of these regulations in any manner.

**And every such code and every amendment shall be promptly intimated to the stock exchanges where the securities are listed.

Schedule A — the eight principles of fair disclosure:

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.

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

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

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

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 to ensure official confirmation and documentation of disclosures made.

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

7.2 Code of conduct — Regulation 9

Regulation 9(1) covers the code of conduct for trading. 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. The code is to regulate, monitor and report trading by its designated persons and immediate relatives of designated persons. It adopts the minimum standards set out in Schedule B (in case of a listed company) and Schedule C (in case of an intermediary).

And a clarification for listed intermediaries: they must adopt 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, adopting 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) requires every such person to identify and designate a compliance officer to administer the code of conduct and other requirements.

Regulation 9(4) requires the board, in consultation with the compliance officer, to specify the designated persons 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, and to include:

(i) Employees of such listed company, intermediary or fiduciary designated on the basis of their functional role or access to unpublished price sensitive information;

(ii) Employees of material subsidiaries of such listed companies designated on the basis of their functional role or access;

(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 of such listed company, intermediary, fiduciary and its material subsidiaries irrespective of their functional role in the company or ability to have access to unpublished price sensitive information;

(v) Any support staff of a listed company, intermediary or fiduciary such as IT staff or secretarial staff who have access to unpublished price sensitive information.

Note category (iv) — CEO and two levels below, regardless of access. And category (v), which reaches IT staff or secretarial staff.

Regulation 9A — institutional mechanism

The Chief Executive Officer, Managing Director or such other analogous person of a listed company, intermediary or fiduciary shall put in place an adequate and effective system of internal controls to ensure compliance with the requirements given in these regulations to prevent insider trading.

The internal controls shall include:

• a) all employees who have access to unpublished price sensitive information are identified as a designated person.
• b) all the unpublished price sensitive information shall be identified and its confidentiality shall be maintained.
• c) adequate restrictions shall be placed on communication or procurement of unpublished price sensitive information.
• d) 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 to all such employees and persons.
• e) all other relevant requirements specified under these regulations shall be complied with.
• f) periodic process review to evaluate the effectiveness of such internal controls.

Audit committee review: the Audit Committee of a listed company or other analogous body for intermediary or fiduciary shall review compliance with the provisions of these regulations at least once in a financial year and shall verify that the systems for internal control are adequate and are operating effectively.

Leak inquiries: every listed company shall formulate written policies and procedures for inquiry in case of leak of unpublished price sensitive information or suspected leak..., which shall be approved by board of directors... and accordingly initiate appropriate inquiries on becoming aware of leak... and inform the Board promptly of such leaks, inquiries and results of such inquiries.

Whistle-blower policy: 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 co-operation: if an inquiry has been initiated by a listed company in case of leak..., the relevant intermediaries and fiduciaries shall co-operate with the listed company.

Schedule B — the code for listed companies

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 but not less than once in a year.

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 legitimate purposes, the performance of duties or discharge of 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. Designated Persons and immediate relatives of designated persons in the organisation shall be governed by an internal code of conduct governing dealing in securities.

4. (1) 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.

(2) 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.

(3) The trading window restrictions... shall not apply in respect of –

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.

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.

That is the first review question — True.

7. 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.

8. 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.

9. 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 contra trade. The compliance officer may relax this for reasons to be recorded in writing. 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 — though this shall not be applicable for trades pursuant to the exercise of stock options.

10. The code shall stipulate formats for pre-clearance, reporting of trades executed, reporting of decisions not to trade after securing pre-clearance and for reporting level of holdings in securities.

11. The code shall stipulate the sanctions and disciplinary actions, including a wage freeze, suspension recovery, clawback etc., and any amount collected under this clause shall be remitted to the Board for credit to the Investor Protection and Education Fund.

12. On observing a violation, the company shall promptly inform the stock exchange(s) where the concerned securities are traded.

13. Designated persons shall be required to disclose names and Permanent Account Number or any other identifier authorized by law of the following persons to the company on an annual basis and as and when the information changes:

• 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.

In addition, the names of educational institutions from which designated persons have graduated and the names of their past employers shall also be disclosed on a one-time basis.

And the definition to remember: "material financial relationship" shall mean 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 but shall exclude relationships in which the payment is based on arm's length transactions.

14. Listed entities shall have a process for how and when people are brought "inside" on sensitive transactions. Individuals should be made aware of the duties and responsibilities attached to the receipt of Inside Information, and the liability that attaches to misuse or unwarranted use of such information.

Schedule C — the code for intermediaries and fiduciaries

Schedule C tracks Schedule B closely, with these differences worth noting.

**The compliance officer reports to the board of directors or head(s) of the organisation (or committee constituted in this regard) and to the Chairman of the Audit Committee or other analogous body, not less than once in a year.

Clause 5 adds 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.

Clause 6 makes the declaration mandatory — the compliance officer shall seek declarations (in Schedule B he shall be entitled to seek them).

Clause 7 repeats the seven trading days limit for executing pre-cleared trades.

Clause 8 has the six months contra-trade restriction for a designated person who is a connected person of the listed company. It adds a mutual fund rule. The code must set a period which in any event shall not be less than two months. During it, a Designated Person who is a connected person of the mutual fund/asset management company/trustees and is permitted to trade in the units of such mutual fund, shall not execute a contra trade.

Six months for securities; two months for mutual fund units.

Clauses 9 to 13 mirror Schedule B on formats, sanctions including a wage freeze, suspension, recovery, clawback, informing the exchanges, the annual disclosure of immediate relatives, material financial relationship and phone numbers with the one-time disclosure of education and past employers, and the process for bringing people "inside" on sensitive transactions.

7.3 The role of the compliance officer

The Compliance Officer is required to maintain all the documents as required under these Regulations. The Compliance Officer is required to frame a code of fair disclosure and conduct in line with the model code specified under Schedule A.

**Listed intermediaries must adopt the minimum standards set out in Schedule B with respect to trading in their own securities and in Schedule C with respect to trading in other securities.

Every listed company, intermediary and other persons formulating a code of conduct shall identify and designate a compliance officer to administer the code of conduct and other requirements under these regulations, and every compliance specified in the Regulations is normally the responsibility of the Compliance Officer.

SEBI's FAQs. With an objective to provide greater clarity on several concepts related to the SEBI (PIT) Regulations, 2015... SEBI had issued comprehensive Frequently Asked Questions (FAQs) on April 29, 2021, which consolidated all the FAQs and guidance notes issued earlier. They were revised and updated on March 31, 2023, more particularly, with regard to structured digital database and contra-trade, and are grouped under ten headings: Trading Related · Structured Digital Database · Pledge · Trading Plan · Disclosures including system Driven Disclosures · Pre-clearance · Trading Window Closure · Contra Trade · Designated Person and Immediate Relatives · General.

Four decided matters

Case 7.1 — Palred Technologies. SEBI investigated the scrip of Palred Technologies Ltd (PLT) for the period Sep 18, 2012 to November 30, 2013, and vide order dated February 4, 2016 as an interim measure, impounded the alleged gains under Section 11(4)(d) of the SEBI Act.

Two items of UPSI: the slump sale on August 10, 2013 of its software solutions business to Kewill group, and a one-time special dividend post the closure of sale transaction on October 14, 2013.

The UPSI periods were re-fixed. SEBI held that since NDA signified only the commencement of the due diligence process, there was every possibility of the deal being scrapped anytime during the due diligence process. Therefore, UPSI I emanated on September 18, 2012 is not correct. UPSI, I came into existence on May 9, 2013 and continued till August 10, 2013. And for the dividend, investigations concluded that the UPSI-II came into existence on October 4, 2013 and continued till October 14, 2013.

Some were held liable, others were not. Ameen Khwaja was a co-promoter and co-director with the Chairman in another company rendering services to PTL, so there existed a business relationship, and members of the Khwaja family, by virtue of their relationship with Ameen Khwaja squarely fall with the definition of "deemed connected". The overall pattern of trading of the Khwaja group in PTL, wherein a short period of two and half months, the group invested more than Forty-Nine Lakh rupees for 3,24,001 shares confirmed the distinct likelihood of the trades being based on the communication of UPSI-I.

Karna Reddy was liable because he was working in the finance department of PTL and... he started purchasing scrip of only PTL and that too, only after May 2013, during the UPSI period.

But several were exonerated. Kukati Parvathi — degrees of relationship with Palem are not so proximate. Pirani Aziz — although the trading pattern was suspicious, on Facebook, Pirani and Ameen Khwaja are not direct friends and they are connected through Mutual friends. 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. Mohan Krishna Reddy, an independent director — there is nothing on record to show that [he] had awareness and knowledge about the exact payment of dividends prior to October 7, 2013 when the board agenda was circulated. And two former employees who had resigned from PTL in January 2010 and April 2011 with nothing on record like constant telephonic connection, email exchanges, fund movement etc.

The order: eight persons shall be restrained from accessing the securities market and further prohibited from buying, selling or otherwise dealing in securities, directly or indirectly for a period of three years. They also shall not associate with any listed company in the capacity of a director or otherwise for a period of three years. They had liberty to liquidate their existing holdings, except PTL. And six of them shall individually disgorge the amounts indicated in the order.

Case 7.2 — Shruti Vora vs. SEBI (SAT). In November 2017 certain articles were published in newspapers wherein it was alleged that the quarterly financial results of several companies were in circulation in certain WhatsApp groups before its official disclosure. SEBI carried out search and seizure operations of 26 entities and about 190 devices were seized, and around 12 companies' earnings and financial information got leaked in WhatsApp messages. SEBI imposed a penalty of Rs 15 lakhs on Ms Shruti Vishal Vora in terms of... Section 15G of the SEBI Act, 1992 for the violation of Sections 12A(d) & 12A(e) of SEBI Act 1992 and Regulation 3(1) of SEBI (Prohibition of Insider Trading) Regulations, 2015.

SAT set the penalty aside. Despite great efforts by SEBI to find out the source of information, no information could be recovered. Out of the number of messages mined from devices, only in present six cases message matched with the exact figure of financial results. The adjudicating officer failed to appreciate that WhatsApp message may have originated in a brokerage house or from platforms of Bloomberg which are in public domain. And decisively, respondent (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.

Three things must be shown — that it was UPSI, that the person knew it was, and that he passed it on knowing.

Case 7.3 — Piramal Enterprises vs. SEBI (SAT). Abbott approached the PEL with an offer to acquire its Domestic Healthcare Business on January 18, 2010; due diligence ran February-May 2010; the Chairman individually informed other Board Members on May 10, 2010; and the board approved the offer for a consideration of 3.72 billion USD on May 21, 2010 with an announcement at 11:59 AM.

Two charges: sharing the information with persons who were not required to know about the transaction, and failure to close the trading window.

On the first, SAT accepted the need-to-know defence. Anand Piramal was a promoter of the appellant PEL, a "deemed to be connected person", and being a promoter holding about 2% of the equity capital of the PEL he had to give an undertaking relating to multiple Clauses in the BTA like non-compete provision for 8 years. Hence, he had to know in advance the decision.

On the second, the violation was made out but treated as technical. 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. And the board could not shelter behind the compliance officer: 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 SAT looked at substance. 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... UPSI at all times was preserved and there was no misuse of UPSI.

The famous line: 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 order: the imposition of penalty is converted into one of warning with a further direction that if any such incident occurs in future, it would be open to SEBI to proceed in accordance with the law.

Case 7.4 — SEBI fines the compliance officer of Kwality. Complaints alleged manipulation in the scrip; BSE reported that Kwality's promoters and directors, Sanjay Dhingra and Siddhant Gupta traded in the scrip for which they did not file necessary disclosures, and that Mr Gupta had taken an opposite position or executed contra trade.

The findings: an HUF where Mr Gupta was karta traded in Kwality scrip while possessing UPSI, unlawfully avoided a loss of Rs.96,300; Mr Dhingra... has executed contra trades within six months and a profit of Rs2.12 crore and did not remit it to SEBI for credit to the investor protection and education fund, and also traded during the trading window closure period; and several designated persons executed contra trades within six months and failed to remit the profit.

The compliance officer's liability. As per clause 1.5 of the Company's Code of Conduct and Regulation 9(3) and Regulation 2(1)(c) of the PIT Regulations, it is the duty and responsibility of a compliance officer to administer the code of conduct and other requirements including monitoring the trades of all designated persons. The RTA used to send specific information as and when sought by the Company through e-mail to Mr Srivastava, who accepted that he received information from RTA every week, yet did not take any action on various violations of the code of conduct by the promoter, directors and designated persons.

His defences failed. He argued wilful concealment of facts and non-cooperation of the alleged concerned violators and that he had promptly reported all transactions and violations to Mr Dhingra, the then MD. SEBI answered: 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. However, it is noted that Mr Srivastava did not take any such measures.

The order: he failed to report non-compliances by 11 erring entities, and a penalty of Rs2 lakh was imposed.

Reporting upward to the wrongdoer is not enough — that is the lesson for every compliance officer.

The chapter's review questions confirm four answers. Pre-clearance applies when the trading window is open and the value exceeds the board's threshold — True. The Regulations prohibit insiders from dealing, communicating and counselling — All of the above. Organisations must develop practices on a need to know basis. And generally available information means information accessible to the public on a non-discriminatory basis.