Code of Fair Disclosure

Insider trading rules mostly say what people may not do with price sensitive information. The Code of Fair Disclosure is the other half: a listed company's public promise about how it will release that information — promptly, to everyone at once, through a named officer, and never selectively to a favoured analyst or fund.

The logic is simple. The less time unpublished price sensitive information (UPSI) spends inside the company, and the more evenly it reaches the market when it comes out, the smaller the window in which anybody can trade on it.

The obligation (Regulation 8).

• 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 UPSI, to adhere to each of the principles in Schedule A — without diluting the regulations in any manner.
• The code, and every amendment to it, shall be promptly intimated to the stock exchanges where the securities are listed.
• Under Regulation 3(2A), the board must also make a policy for determination of "legitimate purposes" as part of the "Codes of Fair Disclosure and Conduct".

The eight principles of Schedule A.

1. Prompt public disclosure of UPSI that would impact price discovery, no sooner than credible and concrete information comes into being, to make it generally available.
2. Uniform and universal dissemination to avoid selective disclosure.
3. Designation of a senior officer as a chief investor relations officer to deal with dissemination and disclosure of UPSI.
4. Prompt dissemination of UPSI that gets disclosed selectively, inadvertently or otherwise, to make it generally available.
5. Appropriate and fair response to queries on news reports and requests from regulators for verification of market rumours.
6. Ensuring that information shared with analysts and research personnel is not UPSI.
7. Developing best practices to put transcripts or records of analyst meetings and investor relations conferences on the official website.
8. Handling of all UPSI on a need-to-know basis.

How it fits with the other code. The Code of Fair Disclosure governs the company's disclosure. The separate code of conduct under Regulation 9 governs trading by designated persons and their immediate relatives, using the minimum standards in Schedule B (listed companies) or Schedule C (intermediaries and fiduciaries). A listed intermediary needs both.

Why "generally available" matters. Information is generally available when it is accessible to the public on a non-discriminatory basis; information published on a stock exchange website ordinarily counts. Unverified events or information reported in print or electronic media do not count.

Illustrative facts. Narmada Cables Ltd closes its quarter on 30 June. On 28 July, three days before the board meeting, its CFO meets analysts from two brokerages in Mumbai and, asked about margins, says operating margin is "comfortably above 14%" — a figure not yet published. The stock is at Rs 410.

Walk it through the Code of Fair Disclosure:

By the time the company releases the figure, one brokerage client has bought 50,000 shares at Rs 412; the stock closes at Rs 455 after the disclosure.

Gain on paper = 50,000 × (455 − 412) = Rs 21,50,000

The company's code does not decide whether that client is liable — Regulation 4 and the insider provisions do. What the code does decide is that the company had a published duty to prevent the selective disclosure and a published duty to cure it immediately. A board that cannot show the code, its intimation to the exchanges, and a record of how the leak was cured has a compliance failure of its own.

Chapter 7 (SEBI (Prohibition of Insider Trading) Regulations, 2015), 6% of the paper, carries Regulation 8 and the Schedule A principles, and repeats in section 7.3 that the compliance officer works with the code.

Expect a "which of the following is not a principle of fair disclosure" question — a typical distractor would be "disclosure to institutional investors ahead of retail investors" — and a question on who formulates the code (the board) and where it goes (the company website, with intimation to the stock exchanges).

• The board formulates the code under Regulation 8. But section 7.3 of the workbook also says the compliance officer "is required to frame a code of fair disclosure and conduct in line with the model code specified under Schedule A". The regulation places the duty on the board; the compliance officer drafts and administers. If a question quotes Regulation 8, answer "board of directors".
• Fair Disclosure (Regulation 8, Schedule A) ≠ Code of Conduct (Regulation 9, Schedules B and C). One is about the company's disclosures, the other about people's trading.
• Every amendment must also be promptly intimated to the stock exchanges, not only the original code.
• Unverified media reports are not "generally available". A newspaper story about results does not free insiders to trade.
• Selective disclosure is cured by prompt general dissemination, not by asking the analysts to keep quiet.
• The code must be published on the official website, not merely approved and filed.