Designated persons

A listed company cannot police the trading of all 8,000 of its employees, and it is not asked to. It is asked to police the ones who can reach price sensitive information.

Designated persons is the name for that population. Under Regulation 9(4) the board of directors — or the analogous authority in an intermediary or a fiduciary — specifies them in consultation with the compliance officer, on the basis of role and function and the access that role provides to unpublished price sensitive information, in addition to seniority and professional designation.

Once named, a designated person and their immediate relatives live inside the code of conduct: the trading window, pre-clearance, the contra trade restriction, the prescribed reporting formats, and the disciplinary sanctions the code has to stipulate.

Regulation 9(4) sets a floor. The list shall include:

1. employees of the listed company, intermediary or fiduciary designated on the basis of functional role or access to UPSI;
2. employees of material subsidiaries of such listed companies, designated the same way;
3. all promoters of listed companies, and promoters who are individuals or investment companies in the case of intermediaries and fiduciaries;
4. the Chief Executive Officer and employees up to two levels below the CEO of the company, intermediary, fiduciary and its material subsidiaries — irrespective of functional role or ability to access UPSI;
5. support staff such as IT or secretarial staff who have access to UPSI.

Regulation 9A(2)(a) closes the loop from the other end: the internal controls must ensure that all employees who have access to UPSI are identified as designated persons.

Which minimum standards apply is not uniform. A listed company adopts Schedule B; an intermediary or a fiduciary adopts Schedule C. A listed intermediary does both — Schedule B for trading in its own securities, Schedule C for trading in other securities. Fiduciaries are the professional firms assisting or advising listed companies: auditors, accountancy firms, law firms, analysts, insolvency professional entities, consultants and banks.

Who names them, and who that person answers to. Regulation 9(3) requires every listed company, intermediary and other person formulating a code of conduct to identify and designate a compliance officer to administer it. Regulation 2(c) defines that officer for the purposes of these regulations: a senior officer, designated so and reporting to the board of directors — or to the head of the organisation where there is no board — who is financially literate and capable of appreciating the legal and regulatory requirements under the regulations. "Financially literate" is itself defined: able to read and understand basic financial statements, meaning a balance sheet, a profit and loss account and a statement of cash flows. The officer is responsible for compliance with policies and procedures, maintenance of records, monitoring adherence to the rules preserving UPSI, monitoring of trades and implementation of the codes — under the overall supervision of the board of directors of the listed company, or the head of the organisation.

The schedules repeat the reporting line. Under Schedule B the compliance officer reports to the board of directors, and in particular provides reports to the Chairman of the Audit Committee, if any, or to the Chairman of the board, at a frequency the board stipulates but not less than once a year. Schedule C says the same for an intermediary or fiduciary, widened to the board of directors or head(s) of the organisation, or a committee constituted in that regard, and to the Chairman of the Audit Committee or other analogous body.

Meridian Securities Ltd is a SEBI-registered stock broker, itself listed, with 2,400 employees. Its board, in consultation with the compliance officer, designates:

The other 2,257 employees are governed by ordinary HR policy, not by the code.

The board fixes a pre-clearance threshold of Rs 10 lakh per trade. In August a research associate on the designated list buys Rs 14 lakh of a client company's shares without pre-clearance, while that scrip sits on the compliance officer's restricted list.

Two consequences follow. The trade needed pre-clearance because it crossed the threshold the board itself set. And the sanctions the code must stipulate — wage freeze, suspension, recovery, clawback — are available, with any amount collected remitted to SEBI for credit to the Investor Protection and Education Fund, not retained by Meridian. Because Meridian is an intermediary, it must also promptly inform the stock exchanges where the concerned securities are traded.

Chapter 7, section 7.2 (Code of Conduct), together with Schedules B and C. Questions come in two shapes. "Who must be included among designated persons?" — where the Regulation 9(4) floor is the answer and the CEO plus two levels below rule is the tested detail. And "which schedule applies?" — where the answer turns on whether the entity is a listed company, an intermediary or a fiduciary, and a listed intermediary is the trick option.

Section 7.3 (Role of Compliance Officer) supplies the third variety: who designates the compliance officer, what "financially literate" means, and to whom the officer reports. Read it against Chapter 3 (Introduction to Compliance), which sets out the same officer's dual reporting line to the board of directors and to SEBI — the two chapters are describing one role under different regulations, not disagreeing.

• CEO plus two levels below is automatic. Access is irrelevant for that group, so an answer excluding a general manager because he never sees UPSI is wrong.
• The list is specified by the board in consultation with the compliance officer. Neither the compliance officer alone nor the CEO alone draws it up.
• Employees of material subsidiaries are in scope; ordinary subsidiaries are not automatically caught.
• Immediate relatives of designated persons are bound as well — the trading window and contra trade rules follow the household, not just the employee.
• This is a code of conduct concept. Being designated does not make a person a connected person under the deeming list, and not being designated does not stop someone being an insider.
• Schedule B is for listed companies and Schedule C for intermediaries and fiduciaries; for a listed intermediary the split is decided by which securities are being traded, not by which schedule is more convenient.
• "Reports to the board" is not one answer, and the compliance officer does not have one reporting line. Under these regulations the officer reports to the board of directors of the listed company. But the compliance function carries a dual reporting line: Regulation 18A(2) of the Stock Brokers Regulations requires the compliance officer to immediately and independently report to SEBI any non-compliance observed, while Regulation 14(2) of the Intermediaries Regulations requires written reporting of material non-compliance to the intermediary or its board of directors. Chapter 3 puts both together — non-compliance is reported to the board of directors and to SEBI. Before answering, check which body a question means, because in SEBI statutes the capitalised "the Board" is SEBI, not the company's directors: in the very same Schedule B, contra-trade profits are disgorged "for remittance to the Board for credit to the Investor Protection and Education Fund administered by the Board under the Act".