Void agreements

Picture an employee who spots insider trading at work. They may have signed a job contract with a broad secrecy clause. They may also have a code of conduct that says "all concerns must be raised internally".

What if those clauses could legally stop the employee from going to SEBI? Then the whistle-blower system would be dead on arrival.

Regulation 7J of the PIT Regulations settles this. Such terms are void, which means they have no legal force. This applies as far as they try to stop anyone from telling SEBI about a breach. The one exception is an advocate.

Employers are also barred from blocking a report in other ways. They cannot use threats. They cannot enforce secrecy terms. And they cannot demand to be told first.

Regulation 7J — void agreements.

1. 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 SEBI information relating to a violation of the securities laws that has occurred, is occurring, or has a reasonable belief that it would occur.
2. No person shall, by threat or act, impede an individual from communicating with SEBI — including enforcing or threatening to enforce a confidentiality agreement (other than agreements related to legal representation of a client and communications thereunder) with respect to such communications.
3. No employer shall require an employee to notify it of any Voluntary Information Disclosure Form filed with SEBI, or to seek prior permission, consent or guidance of any person engaged by the employer before or after such filing.

The surrounding framework (Regulations 7A to 7K).

• An informant is an individual who voluntarily submits a Voluntary Information Disclosure Form to SEBI about an alleged insider trading violation that has occurred, is occurring or is reasonably believed to be about to occur — whether or not the individual qualifies for a reward.
• Regulation 7B deals with submission, 7C with SEBI's examination, 7D and 7E with reward eligibility and amount, 7F and 7G with claims and rejection, 7H with confidentiality.
• Regulation 7I requires every person required to have a code of conduct to provide protection against discharge, termination, demotion, suspension, threats, harassment or discrimination of an employee who files the form, testifies or assists SEBI, or breaches a confidentiality term solely to cooperate with SEBI — whether or not the information is accepted or a reward is earned.
• "Employee" here means a director, partner, regular or contractual employee — but not an advocate.
• An employer violating these provisions may face penalty, debarment, suspension and/or criminal prosecution by SEBI; the informant may also approach a court or tribunal. SEBI is not required to direct reinstatement or compensation.

Illustrative facts. Deccan Brokerage Pvt Ltd, a SEBI-registered intermediary, has three documents in its HR file.

Priya, a dealer at the firm, notices that a relationship manager is repeatedly buying a client company's shares a day before its announcements. She files a Voluntary Information Disclosure Form with SEBI without telling her manager.

Three weeks later the firm discovers the filing, cites the first clause and withholds her annual bonus of Rs 3,60,000 "for breach of confidentiality".

• The clause relied on is void for this purpose.
• Withholding the bonus is retaliation against an employee who filed the form — prohibited under Regulation 7I whether or not SEBI acts on her information.
• The firm is exposed to penalty, debarment, suspension and/or criminal prosecution, and Priya may approach a court or tribunal for relief. SEBI itself, however, is not obliged to order the bonus paid.

Chapter 7 (SEBI (Prohibition of Insider Trading) Regulations, 2015), 6% of the paper, covers the informant mechanism in Regulations 7A to 7K, with Regulation 7J set out in full.

For a compliance officer this is practical, not theoretical: employment contracts, NDAs and codes of conduct often contain broad confidentiality or prior-approval clauses of exactly the kind Regulation 7J voids. Expect True/False questions on the advocate exception, the ban on requiring prior permission, and whether protection depends on SEBI accepting the information (it does not).

• Oral agreements count as well as written ones and codes of conduct.
• Advocates are excluded — both from the persons who cannot be gagged and from the definition of "employee" for anti-retaliation protection.
• Agreements related to legal representation of a client are outside the ban on enforcing confidentiality.
• Notification after the filing is also barred — the employer cannot require to be told, before or after.
• "Has occurred, is occurring, or reasonably believed would occur" — future violations are covered.
• Protection does not depend on a reward or on SEBI taking up the information.
• SEBI is not required to direct reinstatement or compensation; the informant's remedy for that lies with a court or tribunal.