SEBI lays down mechanism to prevent insider trading

In a key policy move, the Securities and Exchange Board of India (SEBI) has decided to hold company promoters, irrespective of their shareholding status, responsible for violation of insider trading norms if they possess unpublished price-sensitive information (UPSI) regarding the company without any ‘legitimate’ purpose.

SEBI has specified that the term “legitimate purpose” will include sharing of the UPSI 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, provided that such sharing has not been carried out to evade or circumvent the prohibitions of these regulations.

Digital database

The board of directors shall ensure that a structured digital database is maintained containing the names of such persons or entities, as the case may be, with whom the information is shared. There is no reference to a company promoter in the list of those with whom a company can share the UPSI. SEBI has further specified that any person in receipt of the UPSI pursuant to only a “legitimate purpose” will be considered an “insider.” Simply put, a promoter who is not an advisor in official capacity or does not hold any position on the board will not be considered a person having “legitimate purpose” to hold the UPSI. SEBI’s decision is based on the recommendations of the TK Viswanathan committee on insider trading.

“SEBI has taken care to reject the proposition that access to the UPSI can be freely provided to the promoter(s) without the promoter(s) holding any office in the company from which the inside information emanates,” said Somasekhar Sundaresan, a senior independent counsel.

“For the access to such information to be legitimate, external persons such as advisors are now required to be given notice that the information given to them is inside information and they should apply it only for the purpose it is meant. SEBI has also said that a database of such persons must be maintained with identification of the recipients. This is consistent with SEBI’s past regulatory actions against promoters who gained access to such information without being insiders by way of having been engaged as officials or advisors,” Sundaresan added.

Cases under spotlight

There have been many cases in the recent past wherein information given to promoter groups have come under spotlight. Recently, Cyrus Mistry, the former Chairman of Tata Sons, had alleged that information related to Tata group companies was being shared with Ratan Tata. The Tata group has maintained that it has complied with all rules in this matter.

Uday Kotak, who chaired a SEBI committee on governance of companies, in a report, had proposed that any material information be shared with a promoter or promoters or a group having shareholding of more than 25 per cent in the company, who (that) is/are in direct or indirect control of the shareholders or has/have nominated a director on the board of directors of the listed entity.

The Kotak committee further specified several conditions for sharing of the UPSI but had proposed amendment to laws pursuant to which the legitimacy of the purpose for sharing the UPSI was not required to be tested. In fact, it was proposed to legitimise a channel for constant information flow between the promoters/controlling shareholders and the listed entity.

It had also sought changes to the law pursuant to which it may have been deemed that sharing of the UPSI as aforesaid was to be “in furtherance of legitimate purposes.”