REGULATION OF INSIDER TRADING: COMPLIANCE, DISCLOSURES, AND PENALTIES UNDER SEBI REGULATIONS

Introduction

Insider trading refers to the act of dealing in securities while in possession of unpublished price-sensitive information (UPSI). The SEBI (Prohibition of Insider Trading) Regulations, 2015, were enacted to ensure market integrity and protect investors from unfair practices. These regulations define the roles and responsibilities of insiders, connected persons, and companies, mandating fair and transparent trading. The framework incorporates strict disclosure requirements and severe penalties to discourage insider trading and promote ethical behavior in the securities market.

Prohibition of Trading with UPSI

Regulation 4 prohibits insiders from trading in securities listed or proposed to be listed on a stock exchange while in possession of UPSI. The following exceptions apply:

1. Off-Market Transfers:

   • Transactions between promoters aware of UPSI, provided both parties consciously and informally decide to trade.
   • These trades must be reported to the company by the insiders within two working days.
   • The company must notify the stock exchange of such trades within two trading days of receiving the disclosure or upon becoming aware.

2. Non-Individual Insiders:

   • If individuals possessing UPSI are separate from those making trading decisions, and there is no communication of UPSI between them.

3. Block Deal Mechanism:

   • Transactions conducted via the block deal window between parties aware of UPSI, ensuring compliance with Regulation 3 and mutual informed decision-making.

4. Regulatory Obligations:

   • Transactions carried out to fulfill statutory or regulatory requirements.

5. Exercise of Stock Options:

   • Trades arising from exercising stock options where the exercise price was pre-determined under applicable regulations.

6. Trading Plans:

   • Transactions executed under a pre-approved trading plan in accordance with regulatory provisions.

Onus of Proof:

• Connected persons must demonstrate that they were not in possession of UPSI.
• For others, the burden of proof lies with SEBI.

SEBI retains the authority to specify standards and requirements as deemed necessary.

Disclosures by Certain Persons

1. Initial Disclosure [Regulation 7(1)]

• Promoters, Key Managerial Personnel (KMPs), and Directors must disclose their securities holdings as follows:
  a. Within 30 days of the regulations taking effect.
  b. Within 7 days of appointment as a KMP, director, or upon becoming a promoter.

2. Continual Disclosures [Regulation 7(2)]

• Promoters, members of the promoter group, designated persons, and directors must disclose to the company any acquisition or disposal of securities exceeding ?10 lakh in value (or as specified) within two trading days.
• Companies must notify the stock exchange within two trading days of receiving this disclosure or upon becoming aware.

Principles of Fair Disclosure

Schedule A [Sub-regulation (1) of Regulation 8] outlines the following principles for fair disclosure:

1. Prompt Disclosure: Timely public disclosure of UPSI impacting price discovery.
2. Uniform Dissemination: Avoid selective disclosure of UPSI.
3. Chief Investor Relations Officer: Designate a senior officer to oversee information dissemination.
4. Market Rumors: Provide appropriate responses to news reports and regulatory queries.
5. Analyst Interactions: Ensure UPSI is not shared with analysts or research personnel.
6. Transparency: Publish transcripts or records of analyst and investor meetings on the official website.
7. Need-to-Know Basis: Handle UPSI strictly on a need-to-know basis.

Penalties for Insider Trading

Under Section 15G of the SEBI Act, any insider trading or communication of UPSI results in penalties as follows:

• Minimum Penalty: Rs 10 lakh.
• Maximum Penalty: Rs 25 crore or three times the profit made, whichever is higher.

Conclusion

The SEBI (Prohibition of Insider Trading) Regulations, 2015, emphasize stringent measures to deter insider trading, ensuring a transparent and ethical securities market. These regulations foster investor trust by mandating fair disclosure, enforcing strict penalties, and promoting equitable access to information. By adhering to these norms, companies and insiders contribute to building a robust financial ecosystem grounded in integrity and fairness.

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Article Compiled by:-

~Neel Lakhtariya

(LegalMantra.net Team)