Insider trading regulations to apply to companies even before listing

Regime comes into effect in May

The new insider trading regulations, which were notified last month, will not just apply to listed companies like the 1992 Regulations. The text of the new regulations show that it will also apply to ‘proposed to be listed' companies. 

“The 1992 Regulations were restricted in their application to only listed companies. However, the New Regulations apply to both listed companies and companies that are ‘proposed to be listed’. It is unclear how the term ‘proposed to be listed’ will be interpreted. We consider that this is intended to include such companies which have filed draft red herring prospectus with Sebi for an ‘Initial Public Offer’ or ‘Offer for Sale,’” said law firm Khaitan & Co in a note dated February 19 entitled ‘New Insider Trading Regime – Compliance Issues And Challenges’. 

Sandeep Parekh, founder of Finsec Law Advisors and former executive director, Sebi and an author on a book on insider trading, too said that the provision likely applies to companies who are looking to list their shares on the stock exchange. 

"The provision would apply to anyone who has insider information which is not present in the prospectus. Broadly, it would cover companies which are proposed to be listed too," he said. 

He added that perhaps what was envisaged within the breadth of the prohibition was price sensitive information being made available to insiders after the drafting of the prospectus but before the listing date. There could be a window for mischief in this time period, which the prohibition seeks to outlaw. 

“These provisions may particularly get attracted in the case of an offer for sale as part of the IPO, where an insider could take advantage of his access to Unpublished Price Sensitive Information and trade with the investors in the IPO without making such Unpublished Price Sensitive Information generally available in the prospectus of the company,” said Yogesh Chande, Associate Partner, Economic Laws Practice. 

The roots of the expanded scope lies in the Companies Act of 2013, say lawyers. Section 195 of the Companies Act, 2013 prohibits insider trading by director or key managerial person. Section 458 of the Companies Act, 2013 delegates powers to Sebi to prosecute insider trading in securities of listed companies and companies which intend to get their securities listed. 

The same is also mentioned in the new insider trading regulations. 

“No insider shall communicate, provide, or allow access to any unpublished price sensitive information, relating to a company or securities listed or proposed to be listed,” said the Sebi (Prohibition of Insider Trading) Regulations, 2015 which were notified on 15 January.