Significant legislative action on the insider trading front was discovered recently. The Securities and Exchange Board of India (“Sebi”) has amended the Sebi (Prohibition of Insider Trading) Regulations, 1992 (“Insider Trading Regulations”) to impose a requirement on listed companies to prohibit their directors, officers and designated employees (“Insiders”) from any form of trading in derivatives of shares of their employer-companies.
Listed companies have to ensure in their internal codes of conduct (“Internal Code”) that once an Insider effects a particular type of transaction in shares of the company (say, a ‘buy’ transaction), he would be barred from entering into a contrary transaction for a period of six months (a ‘sell’ transaction, in this example). Similarly, if an Insider were to sell shares this month, he would be barred from buying shares for another six months.
Both these measures have been introduced by replacing a provision in the model code of conduct set out in the Insider Trading Regulations (“Model Code”) which earlier provided that all investments made by such persons would have to be held for 30 days in order to be regarded as having been held for “investment purposes”. Therefore, if an Insider were to buy and sell shares within short intervals, his investments would not have been considered to have been made for purely investment purposes.
Such holdings may be regarded as having been made for speculative purposes. A person who is in the habit of trading in a company’s stock at short intervals is more likely than not to have indulged in violative conduct. Now that the Internal Code will actually prescribe a ban on trading within a span of six months, a breach of such ban would attract an even more adverse attention when Sebi presses a charge of violation of the Insider Trading Regulations.
Interestingly, the Insider Trading Regulations have also been amended to expressly state that the Internal Codes ought not to dilute the provisions of the Model Code. The Insider Trading Regulations have also been amended to provide that listed companies ought to ensure compliance with the Internal Code. In other words, the Model Code can be improved upon and the bar could be raised higher, but the standard specified in the Model Code cannot be diluted.
Sebi has done well to ignore for now its earlier proposal of mandating that any profits made when a transaction (say, purchase of shares) is followed by the contrary transaction (sale of shares in this example) within a period of three months. Such a provision was aimed at being a deterrent to short-term trading and would expropriate profits and have the same paid to the company.
The execution of a contra trade within six months, by itself does not necessarily amount to an act of insider trading. However, such trading would be a breach of the Internal Codes of the listed companies. A breach of such a provision repeatedly would also be a ground for Sebi to issue directions to such an Insider to desist from doing so, and this can cause serious reputation risk to the Insider.
Sebi is yet to learn how to amend its laws in a transparent manner. I began this column by saying that this legislative action was “discovered”. The amendments took effect on November 19, 2008, because they got printed in the Official Gazette. However, no one including seems to have known this fact because Sebi’s official website did not have this on November 19, 2008.
Sebi would do well to simply provide for a prospective date of amendment, leaving the time buffer needed to get the publication into the Official Gazette. Amendments go into queue for printing in the Official Gazette and no one realises that the amendments have taken effect. Announcing that the new law would become applicable from a prospective date will give people lead time to prepare themselves. Unless there is a tearing emergency, Sebi too need not have to make laws that take immediate effect.
The author is a partner of JSA, Advocates & Solicitors. Views expressed herein are his own
