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India – Striking Features Of The Proposed Insider Trading Regulations.

6 January, 2014


SEBI Insider Trading: Spreading its Wings


Proposed changes to the SEBI (Prohibition of Insider Trading) Regulations, 1992 (“SEBI Insider Trading Regulations”) by the Sodhi Committee: 


The recent scams high profile conviction of Mr. Raj Rajaratnam and Mr. Rajat Gupta in the US has again brought into lime light the need  for  stringent  and  effective  Insider Trading laws all over the world. The Indian stock markets  have  in the  past  witnessed various instances of insider trading. Looking at the past cases of insider trading we can comfortably assume that what has come to light is just the tip of the ice‐berg. Further, the rate of conviction in relation to insider trading  is  even  lesser.  The  SEBI  Insider Trading Regulations being the Indian statute on insider trading required major review in view of the  inadequacy or  lack thereof of the  present  regulations  in  achieving  the regulatory objectives.


In  the  light  of  the  above,  the  Indian regulator SEBI formed a Committee under the  chairmanship  of  Justice  N.  K.  Sodhi, Former Chief Justice of the High Courts of Kerala  and  Karnataka  and  a  Former Presiding Officer of the Securities Appellate Tribunal.  The  Committee  has  issued  its report dated December 7, 2013 wherein far reaching reforms to the  existing  law  have been  proposed.  The  Report  is  presently before  the  public  for  comments  and suggestions and is expected to be adopted by the SEBI Board in the near future with or without amendments. 


We  propose  to  discuss  certain  striking features or terms viz. “insider”, “connected person”  and  “generally  available information” of this Report which may have far reaching consequences if and when the proposed regulation comes into force. 


The proposed regulations intend to include any  person  in  possession  of  Unpublished Price  Sensitive  Information  (“UPSI“)  as  an ‘insider’ regardless of the manner or mode by which one came in possession of such  information. The term ‘insider’ has to be read along  with  the  terms  ‘connected  person’ being a person who has a connection with the company  that  is  expected  to  put  him  in possession of UPSI. 


One of the most far reaching provisions of the proposed  regulation  is  to  bring  within  its ambit those people who would be expected to have any kind of access to UPSI about any company or  class of  companies by  virtue of being  government  servants  i.e.  public servants and occupying official positions that would put them in possession of UPSI. 


‘Public Servant’ will have the same meaning as in the Prevention of Corruption Act, 1988 which defines a public servant as ‘any person in the service  or  pay  of the  government  or remunerated by the  government by fees or commission  for  the  performance  of  any public  duty’.  In  other  words,  a  judge,  a bureaucrat,  a  minister  etc.  too  now  come within the purview of the scrutiny and check of SEBI for any trading in scrips done by them or persons  connected with them while they are considered to be in possession of UPSI.


Government  officials  involved  in  policy making on any matter that could result in material impact on the price discovery for securities of a listed company like decisions on the pricing policy for a natural resource or  a  limit  on  foreign  investment  in  a specific sector may  also  come  under the scanner  of  SEBI.  Already  government officials are facing a lot of public anguish due  to  delay  in  decision  making  and clearing of projects.


Public perception of public servants is at a all time  low  due to scams  like  Coalgate, CWG and Adarsh Housing Society wherein investigations  have  found  a  deep‐rooted nexus  between  bureaucrats  and politicians.  Such  measures  bring  them directly  under  the  purview  of  SEBI investigations  and  may  make  decision making  all  the  more  difficult  thereby restricting  the  smooth  working  of  the government. 


In one stroke three legislations shall now be specifically  applicable  on  government official’s i.e. Prevention of Corruption Act, 1988;  Lokpal  and  SEBI  Insider  Trading (if implemented  in  the  present  form).  These three legislations will make life more difficult for  the  already  “terror  stricken”  Indian bureaucracy.


Another  aspect  which  has  been  covered under the definition of  connected person is where a person may or may not occupy any position in a company though may regularly be  in  touch  with  the  company  through  its officials  and  also  involved  in  how  the company  operates  would  also  come  within the  ambit  of the term  ‘connected  persons’ and thereby will be  considered  as  ‘insiders’ who  would  be  prohibited  from  trading  in securities of the company when in possession of UPSI.


The proposed regulations has recommended broadening  of  the  definition  of  the  term ‘insider’ wherein even a person who is either financially dependent or consults the insider within its reach any person who is in receipt when trading in securities shall be presumed to  be  a  ‘connected person’  and thereby  an ‘insider’. Immediate relatives of such persons too are presumed to be connected persons and thereby ‘insiders’. Well, the change has been proposed with an intention to bring of UPSI  as  well  as  those  people  (connected persons)  who  may  use  the  knowledge  in trading in scrips of such companies.


Various  defences  are  provided  for such  a person  to  demonstrate  that  he  has  not indulged  in  insider  trading.  Therefore,  the person who has traded when in possession of UPSI may demonstrate that he was not in such possession or that he has not traded or that  his  trading  in  the  scrips  when  in possession of such information was squarely covered by the available defences.


Further, the Committee for the first time has made  an  attempt  to  define  what  can  be termed as “Published Information”.


The  Report  coins  a  new  term  “Generally Available Information” which would mean all the information about the  company that is accessible  to  the  public  on  a  non‐discriminatory  basis  say,  information published on the website of a stock exchange and company website, would normally  be  considered  generally available information.  Research,  deductions  and conclusions based on such generally available information  will  also  constitute  “Generally Available  Information”.  Even  organisations like a brokerage house that provide research reports  may  add  value  to  the  information because of their research and analysis but so long  as the research  is  based  on  generally available  information,  the  findings  of  such research would not become or be termed as UPSI. Such research reports may be available for a price (to compensate for their enterprise of conducting research) and so long as such research is available for purchase by clients without discrimination, the fact that it has to be  paid  for  would  not  make  the  access discriminatory.


So long as it can be shown that the research is based on information in the public domain, the  findings  would  also  be  “Generally Available Information”. So also, it is intended that  information  that  is  capable  of  being accessed  by  anyone without  breach  of  any law would be considered generally available. 


For example, a person  legitimately watching and  counting the movement  of  goods from factories of  a  company and making his own analysis  and  assessment without  involving  a breach  of  the  obligations  under  these regulations  would  be  accessing  information that  is  generally  available.  Such  research would not render him to be in possession of UPSI. However, a person who procures such information  by  breaking  into the  company’s systems or by reason of an insider passing on such information in breach of the obligation to  keep  information  confidential,  would  be regarded  as  having  availed  of  publicly inaccessible information.


The  proposed  change  in  relation  to  the inclusion  of  the  bureaucracy  within  the purview of SEBI Insider Trading may put a lot of  pressure  on  decision making  government officials  considering  the  fact  that  a specific anti‐graft  legislation  i.e.  Lokpal  Bill  has  also been  passed  by  the  Indian  Parliament. Although,  the  changes  are  welcome,  the bureaucracy may try to scuttle the efforts of SEBI  to  include  them  within  the  realm  of Insider Trading.


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For further information, please contact:


Sanjay Israni, Partner, Rajani, Singhania & Partners

[email protected]


Rajani Associates Capital Markets Practice Profile in India


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