To start with -An insider is a person who has access to the price sensitive information of the company. Trading (Selling or purchasing of shares) the stocks of the company directly (by himself) or indirectly (through connected persons) based on this information before it is available for the general public, is called insider trading.
SEBI (Prohibition of Insider Trading) Regulations, 1992 imposes restrictions on using inside information outside affecting others. Inside trading regulations are applicable to all listed companies and registered intermediaries. These regulations require company to adopt internal code of conduct.
Any person who is proved to be guilty of insider trading will be punished severally –
a. Penalty of Rs.25 Crore or 3 times the amount of profit made whichever is higher.
b. Imprisonment up to 10years or fine up to 25 crores or both
Substance of the article – All listed companies and organizations associated with security market shall frame and comply with CODE OF INTERNAL PROCEDURE and abide by CODE OF CORPORATE DISCLOSURE PRACTICES and adopt appropriate mechanism & procedures to enforce it.
They are as follows-
1. Compliance officer – A senior level employee may be appointed as compliance officer to report to MD/CEO and such person shall be responsible for policies & procedures to preserve PSI, pre-clearance & monitoring of trades, implementation of code of conduct under supervision of board, also maintain list of designated employees & declarations from directors or employees for 3 years and clarify regarding Insider Trading Regulations & Code of Conduct.
2. Trading Window- It is the trading period. It shall be closed for employees or directors or designated employees at the time of considering items which are “DEEMED” to be PSIs”, it shall be opened after 24 hours. When trading window is closed, the said persons shall not deal with company’s securities, except for exercising options under ESOPs.
3. Pre-Clearance of trade- This is a case where the said persons & their depends can get a prior permission of company to deal with securities by following pre-clearance procedure (i.e) by making an application to compliance officer intimating his intention to deal with details and executing an undertaking that,
a. Said persons does not have access or has not received by PSI till signing this undertaking
b. If such person receive PSI after signing undertaking but before dealing, then dealing shall be made only after such information becomes public
c. Has complied with code of conduct and has made full and true disclosure.
Pre-cleared transaction shall be executed within 1 week, else fresh clearance is required.
4. Restrictions- All directors or officers or designated employees shall not buy the securities sold or sell the securities bought in secondary market within 6 months and also not enter into derivative transactions of company’s shares. In case of IPO to said persons, the holding period shall be 30 days, unless waived by compliance officer.
5. Need to know basis- PSI is to be handled on “need to know” basis, i.e., UPSI should be disclosed only to those within the company who need the information to discharge their duty.
6. Chinese will- to separate areas of organization & segregate employees,
(OVER THE WALL is permitted (i.e., confidential information may be given) in exceptional cases on NEED TO KNOW basis after intimating compliance officer)
7. Restricted/Grey list- This is a list of transaction maintained by compliance officer which is highly confidential in nature, where trading is restricted to monitor the Chinese wall.
List contains – Trading in client securities by intermediaries, securities dealt on behalf of clients or MFs, securities of listed companies, when an organization handles assignment or makes project appraisal or crediting rating of listed company.