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Introduction: 

In Part-1, important aspects of insider trading were covered and in this concluding part, coverage is given to code of conduct, disclosure requirements, investigation procedure and powers of SEBI. These parts will give a fair view about procedural aspects to be adopted for prevention of misuse of price sensitive information, effective monitoring of holdings/disclosure through code of conduct, role of SEBI in investigation and penalties for non compliance

Code of conduct:

All listed companies, intermediaries including consultants, analysts and auditors advising company and others associated with the company or securities of market are required to frame a Code of conduct to prevent insider trading. This can be as near to the model code of conduct or even more stringent than the model code to prevent misuse of unpublished price sensitive information and also insider trading. It is evident that the matter is left to the discretion of companies/entities to frame their own code of conduct without diluting the compliance of the code. Let us now shift the focus to the requirements of code of conduct.

Code of conduct Schedules:

Schedule-I (Part- A) refers to code of conduct to be framed and complied with by all listed companies. Similarly Part-B refers to and deals with model code of conduct to be framed and complied with by other entities such as merchant bankers, consultants, solicitors, Registrars to issue etc (deemed to be connected persons). If the entities are also listed companies and act as advisors then, they have to comply with both Part-A and Par-B of Schedule-I.

Schedule-II  deals with  Code for Corporate disclosure  practices to be followed by listed companies as well as other entities associated with listed entities in dealing with securities{Reg. 12(1) & 12(2)}

Model code of conduct should incorporate the following:-

Part- A (For Listed companies)

1. Company shall designate a compliance officer (senior level) who shall be responsible for framing and compliance of code of conduct and report to MD/CEO.

2. Compliance officer’s  duties to  involve fixing limits for trading of shares, announcing window closure and open periods, pre-clearance of trades, receiving of disclosures and monitoring of disclosures and responding to SEBI/Stock exchanges, if threshold limits are crossed.

3. Code should emphasize/spell out that Compliance officer, Directors and designated employees shall maintain confidentiality of price sensitive information and an undertaking to that effect be given by connected persons.

4. Directors/employees to disclose their holdings on assuming office and thereafter continual disclosures for changes. Similarly designated employees also to disclose their holdings.

5. Trading window opening and closure to be observed to prevent insider trading during consideration of material events which affects price of shares. It is to be ensured that Pre-cleared trades must be executed within a week or else fresh permission must be sought.

6. Purchased shares must be held for a minimum of 30 days. Waiver of holding period to relaxed only in case of emergent need of funds and on recording of reasons.

7. Any violation of code conduct should be reported to SEBI.

8. Code should provide for penalty for violation besides the penalties to be imposed by SEBI.

Part B: Code of conduct (For Other entities)

For brevity sake, it is not repeated. It may please be noted that more or less the same stipulations to be  as stated above except that the restriction for trading applies to all securities of all companies to which the entities act as Merchant bankers, advisers, consultants.

Code of conduct and restriction on Dealing in securities:

It is worth noting the concept of trading window open and closure. Trading window is closed when events which materially affect the share price movements are considered and till information is made public. It is opened on the next day i.e. 24hrs after the information is made public. All directors/officers/designated employees of the company shall not deal in any transactions involving the purchase or sale of the company’s securities during the periods when trading window is closed.

Further code of conduct Clause 4.2 provided that directors/officers/ designated officers who buy shares  will not  sell  and similarly if they sell, they will not buy during next 6 months from the date of last transaction. SEBI has clarified that with the permission and pre clearance by the compliance officer  in case of financial problems  trading can be allowed even before window is open provided reasons are recorded for such permissions and  due compliance of  code of conduct is ensured.

SEBI further clarified that waiver of holding period can be relaxed by the Compliance officer, if such sale is to meet urgent need of funds. However reasons for waiver should be recorded in writing

Disclosures:

Regulation 13 mandates initial disclosure and continual disclosures by certain persons. For easy and quick grasping of the matter, they are classified as follows:

a) Disclosure by any person:

If the holding reaches a threshold of more than 5%, an initial disclosure of such holdings/voting rights be made in Form- A. Thereafter a continual disclosure for changes in Form-C be given even if the holding falls below 5%.

Both the above disclosures are to be given within 2 working days of receiving allotment advice or acquisition/ sale of shares/voting rights

b) Disclosure by Director/officer:

This category shall make initial disclosure of their holdings /derivatives position (Form-B) to the company within 2 working days of becoming a director or officer of the company.

c) Disclosure by designated employees:

Even the designated employees are also required to intimate the compliance officer of the company, about their/dependant’s holdings in securities of the company by them, at the time of nomination in the same manner followed by directors/officers.

d) Continual disclosure:

Further Directors/officers/designated officers  shall disclose any changes(if any) within 2 working days to the company and the stock exchange in Form D In the case of this category of persons, the disclosure is triggered only if the change exceeds Rs.5 lakhs in value or 25,000 shares or 1% of total shareholding or voting rights, whichever is lower. Since one percent of total shareholding will be higher limit, it will always be either the market value or 25,000 numbers of shares become the parameter.

e) Disclosure by the company:

When the company receives disclosures from the above persons, it is required to disclose to the Stock Exchanges on which its shares are listed. The time limit is 2working days.

Powers of SEBI:

a) Investigation procedure:

Chapter III deals with powers of SEBI to investigate and deal with insider trading cases. Board may either on its own or on the basis of complaints from investors or intermediaries can appoint officers to inspect and appoint an authority to investigate any violation of regulations. (Reg.5&6) SEBI may or may not give notice to insider before carrying out its investigation. Insider has to furnish all information/explanations sought and co-operate with investigating authority who in turn provide its findings /report to the SEBI {Reg.7}. The insider has to reply within 21 days to the findings communicated by SEBI {Reg.9}. If any insider is found guilty, SEBI may give direction to him to restrain from dealing in securities or declare void the sale and deliver securities back to the seller, or pay market price at the time of sale or direction (whichever is higher) or transfer   cost price or market price of securities to Investor protection fund of stock exchange 

b) Consequences of violation of Insider regulations:

If any person violates provisions of Insider regulations, he shall be liable for appropriate action under Sections 11, 11B, 11D, Chapter VIA and Section 24 of the Act. Criminal proceedings can also be initiated for breach of fiduciary duties. For breach of internal code of conduct company can inflict punishment as provided in the code such as freezing of wages or suspension of employee, penalty etc.

Right of appeal: 

Any person aggrieved with the order of SEBI may appeal to Securities appellate Tribunal.

Conclusion:

In the past it is seen that some of the cases initiated by SEBI were dismissed by SAT for lack of evidence or on account of loop holes in the Regulations. Insiders escape punishment especially when third parties trade in shares on the basis of information passed on to them as it is very difficult to establish motive and prove personal gain from such insider information used by third parties. The famous Hindustan Lever case, Rakesh Agarwal and Samir Arora’s cases are examples which were dismissed. However one can hope that good corporate governance can guard price sensitive information and prevent misuse of the same before it is made public for personal gains directly or indirectly.

G S Rao

DGM (Legal), OCL India Limited

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Category Shares & Stock, Other Articles by - G S Rao 



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