SEBI

SEBI Amends Regulation of Prohibition of Insider Trading

The term insider trading means malpractice, wherein the buying & selling of securities take place by people who have access to non-public information, which can be crucial for making investment decisions. The SEBI, in order to maintain secrecy and prohibit the practice of insider trading in the securities market and protect businesses and investors from any undue influence, has issued SEBI (Prohibition of Insider Trading) Regulations 2015. These regulations have undergone various amendments to suit the changing regulations, situations, and circumstances. The present article will deal with one such amendment in the regulation of Prohibition of Insider Trading, dated 24^th November 2022.

The SEBI, in the exercise of powers granted under Section 30 read with Section 11 (2) (g) & Section 12A (d) & (e) of SEBI Act 1992^[1], has amended the prohibition of insider trading regulations and has inserted or modified the certain regulations which will be discussed in this article.

Omissions and Insertions brought under the regulation of Prohibition of Insider Trading

The amended regulation of Prohibition of Insider Trading has modified the following regulations by modification and insertion:

1. Regulation (2) (1) (i): The words “except units of mutual fund” shall be omitted.

2. Regulation (2) (1) (l): The words “redeeming, switching” shall be inserted between the word “Subscribing” and “Buying”, and the word “redeem, switch” shall be inserted between the word “Subscribe” and “buy”.

3. Regulation 7A (d) (iv): The words “and” shall be omitted

4. After Regulation 7A (d) (iv) and Regulation 7A (d) (v): The regulations 5A to 5G shall be inserted.

Applicability and Key Definitions of the amended regulation on Prohibition of Insider Trading

The amended regulation of Prohibition of Insider Trading has inserted a new Chapter–IIA, which will be named as “Restrictions on communication in relation to & trading by insiders in the units of Mutual Funds” and will cover the applicability of the regulations and the key definitions.

Regulation 5A-Applicability: The provisions of this chapter will apply only to the units of a mutual fund. Further, all the provisions of Chapters IIIA & V shall also apply to the units of a mutual fund.

Regulation 5B-Definitions: The important definitions covered under SEBI Prohibition of Insider Trading Regulations 2022 are:

1. Associate: The word “associate” shall mean the same meaning as given in SEBI (Mutual Funds) Regulations 1996.

2. Connected Person: The connected person means:

a. Any person who is or has been connected with the Mutual Fund, Asset Management Company (AMC) and Trustees during the 2 months before the concerned act and holds frequent communication with its

1. Officers while in any capapcity such as contractual, fiduciary, or employment relationship or
2. Director, employee or officer of the Asset Management Company and trustee
3. Person who holds any position, including business or professional relationship with the AMC or Mutual Fund or the trustees, whether by  temporary or permanent means, and

that person has access to unpublished price-sensitive information.

b. Apart from the persons mentioned above, the persons falling under the below categories can be categorised as connected persons:

1. An immediate relative of the connected person
2. Sponsor, Holding Company or associate company
3. Subsidiary Company of Sponsor, or Asset Management Company and Trustees.
4. Board of Directors and KMPs of Sponsor of Mutual Fund
5. Directors or employees of RTAs, Custodians, and valuation agencies who have access or reasonably have access to unpublished price-sensitive information.
6. Official or employee of fund accountant providing services to mutual fund
7. Employee or official of a self-regulatory organisation recognised or authorised by a board
8. Officer of stock exchange for publishing information.
9. Director or employees of legal advisor, auditor or consultants of the mutual fund or AMC
10. An intermediary, as defined in Section 12 of the Act
11. Banker of the Mutual Fund or AMC

3. Insider: The word “Insider” would imply a person who is

a. connected Person or

b. in possession of or have access to the unpublished sensitive information relating to the scheme.

4. Unpublished Price Sensitive Information: The word “unpublished Sensitive Information” means any information relating to the scheme of Mutual Fund which is not yet been released and which, upon becoming public, will likely materially impact the net asset value and interests of the unit holders. It shall further include the instances of:

a. Change in Accounting Policy

b. Change in the valuation of the asset or class of asset

c. Restriction on redemptions and winding up of scheme

d. Creation of Segregated portfolio.

e. applicability of the Swing factor and triggering of swing price framework

f. Material change in the liquidity position of the mutual fund scheme

g. Default in the underlying securities of a mutual fund scheme.

Communication or procurement of unpublished price-sensitive information and maintenance of a structured digital database

The amended regulation of Prohibition of Insider Trading provides the following points in the field of procurement or communication  of unpublished Price Sensitive Information by inserting Regulation 5C.

No Communication to any person:  The insider is not allowed to provide, communicate, or allow access to any unpublished price-sensitive information to any person, including other insiders. However, such communication can be made if it is necessary for legitimate purposes, performance of duties and the discharge of legal obligations. The provision puts an obligation on all insiders who hold price-sensitive information to handle such information with due care and to deal with the information on need to need basis while transacting their business.

No Procurement of Information: The person is not allowed to procure or cause communication from any insider about the unpublished price-sensitive information provided it is done in the necessary for legitimate purposes, performance of duties, and discharge of legal obligations. These regulations further prohibit unlawfully procuring the possession of unpublished price-sensitive information. Any inducement and procurement of unpublished price-sensitive information would be held illegal.

Policy for Legitimate Purposes: The amended regulation of Prohibition of Insider Trading require the board of directors of AMC make a policy for determination for “Legitimate Purposes” with the approval of Trustees.

Notice to the person holding Unpublished Price Sensitive Information: The person who receives Unpublished Price Sensitive Information in relation to “Legitimate Purpose” shall be considered an insider and notice shall be given to such person for maintaining the confidentiality of such information.

Confidential and Non-Disclosure Agreements: The amended regulation of Prohibition of Insider Trading require the Board of Directors of AMC to execute a confidentiality and non-disclosure agreement between the parties and such parties shall have an obligation to keep information so received confidential. Further, the parties shall not deal in the units of a mutual fund when possessing Unpublished Price Sensitive Information.

Maintaining Digital Database: The amended regulation of Prohibition of Insider Trading requires the head of the organisation or every person or board of directors to make sure that a structured digital database is maintained that will contain the nature of unpublished price-sensitive information, name of persons who have shared the unpublished information and the name of such person with whom such information is shared along with PAN or any identifier. Further, it shall ensure that data is not outsourced and is maintained internally with adequate internal controls. The checks should be maintained by time stamping & audit trails to ensure non tampering of database.

Perseverance of Digital Database: The amended regulation of Prohibition of Insider Trading require the head of the organisation or every person or board of directors shall ensure that the digital database is secured for more than 8 years after completion of the transaction. In the event of investigation or enforcement proceedings, the board must keep the data preserved till the completion of the proceedings.

Trading while possessing Unpublished Price-Sensitive Information

The Amended regulation of Prohibition of Insider Trading provides the following points of trading while possessing unpublished price-sensitive information by inserting Regulation 5D.

No insider allowed to trade in units of Mutual Fund Scheme: The insider is not allowed to deal in the units of the mutual scheme when possessing Unpublished Price Sensitive Information. It may affect the Net Asset Value of the Scheme and impact the investor’s interests.

Exceptions to trading: The insider is allowed to justify its innocence by demonstrating the circumstances included in the following:

1. The transaction is an off-market interstate transfer between insiders who possess the same unpublished price-sensitive information.
2. The transaction is carried out in pursuance of statutory or regulatory obligations, including investment or subscription in the units of mutual funds.
3. The transaction is triggered by systematic transactions
4. The transaction is triggered by irrevocable trading plans provided that such plans are approved by the compliance officer and is disclosed on the stock exchange for at least 60 days before the trade commencement.

Onus of not possessing unpublished Price Sensitive Information: The onus of proving that they do not possess unpublished price-sensitive information shall lie on

1. Connected person, in the case of a connected person, possesses such information.
2. Board, in case of any other person, possess such information

Disclosures by Certain Persons

The Amended regulation of Prohibition of Insider Trading provides the following points of trading while possessing unpublished price-sensitive information by inserting Regulation 5E.

Disclosure of holdings on an aggregate basis: The Amended regulation of Prohibition of Insider Trading require that the AMC shall, on a quarterly basis and as specified by the boards, disclose the details of holding in the units of the mutual fund scheme held by the Designated Persons of AMC, trustees & their immediate relative on the stock exchange platform on an aggregate basis.

Details of all transactions in the units of its own Mutual funds: The authorised person to the compliance officer of AMC shall report the details of all transactions in the units of its own mutual funds executed by the designated persons of AMC, trustees & their immediate relatives within 2 business days from the transaction date.

Reporting of Systematic Transactions: The Amended regulation of Prohibition of Insider Trading require the Designated Persons to report the systematic transaction of any mutual fund scheme only at the time of making the first instalment of such transaction.

No Reporting Required: The reporting is not required if the transaction is in pursuance of the following:

1. Subscription or investment in the Mutual Fund units in pursuance of the mandatory requirement specified by the board of AMC with the unit holders of the Mutual Funds Schemes and where the AMC maintains separate records in this regard.
2. Any trading in Index Funds, Overnight Schemes and Exchange Trade funds.

 Manner of Reporting:  The manner of reporting of such disclosures shall be made in as per the proceduure specified by the board from time to time.

Code of Conduct

The Amended regulation of Prohibition of Insider Trading provides the following points of trading while possessing unpublished price-sensitive information by inserting Regulation 5F.

Formulation of Code of Conduct by CEO & MD: The Amended regulation of Prohibition of Insider Trading requires the CEO and MD to formulate a code of conduct with the approval of the Board of Director in order to regulate, monitor & report dealings in the units of Mutual Fund by the designated persons and the immediate relatives of the Designated Persons without diluting the provisions of the regulations.

Formulation of Code of Conduct by Board of Directors or Organisation Head or other person: The Board of Directors or Organisation Head or other person who handles unpublished price-sensitive information in relation to the Mutual Funds Scheme shall formulate a code of conduct in order to monitor, regulate & report trading by their Designated Persons and the immediate Relative of Designated Persons.

Appoint Compliance Officer: Every AMC, intermediary and other persons shall appoint a compliance officer who will administer the code of conduct & other requirements mentioned under the guidelines.

Designated Persons

The Amended regulation of Prohibition of Insider Trading provides the following points of trading while possessing unpublished price-sensitive information by inserting Regulation 5G.

Appointment of Designated persons by AMC or Board of Directors: The Amended regulation of Prohibition of Insider Trading require the Board of Directors of AMC and trustees shall, in consultation with the compliance officer, appoint the Designated Persons to be covered under the Code of Conduct based on their role & functions in the organisation and the access of them to the unpublished price sensitive information. The designated person shall include the following:

1. CEO or MD or President or by any other name of AMC
2. Directors of the AMC or Trustee
3. Chief Investment Officer, Chief Operation Officer, Chief Information Security Officer, Chief Risk Officer, Fund managers, Dealers, Research Analysts, Employees of Fund Operations department, Compliance Officer & Heads of Divisions or departments.

Appointment of Designated Person by other intermediaries & other persons: The other intermediaries and persons shall, in consultation with the compliance officer, appoint the designated persons to be covered under the code of conduct based on their role & functions in the organisation.

Institutional Mechanism for Prevention of Insider Trading

The Amended regulation of Prohibition of Insider Trading provides the following points of trading while possessing unpublished price-sensitive information by inserting Regulation 5H.

Adequate system of Internal Controls: The Amended regulation of Prohibition of Insider Trading  require the Chief Executive officer or MD of an AMC shall put in place adequate systems of internal controls with the approval of the trustee or other fiduciary to ensure the compliance with the provision of the said regulations.

Internal Controls: The internal controls will include:

1. All employees with access to unpublished price-sensitive information will be identified as “Designated Persons”.
2. The details of unpublished price-sensitive information shall be identified and its confidentially shall be maintained as per the requirements.
3. Restrictions be placed on the communication and procurement of Unpublished Price-Sensitive Information.
4. A List of employees will be maintained with whom the information is shared and the confidentiality agreements shall be signed or notice is served to all such persons or employees.
5. Periodical review of the process to adjudge the effectiveness of the internal controls.
6. Compliance with any other requirements.

Compliance with the Regulations: The board of directors or head of an organisation of AMC or intermediary or fiduciary shall ensure that the CEO, MD or other relevant person complies with the provisions of the regulations.

Review by Audit Committee: The Amended regulation of Prohibition of Insider Trading require the Audit Committee of the AMC or the other relevant person of intermediary & fiduciary shall review the compliance procedure of these regulations for at least once in financial year. The audit committee shall further verify the adequacy and effectiveness of the internal controls.

Written policy for inquiry in case of leak of information: Every AMC shall formulate a written policy for the inquiry in case of any leak or suspicion of leak of unpublished price-sensitive information with the trustees’ approval. Based on such information, the AMC shall initiate appropriate action and inform the board of such a leak as soon as possible.

Whistle-blower Policy: The AMC shall, with the approval of the trustees, frame a whistle-blower policy which will be brought to the notice of all the employees to enable them to report instances of any leaks of information.

Cooperation with the inquiry: In case of any inquiry initiated by an AMC or trustee in relation to the leak of information, in that case, the relevant intermediary and fiduciary shall cooperate with the AMC or Trustees in the process of such inquiry.

Conclusion

The Amended regulation of Prohibition of Insider Trading has provided a new chapter that will apply to Asset Management Companies and other intermediaries for prohibiting any instances of Insider Trading in relation to units of Mutual Fund Houses. The Amended regulation of Prohibition of Insider Trading have made the communication or procurement of any information illegal. Further, it is also made necessary that a database be maintained that will contain all the information on who holds the unpublished price-sensitive information. The amended regulation further makes it necessary that the board of directors shall frame a code of conduct which will regulate or monitor the reporting details of the mutual fund unit.

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