Since overhauling the insider trading regime with the introduction of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”), the Securities and Exchange Board of India (“SEBI”) has continually sought to fine tune and tweak the regulations through amendments in 2018 and 2019. On July 17, 2020, SEBI notified the Securities and Exchange Board of India (Prohibition of Insider Trading) (Amendment) Regulations, 2020 (“PIT Amendment”), to introduce further changes to the PIT Regulations.
The PIT Amendment, approved by SEBI at its board meeting held on June 25, 2020, include the following key changes:
- Enhancement of the structured digital database towards seeking and storing additional details of persons sharing unpublished price sensitive information (“UPSI”)
- Automation of shareholding disclosures and change in reporting authority for making disclosures of PIT violations by listed entities, market intermediaries and fiduciaries.
- Introduction for additional transactional mechanisms as an exception to trading window restrictions.
Changes Introduced to the PIT Regulations
A. Structured digital database
Prior to the PIT Amendment, the board of directors of a listed company were required to simply maintain a structured digital database containing names and Permanent Account Number (“PAN”) (or any other identifier, where PAN was not available) of UPSI recipients. This directive had given rise to queries on the manner in which listed entities were supposed to record details where the UPSI recipient comprised an intermediary or fiduciary, given that listed companies often interact with them. SEBI had answered this through its FAQs issued in November 2019, wherein it was clarified that in cases where UPSI has been shared with intermediaries/ fiduciaries, the listed company would be required to maintain details of the recipient entity while the intermediary/ fiduciary would, at their end, be required to maintain a list of individuals having access to UPSI, in accordance with the PIT Regulations.
Now, in an attempt to bolster the level of compliance, SEBI has, through this PIT Amendment, directed all entities handling UPSI to maintain such a structured digital database.
In addition, SEBI has also ensured that additional details are sought and stored in this database, including the nature of the UPSI and the names of persons who have shared it with others (in addition to details of the recipients).
From an internal administrative perspective as well, SEBI has incorporated the following necessary amendments:
- Maintenance of structured digital database for a period of 8 (eight) years after completion of the relevant transaction, except in case of any pending enforcement or investigative proceeding by SEBI: While, optically, this duration may seem excessive in comparison to the typical regulatory requirement of 5 (five) years under AML laws, SEBI has chosen to align this period with SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, and similarly, Section 128 of the Companies Act, 2013. This move would also avoid any roadblocks or challenges in obtaining information during investigations conducted by SEBI.
- Prohibition on outsourcing maintenance of the internal database: While entities routinely outsource their technology and IT functions, SEBI has strictly restricted outsourcing this database to third party service providers. Given that this database will hold a growing number of personal details of UPSI providers and recipients coupled with the listed entity’s own UPSI , the maintenance of the database itself would be sensitive operation and would have to be handled by entities in-house.
B. Reporting of violations of the Code of Conduct
SEBI has always viewed breach of an entity’s code of conduct on insider trading as a serious issue and has hence been constantly tweaking its laws to encourage and mandate reporting violations of the same. In 2010, SEBI held that a violation of the Code of Conduct would in fact amount to a breach of the Insider Trading Regulations, since the Code of Conduct has been incorporated into the regulations. In July 2019, SEBI first prescribed the format and procedure for reporting violations of the Code of Conduct to it.
While the recent SEBI circular dated July 23, 2020 (“Circular”) slightly modifies the standard format for reporting violations which was set in July 2019, the PIT Amendment and this Circular also bring forth a substantial shift in the reporting matrix. With effect from this amendment, all listed entities, intermediaries and fiduciaries are required to submit the standard format identifying the violation to stock exchange(s) where the concerned securities are traded, and not to the securities market regulator anymore.
For listed entities, this change of guard from SEBI to stock exchanges continues to be relevant, from a price movement or surveillance perspective. However, the requirement for unlisted intermediaries/ fiduciaries to inform stock exchanges regarding any violation of their Code of Conduct seems to be an incongruous stipulation for all parties concerned, given that such entities (unlike listed companies) would typically not have any interaction with stock exchanges. It remains to be seen how these proposals will be implemented and whether the stock exchanges themselves issue any circulars or guidance in this regard.
In terms of the format itself, the PIT Amendment does not clarify the mechanism for such intimation to stock exchanges and whether such information would be disclosed to the public or simply maintained by the stock exchanges. It is pertinent to note that the violations reported to SEBI previously were not generally required to be published in the public domain.
Separately, the Circular also provides payment details for remittance of penalty imposed by entities on their designated persons violating the Code of Conduct to the Investor Protection and Education Fund administered by SEBI. Previously, as part of the action taken upon identification of the violation, entities would often penalise their designated persons without proper clarity from SEBI regarding where such amounts are to be deposited. With this Circular in place, all such proceeds will have to transferred towards investor interests.
C. Trading Window Restrictions
The SEBI (Prohibition of Insider Trading) Amendment, 2019 introduced certain transactions to Schedule B which would be exempted from trading window restrictions. This list includes defenses to allegations of insider trading covered under Regulation 4 of the PIT Regulations (transactions carried out as a result of statutory obligations, off market trade between insiders) as well as further public offer, subscribing to a rights issue, or tendering of shares in an open offer. This list under Schedule B was an indicative list and could not hence be extended to include transactions not included in the same.
Hence, the PIT Amendment has created room for SEBI to consider and recognise additional categories of transactions/ mechanism as an exception to the closure of trading window related restrictions. Following the PIT Amendment, and moving away from the SEBI board meeting takeaways, SEBI recently issued another circular on July 23, 2020, through which it has now permitted offer for sale and rights entitlement transactions to be carried out while the trading window is closed.
With each of these amendments, while SEBI has chalked out additional responsibilities for intermediaries and fiduciaries, as well as streamlined its own regulatory powers with stock exchanges, the overall impact on the market hygiene remains to be seen. While there seem to be concerns regarding the degree and extent of control that may be exercised by stock exchanges over unlisted entities, the same will depend on successful implementation of the PIT Amendment and issuance of further clarifications and circulars by SEBI.
As noted above, the requirement of maintaining an enhanced digital database is in line with SEBI’s investigation and surveillance procedure. However, the same may lead to certain operational challenges and issues for the listed company, intermediary or fiduciary, because in addition to maintaining more data for a longer period of time, the entity is no longer permitted to outsource the task of maintaining the database to a third party.
 Regulation 8, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015: “Preservation of documents –
The listed entity shall have a policy for preservation of documents, approved by its board of directors, classifying them in at least two categories as follows-
(a) documents whose preservation shall be permanent in nature;
(b) documents with preservation period of not less than eight years after completion of the relevant transactions:
Provided that the listed entity may keep documents specified in clauses (a) and (b) in electronic mode.”
 Section 128(5), Companies Act, 2013: “(5) The books of account of every company relating to a period of not less than eight financial years immediately preceding a financial year, or where the company had been in existence for a period less than eight years, in respect of all the preceding years together with the vouchers relevant to any entry in such books of account shall be kept in good order”
 Adjudication Order in respect of Shri Manmohan Shetty in the Matter of Adlabs Films Ltd. dated June 9, 2010