In the first decades after enactment of Companies Act, 1956, the corporate governance of companies in India, especially the private companies, one person companies and family-owned companies was structured in such a manner that shareholders themselves presided as managing directors of the company. The later decades witnessed a shift in the standard corporate governance structure in favour of separation of the board, management and shareholders and growth of public and listed companies.
In a scenario where shares of companies are freely traded in stock markets and internal governance of the companies are handled by the management, an iron curtain separates the management and shareholders, insiders and outsiders to a company, thereby maintaining a delicate balance between transparency and confidentiality of internal matters before shareholders. This balance shall be maintained to ensure that all shareholders enjoy same level of transparency in the internal matters of the company. This promotes shareholder democracy and ensures that the interests of the minority and public shareholders are treated at par with the interests of promoters and majority shareholders. It also ensures that all players in the stock market are in possession of same level of information regarding internal matters of a company and thereby capable of making informed decisions regarding trading of securities. To ensure transparency and equity in the process of sharing internal information of a company with its shareholders, the corporate and securities law regime and regulatory authorities seeks to prevent the Unethical practice of INSIDER TRADING.
Insider trading involves trading in a public company’s stock or other securities by those in possession of unpublished price sensitive information about the company. Unpublished Price Sensitive Information(UPSI) is any information that could substantially impact an investor’s decision to buy or sell the security, including the price of the security, that has not been made available to the public. A stock market transaction qualifies as insider trading when one of the parties is in possession of UPSI. A party in possession of UPSI by virtue of their position in the company or their relationship with people in such positions in the company are treated as insiders.
The laws propounded by Securities Exchange Board of India and internal bylaws of the companies seeks to prevent both trading in the securities of a company by insiders during trading period as well as leakage of UPSI during silent period. The SEBI (Prohibition of Insider Trading) Regulations, 2015 and Codes of Fair Disclosure and Conduct implemented by the company lays down the measures a company shall undertake to check Insider Trading.
Trading Period is the period during which the employees of the Company who have access to material information are prohibited from trading in the securities of the Company. This is period during which the UPSI is known to the insider and not available to the public. During the trading period, the insiders are prohibited from making and transfer or acquisition of securities of the company, a prohibition that is called as trading window closure. The PIT regulations states that Companies shall close the trading window from the end of the quarter of which the financials are to be announced till 48 hours after the disclosure of financials results to the stock exchange.
Silent period is the period during with a Company’s senior management does not interact with the institutional investors, analysts and the media to ensure that there is no leakage of confidential information to selected group of stakeholders or investors.
Compliances applicable to insiders under SEBI (Prohibition of Insider Trading) Regulations, 2015
- Maintain confidentiality of the Unpublished price sensitive information.
- Ensure that the UPSI is transferred only for legitimate purposes laid down under Codes of Fair Disclosure and Conduct implemented by the company on a need-to-know basis
- Disclose to the company upon receipt of UPSI, all material financial relationships and details of other relatives of the insider,
- To sign a confidentiality agreement regarding the UPSI.
- To restrain from trading in the securities of the company when the trading window is closed.
Compliances applicable to companies under SEBI (Prohibition of Insider Trading) Regulations, 2015
- The Company shall formulate a ‘Code on fair disclosure and conduct’.
- The code shall be published on the official website of the company. The company shall promptly notify the stock exchanges with respect to formulating of such code and any amendments thereto.
- The company shall identify and designate a senior officer as ‘Compliance Officer’ to administer the compliance of the Code of Conduct.
- The compliance officer shall report to the board of directors and in particular to the Chairman of the Audit Committee.
- Inform stock exchanges regarding violations.
- The Audit Committee shall review compliance with the regulations at least once in a financial year.
- Maintain internal controls, inquiry mechanism and whistle blower mechanism.
- Maintain a structured digital database to track the movement of UPSI.
Alby Stephan. K, Legal Executive at Legality Simplified.