Insider trading involves trading in a public company’s stock or other securities by those in possession of unpublished price sensitive information about the company.
Insider trading poses a grave threat to the interests of minority shareholders, public shareholders, traders in the share market, the company itself and the economy as a whole. Thus, it is the responsibility of companies, stock exchanges and authorities to check insider trading. Companies shall maintain a corporate governance structure that eliminates all potential risks of insider trading.
Maintenance of Structured Digital Database (SDD), is a legal requirement introduced to track Unpublished Price Sensitive Information (UPSI) communications of listed entities, and to nip the practice of insider trading in the bud. SEBI has mandated every entity to maintain an SDD (be it internally or through third-party vendor software, installed on the entity’s database / server). Even though the company have both a commercial interest and a legal requirement to check insider trading, developing a corporate governance structure that eliminates all potential risks of insider trading through internal check and bounds is nearly impossible because insider trading is an offence often committed by top level employees or owners of a company itself. This demands the company’s management, stock exchanges and SEBI to coordinate in maintaining vigilance against insider trading. Internally, the company shall maintain a structure where the Board of Directors, Compliance officer and auditors coordinate to check insider trading. The audit requirements related to SDD seeks to ensure this.
The SDD maintains information regarding movement of every UPSI between the insiders and designated persons of the company. The companies are at liberty to determine the staff entrusted with uploading this information to SDD. As maintenance of SDD is a relatively new legal requirement, soon the companies across India will develop standard business practices governing the process of uploading information into SDD. It is advisable to entrust the head of departments dealing with UPSI to upload information into SDD.
The Insider trading regulations mandates the compliance officer to supervise the overall process of maintenance of SDD. The law also mandates that the Audit Committee of a listed company shall review compliance with the provisions of these regulations at least once in a financial year and shall verify that the systems for internal control are adequate and are operating effectively.
The information added to SDD shall have an audit trail and time stamping. This shall help in the audit process. The compliance officer shall provide reports to the Chairman of the Audit Committee or other analogous body, if any, at such frequency as may be stipulated by the board of directors or head(s) of the organization but not less than once in a year.
The audit committee can call compare the information in the SDD with reports of compliance officer and information collected from designated persons and heads of departments. Finally, both the compliance officer and audit committee will report to the BoD.
Companies are mandated to submit a quarterly compliance certificate certified either by the compliance officer or a Practicing Company Secretary (PCS) to BSE and NSE. The compliance certificate can be prepared based on audit report. The stock exchanges can thereby supervise the compliance with SDD related requirements.
The annual audit ensures that the management of listed entities supervises over the maintenance of database and timely submission of compliance certificates enables stock exchanges to supervise the same. If any external auditors conducts the annual audit, such third-party entity is also mandated to maintain SDD thereby ensuring there are no loose ends in the system that can lead to leakage of UPSI. Further, SEBI can also inspect the SDD at its discretion and the BoD is made accountable for any non-compliance with any SDD related requirements. SDD is supervised by audit committee, board of directors and the compliance officer. This facilitates whistle blowing by employees even if companies fails to report insider trading.
Thus, the statutory provisions itself mandates establishing a sound internal mechanism to check insider trading by combined supervision from audit committee, board of directors and the compliance officer.
Author: Adv Alby Stephan, Legal Executive at Legality Simplified