Structured Digital Database for UPSI; a habit changer law against insider trading

LegalitySimplified

Insider trading is a fundamental threat to fair market conduct and effective corporate governance. It is an offence that compromises the reputation of the listed entities, the interests of its shareholders, the morale of its employees, the fair-trade practices in the stock market and public policy. As insider trading causes irremediable damage, it is the duty of both listed entities and regulatory bodies to check, track and penalize the practice.

Maintenance of a Structured Digital Database for storing Unpublished Price Sensitive Information of listed entities is a legal requirement introduced to constantly track the movement of insider data and thereby nip the practice of insider trading in the bud. This new legal requirement introduced by Securities and Exchange Board of India (Prohibition of Insider Trading) (Amendment) Regulations, 2018 mandates compliances for listed entities, their fiduciaries, compliance officers, insiders, directors and auditors. It introduces compliance requirement to internally maintained a structured digital database with audit trail and time stamping, its timely updating, annual audit and submission of compliance certificates in the regard.

This comprehensive compliance framework was established through a set of amendments and clarifications from SEBI, BSE and NSE.

 

Timeline of establishment of framework for SDD
  Date Notification Legal Update
1 August,  2017   SEBI constituted a Committee  on  Fair  Market  Conduct under  the  Chairmanship of Shri T.K. Viswanathan, Ex-Secretary General, Lok Sabha and Ex-Law Secretary
2 August 09, 2018 Report of Committee on Fair Market Conduct for public comments The requirement for structured digital database was proposed by the committee report.

 

3 December 31, 2018

 

Securities and Exchange Board of India (Prohibition of Insider Trading) (Amendment) Regulations, 2018

 

The Board of Directors are mandated to establish a structured digital database of nature of unpublished price sensitive information and details of persons/entities in possession of the same.

 

4 April 1, 2019

 

 

Commencement of 2018 amendment The requirement to maintain SDDs comes into effect.
5 5th July 2019

 

SEBI Guidance Note It is clarified that SDD shall be maintained by listed entities, intermediaries and fiduciaries
6 April 29, 2021 Comprehensive FAQs on SEBI (PIT) Regulations, 2015 It was clarified that irrespective of the fact that information is shared within or outside the Company, requisite records  shall  be  updated  in  structured  digital  database  as  and  when  the  information  gets transmitted.
7 July 17, 2020

 

 Securities and Exchange Board of India (Prohibition of Insider Trading)(Amendment) Regulations, 2020 It is mandated that the database shall not be outsourced and shall be maintained internally with adequate internal controls and checks such as time stamping and audit trails to ensure non-tampering of the database.

 

The BoD shall ensure that the structured digital database is preserved for a period of not less than eight years

8 8th October 2020 SEBI Guidance Note It is clarified that both the listed entity and their intermediaries/fiduciaries shall maintain separate SDD’s.

The SDD shall contain both details of UPSI and that of every employee entity with access to such information.

9 29 April, 2021 SEBI Guidance Note It is clarified that the SDD shall use the internal software and server of the entity itself, it shall not use software or server of any other vendor, domestic or overseas.
10 August 4, 2022 Bombay Stock Exchange (BSE’) and National Stock Exchange (`NSE’) sent mails to listed entities Compliance officers of listed entities are directed to certify compliance with maintenance of Structured Digital Database. The last date for giving this certification by Compliance Officer is August 9, 2022.

Extensions have been requested by stakeholders including ICSI

 

Compliances relating to Structured Digital Database

Every listed entity and its intermediaries and fiduciaries including Professional firms such as auditors, accountancy firms, law firms, analysts, insolvency professional entities, consultants, banks etc., assisting or advising listed companies shall separately comply with the legal framework related to SDD. The following are the compliances related to maintenance of SDD.

  • Head of organization shall draft a code conduct to prevent insider trading as per the format provided in Schedule C of Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015
  • As per the code on conduct, the board of directors or such other analogous authority shall in consultation with the compliance officer, identify:
  1. All the unpublished price sensitive information
  2. The designated person’s who have access to such information in the basis of their role and function in the organization.
  3. Every external entity that has access to such UPSI including intermediaries and fiduciaries including Professional firms such as auditors, accountancy firms, law firms, analysts, insolvency professional entities, consultants, banks etc., assisting or advising listed companies.
  • Inform these person’s that they are receiving UPSI
  • Ensure that all such person’s and entities have signed confidentiality agreements.
  • Designated persons shall be required to disclose the following:
    1. Names and Permanent Account Number or any other identifier authorized by law and Phone, mobile and cell numbers of the following persons to the company on an annual basis and as and when the information changes:
    2. Immediate relatives
    3. Persons with whom such designated person(s) shares a material financial relationship
    4. The names of educational institutions from which designated persons have graduated and names of their past employers shall also be disclosed on a one-time basis.
  • Create and maintain an internal Structured Digital Database for the entity.
  • The SDD shall not be out sourced. The data in SDD shall not be accessible to or stored in the server of any other entity, domestic or foreign.
  • Ensure that all the details regarding the UPSI and the details provided by designated person’s are uploaded in the SDD and the information is kept updated.
  • The details of UPSI to be uploaded:
  1. Date and time of Sharing
  2. Nature of UPSI shared
  3. Mode of Sharing
  4. Purpose of sharing UPSI.
  5. Recipient individual or entity
  • Ensure that the SDD is maintained with adequate internal controls and checks such as time stamping and audit trails to ensure non-tampering of the database. The data shall be non-tamper able. It can be editable but a time stamping shall be maintained
  • The Audit Committee of a listed company or other analogous body for intermediary or fiduciary 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.
  • Compliance officers of listed entities shall certify compliance with maintenance of Structured Digital Database and submit the same to BSE and NSE
  • The structured digital  database  shall  be  preserved for a period of not less than eight years after completion of the relevant transactions and in the event of  receipt of any information from SEBI regarding any investigation or enforcement proceedings, the relevant information in the structured digital database shall be preserved till the completion of such proceeding.

Conclusion

The maintenance of a structured digital database for UPSI ensures that the listed entity and their fiduciaries tracks the movement of UPSI, the person’s with access to UPSI, their significant relationships and confidentiality agreements signed by them. 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. This requirement is a habit changer that encourages self regulation, transparency and accountability with regard to protection of insider information.

(For purchasing software that can be used to maintain Structured Digital Database, contact Legality Simplified via admin@legalitysimplified.com or https://legalitysimplified.com/contact-us/)

Authors:

Alby Stephan. K, Legal executive at Legality Simplified

Sathya Krishna

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