SEBI on 25th July, 2024 has issued the due date for commencement of Securities and Exchange Board of India (Prohibition of Insider Trading) (Amendment) Regulations, 2022. Securities and Exchange Board of India has appointed the 1st day of November, 2024 as the date on which the Securities and Exchange Board of India (Prohibition of Insider Trading) (Amendment) Regulations, 2022 shall come into force.
Introduction of Chapter IIA: Insider Trading in Mutual Funds
A new chapter, Chapter IIA, specifically addresses restrictions on communication and trading by insiders in mutual funds. The provisions under this chapter are pivotal and detailed.
Communication and Data Maintenance (5C):
- Insiders are prohibited from sharing UPSI, except for legitimate purposes, duties, or legal obligations.
- A structured digital database must be maintained, recording all instances of UPSI communication, ensuring transparency and traceability.
Trading Restrictions (5D):
- Insiders cannot trade mutual fund units while in possession of UPSI.
- Several defenses are available for insiders to prove innocence, such as pre-approved trading plans or systematic transactions registered two months prior.
Disclosure Requirements (5E):
- Asset management companies (AMCs) must disclose holdings and transactions in mutual fund units by designated persons and their immediate relatives quarterly.
- Details of significant transactions must be reported within two business days.
Code of Conduct (5F):
- AMCs must formulate a code of conduct to monitor and regulate dealings in mutual fund units by designated persons.
- The code includes provisions for closure periods, pre-clearance of trades, and restrictions on contra trades.
Designated Persons (5G):
- AMCs must identify and specify designated persons based on their role and access to UPSI.
- This category includes top executives and employees with significant responsibilities.
Institutional Mechanism (5H):
- AMCs must implement internal controls to prevent insider trading.
- Regular reviews and audits are mandated to ensure effectiveness and compliance.
The amendment prescribed following internal controls to prevent insider trading in asset management companies:
- All employees who have access to unpublished price sensitive information are identified as Designated Persons;
- All the unpublished price sensitive information shall be identified and its confidentiality shall be maintained as per the requirements of these regulations;
- Adequate restrictions shall be placed on communication or procurement of unpublished price sensitive information as required by these regulations;
- Lists of all employees and other persons with whom unpublished price sensitive information is shared shall be maintained and confidentiality agreements shall be signed or notice shall be served to all such employees and persons;
- Periodic process review to evaluate effectiveness of such internal controls;
- Compliance of all other relevant requirements specified under these regulations.
Implications
These amendments mark a significant shift in SEBI’s approach to insider trading regulations, especially regarding mutual funds. By including mutual fund units and expanding the definitions and responsibilities of insiders, SEBI aims to create a more transparent and fair trading environment. The emphasis on maintaining digital records and pre-clearance of trades underscores the importance of accountability and traceability.
For investors and market participants, these changes mean enhanced protection and assurance that the market operates on a level playing field. For AMCs and other entities, these regulations necessitate robust internal controls, comprehensive policies, and rigorous compliance mechanisms.
