SEBI GETS ITS MOJO BACK - GOES ALL OUT ON INSIDER TRADING

By Ruma Dubey

Finally, SEBI’s teeth will be put to use! The much needed bite – tighter insider trading norms have come into place. What has come in place, compared to the ramshackle ‘norms’ we had is good, aligned to international standards.

Before we get into the merits and demerits of the new norms a quick look through what exactly are these new norms:

• The Justice Sodhi Committee report will replace the SEBI (Prohibition of Insider Trading) Regulations 1992.

• Definition of ‘insider’ has been made wider by including persons connected on the basis of being in any contractual, fiduciary or employment relationship that allows such person access to unpublished price sensitive information (UPSI).

• Directors, employees and all other persons in the deeming category covered under 1992 regulations would continue to be covered.

• “Immediate relatives” presumed to be connected person, with a right to rebut the presumption.

• Definition of ‘UPSI’ also clarified – information which pertains to the company as well as its securities.

• Conspicuously absent from the new norms – no inclusion of public servants in the category of ‘connected persons’.

• Companies to disclose UPSI at least two days prior to trading if such information is ultimately permitted for communication to the public.

• Introduction of “Trading Plans” on the lines of USA for insiders with required safeguards.

Well, these in a nutshell, without getting into the nitty-gritties and legal language, are the new Insider Trading norm. A revamp has happened after 20 years and even though a small move, its welcome. Take this as an acknowledgement that SEBI knows it needs to control this menace. The good news here is that we now have a legal definition for ‘insider’ which until now was very vague.  But leaving out public servants as was recommended by Justice Sodhi Committee was an inadvertent slip or deliberate move?

The good thing is that the entire onus of proving oneself guilty or not guilty is now on the accused and SEBI can go after them, till proven guilty or otherwise with tongs and dagger. The idea of putting in ‘Trading Plan’ is good as this now means that promoters, internally, will have to put in place their future plans much ahead of time, disclose these plans to the stock exchanges and then abide by that time table. Many fear that this could lead to speculation in stock price. We wonder if the information or Trading Plan will be made available only to the exchange and not to the investor? In the US, promoters do not have to disclose to investors the existence of the plans or their provisions, and they can change or discontinue them without disclosure. If the same rule applies here, then we are sure to see ‘legitimate’ insider trading. This is a loophole in the law in USA and they are urging the SEC to correct the same. Hope SEBI puts in place a ‘corrected’ one or else, to some extent it does not really protect the public from insider trading; it becomes more of a tool for the insiders to trade within the legal framework, taking advantage of the information.

Though the definition of “insider” is given, we still do not know what exactly is “insider trading”. ‘There is no proper definition under law for ‘insider trading’, it remains vague. Yet the fact remains that despite all these measures, detecting insider trading is extremely tough and even tougher to bring the guilty to books. Remember, detecting insider trading is not about connecting the dots by going from one dot to the other but by starting at both dots and working towards the middle.