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Fiscal Solutions Powered by Law…
The Inside of Trading
- An Industry PerspectiveBy
Suresh Viswanathan
Founder Director & Chief Consultant
Finteglaw Knowledge Solutions Private Limited
The Regulatory View - Globally
A company's confidential information– Qualifies as property to which the company has a right of
exclusive use.
Divulging UPSI by an insider is violation of a fiduciary duty – Constitutes fraud akin to embezzlement– Has criminal implications
Misappropriation of UPSI amounts to theft– Use of UPSI for ones benefit amounts to dishonesty and
cheating– Has criminal implications
May 6, 2015
Insider trading a crime in US
U.S. insider trading prohibitions are based on English and American common law– Governed by prohibitions against fraud
A director, who bought his company’s stock when he knew it was about to jump up in price, committed fraud by buying while not disclosing his inside information– The US Supreme Court ruling in 1909
– Well before the SEC Act, 1934,
May 6, 2015
Corrupting Effects
Corrupts the ‘Level Playing Field’
Profit made out of the loss of other investors
Leads to loss of confidence in stock market
Easier to identify the beneficiaries– Extent of losses suffered
impossible to calculate.
May 6, 2015
SEBI Investigations
3
11
12
43
86
2
14
10
52
41
6
13
16
6
67
6
13
16
12
73
0 10 20 30 40 50 60 70 80 90 100
Takeovers
Insider Trading
Miscellaneous
Issue Related Manipulations
Market Manipulations
2013-14 Investigations Completed
2013-14 Investigations Taken up
2012-13 Investigations Completed
2012-13 Investigations Taken up
May 6, 2015
Penalties Skyrocket
184
2040
1009
0
500
1000
1500
2000
2500
2012-13 (Rs. Lakhs) 2013-14 (Rs. Lakhs) Increase %
Penalty under SEBI (PIT) Regulations, 1992
May 6, 2015
‘The Unwinnable War’
A.M. Louis in his book ‘The Unwinnable War on Insider Trading,’ asserts that:
– Of all the issues that have confronted regulators of the securities markets, the regulation of insider dealing has proved among the most intractable’
Very true of Indian stock market
– The Indian stock market practically runs on unpublished price sensitive information
May 6, 2015
New Powers
Section11(2)(ia) - Calling for information and records from any – person
– Including any bank or any other authority or board or corporation
• established or constituted by or under any Central or State Act
Relevant to any investigation or inquiry by SEBI in respect of any transaction in securities– In the opinion of SEBI
Implications
Enables collection of call recording data from any Telecom provider
Enjoys courts’ powers for– discovery and production of
books of account and other documents
– Summoning and enforcing attendance
The provisions have powers over-riding other laws
SEBI Act Amended - 2014
May 6, 2015
Search and Seizure
Power to search – Places and Buildings
– Vessel, vehicle or aircraft
– Persons
– Computers
Powers to– Inspect
– Seize
– Place identification mark
– Make copy
– Record statement
May 6, 2015
SEBI’s Tentacles
SEBI has installed an advanced surveillance software– This monitors abnormal patterns of
trading in all scrips– Detailed information sought from
Exchanges on such trades– Exchange in turns to the Members
for client information
Surveillance systems still not able to cope with the malpractices– HDFC Mutual Fund case, the
information was voluntarily shared with SEBI
May 6, 2015
The Odds
Very wide definition of connected persons
Onus on the Connected Person to prove innocence – Guilty unless proved innocent– Contrary to established principles of law
New powers acquired by SEBI– Search & Seizure powers– Power to procure Call records data
Heavy penalties (Rs. 10 Lakh to 25 Crore) and disgorgement
Unlisted intermediaries could face prosecution under Companies Act also
PIT violations outside Settlement process
May 6, 2015
S 447 of Companies Act 2013
“any person who is found to be guilty of fraud, shall be punishable with imprisonment for
a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud”
– Provided that where the fraud in question involves public interest, the term of
imprisonment shall not be less than three years.
“fraud” includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with
intent to deceive, to gain undue advantage from, or to injure the interests of,
the company or its shareholders or its creditors or any other person, whether or not
there is any wrongful gain or wrongful loss
– “wrongful gain” means the gain by unlawful means of property to which the person gaining is not legally entitled
May 6, 2015
S 195 of Companies Act 2013 “No person including any director or key managerial personnel of a company
shall enter into insider trading” “insider trading” means—
– an act of subscribing, buying, selling, dealing or agreeing to subscribe, buy, sell or deal in any securities by any director or key managerial personnel or any other officer of a company
either as principal or agent if such director or key managerial personnel or
any other officer of the company is reasonably expected to have access to any non-public price sensitive information in respect of securities of company
– an act of counselling about procuring or communicating directly or indirectly any non-public price-sensitive information to any person;
Contravention punishable with imprisonment for a term which may extend to
five years five years or with fine which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees or three times the
amount of profits made out of insider trading, whichever is higher, or with both.
S 458 delegates the prosecution powers to SEBI
May 6, 2015
Connected Persons (Non Intermediaries)
The Issuer Company
Director,
Immediate Relative
Company, Firm,
HUF, AOP
Officer, Employee, Professional or
Business Partner
Immediate Relative
Holding, Associate & Subsidiary
Investment, Trustee & Asset Management
Companies
Banker of the Company
Public Financial Institution, its
Directors & Employees
If a Director, immediate Relative or Banker has more than 10% interest
May 6, 2015
Connected Persons (Intermediaries)
The Issuer Company
Any Dealing Intermediary u/s
12 of SEBI Act
Employees & Directors of the
Intermediary
Officials of Stock Exchange &
Clearing House
Immediate Relative
Member of Board of Trustees of MF
Director & Employee of the AMC of the MF
SEBI Authorised Self regulatory Organisations
Officials & Employees
May 6, 2015
“Fig Leaf Cover” for Stock Brokers
Segregate and demonstrate– Prop dealing from client dealing
desk– Sales staff from client dealing desk– Research team from dealing and
sales teams
Maintain documented evidence– NDA with all concerned including
professionals and business partners– Rationale for prop trade decisions– Basis (sources) of research reports– Authenticated order book/deal
tickets • even for prop trades
– Call records of the dealer
May 6, 2015
Taboo for Stock Brokers
Never ever– Prop trade
• on stocks of group companies
• based on any insider information from anyone
– Undertake trades of AMCs, PMS, AIF etc., belonging to your group
– Allow staff to trade through other brokers
– Provide unsolicited trading advise to clients
• other than through an authenticated published document
May 6, 2015
Research Vs. Insider - Wafer thin…
To ask a Maruti employee about footfall at his location
To have lunch with an ex CFO of a software company
To talk to doctors who have worked on past clinical trials of a pharmaceutical company
To appoint an automobile industry veteran as a 'source'
To pay a Maruti employee to get a printout of a sales data
To have lunch with a current CFO of a software company - on your boat
To pose as a doctor to gain access to a clinical trial in progress in a pharmaceutical company
To appoint the brother in law of Maruti VP as an industry 'source'
May 6, 2015
Internal Trade Controls
Effective Employee Securities Dealing Policy– To regulate, monitor & report trades
• Automation suggested
– Adherence to Schedule B– Applicable to Auditors, consultants,
vendors etc. who may have access to UPSI
– Everyone to appoint a Compliance Officer
Address Insider Trading as an Enterprise Risk– Make this part of corporate culture
Conduct periodic awareness sessions to all employees
May 6, 2015
Trading Plan – An EntitlementTrading
Plan
Listed Company
Connected Person
Deemed Connected
Person
SEBI Intermediary
Person Possessing UPSI
Person having access to UPSI
No trading during 10th
March, June, September & December till 2 days
after declaration of results
Minimum Plan period for 12 months
Value of trades or no. of securities, nature of
trades and intervals, or dates to be disclosed
No parallel plans allowed.
No scope for market abuse to be provided
Once approved, cannot be revoked
Trading not to commence before 6 months of disclosure to Stock
Exchange(s)
To be formulated by the insider
To be reviewed & approved by the
Compliance Officer
Disclosure to the Stock Exchange(s)
Plan shall not be implemented if any UPSI is in the possession of the Insider
May 6, 2015
Daunting Tasks for Listed Companies
To maintain the dynamic list of connected persons– Acting in contractual or fiduciary
relationship– Professionals – Business partners
To ensure that UPSI is not shared with the aforesaid except under permitted circumstances
To document and prove that UPSI was not shared with the aforesaid
To enter into NDA with all the aforesaid
To approve and operate Trading Plans
May 6, 2015
Role of Compliance Officer Defined!
SEBI Adjudication Order dated July 27, 2012 in respect of Mr. G Jayaraman in the matter of Satyam Computer Services Ltd. – SEBI held the erstwhile compliance officer of
Satyam is liable for not enforcing the safeguards under the Model Code during the period of December 2008 – January 2009
– Trading window was not closed after becoming aware of certain “price sensitive information”
The order further said – “The duty weighs even more on a person like
Compliance Officer, who is conferred upon with key responsibilities in a company. Hence, the violation by the Noticee needs to be viewed seriously.”
SEBI imposed a penalty of Rs.5,00,000/-(Rupees Five Lakh only) on Mr. G Jayaraman.
May 6, 2015
Onerous role of Compliance Officer
Responsible for Trading Plans and Employee Security Dealing Policy– Means he should ensure that nobody is
front running– Trades by relatives is more onerous to
monitor
Responsible for scrip related rumours floated by other employees
Bound to report all cases of Insider trading to SEBI
Responsible for all reporting to Exchanges
May 6, 2015
Brace up …
Install– Robust internal control systems for
complying with regulatory requirements
– Proper Chinese Wall mechanisms
Strengthen– The ambit of internal audit– The standards in regulatory
compliance
Automate– Compliance processes– Internal controls– Back up mechanisms
May 6, 2015
Awaiting Clarification
Companies whose debt securities are listed also come under the ambit of SEBI as a Listed Company, even though they are closely held– Will PIT apply to these companies
also?
Does a Trading Plan apply to an Intermediary also?– What will happen if an insider goes
bankrupt and not able to continue trades under the Plan
Post FMC Merger, will commodities derivatives also come under the ambit PIT Regulations?
May 6, 2015
Finteglaw Knowledge Solutions Private LimitedCIN: U74140MH2008PTC186787
Registered Office: A – 403, Kukreja Centre, Sector 11, CBD Belapur, Navi Mumbai – 400614.Zonal Office (South) : ‘Reglog’, New No. 17/1, Playground View Road, Nandanam, Chennai – 600 035.
Phone: +91 22 27577315, Website: www.finteglaw.com, email: [email protected]
May 6, 2015