LOGO

Presentation by:CA Vijay MullajiCA Kinner MehtaCA Hemant Hirani

Group study on Insider Trading

– Indian and Foreign case studiesDate: 27th Sept.,2014at ICAI Towers, BKC Mmbai

� First Page Headline Of TOI Dt 10/09/14Reads, ‘Bharara Puts Another PIO In Jail ForInsider Trading’

-Mathew Martoma

�Global Corporate Celebrity & PIO RajatGupta Is Already Behind Bars In USA PursuantTo His Conviction In Insider Trading Case

� Insider Trading Poses Grave Threat To Fair &Efficient Working Of Stock Market

� Importance Of Fair Play

�Level Playing Field

�No One To Have

�What Is Insider Trading?

�Dealing In Securities�No One To Have

Undue Advantage

Securities

�By An ‘Insider’

�On The Basis Of

Unpublished

Price Sensitive Information

� Insider:

� Person Connected With The Company Or Deemed To Have Been Connected

� Reasonably Expected To Have Access to unpublished Price Sensitive Information received Or Access

� Connected Person Includes Inter Alia

A) Merchant Banker

B) Share Transfer Agent

C) Registrar To IssueC) Registrar To Issue

D) Debenture Trustee

E) Broker /Sub-broker

F) Portfolio Manager

G) Investment Advisor

Price Sensitive Information

i. If Published Likely to Materially Affect Price Of Securities

ii. Periodical Financial Results

iii. Declaration Of Interim & Final Dividends

iv. Issue/Buyback Of Securitiesiv. Issue/Buyback Of Securities

v. Major Expansion Plans Amalgamations /Mergers/Takeovers

vi. Disposal Of Whole Or Substantial Part Of Undertaking

vii. Significant Changes In Policies/Plans

Unpublished

1. Not Published By Company/Its Agents &

2. Not Specific In Nature

� Sebi’s Right To Investigate

A) On Complaints Received From Investors/Intermediaries

B) Bearing On Allegations Of Insider TradingTrading

� Suo Motto To Protect Investors

Appoint Auditor To Investigate Books Of Account/Affairs Of Insider

�Without Prejudice To Its Right To Initiate

Criminal Proceedings Under Section 24/

Action Under Chapter VIA Of Sebi Act Issue

Following Orders

A) Insider Not To Deal In Securities

B) Prohibiting Disposal Of Securities AcquiredIn Violation

C) No Communication To Deal/Counsel

I. Transactions : Null & Void

II. Deliver Back Securities to Seller OR

III. Pay To Seller Market Price At Time Of Issuing Directions Or At Transactions Time

IV. Transfer To Investor Protection Fund Higher Of Cost/Market Price Of Securities

A) Initial Disclosure- Holding Above 5% Within 2 Working Days Of Intimation Of Allotment Or Acquisition In Form A

B) Directors /Officers To Discolse- In Form B - Within 2 Working Days - Shares Held B - Within 2 Working Days - Shares Held & Derivatives Position (Themseves & Dependents)

Note:

Continual Disclosure -Change Exceeding 2%

Of Total Share Holding Even If It Results In Fall

Below 5% Form C

�Director/Officer To Disclose Change Exceeding Rs 5 Lakh/25000 Shares/1%of Total Shareholding Whichever Is Lower

Within 2 Working Days Of �Within 2 Working Days Of Allotment/Acquisition

� Trading Window Refers To Trading Period ForTrading In The Company’s Securities

� Employees/Directors Not To Trade InCompany’s Securities When Trading WindowIs ClosedIs Closed

� Trading Window Is Closed DuringAnnouncements Relating To Price SensitiveInformation

� Trading Window Opens 24 Hours After PriceSensitive Information Is Made Public

� Esops May Be Excercised When TradingWindow Is Closed. Shares Alloted ThroughEsops Can Not Be Sold When Trading WindowEsops Can Not Be Sold When Trading WindowIs Closed

� Pre Clearance Of Trades Directors/Officers/Designated Employees Intending To Deal Above Minimum ThreshholdTo Pre Clear Transaction As Per Pre Dealing Procedure—apply In Notified Form Giving Procedure—apply In Notified Form Giving Requisite Details

�Undertaking –Non Violation Of Code Of Conduct For Prevention Of Insider Trading

�Opposite Transaction No Opposite Transaction For Next Six Months

� Shares Through IPO To Be Held For Minimum Period Of 30 Days From Allotment DatePeriod Of 30 Days From Allotment Date

�Waiver Of Holding Period –Personal Emergency

� Compliance Officer To Maintain Records Of Declarations For Minimum 3 Years

Sebi Notices To Junior Mid-level Employees

� On Technical Ground Like Sale During Silent Period Or Failure To Report Transactions Though Employees Unaware Of Price Sensitive Information

� ITC HR Manager Fined Rs 5 Lakhs—Non Disclosure Of Sale Of 10,000 ITC Shares To Stock Exchanges Within Stipulated Time

� Wipro Official Fined Rs 5 Lakh For Sale Of 8000 Shares In Violation Of Insider Trading Regulations

�Only Public Information Or SimultaneouslyMake Public

� To Avoid Misrepresentation

A) Record Discussion

B) Presence Of 2 Company RepresentativesB) Presence Of 2 Company Representatives

�Questions Outside Scope Of Discussion

�Unanticipated Questions –Respond Later

� Press Release/Post On Website

� Live Webcast Of Analyst Meet

� Supreme Court Judgment In CaseOf Shriram Mutual Fund Case OnceThe Violation Is Established Levy OfPenalty Mandatory

� Intentions –Irrelevant

�Mens Rea Not Absolute Pre-condition

�Non Compliance Of Civil Obligations V/S Criminal Violations

Indian case-letsIndian case-lets

� RANBAXY SHARES- GOOD MOVEMENT FIRST IN DECEMBER,2013,THEN IN JANUARY 2014 & SUBSEQUENTLY IN MARCH 14 JUST BEFORE THE DEAL

� SURGED NEARLY 24% BETWEEN APRIL 1 & APRIL 6

DATE OPEN HIGH LOW CLOSE NO.OF

SHARES

27MAR 356.3 359.15 344 346.75 2,40,842

28MAR 348 369.15 348 364.05 8,19,101

31MAR 364.05 373.75 359.2 365.05 4,87,11731MAR 364.05 373.75 359.2 365.05 4,87,117

1APR 369 373.20 364.8 370.7 3,37,894

2APR 371 414.4 371 404.1 23,13,647

3APR 407 429.45 403.1 424.8 15,84,663

4APR 428 462.7 427 459.55 22,60,999

�On 6th April 2014 Sun Pharma Announced It Would Buy Ranbaxy From Japan’s DaichiSankyo In An All Share Deal Pegged @ $ 4 Bn

� Rise Of 8.18% In Ranbaxy Share Price On The Trading Day Before The Actual Announcement

� Sun Pharma clarified that Silverstreet

Developers LLP’s investment in Ranbaxy does

not violate insider trading norms

� Silversteet Developers LLP Has Two Partners & Both Are 100%subsidiaries Of Sun Pharma. Hence All The Benefits Flowing From Investment In Ranbaxy Shall Accrue To Sun PharmaPharma

� SILVERSTREET LLP’s ACQUISITION DURING QE DEC 13 AMOUNTED TO 1.41% In Ranbaxy which Increased To 1.64% In QE March 14

�Document containing disclosure as required under SEBI regulations had been sent by the courier to the stock exchange but the stock exchange denied receipt of the packet.

� Is the disclosure made as required? Is there violation of regulation 13(6)

� Can illiquidity of the scrip be ground fordoubting that trading is manipulative ?

� Is burden of proof on insider to prove that heis not Guilty of insider trading ?

� Is burden of proof on insider to prove that heis not Guilty of insider trading ?

� Can emergency be ground for tradingdespite possessing unpublished pricesensitive information?�

�

�Does information relating to a contractawarded to the construction co amount tounpublished price sensitive information?

Can disclosure by substantial shareholder� Can disclosure by substantial shareholderregarding change exceeding 2% be avoidedby selling the shares in tranches ?

� Is violation of code of conduct for preventionof insider trading framed by the copunishable by SEBI

Whether an insider needs to be related to a�Whether an insider needs to be related to aco?

� Charge of Insider Trading to be provedbeyond reasonable doubt

�Who is responsible for closure of window for trading in securities when price sensitive information is not published

Responsibility of Regulator � Responsibility of Regulator

A To act as amicus curiae

B Fair

C Justice prevails

D To deliver balanced judgement

� Front Running refers to trading in shares on the basis ofadvance information given by Broker, Analyst or executiveat a market intermediary before trades are conducted bythat entity.

� Front running increases the cost of acquisition or reducesthe realization from sale of sharesthe realization from sale of shares

JUDGEMENT:

� SEBI bars former equity dealer at a leading mutual fund &three others (who were trading on the basis of dealer’s tip-offs), from the markets

AND

� Ordered return of over Rs.1.75 cr illegal gains on thecharge of Front Running

ANNEXURES

Chapters

1 Preliminary

2 Prohibition On Dealing, Communicating Or Counselling

3 Investigation

4 Policy On Disclosures & Internal Procedure For Prevention Of Insider Trading

� Schedule I

Part A- Model Code Of Conduct For Prevention Of Insider Trading For Listed Companies

Part B- Model Code For Other Entities

� Schedule II

Code Of Conduct Of Corporate Disclosure Practice For Prevention Of Insider Trading

Schedule III--- Forms ---- Details Of A. Acquisition Of 5% Or More Shares In A Listed Company

B. Shares Or Voting Rights Held By Director Or Officer &His Dependents Or Promoter Or Person Who Is Part Of Promoter Group Of Listed Company,or Positions Taken In Derivatives Group Of Listed Company,or Positions Taken In Derivatives By Director Or Officer Of A Listed Co. & His Dependents

C. Change In Shareholding In Respect Of Persons Holding More Than 5% Shares In A Listed Co

D. Change In Shareholding Or Voting Rights Held By Director Or Officer & His Dependents Or Promoter Or Person Who Is Part Of Promoter Group Of A Listed Co

Current regulation Suggested changes Rationale

1. Wire tapes To be permitted Evidence in Courts

2. ESOPs can be exercised when trading window is closed

Not to be permitted Can lead to Insider trading

3. Transcript of Analyst meet

Reporting to Stock Exchange

Investor to get access to all key informationAnalyst meet Exchange to all key information

4. Analyst meetings Webcasting to be undertaken

Uniform access to information

5.Reporting of price sensitive information on M&A/Takeovers

On Real time basis Avoid Price manipulation

6. Investigation on complaints by Investors or Suo moto

SEBI should set up a separate Investigation mechanism

Strenghtening of Survelleiance

Training To Employees on Model Code of Conduct

� Training To Create Awareness To Avoid UnintentionalViolation Out Of Ignorance

� Need To Explain The Concepts/Definitions LikeDesignated Employees, officer, Dependent OfficerCould Be Director Or Company Secretary Or ManagerOr Any Person At Whose Directions Board Of DirectorsIs Accustomed To Act

� To Act As Auditor In An Investigation By Sebi ToInvestigate Books Of Account & Affairs Of SomeoneWho Is Alleged To Have Indulged In Insider Trading

� To Advise Participants & Intermediaries Like MembersOf Stock Exchanges Portfolio Managers, InvestmentAdvisors & Listed Cos On Compliance Related IssuesArIsing Out Of Sebi Act & Regulations