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Insider Trading Compliance and Automation
Divya Srikrishna
Secretarial and Compliance Head - Redington
2
Discussion Points - Today
A. Who is Covered - Code of Conduct
B. Insider & Connected Person
C. Immediate relative & Material financial relation
D. Unpublished Price sensitive Information (“UPSI”)
E. Trade restriction and disclosure
F. Disclosure and compliance related to UPSI
G. Non - Compliance
H. Automation
Listed Entity – Law and Policies
SEBI (PIT) Regulations
Code of Conduct to regulate,
monitor and report insider
trading
Code for Fair Disclosure
Process document –
Insider Trading Compliance
Automation
Develop or Buy
Recommendatory
Mandatory
Directors and KMP
Promoters
Two level below CEO
Direct reportees to KMP
Support Staffs (IT/ Secretaries/
Executive Assistants)
Secretarial team/ Controllership
team / Finance & Accounts team
Person Identified by Compliance
officer
Who is Covered – Code of Conduct
CompanyMaterial subsidiaries
My list
Company and Material SubsidiaryA. Directors and KMPB. PromotersC. Employees in category of President and
aboveC. Secretarial/Finance StaffD. IT staffE. Investor relations staffF. Secretaries and admin employees of
above categoriesG. Person identified by Compliance Officer
who are assumed to be in possession ofUPSI
4
Insider
Connected Person
+Any other person in
Possession of UPSI
Connected Person
Associated with Company during last 6 months (directly or indirectly)
&Had access to UPSI.
Associated :A. Frequent communication with officers; or
B. Contractual, fiduciary or employment relationship; or
C. Director, officer or an employee, or
D. Professional or business relationship (temporary or permanent)
Designated Person Board of Directors
Employees (identified)&
their immediate relatives
Insider & Connected person
5
Immediate Relative Material Financial Relationship
Dependent on Designated person
Or
Consults Designated person while taking decisions relating to
trading in securities
Spouse
‘Material Financial relationship’
Recipient of any kind (loan or gift) from DP
Immediately preceding 12 months
Equivalent to at least 25% of DP’s annual income
exclude if payment is on arm’s length transactions.
• Annual Disclosure • Trading Restriction • Trading Related Disclosure• UPSI sharing restrictions
and disclosures
Only in Annual Disclosure
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Unpublished Price Sensitive Information (UPSI)
A. Information relating to the Company B. Not available to publicC. If made available to public, it will materially affect share price
Illustrative list of UPSI:Financial results/StatementsDividends (Interim & final)Change in capital structureAny issue (including bonus issue) or buyback of securitiesMajor expansion plans or execution of new projects, new client / new project winsMergers, Amalgamations, De-mergers, Acquisitions, Delisting, Disposals and Expansion of business and such other transactionsChanges in key managerial personnelSignificant changes in policies, plans or operationsAny material event as per SEBI (Listing obligations and Disclosure Requirements) Regulations, 2015
Subscribing
Buying / Selling
Dealing
Pledging
Trading
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Designated person (DP) / Immediate Relative
Trading Window Closure
NO TRADING
Trading window closure:• From end of each financial
quarter• Till 48 hours post publication of
the financial Results.• For any event as decided by the
Compliance Officer.
Trading Window Open
Pre-clearance approval
Not in Possession of UPSI
Possession of UPSI
Threshold at the discretion ofcompany (Example :Least of following:Trade value > INR 1 lakhs OR500 shares OR 1% of totalshareholding or anypermutation / combination)Trading within approved timeperiod (7 days)Disclosure Within 2 days
Without Approval
If aggregate traded value in a quarter > INR 10 lakhs, DP to inform Company within 2 days of trade.
NO Contra trade(opposite transactionduring last 6 months).
Disclosure on trade perthe timeframe provided.
Trade Restriction and Disclosure
A. Between person having UPSI (a)
Off- market
(b) block deal
B. Statutory and regulatory
obligation
C. Stock options with pre-
determined exercise price
D. Trading plan
E. Non- individual insider subject to
conditions
8
Disclosure and compliance requirement related to UPSIA. Mandatory Disclosure to be provided
Particulars Remarks
When UPSI can be shared On need-to-know basis as per fair disclosure policy:A. Legitimate Purpose (or)B. Performance of Duties (or)C. Discharge of Legal Obligations
Obligations before sharing UPSI a) Obtain Compliance Officer approval before sharing information with persons other than Designated persons
b) Provide Name of person/institution with whom UPSI is shared, PAN number (If PAN is not available, any other identifier authorized by law), nature of UPSI to Compliance Officer
c) Enter Non-disclosure agreement when UPSI shared with Third party
What happens when UPSI shared withThird party or Employees who are notdesignated person?
Those persons will become insidersThey will have to adhere to compliance requirement applicable for designated person till they possess UPSI
B. Compliance requirement related to UPSI
Appointment AnnuallyIn case of any change in
details
9
Insider Trading – Automation
Compliance tool - Develop or Buy
Upload Weekly BENPOS files for Cross verification
of trade clearance & non-
compliances
Annual /Periodic
Disclosure
Trading window closure
announcements
Broker-Note and Trade
details post trading
Auto-generation of
Stock exchange
disclosure for submission
Online one-click approval by Compliance
officer of trading plan / pre-clearance
Automated MIS
generation on periodic basis
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UPSI Management
Mechanism to prevent any leak of
UPSI
Mechanism to handle the leak of any UPSI
Plug the loopholes in the internal control system in order to prevent the leak of UPSI in future
Identify the source of leakage of UPSI UPSI
Compliance officer
Data room for sharing UPSI
Structural Digital database with timestamp
Procedure for inquiry in case of any leak of
UPSI or suspected leak of UPSI
Mechanism to initiate appropriate inquiries on
becoming aware of leak of UPSI or suspected
leak of UPSI
Educate the employees regarding the
reporting of leak/ suspected leak of UPSI
Taking action against the person responsible
for leak of UPSI and informing SEBI promptly
of such leaks
11
Questions Needs Answers How to identify the Insiders of the Company?
What is the base for determination of designated persons of a Company?
Foreign employees in remote location - Do they really hold UPSI?
Are the Companies equipped to align HR records with designated persons lists, is intimation
immediately possible for change in designated person with NSDL and CDSL?
How to ensure Intermediaries & fiduciaries are compliant to PIT Regulations?
Is sensitizing Senior executives help them to understand “what not to communicate”?
Do Business Persons really understand what is UPSI?
Do Designated Persons understand compliance requirements after continuous orientation?
Auto – trading triggered in very minimal shares during trading window closure due to dormant
status of demat account, is that a violation?
How much penalty to be levied for violations? What is the guideline?
Timeline/ right time to intimate Stock Exchanges on non-compliance?
Does automation ensure 100% compliance?????????????????????
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1. When Designated person or immediate relative does not follow Codes?
Disciplinary action by the Company as per Code of Conduct
Direction to transfer of proceedings or profit to Investor Education and Protection Fund
Stock exchanges will be informed about non-compliance and disciplinary action
2. When someone is charged with offense of Insider Trading by SEBI?
A. Penalty: Not be less than INR 10 Lakh and may extend to INR 25 Crore; or 3 times amount of profits made out of insider trading, whichever is higher.
B. Prosecution: Imprisonment up to 10 years or fine up to INR 25 Crore, or both, for any offences pertaining to contravention of the provisions of the SEBI Act.
Non - Compliance
Thank You
• July 2017 - Company announced that US food and Drug administration was to lift import alert on its unit – a UPSI information.
• 2 Hours before UPSI disclosure - Assistant GM, Health & Safety Department bought 4,000 shares.
• SEBI imposed -Fine of Rs. 11 LakhsBan from Securities market for 1 yearBan to trade in Company’s shares for 2 years
• September to November 2018 – Trading window closure
• Designated person and his wife traded in the shares of the Company during thatperiod.
• Audit Committee ordered to pay Rs. 1,00,000.
• SEBI imposed fine of Rs. 2,00,000.
• Trading done by GM, Project (Designated person)
• Sept 12, 2018 – He purchased 2000 shares
• Sep 27, 2018 – He sold 5,000 shares without preclearance which is in nature of contra trade
• No disclosure was made about transactions exceeding Rs. 10 Lakh for 1 year (Disclosure has to be given within 2 days of trading)
• Audit Committee ordered to pay approx. Rs. 4,80,000.
• SEBI fined Rs. 3,00,000.
• A Lead Independent Director.
• The manager of portfolio management service sold 1,600 shares without her knowledge.
• This was without preclearance approval.
• Audit Committee ordered to pay Rs. 9,50,000
• She also paid Rs. 3,00,000 by way of settlement with SEBI
• D Co. announced receipt of 3 orders from leading Company
• Price rose approx. 35% after above announcements.
• MD & his wife of D Co. were friends with Directors & their wives of V Co. in facebook and they'liked' each other's photos posted.
• V Co. & its Directors had bought shares before announcement of orders of D Co.
• It was held that V Co. & its Directors are insiders basis above and had traded while inpossession of UPSI.
• SEBI ordered disgorgement of gain - Rs. 1.74 Cr
• UPSI about financial results were circulated by Research analysts in private WhatsApp groups(“Market Chatter”) before their official announcement.
• SEBI ordered for internal investigation, but Companies came back with clean report oninternal leaks.
• SEBI further investigated and found:
• Financial Results – Revenue, PAT shared matched with final results.
• Information was shared by Research analysts not basis any research
• They were not associated with Company in any way
• SEBI held that they were insider as they possessed UPSI regardless of source & they actedas instrument in chain of communication of sensitive information.
• SEBI imposed penalty of minimum Rs. 15 Lakhs on each of research analyst who sharedinformation.
• SEBI has given approx. 10 orders in year 2020 in this matter.