A Company Secretary’s brief guide to prohibiting Insider Trading, managing UPSI & maintaining Structured Digital Database

In every listed company, there exist pieces of information which if made public will have an effect on the value of equity shares of the listed company. Such information should only be released in the market in such a way that it is not prejudicial to the interest of a particular section and is beneficial for all.

Anybody who uses such information for acquiring personal financial gains is guilty of insider trading. SEBI’s recent insider trading notification aims at creating a better control point within the organisation for the same.

So, what is SEBI UPSI?

Unpublished price sensitive information (UPSI) means any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities and shall, ordinarily including but not restricted to information relating to the following :

One of the most important aspects of “corporate governance” is the concept of insider trading. It has to be made sure that insiders who possess knowledge about internal matters do not exploit their positions and take undue advantage of that knowledge. To prevent this from happening, companies need to have compliance and governance policies in place. They should also ensure that insiders of the company do not enter into transactions based on such information, till the information becomes “Generally available Information”.

Source:  SEBI (Prohibition of Insider Trading) PIT Regulations, 2015 ( Issued on 15 Jan 2015 )

SEBI - the regulator and the penalties

There has been a steady rise in Insider trading vigilance by SEBI as well as in the number of investigations. In the period 2015-2019, SEBI has taken up 140+ insider trading cases out of which 70 were in 2019 alone. (source).

Moreover, the SEBI Act imposes penalties of INR 25 crore or three times the number of profits made out of insider trading, whichever is higher. The Act also prescribes that insider trading is punishable with a prison term of up to 10 years.

Some of the current news on insider trading penalties:

1. General Insurance too Paid Rs 1.23 Crore as Settlement to SEBI for Insider Trading Violations in Axis Bank Shares (source).
2. New India Assurance Settles Insider Trading Violation by Paying Rs 62.68 Lakh from Shareholders’ Fund; No Action Against Any Official, Reveals RTI (source).
3. Sebi orders impounding Rs 3.6 crore in insider trading case (source).
4. Sebi imposes Rs 10 lakh fine on erstwhile Satyam Computers investor relations head for insider trading (source).
5. Infosys fines independent director for ‘inadvertent trade’ by spouse’s portfolio manager (source).
6. SEBI orders impounding of over Rs 1.38 crore in Tara Jewels case (source).

Who is an insider or connected person according to SEBI?

Company Secretary - The Moral Torch Bearer

You, as the company secretary, are the nodal point for all compliance-related matters of the company, the link between SEBI, Company Management and Employees of the Company.

According to this clause of the SECURITIES AND EXCHANGE BOARD OF INDIA (PROHIBITION OF INSIDER TRADING) REGULATIONS, 2015 (c) “compliance officer” means any senior officer, designated so and reporting to the board of directors or head of the organisation in case board is not there, who is financially literate and is capable of appreciating requirements for legal and regulatory compliance under these regulations and who shall be responsible for compliance of policies, procedures, maintenance of records, monitoring adherence to the rules for the preservation of unpublished price sensitive information, monitoring of trades and the implementation of the codes specified in these regulations under the overall supervision of the board of directors of the listed company or the head of an organisation, as the case may be.

In relation to the regulation, you are obligated to implement the Prohibition of Insider Trading (PIT) code of conduct. Some of them include:

1. Frame a code of internal procedures and conduct in line with the model code specified in Schedule I of the Regulation and get the same approval from the Board of directors.
2. For an unlisted company, prepare the Chinese wall policy and prepare a grey/restricted list of securities.
3. Frame and monitor adherence to rules for the preservation of price-sensitive information.
4. Monitor and confirm whether transactions for which pre-clearance has been granted were executed within one week.
5. Maintain a record of all directors, officers and persons covered within the ambit of the term ‘designated employee’ and any changes in the same.
6. Maintain a list of all information termed as ‘Price Sensitive Information’.
7. Maintain a record of names of files containing confidential information deemed to be price-sensitive information and persons in charge of the same.
8. Regularly track trades by employees, issuance of warning letters, periodic internal reporting, take disciplinary action and inform SEBI of violation of Code by Designated Persons.
9. Ensure that the trading window is closed at the time of :
10. Declaration of financial results
11. Declaration of dividend
12. Issue of securities by way of public/right/bonus
13. Amalgamation, mergers, takeovers and buyback
14. Any changes in policies, plans or operations of the company.

Best practices to manage UPSI to prevent Insider Trading

There arises a need for you to revisit and ensure the sanctity of your own controls and processes in relation to the handling of UPSI.

The extent to which your employees have been sensitised will determine the effectiveness of the processes and controls. Needless to say, any such instance affects the credibility and reputation of your listed company.

Some of the best practices that can be followed and implemented

1. Ensure whenever unpublished price-sensitive information that gets disclosed selectively, or inadvertently, it shall ensure prompt and proper dissemination of such information so as to make it generally available.
2. Ensure that information shared with consultants, analysts and research personnel is not unpublished price-sensitive information.
3. Develop best practices to make transcripts or records of proceedings of meetings with analysts and other investor relations conferences on the official website to ensure official confirmation and documentation of disclosures made.
4. Ensure that systems are in place for handling all unpublished price-sensitive information only on a need-to-know basis.
5. Ensure an appropriate and fair response to queries on news reports and requests for verification of market rumours by regulatory authorities.
6. Ensure and maintain a structured digital database and such databases shall be maintained with adequate internal controls and checks such as time-stamping and audit trails to ensure non-tampering of the database.
7. Handling all unpublished price-sensitive information on a need-to-know basis.

Benefits of automating your Compliance Processes

By automating processes, we have found that there is improved efficiency & better controls in the monitoring of insider trading regulations. Some of the benefits include‍:

1. Having centralised data storage of the investments & holdings of employees, immediate dependents & persons with material financial relationships as defined under the regulation makes it easier for faster retrieval of past information.
2. Automated requests for approval/rejection of trade requests helps you save time and provides greater visibility.
3. Configurable holding/contra restrictions provide for better control.
4. Setting up UPSI, blackout period/no-trading windows can be better managed within your defined system.
5. Automating the restricted securities list would reject any trading requests that are based on your preset rules.
6. Electronic submissions of periodical disclosures make it hassle-free for all stakeholders.
7. Systematic workflow for all trading approvals, automated reminder emails, notification alerts & audit trail keeps your entire process well-defined and in auto-mode.

Takeaway: Insider trading is a serious issue, and listed companies must have compliance and governance policies in place to prevent it. Unpublished price-sensitive information (UPSI) is any information that, upon becoming generally available, is likely to materially affect the price of the securities. Insider trading is punishable with a penalty of INR 25 crore or three times the profits made out of insider trading, whichever is higher, and a prison term of up to 10 years.

Company Secretaries are responsible for ensuring compliance with regulations and must implement the Prohibition of Insider Trading (PIT) code of conduct, which includes framing a code of internal procedures and conduct, preparing a Chinese wall policy, maintaining a record of all directors, officers, and persons covered within the ambit of the term 'designated employee,' and maintaining a list of all information termed as 'Price Sensitive Information.'

To prevent insider trading, companies can follow best practices such as appointing a compliance officer, implementing an insider trading policy, training employees on insider trading, monitoring employee transactions, and using structured digital databases. Connect with Infomatics' team for automating prohibition of SEBI insider trading regulations and compliance