SEBI (Prohibition of Insider Trading) Regulations, 1992: A Comprehensive Compliance Guide

The SEBI (Prohibition of Insider Trading) Regulations were established under the powers conferred by Section 30 of the SEBI Act, 1992. These regulations are designed to protect the integrity of the securities market by ensuring that no individual gains an unfair advantage through access to non-public, price-sensitive information. Dealing or trading based on information not available in the public domain undermines the principle of fair and equitable markets.

1. Defining the "Insider" and Scope of Regulations

According to the regulations, an insider is defined as any person who is, or was, connected with a company or is deemed to have been connected with it. This individual is reasonably expected to have access to unpublished price sensitive information (UPSI) regarding the company's securities. Furthermore, any person who has received or had access to such unpublished price sensitive information is also classified as an insider.

Key Characteristics of an Insider:

• Connected Persons: Individuals with a direct or indirect link to the company.
• Access to UPSI: Persons in possession of or having access to information that could affect the stock price once made public.

2. Statutory Prohibitions Under the Regulations

The regulations explicitly prohibit several activities to maintain market fairness.

Restriction on Communication (Regulation 3)

• Prohibition of Communication: Under Regulation 3(1), an insider is strictly forbidden from communicating, providing, or allowing access to any UPSI to any person, including other insiders.
• Exceptions: Such communication is only permitted if it is in furtherance of legitimate purposes, the performance of duties, or the discharge of legal obligations.
• Prohibition of Procurement: Regulation 3(2) states that no person shall procure UPSI from an insider unless it is for legitimate purposes or legal duties.

Confidentiality and Digital Tracking

• Non-Disclosure Agreements: The Board of Directors must require parties involved in transactions involving UPSI to execute confidentiality and non-disclosure agreements.
• Trading Restrictions: Parties in possession of UPSI are prohibited from trading in the company's securities.
• Structured Digital Database: Per Regulation 3(5), the Board of Directors must maintain a structured digital database containing the names of entities with whom information is shared, along with their Permanent Account Number (PAN) or another authorized identifier.

3. Informant Mechanism and Rewards

To enhance enforcement, Regulations 7A to 7K introduce provisions for Informants.

• Definition of Informant: An individual who voluntarily submits a Voluntary Information Disclosure Form to SEBI regarding an alleged violation of insider trading laws.
• Scope of Information: This applies to violations that have occurred, are occurring, or are reasonably believed to be about to occur.
• Reward Eligibility: An individual is considered an informant regardless of whether they ultimately satisfy the specific requirements to qualify for a financial reward.

4. Mandatory Code of Conduct

The regulations mandate the formulation of a code of conduct to regulate, monitor, and report trading by designated persons and their immediate relatives.

Responsibilities for Formulation (Regulation 9)

• Listed Companies: The Board of Directors of every listed company must ensure the Chief Executive Officer or Managing Director formulates a code of conduct following the minimum standards set in Schedule B.
• Intermediaries: The Board or heads of every intermediary must formulate a code based on Schedule C.
• Other Entities: Every other person required to handle UPSI during business operations must also formulate a code of conduct based on Schedule C.

Identification of Designated Persons

The Board of Directors, in consultation with the Compliance Officer, must specify the designated persons covered by the code. This identification is based on:

• The person's role and function within the organization.
• The level of access their role provides to UPSI.
• The person's seniority and professional designation.

5. The Critical Role of the Compliance Officer

Every listed company, intermediary, and entity formulating a code of conduct must designate a Compliance Officer (CO) to administer it.

Core Responsibilities of the CO:

• Document Maintenance: The CO is responsible for maintaining all documents required under the Insider Trading Regulations.
• Code Framing: The CO must frame a code of fair disclosure and conduct aligned with the model code in Schedule A.
• Monitoring and Reporting: For listed intermediaries, the CO monitors and reports trading by designated persons in their own securities (Schedule B) and other securities (Schedule C).

6. Key Takeaways and Terms