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Sebi Okays New Insider Trading Rules; Eases Delisting Norms

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Revamping its nearly two-decade old regulations on insider trading, Sebi on Wednesday (19 November) approved stricter norms, including new definition for connected people, to prevent the menace.

Apart from clarity on concepts and definitions, the new regulations strengthen legal and enforcement framework while also ensuring that legitimate business transactions are not impacted.

The new Prohibition of Insider Trading Regulations were approved by the board of Securities and Exchange Board of India (Sebi) in Mumbai today.

Sebi also approved new delisting rules responding to concerns by participants that current regulations make the process of buying out minority shareholders difficult and expensive.

"The new regulations strengthen the legal and enforcement framework, align Indian regime with international practices, provide clarity with respect to the definitions and concepts, and facilitate legitimate business transactions," Sebi said in a statement after the board meeting.
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Sebi has expanded the definition of 'Insider' to include persons connected on the basis of being in any contractual, fiduciary or employment relationship that allows such people access to unpublished price sensitive information (UPSI).

Under the new framework, Sebi has defined a connected person in the context of insider trading activities.

A connected person would be someone who is or has during the past six months prior to the concerned act has been associated with a company, directly or indirectly.

Besides, immediate relatives of connected persons would also come under the same category unless they prove that they were not privy to unpublished price sensitive information.

The onus of establishing that they were not in possession of UPSI would be with the connected persons.

The regulator has decided to remove the requirement for repeated disclosures and ease compliance burden.

"Disclosure of any change of two per cent for persons holding more than five per cent shares or voting rights has been removed as they are prescribed under Takeover Code," the statement added.

To protect the interest of investors, companies would be now mandatorily be required to disclose UPSI at least two days prior to trading in case of permitted communication of such information.

Besides, communication of such information is prohibited except in instances of legitimate purposes or discharge of legal obligations.

Insider trading refers to dealing in securities after having access to unpublished price sensitive information and such practices provide unfair advantage to the entity who has privy to such details.

Sebi has come across various instances of insider trading activities not just at small companies but also at larger ones. .

Sebi had formed a group comprising of representatives from the stock exchanges, depositories and others to work on norms that would enable use of existing secondary market infrastructure for collection of IPO bids and application money; reduce the post issue timelines and help companies reach more retail investors.

Among others, there is a proposal to enable investors to submit its applications to any registered stock broker or depository participant.

Investors may also have the option to submit Applications Supported by Blocked Amount (ASBA) to its bank.

According to the proposal, making ASBA mechanism mandatory for retail investors has the potential to reduce the post issue timelines.

Under ASBA mechanism, investors can bid for shares while the money remains in his/her bank account and gets debited only after allotment of the shares. Currently, 54 banks in India are providing ASBA facility to the investors.

Moreover, it has been proposed that the current arbitration process, settlement guarantee fund and investor protection fund available for secondary market trading be extended for primary market transactions subject to certain conditions and modifications.

The definition of UPSI has been strengthened by "providing a test to identify price sensitive information, aligning it with listing agreement and providing platform of disclosure".

Earlier, the definition of price sensitive information had reference to company only, now it has reference to both a company and securities.

Companies by law would be entitled to require third-party connected persons to disclose their trading and holdings in securities of the company.

In line with the new Companies Act, prohibition on derivative trading by directors and key managerial personnel on securities of the company has been provided.

Disclosure of UPSI in public domain has been made mandatory before trading, so as to rule out asymmetry of information in the market.

"A provision of Trading Plans on the lines of US has been introduced for insiders with necessary safeguards. Such a plan has to be for bona fide transactions and has to be disclosed on stock exchange platform in advance," the release said.

To provide clarity, generally available information has been defined as information that is accessible to public on a non-discriminatory platform such as stock exchange.

Meanwhile, insiders who are liable to possess UPSI all round the year would have the option to formulate pre-scheduled trading plans.

Among others, principle-based Code of Fair Disclosure and Code of Conduct has been prescribed.

The latest norms have been prepared after taking into consideration recommendations of Sodhi panel and suggestions from various other quarters.

After extensive deliberations, a panel headed by former Justice N K Sodhi had submitted its report on insider trading norms in December 2013. Sodhi was former Chief Justice of Karnataka and Kerala High Courts.


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