The deepening of capital markets is essential for sustained growth and long-term wealth creation in the economy. Protecting the integrity of these markets is crucial to India’s goal of becoming a 10 trillion dollar economy by 2030. All listed companies need to be cognizant of their role in fostering trust and accountability in the market and insider trading regulations are critical in this regard. All key managerial personnel (KMP) must familiarize themselves with these regulations and create a culture of compliance towards the larger goal of building free, fair and transparent markets in the country. The Securities and Exchange Board of India (‘SEBI’), the stock market regulator in the country, restricts the malpractice of insider trading primarily through the SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘Regulations’). Below is a quick refresher on the key concepts of insider trading and the important compliances pertaining to the structural digital database under SEBI Regulations.
What is insider trading?
Insider trading refers to any incident that involves trading of a listed company’s securities by certain individuals (called ‘insiders’) who have access to unpublished price-senstive information about the company. It is considered an unfair practice because it provides insiders with an unfair advantage in making trading decisions at the detriment of other stockholders who do not possess such material non-public information.
Who is considered an insider?
An insider is defined as a person who is in possession of or has access to unpublished price sensitive information or anyone who is a connected person. The term ‘insider’ has a wide ambit and it includes directors, officers and employees of the company and related companies as well as persons who have any type of official relationship with the company (such as auditors, consultants, bankers, and brokers). For the purposes of insider trading, an insider can be anyone who has been associated with the company in some way during the six months preceding the insider trading incident.
Unpublished price sensitive information
Unpublished price-sensitive information refers to any non-public information related to a company or its securities which upon becoming publicly available is likely to materially affect the price of the securities. It includes but is not limited to financial results, dividends, change in capital structure, M&As, delistings, disposal and expansion of business and other such transactions before they are available in the public domain.
Structural digital database (SDD)
As per Regulation 3(5), the board of directors of a listed company must ensure that a structured digital database (‘SDD’) is maintained containing the nature of unpublished price sensitive information and the names of such persons who have shared the information and also the names of such persons with whom information is shared, along with their Permanent Account Number (PAN) or any other identifier authorized by law where PAN is not available. The SDD cannot be outsourced and must be maintained internally with adequate internal controls and checks such as time stamping and audit trails to ensure non-tampering. The SDD must be preserved for a period of no less than 8 years after completion of the relevant transactions. In the event of receipt of any information from the Board regarding any investigation or enforcement proceedings, the relevant information in the SDD must be preserved till the completion of such proceedings.
Who can access the SDD and where can it be hosted?
Any person who has access to unpublished price sensitive information in accordance with the Regulations is entitled to access the SDD. The SDD should be deployed on the company’s server only. SEBI has clarified that if the data of the SDD is maintained over cloud, it will be considered as “outsourced” and hence, be contrary to the provisions of Regulation 3(5).
Across the world, countries implement stringent laws to curb insider trading with the aim of protecting the interests of shareholders and investors. These laws are instrumental in preserving the sanctity of capital markets and ensuring an environment of free, fair and transparent trading. Therefore, it is essential for KMPs and insiders in listed companies to have a succinct understanding of the insider trading regulations. Institutionalized processes must be created within listed companies to remain compliant and stay on the right side of law.
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