The Justice Sodhi Committee report which was released on 7 December, 2013, purports to restructure the existing legal regime on Insider Trading in India (“Draft Regulations”). The following table highlights some of the significant provisions in the Draft Regulations vis-à-vis the SEBI (Prohibition of Insider Trading) Regulations, 1992, (“1992 Regulations”) and contains a brief analysis of the proposed changes.1992 RegulationsDraft Regulations
Definition of ‘connected person’ broadened
No provision specifically included public servants or persons who frequently communicate with officials. Separate definition of 'connected person' and 'person deemed to be a connected person'.Persons who frequently communicate with company officials and public servants having access to UPSI included in the definition of 'connected persons'. No separate definition of 'person deemed to be a connected person'.
Comment: Over-broad definition of 'connected person' may lead to uncertainty in scope and create overlaps with other regulations relating to fraud.
Communication of UPSIProhibition on insider from communicating UPSI to any person who is prohibited from dealing in securities while in possession of such UPSI.Mere communication of UPSI is an offence, even in absence of any trading in securities. Communication only permissible when in furtherance of legitimate purposes.
Comment: Insider trading must involve actual trading of securities when in possession of UPSI. Prohibiting mere communication in absence of any trade would be improper.
Due DiligencePermissibility of conducting due diligence prior to investment was unclearDue diligence permissible if board believes it is in best interest of the company. In cases where open offer is not triggered by proposed trading, additional obligation to disclose all UPSI two trading day s prior to transaction.Comment: The due diligence exception should also be provided for private placement of securities by qualified institutional placement, rights issue and follow-on public offering.Dealing vs. TradingRegulations governed all dealing in securities, including subscribing, buying, selling or agreeing to subscribe, buy, sell or deal in securities.By using the term 'trading', regulations more focused on transacting in securities whether by way of acquisition or disposal.Comment: Necessary change, as it narrows applicability and excludes situations such as pledging of shares.Trading PlanConcept of trading plan not provided.Trades by insider pursuant to an approved trading plan and disclosed to the public.Comment: Will make trading by insiders more clear and enable them to engage in regular investments in relation to the company without attracting the prohibition against insider trading.Unpublished Price Sensitive InformationDefinition of 'unpublished price sensitive information' included all information that was not published by company or its agents.Shift to reliance on 'generally available information' threshold which includes information that is accessible to the public on a non-discriminatory basis. Any information that is not 'generally available information' is defined as UPSI.Comment: Unclear whether unconfirmed information that is generally available would be seen as UPSI.Disclosure by EmployeesPromoters, officers and directors required to make disclosures. Only designated employees were covered.Apart from promoters, officers and directors, obligations of making disclosures on all employeesComment: Such mechanical disclosures would simply result in increased compliance costs and accumulation of irrelevant data. Financial threshold for transaction by employees should be provided.Trades by RelativesNo provision requiring disclosure of trades carried out by dependents or relatives.Persons who are required to make disclosures must also disclose trades executed by immediate relatives and dependent persons.Comment: Obligation may be unreasonably onerous in cases where access to trading details of immediate relatives is limited.DefencesThe regulations provide defences to dealing in securities of one company by another company while in possession of UPSI in certain situations.Any insider who has traded while in possession of UPSI may adopt certain defences.Comment: This is a good move since defences have been made available for all transactions covered under the Draft Regulations.Code of ConductCode of Conduct restricts directors/officers/designated employees from executing trades that are opposite to a prior trade executed by them for 6 months from the earlier trade.Provision along these lines absent.
Comment: Any profit made during the short term of 6 months should flow back to the company and there should not be a blanket ban on such trades.
