The SEBI logo at the board meeting in Mumbai on Dec. 12, 2018. (Photograph: BloombergQuint)

What SEBI’s New Insider Trading Regime Does For India Inc.

BloombergQuintOpinion

2019 began with the Securities and Exchange Board of India notifying amendments to the SEBI (Prohibition of Insider Trading) Regulations, 2015, based on the report of the Committee on Fair Market Conduct chaired by TK Viswanathan which came out in August last year.

In their new avatar, the insider trading regulations have brought in a slew of changes, ranging from the parameters of information sharing, defences to trading as well as ongoing compliance obligations. But one amendment, in particular, has captured the collective imagination of corporate India, which is, the enablement of the board of a listed company, to determine the recipients of its price-sensitive information.

The newly inserted Regulation 3(2A) of the insider trading regulation provides that “The board of directors of a listed company shall make a policy for determination of ‘legitimate purposes’ as part of ‘Codes of Fair Disclosure and Conduct’ formulated under regulation 8.”

The explanation to this provision also clarifies that ‘legitimate purpose’ shall include sharing of unpublished price-sensitive information in the ordinary course of business by an insider with partners, collaborators, lenders, customers, suppliers, merchant bankers, legal advisors, auditors, insolvency professionals or other advisors or consultants, provided that such sharing has not been carried out to evade or circumvent the prohibitions of these regulations.

Interestingly, any reference to shareholders—existing or potential—is conspicuous by its absence.

The amendment also requires the board to maintain a database containing the names of each person/entity with whom unpublished price-sensitive information has been shared. This database is required to be maintained with adequate internal controls and audit trails, so as to avoid any tampering.

The Position Until Now

These recommendations find their underpinnings in the Uday Kotak Committee on Corporate Governance in October 2017, where this idea of the board as the primary decision maker on unpublished price-sensitive information recipients, was first kindled.

Given that the erstwhile insider trading regulations allowed for communication of unpublished price-sensitive information for legitimate purposes, the absence of guidance on the perimeter of such ‘legitimacy’, was a source of considerable debate, and confusion, amongst stakeholders. It was in this context that the Kotak Committee had noted that interpreting ‘legitimate purpose’ entails an event-based determination based on subjective standards which not only leads to ambiguous legal interpretations of ‘legitimate purpose’ but also brings uncertainty in the business environment and adversely impacts the ease of doing business.

Therefore, it recommended that the sharing of information with promoters and significant shareholders be brought out of the ‘shadows’, enabling the creation of a transparent framework regulating their information rights with adequate safeguards in place.

Following from the principles set out therein, which were echoed in the recommendations of the Viswanathan Committee, these amendments now allow for sharing of unpublished price-sensitive information, without restricting it to a select class of investors, with the prerogative being that of the board to determine the appropriate recipients of such information.

Scope Of ‘Legitimate Purpose’ – Who Decides?

However, the ability of the board to share information naturally enjoins an obligation on the part of the board, to take these decisions in the best interests of the listed company. And therein lies the rub.

There is little doubt that this principle-based directive, while recognising the autonomy of the board, also aims for a broader, almost tectonic shift in India’s corporate culture. And in doing so, it raises the murmurs of multiple open legal and practical considerations, including:

  • What should be the basis on which the board puts in place such a policy?
  • How must individual directors understand their role, responsibilities, and liability?
  • How should this approach be calibrated across different classes of key investors? Promoters, institutional shareholders, private equity investors, etc., all of whom bring tremendous value to any company but would they need to be treated differently when it comes to information access?
  • Are these decisions subject to regulatory review?
  • Would the list of recipients in itself be material information, which listed companies will need to make public?
Undoubtedly, at this stage, there are more questions than answers, particularly for boards who are faced with the rather daunting task of making this decision, with very little jurisprudence or regulatory guidance to rely on.

This is especially relevant in light of the statutory obligations cast on the board to act in the best interests of the company, all of which must stand the test of public shareholders, proxy advisors and regulators in today’s increasing interventionist environment.

Concluding Thoughts

Market conduct regulation is poised at an important threshold in India, where a combination of nuanced laws and efficient enforcement can truly be transformative for our markets. When understood in their true spirit, these amendments are capable of engendering a behavioural shift across corporates, their board and other key stakeholders, in terms of how we balance commercial interests with accountability for information access. As market practice evolves on this, one can only hope that we are able to achieve that fine, yet firm balance, amply aided by even-handed regulatory practices and judicial momentum.

Bharat Vasani is Partner, and Shruti Rajan is Partner - heading the financial regulatory practice, at Cyril Amarchand Mangaldas.

The views expressed here are those of the authors and do not necessarily represent the views of BloombergQuint or its editorial team.