By CA Soniya Agarwal
SEBI (Prohibition of Insider Trading) Regulations, 2015 & Companies Act, 2013 – Discussion on provisions dealt under Regulations and Act
SEBI (Prohibition of Insider Trading) Regulations, 2015 has come into force with effect from 15th May, 2015 after having been gazetted on 15th January, 2015. It replaces the Regulations of 1992 which were last amended in 2002. The regulations were initially announced under the name and style , SEBI (Insider Trading) Regulations, 1992 which was changed to SEBI (Prohibition of Insider Trading) Regulations, 1992 on 20th February, 2002. The Regulations of 2015 are with the same name and style with 2015 substitution of 1992.
The Companies Act, 2013 is partially in force. Certain provisions of the Companies Act, 1956 are still in force. Section 195 of the Companies Act, 2013 provides for prohibition of insider trading of securities. Along with the provision included in the Act, the Regulations on Insider Trading of 1992 subsisted up to 14th May, 2015. Prior to 12th September, 2013, the Act of 1956 did not include provisions on insider trading.
Provisions under the Companies Act, 2013
Section 195 of the Companies Act, 2013 reads as under :
(1) No person including any director or key managerial personnel of a company shall enter into insider trading.
Provided that nothing contained in this sub-section shall apply to any communication required in the ordinary course of business or profession or any other law.
Explanation – For the purpose of this section –
(a) “ insider trading” means –
(i) An act of subscribing, buying,selling,dealing or agreeing to subscribe, buy, sell or deal in any securities, by any director or key managerial personnel or any other officer of a company either as principal or agent if such director or key managerial personnel or any other officer of the company is reasonably expected to have access to any non-public price sensitive information in respect of securities of company; or
(ii) an act of counseling about procuring or communicating directly or indirectly any non-public price-sensitive information to any person;
(b) “price-sensitive information” means any information which relates, directly or indirectly, to a company and which if published is likely to materially affect the price of securities of the company.
(2) If any person contravenes the provisions of this section, he shall be punishable with imprisonment for a term which may extend to five years or with fine which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher, or with both.”
With the new Insider Trading Regulations coming into force, one is compelled to refer the provisions included in the Companies Act, 2013 mentioned above.
SEBI (Prohibition of Insider Trading) Regulations, 2015
The Regulations of 2015 include the following:
R 2(g) defines ‘Insider’ as :
(i) a connected person; or
(ii) In possession of or having access to unpublished price sensitive information.
Note included under the provision states that since “generally available information” is defined, it is intended that anyone in possession of or having access to Unpublished Price Sensitive Information (UPSI) should be considered as “insider” regardless of how one came in possession of or having access to such information. Various circumstances are provided for such a person to demonstrate that he has not indulged in insider trading. Therefore, this definition is intended to bring within its reach any person who is in respect of or has access to UPSI. The onous of showing that a certain person was in possession of or had access to company, or who has received or has had access to such unpublished price sensitive information may demonstrate that he was not in such possession or that he has not traded or he could not access or that his trading when in possession of such information was squarely covered by the exonerating circumstances.
R 2(l) defines ‘trading’ to mean and include subscribing, buying, selling, dealing or agreeing to subscribe, buy, sell, deal in any securities and `trade’ shall be construed accordingly.
Note: Under the parliamentary mandate, since Section 12A (e) and Section 15G of the Act employs the term ‘dealing’ in Securities, it is intended to widely define the term ‘trading’ to include the dealing. Such a construction is intended to curb the activities based on unpublished price sensitive information which are strictly not buying, selling or subscribing such as pledging etc., when in possession of unpublished price sensitive information.
S 2 (l) defines ‘unpublished price sensitive information’ as ‘any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities and shall, ordinarily including but not restricted to , information relating to the following :
(i) financial results,
(iii) change in capital structure,
(iv) mergers, de-mergers, acquisition, delistings, disposals and expansion of business and such other transaction;
(v) changes in key managerial personnel ; and
(vi) material events in accordance with the listing agreement.’
It is intended that information relating to a company or securities that is generally available would be unpublished price sensitive information if it is likely to materially affect the price upon coming into the public domain. The types of matters that would ordinarily give rise to unpublished price sensitive information have been listed above to give illustrative guidance to unpublished price sensitive information.
S 2 (d) defines ‘Connected Person’ as :
(i) any person who is or has during the six months prior to the concerned act been associated with a company, directly or indirectly, in any capacity including by reason of frequent communication with its officers or by being in any contractual, fiduciary or employment relationship or by being a director, officer or an employee of the company or holds any position including a professional or business relationship between himself and the company whether temporary or permanent, that allows such person, directly or indirectly, access to unpublished price sensitive information or is reasonably expected to allow such access.
(ii) Without prejudice to the generality of the foregoing, the persons falling within the following categories shall be deemed to be connected persons unless the contrary is established –
(a) an immediate relative of connected persons specified in clause (i)’ ; or
(b) a holding company or associate company or subsidiary company; or
(c) an intermediary as specified in S 12 of the Act or an employee or director thereof;
(d) an investment company, trustee company, asset company;
(e) an official of a stock exchange or of clearing house or Corporation; or
(f) a member of the board of directors or an employee of a public financial institution as defined in section 2(72) of the Companies Act, 2013; or
(g) a member of the board of directors or employee of a public financial institution as defined in S 2(72) of the Companies Act, 2013; or
(h) an official or an employee of a self-regulatory organization recognized or authorized by the Board; or
(i) a banker of the company; or
(j) a concern, firm, trust , Hindu Undivided Family, Company or Association of persons wherein a director of a company or his immediate relative or banker of the Company has more than ten per cent of the holding or interest.
It is intended that a connected person is one who has a connection with the company that is expected to put him in possession of unpublished price sensitive information. Immediate relatives and other categories of person specified above are also presumed to be connected persons specified above are also presumed to be connected persons but such a presumption is a deeming legal fiction and rebuttable. This definition is also intended to bring into its ambit who may not seemingly occupy any position in a company but are in regular touch with the company and its officers and are involved in the company’s operations. It is intended to bring within its ambit those who would have access to or could access unpublished price sensitive information about any company or class of companies by virtue of any connection that would put them in unpublished price sensitive information.
S 2 (f) defines ‘immediate relative’ as ‘a spouse of a person, and includes parents, sibling, and child of such person or of the spouse, any of whom is either dependent financially on such person, or consults such person in taking decisions relating to trading in securities.’
It is intended that the immediate relatives of a “connected person” too become connected persons for purpose of these regulations. Indeed this is a rebuttable presumption.
‘Insider Trading’ as per Section 195 of the Companies Act,2013
The Act of 2013 prohibits insider trading and any insider as defined in the Act if found guilty of insider trading will be subject to penalty which provides for jail term up to five years and/or monetary penalty. The Act defines insider trading( S 195(1)(a) and ‘Price Sensitive Information’, (S 195(1)(b)). The Act of 1956 did not have any provision against insider trading. The SEBI Regulations on Insider Trading monitored such activity which was in place from 1992. The provision included in S 195 deals with actions of directors, key managerial persons, any other person or their agents dealing with securities or their agents based on `non-public price sensitive information’ directly or indirectly.
The Companies Act, 2013 in Sec. 2(77) defines `relative’ to mean with ‘reference to any person, means any one who is related to another, if –
(i) they are members of a Hindu Undivided Family’
(ii) they are husband and wife; or
(iii) one person is related to the other in such manner as may be prescribed.’
‘Insider Trading’ as per the SEBI (Prohibition of Insider Trading) Regulation,2015 compared to the Companies Act, 2013.
The Regulation defines ‘Insider’ in a different manner and includes any person who is connected with the company having access to unpublished price sensitive information. So the definitions of `insider’ differs.
The Companies Act,2013 states about ‘non-public price sensitive information’ and the Regulation states about ‘unpublished price sensitive information.’
The Act of 2013 refers to Directors, Key Managerial Persons and any other person of their agents acting directly or indirectly who could be booked for violation of S 195.
The Regulation refers to ‘connected persons’ who could be charged with an act of insider trading.
The Regulation in R 2(f) defines an ‘immediate relative’. So, a relative within the provisions of the Regulations may not be a relative within the meaning of the Act of 2013.
As per the Regulations any connected person found guilty of insider trading within the meaning of the current Regulations will be subject to the following penalty:
Section 15G of the SEBI Act,1992 as amended lays down that if any insider :
- either on his own behalf or on behalf of any other person, deals in securities of a body corporate listed on any stock exchange on the basis of any unpublished price sensitive information; or
- (ii) communicates any unpublished price sensitive information to any person, with or without his request for such information except as required in the ordinary course of business or under any law; or
- (iii) counsels, or procures for any person to deal in any securities or any body corporate on the basis of unpublished price sensitive information,
he shall be liable to a penalty of twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher.
The Act of 2013 provides for jail term up to five years if any person contravenes the provisions of S 195. There is no jail term under S 15G of the SEBI Act,1992 as amended.
Action in case of Insider Trading Proved
Action in case of insider trading by any connected person will have to be initiated by SEBI and the current Regulations will be followed. The Companies Act, 2013 will be superseded. All action under the current Regulation will be followed. In case any connected is proved guilty, penalty as per the provisions of Section 15G of the SEBI Act, 1992 as amended will be applicable. So, there will be no jail as provided in Section 195 of the Companies Act, 2013.
Unlisted companies are regulated by the RoC which is under the Ministry of Corporate Affairs. Listed companies are regulated by SEBI. The provisions of the Regulations on Insider Trading is a special law which will be applicable to deal with such violations. Question arises then why have the provision of S 195 of the Companies Act,2013 at all. Uniformity in the S 195 of the Companies Act,2103 and the SEBI (Prohibition of Insider Trading) Regulations,2015 need to be reviewed and the provisions should be made uniform. There cannot be two sets of provisions for the same violation. This is bound to cause complicated situation when any situation demands action. The situation is that of one violations but two different provisions under an Act and a Regulation.
The situation is similar to the provision of underwriting when the Companies Act,1956 and the SEBI Underwriting Regulations had different provisions and ultimately the provision had to be made uniform. This reminds of the Swaika Vanaspati Ltd vs All Bank Finance Limited decided by the High Court at Calcutta in respect of the provision of underwriting in a public issue.
The country can boast of a dynamic capital market with appropriate legal provisions and an efficient Regulator in place. With actions aimed at protecting investors, the country is set to emerge as one of the leading stable capital markets of the world. Only thing that needs to be observed is that the all actions are required to be pragmatic rather than a provision included in any law for the sake of it to be amended later.