Sebi to introduce norms to separate 'innocent mistakes' from insider trading crimes

Mumbai: Sebi will soon put in place a new set of norms to deal with insider trading menace, which would clearly demarcate ‘innocent mistakes’ from serious violations committed by top corporate executives and other connected entities while trading in shares of listed companies.

The new norms, being finalised on the basis of an expert panel’s suggestions and public comments on this issue, would strengthen the system for controlling and preventing insider trading and also provide greater clarity to the company executives, promoters and others on their trading activities, Sebi Chairman U K Sinha said.

[caption id=“attachment_1242855” align=“alignleft” width=“380”]  The Sebi logo. Image courtesy Sebi[/caption]

This new set of regulations would replace nearly two-decade old insider trading norms currently in place and public comments have been invited till December 31 on draft norms suggested by an expert committee set up by Sebi.

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“The aim is that all points that lacked some clarity, would be made very clear now and by providing this clarity, innocent mistakes can be avoided,” Sinha said.

The new norms are expected to put in place stricter penalties for those found to be indulging in insider trading activities, while it has also been proposed that public servants, regulators and persons holding statutory positions should be brought under its purview if they are handling share price-sensitive information about listed companies.

“But another important thing that I want to communicate is that these norms also provide a clarity,” Sinha told PTI in an interview here.

“We should not create a situation where anybody is afraid of trading and a clarity is required for that. These norms would provide very clear guidelines on what is doable and what is not illegal, so that innocent mistakes and genuine transactions do not get affected because of insider trading rules,” he said.

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The Sebi chief further said that the expert panel has suggested putting in place a new concept, which is already there is many advanced markets and provides for having a pre-decided or pre-scheduled trading calendar.

“The thought process is that, for example there is a CEO or CFO of a company, he may have some exclusive information around the year, which other investors may not have. Right now we have a closing window for trading by such persons. But even when there is no such window within a few days of quarterly or annual results, technically that person can trade.

“So this recommendation says that this man is in possession of UPSI all through the year, but how can he be stopped from trading ever.

“Therefore, it has been suggested that if the person is well-meaning, let him give a pre-scheduled trading pattern and disclose the same and let him trade. These things have been provided to make it easy and practical for genuine transactions,” he said.

When asked whether media and individual journalists would also be covered under the new norms, Sinha said that any person trading on the basis of his or her access to non-public price sensitive information would come under these norms.

There have been instances – many in Western markets and also a few in India – where some journalists have been found guilty of insider trading practices.

“When we talk about media getting access to unpublished price sensitive information and taking a position in the market based on that, the question arises, how did they get that information. You get it from some insider in the company.

“So you (journalist) is not an insider in the company, but some insider has given you the information, so you become a ‘connected person’,” Sinha said.

The Sebi Chairman said that the new regulations would put in place a very clear definition for connected persons.

“The concept of connected person has been expanded (in draft norms) and even relatives have been included. This would take care of any example you may have in your mind.

“So, anybody who is in possession of any unpublished price sensitive information (UPSI), directly related persons or third party entities, they would be covered. If someone has UPSI and they are trading on the basis of that information, they will be covered,” he said, while adding that the new norms would be quite comprehensive.

As per the draft norms, any person who possesses unpublished stock price sensitive information about a company would be deemed as an insider and any person who has been associated with a company in any capacity up to six months prior to trading in its stock would be termed as “connected person”.

A new feature of the proposed regulations is that of treating public servants and persons holding statutory positions, which are expected to have access to UPSI, as connected persons and thereby prohibit them from trading when in possession of UPSI.

Besides, judges hearing corporate cases and outcome of which would be materially adverse or materially positive to the price of a firm’s shares would be considered as a “connected person” until the order is pronounced.

PTI