SEBI insider trading regulations: Risk navigation - a necessity

Use of technology is certainly helping SEBI improve enforcement and surveillance. SEBI’s orders provide insights on the process followed, to procure information and map activities for the purpose of scrutiny. Trade details are mapped against the disclosures made by a company, Unpublished Price Sensitive Information (UPSI) available with the company, price movement around UPSI disclosures and the relationship between the individual and the company. The reviews do not stop at the immediate relationships with the company, e.g., employees or auditors but go beyond and track all possible relationships to conclude whether a person is an insider and whether his/her trade constitutes insider trading. There are cases where individuals have been treated as insiders, basis social media connections and sharing of UPSI through web applications.

The rationale for penalizing a company/individual is not only the monetary gain/avoidance of loss but also the intention to camouflage the actual trading pattern or real intentions for non-disclosure or delayed disclosure. SEBI Insider Trading Regulations does not intend to generally prohibit insiders from trading in securities of a company. It only aims to enforce disciplined trading with the underlying objective that all investors should have a fair opportunity to trade. While SEBI’s investigation process is rigorous, its motive is only to punish the real ‘wrong doers’. This is evident from the many cases where no penalty has been levied or where such cases have been dismissed.

We note that a majority of the cases relate inter-alia to trading while in possession of UPSI, trading during a restricted period, non-disclosures or delayed disclosures. So, were such instances of insider trading avoidable? They certainly were.

Like it has been said, “Discipline is the long and arduous process of convincing the mind to abide by one’s conscience”. It requires companies to move away from a ‘tick in the box’ approach to taking proactive steps in shaping their own compliance behavior and that of their employees, directors and other “connected persons”.  

How many listed companies, under the SEBI Insider Trading Regulations today:

1. Demand that their advisors (intermediaries) confirm / demonstrate that they have established practices to prevent insider trading?
2. Have Invested in robust training programs for their employees which validate their understanding of the provisions and their roles and responsibilities?
3. Have invested in technology to support a strong compliance and monitoring framework?
4. Have put their existing controls to test or got them reviewed and validated to assure themselves of the quality of governance that they have in place?

A long and hard look at these questions and an honest response will help companies reflect on where they stand with respect to their insider trading obligations.

(Saswati Mishra, Manager, EY India also contributed to the article.)