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SEBI takes another leap to prevent Insider Trading

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Insider trading is a tort, a civil violation and a criminal offence, compelling the regulators worldwide to prohibit the same under federal statutes & subordinate legislations. In India, SEBI Act, 1992 and SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations) govern the same.

Usually the insider trading is ‘prohibited’ and the regulators undertake the post facto exercise of investigation to punish the wrong doers. However, the regulators through various disclosures and policies endeavour to ‘prevent’ insider trading place certain restrictions on direct insiders (connected persons). Trading window is one such mechanism and restriction is placed on Designated Persons (DPs).

Trading window is a notional window of a time period during which persons in possession of or in access to UPSI are restricted or allowed to trade. Closed trading window is called ‘blackout period’ in which DPs can not trade. DPs are identified on the basis of their role and functions in the organisation and the access that such role and function would provide to unpublished price sensitive information (UPSI) in addition to seniority and professional designation.

Recently, SEBI issued a consultation paper dated July 08, 2022 wherein it proposed bringing units of a mutual fund under the ambit of PIT Regulations. As an extension of this effort to make the Insider Trading norms more stringent, Securities and Exchange Board of India has issued a circular dated August 05, 2022 (‘SEBI Circular’) to stock exchanges, depositories and listed companies to develop a system to freeze PAN of DPs to prevent inadvertent trading during closure of trading window. This comes as a step to further enforce the already existing restriction under the PIT Regulations on trade from the end of every quarter till 48 hours after the declaration of financial results.

The provisions of the circular will come into force on September 30, 2022 and will be applicable initially only to declaration of financial results of the listed company that is or were part of benchmark indices i.e. National Stock Exchange of India Limited’s Nifty50 and Bombay Stock Exchange Limited’s Sensex from the date of implementation of this circular. The restriction of trading will be for on-market transactions, off-market transfers and creation of pledge in equity shares and equity derivatives contracts (i.e. Futures & Options) on such listed companies.

This comes with the regulatory experience of observing trades by company connected persons during the blackout period leaving such restrictions as under-enforced hitherto. On the other hand, identifying DPs and mandatorily obtaining details from their immediate relatives for enforcing such provision under the SEBI circular may be over-arching.

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