Compliance issues under insider trading regulations

Since the introduction of the new insider trading regime in 2015, India’s securities market has seen a number of changes in terms of processes and controls for transactions and also with regard to routine compliances and reporting requirements. The Securities and Exchange Board of India (SEBI) has provided additional clarity by way of a guidance note and through an informal guidance regime. While several processes have been simplified, some practical constraints arise out of the requirements prescribed under the SEBI (Prohibition of Insider Trading) Regulations, 2015.

1. One of the primary compliances for listed companies and market intermediaries is to regulate and monitor trading of their employees and designated persons through a code of conduct (CoC). The CoC must adhere to the principle-based minimum standards set out under Schedule B of the regulations. This approach was welcomed as a step forward from the prescriptive nature of the previous model codes. However, applying these minimum standards across both financial institutions and listed companies has had some unintended consequences.

For instance, previously only market intermediaries were obliged to maintain a restricted list. Although SEBI, in an informal guidance, has suggested that this obligation applies only to intermediaries, from a plain reading of the regulations, it appears to extend to listed companies as well. As a result, employees not only have to obtain pre-clearance of trades in securities of the listed company which employs them, but also in respect of their trades in all other securities. The same informal guidance also appears to expand scope of applicability of the CoC to “all connected persons and not only to designated persons”, while the regulations specifically state that “employees and connected persons designated on the basis of their functional role … in the organization shall be governed by an internal code of conduct”.

Cyril Amarchand Mangaldas is India’s largest full-service law firm. Shruti Rajan is a partner and Gazal Rawal is a principal associate at the firm.