The Securities & Exchange Board of India recently circulated a discussion paper on amendments to the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations) towards provisioning for an informant mechanism inviting public comments on the proposed amendments to the PIT Regulations as discussed in the Discussion Paper.

The PIT Regulations define ‘Insider trading’ to mean trading of securities while in possession of unpublished price sensitive information (‘UPSI’). While persons allegedly indulge in insider trading indirectly through proxies using UPSI, SEBI, like most other regulators, has also been facing challenges in effectively verifying such instances of insider trading violations owing to insufficiency of evidence. The Discussion Paper states that the mandate of the SEBI Act, 1992 is to ‘protect the interests of investors in securities and to promote the development of, and to regulate the securities market’ which makes it ‘imperative for SEBI to employ all legitimate means to detect and initiate action against insider trading at the earliest to instil confidence amongst investors and ensure integrity of the securities markets in line with the mandate conferred upon it’.

The proposed amendments to the PIT Regulations seek to establish systems and processes (@listed Cos as well as SEBI) to encourage individuals with incentives for reporting insider trading violations through rewards up to INR 1 crore (approx. US$ 150k) in the event of SEBI undertaking disgorgement of at least INR 5 crores (approx. US$ 0.72 million) resulting from action taken based on such true, credible and original information.

The salient features of the proposed amendments to the PIT regulations are as follows:

Furnishing Information to SEBI:
Information relating to any knowledge or reasonable basis that an insider trading violation has or is about to occur (either through trading or communication) maybe voluntarily provided by any individual to SEBI vide a voluntary information disclosure form alongwith the source of the information.
Furnishing Information Anonymously:
Additionally, such information can also be provided anonymously through a practising advocate. Such advocate would however also need to adhere to the obligations applicable to the informant.
Setting up of office of informant protection:
In addition to SEBI’s investigation and inspection wings, a specific wing for informant protection would also be set up for coordination with informants, framing policies and processes to assess and verify information received before being transferred to the relevant departments for suitable enforcement action. The office would also decide on rewards to informants as discussed above.
Confidentiality of Informants & Information:
Except where any information is required to be relied on in proceedings, the said office for informant protection would ensure keeping the informant and the information confidential at all times.
Listed companies, intermediaries, etc., would be required to revise their internal codes to ensure that employees are not penalised merely on account of filing a Form or assisting SEBI.
An amnesty scheme may also be offered to informants facing enforcement action, where they choose to co-operate with the regulatory investigation.

It will be necessary to prevent misuse of the amended provisions of PIT Regulations by bounty hunters and speculators and verifying bonafides and genuiness of information. The exceptions to confidentiality of informants during proceedings as suggested makes the confidentiality regime vulnerable and therefore may not provide the confidence required to be accorded to informants to step forward with information.

If this anonymity, bounties on offer and job-protection regime comes into play, apart from SEBI working towards preventing misuse of such a regime by bounty hunters, Corporates will need to strengthen their market conduct governance practices as well. The amendments also expose practicing advocates towards triggered breach of client privilege obligations under applicable laws.

Proposed Amendments to the PIT Regulations - An Insider

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MANOJ KUMAR