Fiscal Solutions Powered by Law…
The Inside of Trading
- An Industry Perspective
By
Suresh Viswanathan
Founder Director & Chief Consultant
Finteglaw Knowledge Solutions Private Limited
“Divergence of perception”
May 5, 2015
The Regulatory View - Globally
 A company's confidential information
– Qualifies as property to which the company has a right of
exclusive use.
 Divulging UPSI by an insider is violation of a fiduciary
duty
– Constitutes fraud akin to embezzlement
– Has criminal implications
 Misappropriation of UPSI amounts to theft
– Use of UPSI for ones benefit amounts to dishonesty and
cheating
– Has criminal implications
May 5, 2015
Insider trading a crime in US
 U.S. insider trading prohibitions are based on
English and American common law
– Governed by prohibitions against fraud
 A director, who bought his company’s stock
when he knew it was about to jump up in
price, committed fraud by buying while not
disclosing his inside information
– The US Supreme Court ruling in 1909
– Well before the SEC Act, 1934,
May 5, 2015
On the lighter side!
May 5, 2015
Corrupting Effects
 Corrupts the ‘Level
Playing Field’
 Profit made out of the
loss of other investors
 Leads to loss of
confidence in stock
market
 Easier to identify the
beneficiaries
– Extent of losses suffered
impossible to calculate.
May 5, 2015
SEBI Investigations
73
Market
Manipulations
2013-14
Investigations
Completed
67
41
86
12
Issue Related
Manipulations
6
2013-14
Investigations
Taken up
52
43
16
16
Miscellaneous
10
12
2012-13
Investigations
Completed
13
13
14
11
Insider Trading
2012-13
Investigations
Taken up
6
6
Takeovers
2
3
0
10
20
30
40
50
60
70
80
May 5, 2015
90
100
Penalties Syrocket
2500
2040
2000
1500
1009
1000
500
184
0
2012-13 (Rs. Lakhs)
2013-14 (Rs. Lakhs)
Increase %
May 5, 2015
Penalty under
SEBI (PIT)
Regulations, 1992
‘The Unwinnable War’
 A.M. Louis in his book ‘The Unwinnable War
on Insider Trading,’ asserts that:
– Of all the issues that have confronted regulators
of the securities markets, the regulation of insider
dealing has proved among the most intractable’
 Very true of Indian stock market
– The Indian stock market practically runs on
unpublished price sensitive information
May 5, 2015
Challenges Ahead
May 5, 2015
SEBI Act Amended - 2014
New Powers
Implications
 Section11(2)(ia) - Calling for
information and records from any
 Enables collection of call
recording data from any
Telecom provider
 Enjoys courts’ powers for
– person
– Including any bank or any other
authority or board or corporation
• established or constituted by or
under any Central or State Act
 Relevant to any investigation or
inquiry by SEBI in respect of any
transaction in securities
– In the opinion of SEBI
– discovery and production of
books of account and other
documents
– Summoning and enforcing
attendance
 The provisions have powers
over-riding other laws
May 5, 2015
Search and Seizure
 Power to search
–
–
–
–
Places and Buildings
Vessel, vehicle or aircraft
Persons
Computers
 Powers to
–
–
–
–
–
Inspect
Seize
Place identification mark
Make copy
Record statement
May 5, 2015
On the lighter side!
May 5, 2015
SEBI’s Tentacles
 SEBI has installed an advanced
surveillance software
– This monitors abnormal patterns of
trading in all scrips
– Detailed information sought from
Exchanges on such trades
– Exchange in turns to the Members
for client information
 Surveillance systems still not
able to cope with the
malpractices
– HDFC Mutual Fund case, the
information was voluntarily shared
with SEBI
May 5, 2015
The Odds
 Very wide definition of connected
persons
 Onus on the Connected Person to prove
innocence
– Guilty unless proved innocent
– Contrary to established principles of law
 New powers acquired by SEBI
– Search & Seizure powers
– Power to procure Call records data
 Heavy penalties (Rs. 10 Lakh to 25 Crore)
and disgorgement
 Unlisted intermediaries could face
prosecution under Companies Act also
 PIT violations outside Settlement
process
May 5, 2015
S 447 of Companies Act 2013

“any person who is found to be guilty of fraud, shall be punishable with imprisonment for
not be less than six months but which may extend to ten
years and shall also be liable to fine which shall not be less than the amount
involved in the fraud, but which may extend to three times the amount
a term which shall
involved in the fraud”
–

Provided that where the fraud in question involves public
imprisonment shall not be less than three years.
interest, the term of
“fraud” includes any act, omission, concealment of any fact or abuse of position
committed by any person or any other person with the connivance in any manner, with
intent to deceive, to gain undue advantage from, or to injure the interests of,
the company or its shareholders or its creditors or any other person, whether or not
there is any wrongful gain or wrongful loss
–
“wrongful
gain” means the gain by unlawful means of property to which the person
gaining is not legally entitled
May 5, 2015
S 195 of Companies Act 2013


“No person including any director or key managerial personnel of a company
shall enter into insider trading”
“insider trading” means—
– an act of subscribing, buying, selling, dealing or agreeing to subscribe, buy, sell or deal in any
securities by any director or key managerial personnel or any other officer of a company
if such director or key managerial personnel or
either as principal or agent
any other officer of the company is reasonably expected to have access to any
non-
public price sensitive information in respect of securities of company
– an act of counselling about procuring or communicating directly or indirectly any non-public
price-sensitive information to any person;

Contravention punishable with imprisonment for a term which may extend to
five years five years or with fine which shall not be less than five lakh
rupees but which may extend to twenty-five crore rupees or three times the
amount of profits made out of insider trading, whichever is higher, or
with both.
 S 458 delegates the prosecution powers to SEBI
May 5, 2015
Connected Persons (Non Intermediaries)
The Issuer
Company
Director,
Immediate
Relative
Company, Firm,
HUF, AOP
Officer, Employee,
Professional or
Business Partner
Holding, Associa
te & Subsidiary
Banker of the
Company
Immediate
Relative
Investment, Tru
stee & Asset
Management
Companies
Public Financial
Institution, its
Directors &
Employees
If a Director, immediate Relative or
Banker has more than 10% interest
May 5, 2015
Connected Persons (Intermediaries)
The Issuer
Company
Any Dealing
Intermediary u/s
12 of SEBI Act
Officials of Stock
Exchange &
Clearing House
Member of Board
of Trustees of MF
SEBI Authorised
Self regulatory
Organisations
Employees &
Directors of the
Intermediary
Immediate
Relative
Director &
Employee of the
AMC of the MF
Officials &
Employees
May 5, 2015
“Fig Leaf Cover” for Stock Brokers
 Segregate and demonstrate
– Prop dealing from client dealing
desk
– Sales staff from client dealing desk
– Research team from dealing and
sales teams
 Maintain documented evidence
– NDA with all concerned including
professionals and business partners
– Rationale for prop trade decisions
– Basis (sources) of research reports
– Authenticated order book/deal
tickets
• even for prop trades
– Call records of the dealer
May 5, 2015
Taboo for Stock Brokers
 Never ever
– Prop trade
• on stocks of group companies
• based on any insider information
from anyone
– Undertake trades of AMCs, PMS,
AIF etc., belonging to your group
– Allow staff to trade through other
brokers
– Provide unsolicited trading advise
to clients
• other than through an
authenticated published document
May 5, 2015
Research Vs. Insider - Wafer thin…
To ask a Maruti employee about
footfall at his location
To pay a Maruti employee to get a
printout of a sales data
To have lunch with an ex CFO of a
software company
To have lunch with a current CFO of
a software company - on your boat
To talk to doctors who have worked
on past clinical trials of a
pharmaceutical company
To pose as a doctor to gain access to
a clinical trial in progress in a
pharmaceutical company
To appoint an automobile industry
veteran as a 'source'
To appoint the brother in law of
Maruti VP as an industry 'source'
May 5, 2015
Internal Trade Controls
 Effective Employee Securities Dealing
Policy
– To regulate, monitor & report trades
• Automation suggested
– Adherence to Schedule B
– Applicable to Auditors, consultants,
vendors etc. who may have access to
UPSI
– Everyone to appoint a Compliance
Officer
 Address Insider Trading as an
Enterprise Risk
– Make this part of corporate culture
 Conduct periodic awareness sessions
to all employees
May 5, 2015
Trading Plan – An Entitlement
Trading
Plan
No trading
during 10th
March, June,
September &
December till
2 days after
declaration of
results
Deemed
Connected
Person
Minimum
Plan period
for 12 months
To be reviewed &
approved by the
Compliance Officer
SEBI
Intermediary
Listed Company
Connected
Person
To be formulated by
the insider
Person
Possessing UPSI
Value of
trades or no.
of
securities, na
ture of trades
and
intervals, or
dates to be
disclosed
Person having
access to UPSI
No parallel
plans
allowed.
No scope for
market abuse
to be
provided
Disclosure to the
Stock Exchange(s)
Once
approved, can
not be
revoked
Trading not
to commence
before 6
months of
disclosure to
Stock
Exchange(s)
Plan shall not be implemented if any UPSI is in the possession of the Insider
May 5, 2015
Daunting Tasks for Listed Companies
 To maintain the dynamic list of
connected persons
– Acting in contractual or fiduciary
relationship
– Professionals
– Business partners
 To ensure that UPSI is not shared
with the aforesaid except under
permitted circumstances
 To document and prove that UPSI
was not shared with the
aforesaid
 To enter into NDA with all the
aforesaid
 To approve and operate Trading
Plans
May 5, 2015
Utopian!
May 5, 2015
Role of Compliance Officer Defined!
 SEBI Adjudication Order dated July 27, 2012 in
respect of Mr. G Jayaraman in the matter of
Satyam Computer Services Ltd.
– SEBI held the erstwhile compliance officer of
Satyam is liable for not enforcing the safeguards
under the Model Code during the period of
December 2008 – January 2009
– Trading window was not closed after becoming
aware of certain “price sensitive information”
 The order further said
– “The duty weighs even more on a person like
Compliance Officer, who is conferred upon with
key responsibilities in a company. Hence, the
violation by the Noticee needs to be viewed
seriously.”
 SEBI imposed a penalty of Rs.5,00,000/(Rupees Five Lakh only) on Mr. G Jayaraman.
May 5, 2015
Onerous role of Compliance Officer
 Responsible for Trading Plans and
Employee Security Dealing Policy
– Means he should ensure that nobody is
front running
– Trades by relatives is more onerous to
monitor
 Responsible for scrip related
rumours floated by other
employees
 Bound to report all cases of Insider
trading to SEBI
 Responsible for all reporting to
Exchanges
May 5, 2015
Brace up …
 Install
– Robust internal control systems for
complying with regulatory
requirements
– Proper Chinese Wall mechanisms
 Strengthen
– The ambit of internal audit
– The standards in regulatory
compliance
 Automate
– Compliance processes
– Internal controls
– Back up mechanisms
May 5, 2015
Insider regulations fully enforced…
May 5, 2015
Awaiting Clarification
 Companies whose debt securities
are listed also come under the
ambit of SEBI as a Listed Company,
even though they are closely held
– Will PIT apply to these companies
also?
 Does a Trading Plan apply to an
Intermediary also?
– What will happen if an insider goes
bankrupt and not able to continue
trades under the Plan
 Post FMC Merger, will
commodities derivatives also come
under the ambit PIT Regulations?
May 5, 2015
Finteglaw Knowledge Solutions Private Limited
CIN: U74140MH2008PTC186787
Registered Office: A – 403, Kukreja Centre, Sector 11, CBD Belapur, Navi Mumbai – 400614.
Zonal Office (South) : ‘Reglog’, New No. 17/1, Playground View Road, Nandanam, Chennai – 600 035.
Phone: +91 22 27577315, Website: www.finteglaw.com, email: [email protected]
May 5, 2015