Frequently Asked Questions on Insider Trading

What is Insider Trading?

Insider trading is defined as a malpractice wherein trade of a company's securities is undertaken by people, who by virtue of their work or relationship with the people working with the company (defined as Insider), have access to the otherwise non-public information which can be crucial for making investment decisions.

It gives an unfair advantage to the Insider with respect to understanding the financial position of the company, whereas the other shareholders and investors are at a great disadvantage due to a lack of important insider non-public information.

What are SEBI Regulations on Prohibition of Insider Trading?

SEBI has made the compliance officer of an organisation to be responsible for monitoring all the trade made by Access/ Designated employees and close the trading window for the trade if the employees could be in possession of non-public Information.

It mandates the compliance department to create a base framework (using SEBI guidelines on Prohibition of insider trading ) for regulating the Trading in securities by Employees as well as their Dependants including spouses.

What is ‘Structured Digital Database’ for Unpublished Price Sensitive Information (UPSI)?

As per the new amendment, SEBI has made additional compliances where all listed companies and connected persons as defined under the regulation are required to maintain a structured digital database with adequate internal controls, containing the name(s) and PAN Number(s) of the person(s) with whom unpublished price sensitive information (UPSI) is shared and the nature of UPSI. Also maintaining a list of all employees and other persons with whom unpublished price-sensitive information is shared and confidentiality agreements signed.

What are the latest amendments to SEBI Insider Trading Regulations?

On July 17, 2020, SEBI notified the Securities and Exchange Board of India (Prohibition of Insider Trading) (Amendment) Regulations, 2020 (“PIT Amendment”), to introduce further changes to the SEBI PIT Regulations.

• Enhancement of the structured digital database towards seeking and storing additional details of persons sharing unpublished price sensitive information (“UPSI”)
• Automation of shareholding disclosures and change in reporting authority for making disclosures of PIT violations by listed entities, market intermediaries and fiduciaries.
• Introduction for additional transactional mechanisms as an exception to trading window restrictions.

What are the periodic disclosures requirements as an insider?

Initial disclosure

Every Promoter, Key Managerial Personnel and Director of the Company whose securities are listed on any recognized stock exchange shall disclose (Form 4) his holding of securities of the Company as on the date of these regulations taking effect to the Company within thirty days of these regulations taking effect

Continual Disclosure

Every promoter, designated employee and Director of every Company shall disclose in Form 5 & 6 to the Company the number of such securities acquired or disposed of within two trading days of such transactions if the value of the securities traded, whether in one transaction or a series of transactions over any calendar quarter, aggregates to a traded value in excess of Rs.10 lakhs or such other value as may be specified.

How many times has SEBI amended the insider trading policy?

The base guidelines for Prohibition of Insider Trading are as per SEBI insider trading guidelines 1992. SEBI has been making amendments to the policy every year to ensure the Insider trading policy framework becomes more robust. A few of the major recent amendments have been coming almost every year i.e. 2015, 2018, 2019, 2020 as well as in 2021.

Why do I need a insider trading software to manage the SEBI PIT & UPSI regulation?

It is risky & prone to errors for using a combination of emails and spreadsheets to manage & track details of Initial Holdings, Transaction Requests, Transaction Reporting & Periodic Disclosures of employees & for their dependents. It is also cumbersome to manually track violations of Holding period/ Contra transactions, UPSI as well as Restricted lists & information of employees stored in spreadsheets & physical documents.

In both cases, a proven automation solution like VELOX PIT & VELOX UPSI reduces your risks and improves your reporting accuracy with minimal effort.

Besides, a good automation tool allows:

1. Having centralised data storage of the investments & holdings of employees, immediate dependents & persons with material financial relationships makes it easier for faster retrieval of past information.
2. Automated approval/rejection of trade requests helps you to save time and provides greater visibility.
3. Configurable holding/contra restrictions provide for better control.
4. Setting up SEBI UPSI, blackout period/no-trading windows can be better managed within your defined system.
5. Automating the restricted securities list would reject any trading requests that are based on your preset rules.
6. Electronic submissions of periodical disclosures make it hassle-free for all stakeholders.
7. Systematic workflow for all trading approvals, automated reminder emails, notification alerts & audit trail keeps your entire process well-defined and in auto-mode.

Takeaway: Insider trading is a malpractice that involves the use of non-public information for personal gains in the stock market. SEBI has laid down regulations to prevent insider trading, and failure to comply can lead to legal consequences. Using an automation tool like VELOX PIT & VELOX UPSI can help to reduce risks and improve reporting accuracy by providing a centralised data storage system, automating trade requests, setting up SEBI UPSI, and maintaining a restricted securities list. It also helps to ensure periodic disclosures are hassle-free and comes with a systematic workflow that keeps the entire process well-defined and in auto-mode.