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Corporate India’s top bosses are jittery about the new insider trading regulations being implemented by the Securities and Exchange Board of India (Sebi).
The market regulator had revamped these regulations to bring several new provisions including the concept of ‘material financial relationships’.
Under this, company insiders will have to disclose details of all people with whom they have significant financial relationships.
These insiders are not just required to reveal their own sensitive personal data but are also required to find out the annual income of their relatives to make appropriate disclosures.
A material financial relationship is the one where the insider has received or paid any money to anyone that is more than 25 per cent of his last one-year earnings.
Interestingly, the rule would also apply in cases where the transaction is less than 25 per cent of the insider’s annual income but is more than 25 per cent of the income of the person who is a party to the transaction.
Hence, the insiders of a company will have to find out the financial information of their relatives and friends with whom they have financial transactions.
“The definition seems to extend both ways i.e.
not only the individual who receives the payment, but also the one making the payment,” said Shruti Rajan, partner, Cyril Amarchand Mangaldas.
“Safeguarding of this information and ensuring that it is available within the organisation on a need-to-know basis only, will be critical from implementation point of view,” said Rajan.
A chief operating officer said on the condition of anonymity that there were several implementation challenges with the law.
“We often make advance payments to our personal staff such as domestic help and chauffeur.
As per the new rules, we have to give the details of those persons as well.”
Another person impacted by the new law said rather than asking for the details of third parties, Sebi should have kept the responsibility limited to the designated persons.
“Designated persons can be asked to produce affidavits disclosing all the financial transactions they have done over a specific threshold say Rs 10 crore.
Such regulation will be both effective and easy to comply with,” the person said.
These rules will apply to all the designated persons of a listed company.
As per Sebi’s Prevention of Insider Trading (PIT) regulations, boards of all the listed companies are expected to prepare a list of designated persons.
These are the people who have reasonable access to price sensitive information.
The list could include promoters of the company, board members, and other key functionaries.
Even some of the lowerrung employees who work in departments like software maintenance could be placed in the list if they have access to insider information.
All the designated persons are expected to meet the compliance requirements specified under insider trading which includes disclosure of their investments, details of their immediate relatives etc.
‘PRIVACY CONCERNS’“Designated persons might find it difficult getting information such as annual income of people in order to determine whether they ought to disclose details of such persons to their companies,” said Tomu Francis, partner, Khaitan Co.
“People may also be reluctant to share such sensitive financial data due to privacy concerns.”
Another key concern of the insiders seems to be the authenticity of data.
The top corporate bosses are worried they could be made liable if any of the data pertaining to the income of their relatives is found incorrect.
“Since such a disclosure is not solely based on information in the hands of designated persons, any inaccuracy with respect to such information should not lead to any liability on designated persons,” said Anil Choudhary, partner, Finsec Law Advisors.
“By inserting such onerous restrictions, Sebi has raised the compliance costs and complexity in relation to compliance with insider trading regulations.”
The new rules also mandate the insiders to provide personal details of all their immediate relatives including their PAN details.
Further, the listed companies have also been asked to maintain structured digital database with details of all the people who had access to unpublished price sensitive information (UPSI).
The market regulator has brought in material financial relationship to help crack cases where an insider may have funded an unconnected person to trade on his behalf.
Sebi notified these new insider trading regulations on December 31, 2018.
These were based on the recommendations of a committee on fair market access.
The increased compliance requirements are aimed at increasing accountability and curbing any leak of UPSI.
The issue came to focus last year when the quarterly results of several blue-chip companies were leaked over social media platforms such as WhatsApp.
