Insider Trading Compliance and Automation

Divya Srikrishna

Secretarial and Compliance Head - Redington

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Discussion Points - Today

A. Who is Covered - Code of Conduct

B. Insider & Connected Person

C. Immediate relative & Material financial relation

D. Unpublished Price sensitive Information (“UPSI”)

E. Trade restriction and disclosure

F. Disclosure and compliance related to UPSI

G. Non - Compliance

H. Automation

Listed Entity – Law and Policies

SEBI (PIT) Regulations

Code of Conduct to regulate,

monitor and report insider

trading

Code for Fair Disclosure

Process document –

Insider Trading Compliance

Automation

Develop or Buy

Recommendatory

Mandatory

Directors and KMP

Promoters

Two level below CEO

Direct reportees to KMP

Support Staffs (IT/ Secretaries/

Executive Assistants)

Secretarial team/ Controllership

team / Finance & Accounts team

Person Identified by Compliance

officer

Who is Covered – Code of Conduct

CompanyMaterial subsidiaries

My list

Company and Material SubsidiaryA. Directors and KMPB. PromotersC. Employees in category of President and

aboveC. Secretarial/Finance StaffD. IT staffE. Investor relations staffF. Secretaries and admin employees of

above categoriesG. Person identified by Compliance Officer

who are assumed to be in possession ofUPSI

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Insider

Connected Person

+Any other person in

Possession of UPSI

Connected Person

Associated with Company during last 6 months (directly or indirectly)

&Had access to UPSI.

Associated :A. Frequent communication with officers; or

B. Contractual, fiduciary or employment relationship; or

C. Director, officer or an employee, or

D. Professional or business relationship (temporary or permanent)

Designated Person Board of Directors

Employees (identified)&

their immediate relatives

Insider & Connected person

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Immediate Relative Material Financial Relationship

Dependent on Designated person

Or

Consults Designated person while taking decisions relating to

trading in securities

Spouse

‘Material Financial relationship’

Recipient of any kind (loan or gift) from DP

Immediately preceding 12 months

Equivalent to at least 25% of DP’s annual income

exclude if payment is on arm’s length transactions.

• Annual Disclosure • Trading Restriction • Trading Related Disclosure• UPSI sharing restrictions

and disclosures

Only in Annual Disclosure

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Unpublished Price Sensitive Information (UPSI)

A. Information relating to the Company B. Not available to publicC. If made available to public, it will materially affect share price

Illustrative list of UPSI:Financial results/StatementsDividends (Interim & final)Change in capital structureAny issue (including bonus issue) or buyback of securitiesMajor expansion plans or execution of new projects, new client / new project winsMergers, Amalgamations, De-mergers, Acquisitions, Delisting, Disposals and Expansion of business and such other transactionsChanges in key managerial personnelSignificant changes in policies, plans or operationsAny material event as per SEBI (Listing obligations and Disclosure Requirements) Regulations, 2015

Subscribing

Buying / Selling

Dealing

Pledging

Trading

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Designated person (DP) / Immediate Relative

Trading Window Closure

NO TRADING

Trading window closure:• From end of each financial

quarter• Till 48 hours post publication of

the financial Results.• For any event as decided by the

Compliance Officer.

Trading Window Open

Pre-clearance approval

Not in Possession of UPSI

Possession of UPSI

Threshold at the discretion ofcompany (Example :Least of following:Trade value > INR 1 lakhs OR500 shares OR 1% of totalshareholding or anypermutation / combination)Trading within approved timeperiod (7 days)Disclosure Within 2 days

Without Approval

If aggregate traded value in a quarter > INR 10 lakhs, DP to inform Company within 2 days of trade.

NO Contra trade(opposite transactionduring last 6 months).

Disclosure on trade perthe timeframe provided.

Trade Restriction and Disclosure

A. Between person having UPSI (a)

Off- market

(b) block deal

B. Statutory and regulatory

obligation

C. Stock options with pre-

determined exercise price

D. Trading plan

E. Non- individual insider subject to

conditions

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Disclosure and compliance requirement related to UPSIA. Mandatory Disclosure to be provided

Particulars Remarks

When UPSI can be shared On need-to-know basis as per fair disclosure policy:A. Legitimate Purpose (or)B. Performance of Duties (or)C. Discharge of Legal Obligations

Obligations before sharing UPSI a) Obtain Compliance Officer approval before sharing information with persons other than Designated persons

b) Provide Name of person/institution with whom UPSI is shared, PAN number (If PAN is not available, any other identifier authorized by law), nature of UPSI to Compliance Officer

c) Enter Non-disclosure agreement when UPSI shared with Third party

What happens when UPSI shared withThird party or Employees who are notdesignated person?

Those persons will become insidersThey will have to adhere to compliance requirement applicable for designated person till they possess UPSI

B. Compliance requirement related to UPSI

Appointment AnnuallyIn case of any change in

details

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Insider Trading – Automation

Compliance tool - Develop or Buy

Upload Weekly BENPOS files for Cross verification

of trade clearance & non-

compliances

Annual /Periodic

Disclosure

Trading window closure

announcements

Broker-Note and Trade

details post trading

Auto-generation of

Stock exchange

disclosure for submission

Online one-click approval by Compliance

officer of trading plan / pre-clearance

Automated MIS

generation on periodic basis

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UPSI Management

Mechanism to prevent any leak of

UPSI

Mechanism to handle the leak of any UPSI

Plug the loopholes in the internal control system in order to prevent the leak of UPSI in future

Identify the source of leakage of UPSI UPSI

Compliance officer

Data room for sharing UPSI

Structural Digital database with timestamp

Procedure for inquiry in case of any leak of

UPSI or suspected leak of UPSI

Mechanism to initiate appropriate inquiries on

becoming aware of leak of UPSI or suspected

leak of UPSI

Educate the employees regarding the

reporting of leak/ suspected leak of UPSI

Taking action against the person responsible

for leak of UPSI and informing SEBI promptly

of such leaks

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Questions Needs Answers How to identify the Insiders of the Company?

What is the base for determination of designated persons of a Company?

Foreign employees in remote location - Do they really hold UPSI?

Are the Companies equipped to align HR records with designated persons lists, is intimation

immediately possible for change in designated person with NSDL and CDSL?

How to ensure Intermediaries & fiduciaries are compliant to PIT Regulations?

Is sensitizing Senior executives help them to understand “what not to communicate”?

Do Business Persons really understand what is UPSI?

Do Designated Persons understand compliance requirements after continuous orientation?

Auto – trading triggered in very minimal shares during trading window closure due to dormant

status of demat account, is that a violation?

How much penalty to be levied for violations? What is the guideline?

Timeline/ right time to intimate Stock Exchanges on non-compliance?

Does automation ensure 100% compliance?????????????????????

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1. When Designated person or immediate relative does not follow Codes?

Disciplinary action by the Company as per Code of Conduct

Direction to transfer of proceedings or profit to Investor Education and Protection Fund

Stock exchanges will be informed about non-compliance and disciplinary action

2. When someone is charged with offense of Insider Trading by SEBI?

A. Penalty: Not be less than INR 10 Lakh and may extend to INR 25 Crore; or 3 times amount of profits made out of insider trading, whichever is higher.

B. Prosecution: Imprisonment up to 10 years or fine up to INR 25 Crore, or both, for any offences pertaining to contravention of the provisions of the SEBI Act.

Non - Compliance

Thank You

• July 2017 - Company announced that US food and Drug administration was to lift import alert on its unit – a UPSI information.

• 2 Hours before UPSI disclosure - Assistant GM, Health & Safety Department bought 4,000 shares.

• SEBI imposed -Fine of Rs. 11 LakhsBan from Securities market for 1 yearBan to trade in Company’s shares for 2 years

• September to November 2018 – Trading window closure

• Designated person and his wife traded in the shares of the Company during thatperiod.

• Audit Committee ordered to pay Rs. 1,00,000.

• SEBI imposed fine of Rs. 2,00,000.

• Trading done by GM, Project (Designated person)

• Sept 12, 2018 – He purchased 2000 shares

• Sep 27, 2018 – He sold 5,000 shares without preclearance which is in nature of contra trade

• No disclosure was made about transactions exceeding Rs. 10 Lakh for 1 year (Disclosure has to be given within 2 days of trading)

• Audit Committee ordered to pay approx. Rs. 4,80,000.

• SEBI fined Rs. 3,00,000.

• A Lead Independent Director.

• The manager of portfolio management service sold 1,600 shares without her knowledge.

• This was without preclearance approval.

• Audit Committee ordered to pay Rs. 9,50,000

• She also paid Rs. 3,00,000 by way of settlement with SEBI

• D Co. announced receipt of 3 orders from leading Company

• Price rose approx. 35% after above announcements.

• MD & his wife of D Co. were friends with Directors & their wives of V Co. in facebook and they'liked' each other's photos posted.

• V Co. & its Directors had bought shares before announcement of orders of D Co.

• It was held that V Co. & its Directors are insiders basis above and had traded while inpossession of UPSI.

• SEBI ordered disgorgement of gain - Rs. 1.74 Cr

• UPSI about financial results were circulated by Research analysts in private WhatsApp groups(“Market Chatter”) before their official announcement.

• SEBI ordered for internal investigation, but Companies came back with clean report oninternal leaks.

• SEBI further investigated and found:

• Financial Results – Revenue, PAT shared matched with final results.

• Information was shared by Research analysts not basis any research

• They were not associated with Company in any way

• SEBI held that they were insider as they possessed UPSI regardless of source & they actedas instrument in chain of communication of sensitive information.

• SEBI imposed penalty of minimum Rs. 15 Lakhs on each of research analyst who sharedinformation.

• SEBI has given approx. 10 orders in year 2020 in this matter.