1. Fiscal Solutions Powered by Law…
The Inside of Trading
- An Industry Perspective
By
Suresh Viswanathan
Founder Director & Chief Consultant
Finteglaw Knowledge Solutions Private Limited

2. “Divergence of perception”
May 6, 2015

3. 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 6, 2015

4. 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 6, 2015

5. On the lighter side!
May 6, 2015

6. 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 6, 2015

7. SEBI Investigations
3
11
12
43
86
2
14
10
52
41
6
13
16
6
67
6
13
16
12
73
0 10 20 30 40 50 60 70 80 90 100
Takeovers
Insider Trading
Miscellaneous
Issue Related
Manipulations
Market
Manipulations
2013-14
Investigations
Completed
2013-14
Investigations
Taken up
2012-13
Investigations
Completed
2012-13
Investigations
Taken up
May 6, 2015

8. Penalties Skyrocket
184
2040
1009
0
500
1000
1500
2000
2500
2012-13 (Rs. Lakhs) 2013-14 (Rs. Lakhs) Increase %
Penalty under
SEBI (PIT)
Regulations, 1992
May 6, 2015

9. ‘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unpublished price sensitive information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 6, 2015

10. Challenges Ahead
May 6, 2015

11. New Powers
 Section11(2)(ia) - Calling for
information and records from any
– 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
Implications
 Enables collection of call
recording data from any
Telecom provider
 Enjoys courts’ powers for
– discovery and production of
books of account and other
documents
– Summoning and enforcing
attendance
 The provisions have powers
over-riding other laws
SEBI Act Amended - 2014
May 6, 2015

12. 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 6, 2015

13. On the lighter side!
May 6, 2015

14. 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 6, 2015

15. 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 6, 2015

16. S 447 of Companies Act 2013
 “any person who is found to be guilty of fraud, shall be punishable with imprisonmentfor
a term which shall not be less than six monthsbut which may extend to ten
yearsand 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
involved in the fraud”
– Provided that where the fraud in question involves public interest, the term of
imprisonment shall not be less than three years.
 “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 6, 2015

17. 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
either as principal or agent if such director or key managerial personnel or
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 6, 2015

18. Connected Persons (Non Intermediaries)
The Issuer
Company
Director,
Immediate
Relative
Company, Firm,
HUF, AOP
Officer, Employee,
Professional or
Business Partner
Immediate
Relative
Holding, Associa
te & Subsidiary
Investment, Tru
stee & Asset
Management
Companies
Banker of the
Company
Public Financial
Institution, its
Directors &
Employees
If a Director, immediate Relative or
Banker has more than 10% interest
May 6, 2015

19. Connected Persons (Intermediaries)
The Issuer
Company
Any Dealing
Intermediary u/s
12 of SEBI Act
Employees &
Directors of the
Intermediary
Officials of Stock
Exchange &
Clearing House
Immediate
Relative
Member of Board
of Trustees of MF
Director &
Employee of the
AMC of the MF
SEBI Authorised
Self regulatory
Organisations
Officials &
Employees
May 6, 2015

20. “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 6, 2015

21. 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 6, 2015

22. Research Vs. Insider - Wafer thin…
To ask a Maruti employee about
footfall at his location
To have lunch with an ex CFO of a
software company
To talk to doctors who have worked
on past clinical trials of a
pharmaceutical company
To appoint an automobile industry
veteran as a 'source'
To pay a Maruti employee to get a
printout of a sales data
To have lunch with a current CFO of
a software company - on your boat
To pose as a doctor to gain access to
a clinical trial in progress in a
pharmaceutical company
To appoint the brother in law of
Maruti VP as an industry 'source'
May 6, 2015

23. 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 6, 2015

24. Trading Plan – An Entitlement
Trading
Plan
Listed Company
Connected
Person
Deemed
Connected
Person
SEBI
Intermediary
Person
Possessing UPSI
Person having
access to UPSI
No trading during 10th
March, June, September
& December till 2 days
after declaration of
results
Minimum Plan period for
12 months
Value of trades or no. of
securities, nature of
trades and intervals, or
dates to be disclosed
No parallel plans allowed.
No scope for market
abuse to be provided
Once approved, cannot
be revoked
Trading not to commence
before 6 months of
disclosure to Stock
Exchange(s)
To be formulated by
the insider
To be reviewed &
approved by the
Compliance Officer
Disclosure to the
Stock Exchange(s)
Plan shall not be implemented if any UPSI is in the possession of the Insider
May 6, 2015

25. 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 6, 2015

26. Utopian!
May 6, 2015

27. 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 6, 2015

28. 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 6, 2015

29. 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 6, 2015

30. Insider regulations fully enforced…
May 6, 2015

31. 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 6, 2015

32. 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: contact@finteglaw.com
May 6, 2015