Insider trading refers to the act of an individual trading stock in a company. Insider trading is legal or illegal, depending on what information the insider has and the definition of insider Securities and Exchange Board of India.
If an individual trades based on information they have, but it is not available to the general public, insider trading can influence the market price for a particular stock. This gives the "insiders" an unfair advantage.
Insider trading is considered unfair because investors are not able to access certain information they might be able to benefit from. It is also considered unethical.
Insider trading can also affect the investor's trust and confidence. SEBI has strict rules for stocks trading to make sure that average investors are not disenfranchised.
In February 2021, SEBI will release a new disclosure format. This is part of its insider trading rules. According to an official circular, the disclosure formats were revised in response to feedback from stock exchanges as well as participants in the markets. SEBI had previously specified certain formats that were required for disclosure under Regulation 7 of Prohibition of Insider Trading Regulations (PIT). Due to amendments to the PIT regulations disclosure formats B through D have been updated.
The new SEBI format requires that details of securities held by a member of a promoter association of a listed company, as well as immediate relatives of members, be made public.
SEBI decided in September 2020 to implement "system-driven discourses" for promoter groups' members directors and designated people of listed firms. These system-driven disclosures are applicable to trading in shares or derivative instruments, such as F&O of listed firms. This system-driven approach has been in place since 2015, but it is now available for promoter groups.
In 1992, SEBI's PIT regulations were first in effect. In 2015, SEBI introduced the Prohibition of Insider Trading Regulations 2015 to address the issue of insider trade. Several amendments to stock trading regulations pertaining to insider trading have been made, including in 2019 as well as 2020.
2019 SEBI amendments mandated that all listed companies and individuals connected to them maintain a structured digital data base with the name and nature of unpublished price sensitive information (UPSI). SEBI also noted that listed companies and intermediaries must sign a confidentiality or non-disclosure agreement. Each party must be informed about compliance with the PIT Regulations when they have UPSI.
SEBI notified again in July 2020 the new Prohibition of Insider Trading Amendment Regulations 2020. This amendment will bring new changes to trading rules.
Some important changes have been made to the Amendment, including details about persons sharing UPSI. The amendment will allow for an enhanced digital database to store and retrieve additional information about UPSI. The amendment only required that a company's board maintain a basic digital database with names and PANs of those who were sharing or holding UPSIs. This led to questions on what would happen in situations where the UPSI was an intermediary/fiduciary because it is common for listed companies to interact with fiduciaries and intermediaries.
As previously stated, in such a scenario, the listed company would need record and maintain recipient entity's details. The fiduciary or intermediary would have to keep records of individuals who are in touch with UPSI. The amendment to stocks trading regulations makes it clear that any additional information will be stored in the digital database. This information includes the type/nature of UPSI and names of individuals who have shared UPSI data with other entities.
SEBI clarifies that the digital data must be kept for at least eight years from the date of completion of any relevant transaction. This excludes cases of enforcement or investigation proceedings. Market regulator SEBI also placed restrictions on the outsourcing of service provider database maintenance, because it considers that information about individuals who provide UPSI and recipients of such information must be protected.
A second amendment to the insider trading rules concerns making disclosures about PIT violations. The amended regulations will automate the disclosure of shareholdings and any changes in the reporting authority. The SEBI amendment to its code of conduct has shifted the reporting framework. The new amendment would require listed companies to report violations to the stock markets and not SEBI.
Trading window restrictions are the third important amendment to insider trade rules. The 2020 amendment allows certain transactions to be completed during the closing of the trading window. Transactions relating to the offer for purchase (OFS), and rights entitlement (RE), fall under the exempt category. According to SEBI norms listed companies must use a trading window to track transactions by designated persons to curb insider trading.
Trading rules are strictly controlled and monitored to ensure fairness. Insiders are not allowed to see the names of companies or price sensitive details that aren't published. SEBI has introduced strict measures, such as amendments to the Prohibition of Insider Trading Regulations, to increase investor trust. This is the latest step in this direction.