Introduction
The menace of insider trading was recognised and curbed by the SEBI (Prohibition of Insider Trading) Regulations, 1992, which came into force on 19th November, 1992. In order to bring clarity in the nature of offence, the amendment of 2002[1] was made by SEBI, followed by the 2008[2] and 2011[3] amendments. As the 2008 and 2011 amendments considerably reduced the importance of intention in proving the offence, it started the movement towards dilution of presumption of innocence.
The proposed draft of SEBI (Prohibition of Insider Trading) Regulations, 2013 was brought into the public domain by a Committee set up under the chairmanship of Justice N. K. Sodhi.[4] The Committee, in the making of the proposed draft, emphasised on the strict prohibition of use of sensitive information while it aimed at maintaining integrity in the market.[5] For its acceptability by investors and stakeholders, the draft was made open for public comments and critiques by SEBI in December, 2013. This was also done to assess the effectiveness of the regulatory measure adopted as against the cost and burden imposed by it.[6] After receiving and reviewing the same, SEBI approved these new regulations with amendments in its Board Meeting, notified by the Press Release No. 130/2014.[7]
Through these regulations, the SEBI has sought to bring significant changes and measures regarding insider trading, delisting norms, listing requirements, securities market etcetera. They have widened the definition of an ‘insider’/‘connected person’; have changed the onus of proof of a person accused of insider trading in securities; have brought clarity in UPSI and the like. Moreover, the delisting regulations[8] have been simplified and technicalities have been reduced after inviting public comments on the same in May 2014.
This note seeks to portray a brief description of the amendments approved by SEBI, in addition to the reason for their inclusion. However, the main focus of this note shall be to analyse the reasons, effectiveness and critique of the amendment regarding change in burden of proof of the insider. Further, the presumption of guilt of the insider is evaluated in the light of the quasi-criminal nature of the offence. Lastly, it depicts the comparison with regard to the defence of ‘trading plan’, of the U.S. regime and the regime as proposed in India.
New Developments & Brief Overview of the Regulations
Insider trading refers to buying and selling of securities by corporate insiders invoking breach of confidence and that of a fiduciary duty.[9] It also means use of internal non-public information by insiders that owe a fiduciary duty to the enterprise.[10] Thus SEBI restricts the use of ‘unpublished price sensitive information’ in any manner injurious to interests of the enterprise. In order to further protect the interests of the investors and stakeholders, SEBI has exercised its powers to bring in numerous new developments by the approval of the proposed SEBI (Prohibition of Insider Trading) Regulations, 2014. A brief overview of the new provisions, which would affect the burden of proof on the insider are discussed as follows:
| Provision | 1992 Regulations | 2014 Regulations | Degree of Difference |
| Connected Person | Director or deemed directorOccupies position of officer/employee, professional or business relation (permanent/temporary) AND reasonably expected to have access to UPSI The above persons’ relationship with the company shall be six months prior to the concerned trade.[11] | Connected persons[12] shall be ‘any person’: who has been associated with the company in any capacity, six months prior to the concerned trade, by the following means:By reason of frequent communication with officers of the company; OR By being in any employment, contractual or fiduciary relationship; OR Any public servant or person holding statutory position allowing him (or is reasonably expected to have) access to UPSI.Immediate relatives of connected persons shall be deemed to be connected persons. | The ambit of ‘connected person’ has been significantly widened.The definition in the earlier regulation was position and occupation centric. However, the new definition has been made more inclusive by emphasising on a relationship with the company by any of the stated means.Further, relatives have been included within the ambit of the definition by virtue of a deeming fiction, and such is a rebuttable presumption.Thus, in the earlier definition the requirements were to prove the relationship with the company AND possession of UPSI, however in the new definition the only requirement is to prove a relationship and the fact of possession shall be presumed by virtue of the above relationship. |
| Insider | The dentition of insider[13] has two categories: The first category is of a connected or deemed to be connected person who has to be proved to be in possession of UPSI to fall under this definition. The second category is of those who are in possession of UPSI (notwithstanding an existence of position). | The definition of insider[14] has been simply stated under two clauses; first is that of a connected person, and the second of any person in possession of UPSI. | The striking difference first lies in the simplicity of the new provision, and secondly in the removal of requirement of UPSI from the first category. |
| Burden of Proof | The burden lies on the accusing authority to prove connection as well as possession of UPSI with the accused. | Connected Person: The onus lies on such person to either disprove that such trading was on the basis of UPSI or to prove the application of any of the defences.[15] Insider: The onus lies on the accusing authority to prove that the insider was a connected person.[16] | The burden of proof has been completely shifted onto the accused once he falls within the ambit of connected person. |
| Unpublished Price Sensitive Information (UPSI) and Generally Available Information (GAI) | Price Sensitive Information is an inclusive definition that covers any information which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of company. Such information would be UPSI if it isn’t published by the company or its agents and is not specific in nature. | UPSI[17] means any information that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities to which it relates. GAI[18] means information that is accessible to the public on a non-discriminatory basis and shall include research and analysis based thereon. | There is an addition of the concept of GAI that shows a change in burden of proof with respect to the information being proved as UPSI. |
Presumption of Guilt of the insider
The difference in presumption of guilt may as well be very slight to the layman, but legally the shift in burden of proof is striking between the two regulations. Where in the earlier provisions, the presumption only related to the fact that any insider in possession would be presumed to have traded on the basis of the possessed UPSI[19], it has now been extended to the effect that any connected person would be presumed to have access to such UPSI.
Regulation 4(2)[20] reads that ‘Where an insider who has traded in securities is a connected person, the onus of establishing that he was not in breach of the prohibition in sub-regulation (1)[21] shall be on such connected person.’
Thus where first, at least possession was a burden that had to be discharged by the prosecution/accusing authority, it is now a presumption, rebuttable by the one accused of being a connected person.
It seems that drawing its experience from various cases, it became burdensome and arduous for SEBI to prove insider trading on the basis of UPSI, and thus this change was effected. For instance, in the case of Mr. V. K. Kaul v. The Adjudicating Officer, SEBI[22] the factors for sustaining insider trading convictions were observed, as inspired from the Rajaratnam Case[23], as: (1) access to information; (2) relationship between the tipper and the tippee; (3) timing of contact between the tipper and the tippee; (4) timing of the trades; (5) pattern of the trades; and (6) attempts to conceal either the trades or the relationship between the tipper and the tippee.[24] The prosecution needed to dicharge a burden that met the balance of possibilities for and against the person charged while being consistent with the presumption of innocence or honesty of the person charged[25]. The burden was less than ‘beyond reasonable doubt’ but it still kept the conviction rate of insider trading below acceptable levels because it provided more opportunities to the accused to break the prosecution’s case, simply on presumption of innocence. This shackle has been removed now in the new regulations.
The earlier regime provided a defence against conviction of the accused and he could prove that he did not trade on the basis of unpublished price sensitive information but on some other basis.[26] Whether or not this defence would be made available to the accused is not clear from the new regulations and would largely depend on the interpretation of the courts. This is because with the addition of trading plans and a very limited set of defences[27] it seems that trading by a connected person, is ‘almost a strict liability offence’.
It can be concluded that such a shift has been brought to curb the menace of insider trading more effectively and more strictly[28] compared to the earlier regime.
Trading Plans, which were introduced by way of an amendment in the U.S. Securities Exchange Act, 1934 provides the most plausible defence for companies accused of insider trading in the U.S. securities market. A ‘trading plan’ is essentially a plan comprising of all possibilities regarding price movements, liquidity of shares, trading structure, risks of trading business, amount of capital to be traded[29] and the like. Rule 10b5-1[30]of the SEC Rules provides an opportunity to publicly traded corporations to set up trading plans and trade according to pre-determined rates, stock etcetera. These plans are used by corporations as a defence to insider trading to prove that trading was pre-planned and not on UPSI. On the question of termination or cancellation of such plans the fact that whether the plans were entered into in good faith and bonafidely and not to avoid the insider trading norm under Rule 10b5-1(c)(1)(ii)[31] becomes important.
The new insider trading norms provide for the inclusion of the concept of ‘trading plans’ as practised in the U.S.[32] The Press Release by SEBI confirmed such a provision to the existing legislation on insider trading with necessary safeguards like execution of the plan only post 6 months of its public disclosure. Other safeguards include existence of the plan for 12 months and its implementation after its disclosure.[33] These plans have to be strictly followed, must be for bona fide transactions and must be disclosed on a stock exchange in advance.[34] The SEBI Regulations[35] provide that insiders who are liable to possess UPSI may formulate trading plans and emphasises on the monitoring and approval of such plans by a compliance officer.[36]
The Sodhi Committee Report explains that bringing in the concept of trading plans is permitting the insider to prepare a pre-arranged trading plan in advance and execute it at a later date. This ensures that when the trade is executed the insider is now in possession of new UPSI, and the UPSI which was in possession of the insider when the plan was formulated has now been made generally available.[37]Thus, trading plan was neither formulated nor executed according to the new UPSI, but only according to generally available public information.
The motivation for SEBI to include the concept of a ‘trading plan’ has been an analysis of various jurisdictions where it is already in use and evidence which leads to the same.[38] While analysing the same the disadvantages of such a provision and abuse of trading plans was also considered by SEBI and thus a number of caveats were added to the provision. The need for a corporate-compliant mechanism for insiders and better regulation of insider trading in the Indian securities market also necessitated the need for such a provision.[39]
The new insider trading norms were proposed by SEBI with a view to increase prosecution in insider trading cases in India. Post completion of its draft by the High Level Committee the regulations were opened for public comments and criticisms. The Press Release of SEBI dated 19/11/2014 gave a green signal for the regulations, giving a brief overview of the provisions approved and the changes brought in the existing regime. The change in ‘presumption of guilt’ of an insider in possession of UPSI to that of a rebuttable presumption of any connected person is a step in the right direction because of its clarificatory effect in the practical arena. Also, the addition of the concept of a ‘trading plan’ as a defence available to the insider is parallel to the U.S. securities market balances out the enhancement of ‘presumption of guilt’. All in all, the SEBI seems to have adopted a balanced approach but at the same time has managed to carve out a stricter regime in the face of the dismal convinctions of accused connected persons.
[1] SEB1 (Prohibition of Insider Trading) (Amendment) Regulations (2002).
[2] SEBI (Prohibition of Insider Trading) (Amendment) Regulations (2008).
[3] SEBI (Prohibition of Insider Trading) (Amendment) Regulations (2011).
[4]Report of the High Level Committee to Review the SEBI (Prohibition of Insider Trading) Regulations, 1992, 9 (Dec. 7, 2013).[hereinafter ‘High level Committee Report’]
[5] High level Committee Report, supra note 4.
[6]Id.
[7] SEBI Board Meeting, PR No. 130/2014 (Nov. 19, 2014) [hereinafter ‘PR, SEBI’].
[8] SEBI (Delisting of Equity Shares) Regulations (2009). [hereinafter ‘The Delisting Regulations’]
[9] http://www.sec.gov/answers/insider.htm (last assessed on December 6, 2014).
[10] Black’s Law Dictionary 564 (5th edn. West Publishing Company, 1979).
[11] Regulation 2(c) SEBI (Prohibition of Insider Trading) Regulations, 1992. [hereinafter ‘1992 Regulations’]
[12] Regulation 2(e), SEBI (Prohibition of Insider Trading) Regulations , 2014. [hereinafter ‘Proposed Regulations 2014’].
[13] 1992 Regulations, supra note 11, Regulation 2(e).
[14] Proposed Regulations 2014, supra note 12, Regulation 2(h).
[15] Proposed Regulations 2014, supra note 12, Regulation 2(e).
[16] High level Committee Report, supra note 4, at 49.
[17] Proposed Regulations 2014, supra note 12, Regulation 2(p).
[18] Proposed Regulations 2014, supra note 12, Regulation 2(f).
[19] Rakesh Agarwal vs. SEBI, Appeal No. 33 of 2001.
[20] Proposed Regulations 2014, supra note 12, Regulation 4(2).
[21] ‘No insider shall trade in securities that are listed on a stock exchange when in possession of unpublished price sensitive information relating to such securities.’ Proposed Regulations 2014, supra note 12, Regulation 4(1).
[22]Mr. V. K. Kaul v. The Adjudicating Officer, SEBI, Appeal No. 55 of 2012\.
[23] United States of America v. Raj Rajaratnam 09 Cr. 1184 (RJH)
[24] Mr. V. K. Kaul v. The Adjudicating Officer, SEBI, Appeal No. 55 of 2012.
[25] Imperial Corporate Finance and Services Pvt. Ltd., Mumbai v. SEBI, Appeal No. 56/2003.
[26] Mrs.Chandrakala v. The Adjudicating Officer, SEBI, [2012] 107 CLA 55 (SAT).
[27] The defences provided for are furtherance of legitimate purposes, performance of duties or discharge of legal obligations. Proposed Regulations 2014, supra note 12, Regulation 3(1).
[28] High level Committee Report, supra note 4, at 5 ¶ 15.
[29] Justine Pollard, Smart Trading Plans (John Wiley & Sons, 2011).
[31] William Wang & Marc Steinberg, Insider Trading 209 (Oxford University 2010).
[32] PR, SEBI, supra note 7, B(iii).
[33] High level Committee Report, supra note 4, at 35 ¶ 64.
[34] PR, SEBI, supra note 7, D(ii).
[35] Proposed Regulations 2014, supra note 12, Regulation 4(3)(vii).
[36] Proposed Regulations 2014, supra note 12, Regulation 5.
[37] High level Committee Report, supra note 4, at 35 ¶65.
[38] High level Committee Report, supra note 4, at 34 ¶ 64.
[39] High level Committee Report, supra note 4, at 35.
Co-authored by Suriti Chowdhary, Partner, Saaz Partners LLP and first published in Lawz Magazine, Issue 164, April 2015