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Since the prohibitions integrally involve an insider, it is key to note that the term \u2018insider\u2019 has been defined to mean any person who is either a connected person or in possession of or having access to UPSI. A person having access to UPSI, regardless of the manner in which they come in such possession or access is considered to be an insider. The burden of proving that a person was in possession of\/had access to UPSI at the time of trading has been placed on SEBI.<\/span><\/span><\/p>\n<\/div>\n\n
A natural corollary is the need to understand who then would be a connected person.<\/span><\/span><\/p>\n<\/div>\nWho is a connected person?<\/span><\/span><\/h5>\n<\/p>\n\n
A connected person has been defined under Regulation 2(1)(d)(i) to mean any person who, during 6 months prior to the concerned act, was associated with a company in any capacity.<\/span><\/span><\/p>\n<\/div>\n\n
Such association may have been directly or indirectly, by reason of frequent communication or by being in contractual, fiduciary or employment relationship or by being a director, officer or an employee of such company. Alternatively, he may be holding any position including a professional, or business relationship, whether temporary or permanent. So long as such connection allows such a person to have access to UPSI or where it is reasonably expected to allow such access, they would be construed as connected persons.<\/span><\/span><\/p>\n<\/div>\n\n
A list of persons who are deemed to be connected has been provided under Regulation 2(1)(d)(ii). This includes relatives of connected person under sub-clause (i); holding\/ associate\/ subsidiary company; intermediary specified under Section 12 or any employee\/director thereof; official of stock exchange\/ clearing corporation\/ clearing house of corporation, etc.<\/span><\/span><\/p>\n<\/div>\nWhy is the definition so wide?<\/span><\/span><\/h5>\n<\/p>\n\n
It includes such persons are those who have connection with a company that is expected to put him in possession of UPSI. Relatives and other categories of persons specified are also presumed to be connected persons, however, such a presumption is a deeming legal fiction and rebuttable.<\/span><\/span><\/p>\n<\/div>\n\n
The intent was to cast the net wide to include those who may not appear to be connected to the company, but are in fact in the know of its operations.<\/span><\/span><\/p>\n<\/div>\n\n
The HLC had interestingly noted that whether or not a person is a connected person will always be necessarily a mixed question of fact and law, which would need to be determined from facts and circumstances of the case. Whether the association would put him in position of accessing UPSI would also be a mixed question of fact and law.<\/span><\/span><\/p>\n<\/div>\nWhy securities that are listed or proposed to be listed?<\/span><\/span><\/h4>\n<\/p>\n\n
The prohibitions pertain to listed and proposed to be listed securities. The term \u2018securities\u2019 has been assigned the same meaning assigned to the term under the Securities Contracts (Regulation) Act, 1956. This includes shares, scrips, bonds, derivatives, etc.<\/span><\/span><\/p>\n<\/div>\n\n
The HLC had noted that there is a need for price-discovery platform for a security, for the wrong of insider trading to be committed. Section 458 of the Companies Act, 2013 has also delegated the power to prosecute insider trading in securities of listed companies and companies which intend to get their securities listed to SEBI.<\/span><\/span><\/p>\n<\/div>\n\n
In case of companies in the process of initial public offering (\u201c<\/span>IPO<\/span><\/strong>\u201d), insider trading could occur in relation to the price discovery process in book building during the IPO and there could be instances of insiders taking advantage of access to UPSI to trade with the investors in the IPO.<\/span><\/span><\/p>\n<\/div>\n\n
Accordingly, the term \u2018proposed to be listed\u2019 has also been defined. Unlisted companies which have filed offer documents or other documents, as the case may be, with SEBI, exchanges or companies in connection with listing are considered proposed to be listed. It also includes unlisted companies getting listed pursuant to mergers and acquisitions where a copy of the scheme has been filed under the Companies Act, 2013.<\/span><\/span><\/p>\n<\/div>\nWhat is trading?<\/span><\/span><\/h4>\n<\/p>\n\n
It may be noted that the term \u2018trading\u2019 has been defined in a much wider sense than was envisaged by the HLC. The HLC had noted the distinction between the terms \u2018trading\u2019 and \u2018dealing\u2019, and was of the view that the latter be excluded from the scope of the regulations so as to avoid inflicting unintended and untold prohibitions.<\/span><\/span><\/p>\n<\/div>\n
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