This update has been prepared to set out the key takeaways on insider trading norms from the SEBI press release [PR No. 20/2019] dated August 21, 2019. The press release also addresses other subjects particularly proposed changes to foreign portfolio investors.
In the press release, it is clear that SEBI will introduce a reward-based informant mechanism for reporting of insider trading [as defined in SEBI (Prohibition of Insider Trading) Regulations, 2015]. As background, on June 10, 2019, SEBI had floated a discussion paper on amendment to the SEBI (Prohibition of Insider Trading) Regulations, 2015 to provision for an informant mechanism for public comments.
This is a significant change as there is currently no voluntary information disclosure mechanism.
Incentives to informants:
SEBI has further proposed that (i) an informant will get 10% of the disgorged amount up to INR 1,00,00,000 (the information must lead to disgorgement of at least INR 1,00,00,000 for the informant to be eligible for the reward); (ii) a hotline for facilitating informants in submitting information; and (iii) a possible amnesty or settlement for their wrongdoings in return for co-operation in the probe. The reward will be paid out of Investor Protection and Education Fund, which is set up for promotion of investors‟ awareness and protection of the interests of investors. At the same time, SEBI will also act against those submitting frivolous or vexatious information under this mechanism.
An ‘informant’ will mean a person voluntarily submitting a “voluntary information disclosure form”, (“VIDF”) detailing “credible, complete and original” information relating to an act of insider trading.
Code of Conduct:
Further, entities associated with the securities markets will have to incorporate suitable provisions in their Code of Conduct to protect informants (if employees), from harassment, including by way of demotion, suspension or termination.
Confidentiality, Anonymity and Role of “practicing advocate”:
Anonymous reporting is an option. SEBI will protect the identity of the informant (in cases where the informant wants to remain anonymous) by putting a protection system in place where an informant can submit information on insider trading through a practicing advocate. The informant will be mandatorily required to disclose the source of the information to SEBI (and to undertake that the source is not an employee SEBI or of a regulator).
Confidentiality of the informant regarding his identity and information will be maintained except in cases where the evidence of the informant is required during insider trading proceedings initiated by SEBI. The original information may also be shared with an appropriate agency or law enforcement authority within or outside India or a self-regulatory organisation. The provisions of Right to Information Act, 2005 will not be applicable on the information provided for the purpose of law enforcement.
Office of Informant Protection:
SEBI will also set up Office of Informant Protection (“OIP”), which will be an independent office to devise policy relating to receipt and registration of the complaint i.e. the VIDF. OIP will also process the original information submitted after establishing its materiality and subsequently transfer the case to the operational department. The OIP will be required to submit an annual report regarding its functioning and working of the informant mechanism to SEBI which will then be made public.
At present, there is no whistle-blower mechanism to obtain information on market abuse such as market manipulation and insider trading in place.
As per Sec. 24B of the SEBI Act, 1992, the Central Government can grant immunity to any person from prosecution for any offence under SEBI Act (or the rules or the regulations made thereunder) on recommendation of SEBI. In a SEBI report of “Committee on Fair Market Conduct” dated August 9, 2018, it was noted that neither Central Government has used the power to grant immunity, nor SEBI has made any recommendation for granting immunity to any person to the Central Government under this provision.
Informants, whistle-blowers and self-disclosure:
An informant is defined in the press release as a person who submits a complete and original “voluntary information disclosure form”. While the press release does not expressly make a distinction between informants who are outsiders as opposed to insiders (whistle-blowers) and self-disclosures, it is apparent that informants can be all of these entities. There is a mention of possible amnesty while “bringing an action against an informant”. There is also a structure for a “reward” which it can be assumed cannot apply to a self-disclosure situation.