CHANAKYA NATIONAL LAW

UNIVERSITY

LAW RELATED TO
INVESTMENT,SECURITIES,CORPORATE
FINANCE AND COMPETITION.
Angel and Portfolio Investment

Submitted to:
DR. ASHOK KUMAR.

Submitted by:
Rajat Kashyap
Roll No- 1423
5th Year, 9th Semester
 Research Methodology

Aims and Objectives:

The aim of the project is to present a detailed study of Angel and Portfolio Investment.

Scope and Limitations:

The project is basically based on the doctrinal method of research as no field work is done on this
particular topic. The whole project is made with the use of the secondary sources.

Method of Writing:

The method of writing followed in the course of this research paper is primarily analytical and
descriptive.

Mode of Citation:

The researcher has followed uniform form of citation throughout the course of this research paper.

Sources of Data:

The following secondary sources of data have been used in the project-

1. Books
2. Websites

1
 Acknowledgement
It gives me incredible pleasure to present a research work on the case study of “Angel and Portfolio
Investment”. I would like to enlighten my readers regarding this topic and I have tried my best to
pave the way for bringing more luminosity to this topic.

I am grateful to my faculty in charge Dr. ASHOK KUMAR who has encouraged me to complete
this project. I would like to thank the librarian of CNLU for their interest in providing me ample
research material.

-Rajat Kashyap

2
 TABLE OF CONTENTS

Insider Trading: Key Concepts ....................................................................................................... 4

Need for Regulation ........................................................................................................................ 6

Applicability on Private Companies ............................................................................................... 8

Insider Trading Regulations, 2015 ................................................................................................ 11

Case Laws ..................................................................................................................................... 13

SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2018 ..................................... 17

Conclusion .................................................................................................................................... 20

Bibliography ................................................................................................................................. 22

3
 INSIDER TRADING: KEY CONCEPTS
The management, lawyers, accountants etc. of a company have routine access to information
inaccessible to general public Some of this information is price sensitive and the supposed
‘insiders’ can make a profit by manipulating the sale or purchase of such securities, before the
information is made public. In lex-jurisprudence, this is known as ‘insider trading.’ India regulated
such insider trading for the first time via SEBI (Prohibition of Insider Trading) Regulations, 1992
by imposing civil and criminal sanctions against any person who engaged in such practice. Riding
over a decade of enforcement, in 2015, SEBI overhauled the 1992 regulations. Aim to counter
several shortcomings of the old regulations to fortify the regulatory framework of insider trading
in India. Though the 2015 regulations are commemoratory, its applicability on private companies
has become the despicable albatross. 1

The term ‘insider’ has been defined under Regulation 2(g) of SEBI (Prohibition of Insider Trading)
Regulations, 2015. Basically, the term ‘insider’ can be classified into three broad categories, which
are:

• Persons who are connected to the company,

• Persons who were connected with the company,

• Persons who are deemed to be connected to the company.

In order to become an insider a person has to fulfil three elements, viz;

• The person should be a natural person or legal entity;

• The person should be connected person or deemed to be connected;

• Acquisition of the unpublished price sensitive information by virtue of such connection.

The aim of insider trading laws and regulations is to assure that no one would gain by trading on
‘insider’ or ‘unpublished’ information that is not available to all market participants. The ultimate
goal is to create a level playing field by making information accessible to all market participants.
The enforcement of insider trading laws increases market liquidity and decreases the cost of

1 Imposing Insider Trading Regulations, 2015 on Private Companies: Warranted? CNLU LJ 6 [2016-17] 49.

4
equity.2 This has been found to be the objective in the developed countries where stringent insider
trading regulations are adopted. Insider trading laws exists on the strong foundation of equity and
efficiency. With regard to equity the government wants to ensure that (i) everyone involved in the
stock market has access to same set of information and (ii) any information available to one active
participant in the market is available to all participants.

Perfect information is an abstraction that exists only in the elementary micro-economic text books.
It is argued that by enforcing insider trading laws government is expected to enforce an
unattainable ideal on the securities market. Insider trading laws encourage the free distribution of
securities related information which helps to ensure more efficient pricing of stocks. However,
when insider trading regulations discourage insiders from buying or selling based on inside
information that only results in stock being priced in a manner consistent with all available
information.”

Since liberalization of the Indian economy and consequential opening of the securities markets to
the foreign institutional investors (FILs), it has been found that the common investors are attracted
towards quick returns from the markets. Indian securities market witnessed irregularities and
violations such as price manipulation, creation of artificial market, insider trading, initial public
offer (EPO) imbroglio, takeover violations and other misconducts. The objective of regulation of
Indian securities market is to ensure the growth of a normal market in a stable manner. In India,
SEBI (Insider Trading) Regulations 1992 framed under the section 11 of the SEBI Act, 1992 are
intended to prevent and curb the menace of insider trading in securities.

The objective of this project is to examine insider trading regulatory practices in India. Efforts
have also been made to examine the overall effectiveness of the regulatory system and not the
individual regulations. This chapter mainly focuses on Securities and Exchange Board of India
(Prohibition of Insider Trading) Regulations, 1992.

2Bhattacharyya Utpal and Daouk Hazem, The World Price of Insider Trading”, Journal of Finance 54 (2002) pp-
75-108.

5
 NEED FOR REGULATION
Regulations are fundamentally rules of behaviour 3. Every country establishes a wide range of
behavioral “rules as a means of reconciling and conflicting rights and interests of its citizens. Many
of these rules are designated to govern how individuals interact socially. Absence of conditions of
perfect competition and existence of information asymmetry 4 make it possible for certain
participant to take unfair advantage of investors by exploiting regulatory inadequacy 5. Here lies
the significance of an effective securities market regulation.

Financial regulations are rules that govern commercial behaviour in the financial system. Financial
regulations establish a legal and ethical framework within which trade and commerce may flourish
to the mutual benefit of all involved. There are four broad rationales for financial regulation 6:

a) Safeguarding the system against systematic risk;

b) Protecting consumers against opportunities behaviour by suppliers of financial services;
c) Enhancing the efficiency of the financial system and
d) Achieving a range of social objectives (such as increasing homeownership or channeling
resources to particular sectors of the economy or population)

The objective of the regulation of securities markets is to ensure the growth of a normal market in
a stable manner. Stability is an essential prerequisite for vibrancy and viability of the stock
markets. Stability ensures fair and orderly price movements and builds up investor confidence. A
stable market should reflect not only demand but also market values. It is based on a good
performance of the corporate sector in terms of earnings and cash flows against the backdrop of
overall growth and prospects of the economy.

The stable and efficient financial system provides the foundation for implementation of effective
stabilization policies, more accurate pricing of risk and more efficient use of capital. During last
one-decade Indian financial system gets increasingly globalised. Increased integration of India’s

3 Jeffry Carmicheal & Michael Pomerleano, The Development and Regulation ofNon-Banking Institutions (2002) pp
12-33.
4 Information asymmetry means where buyers and sellers of particular products or services will never be equally
well informed, regardless of how much information is disclosed.
5 Suchismita Bose, Securities Market Regulation: Lessons from US and Indian Experience ICRA Bulletin Money
and Finance, Jan-June, 2005, p 83.
6 Richard Herring and Anthony M. Santomero, What Is Optimal Financial Regulation? University of Pennsylvania,
Wharton School, Philadelphia, September 1999.

6
securities markets with global markets implies that the state of the regulatory environment in the
Indian securities market is now of relevance to both domestic investors as well as foreign investors.
Securities regulation monitors the trading of securities with the purpose of ensuring that trading is
fair.

The need for statutory regulations and regulatory authorities is to oversee the operations in
securities markets that have been recognized the world over. The vast majority of securities
regulations in all countries aim primarily at promoting fair and full disclosure of material
information relating to the securities markets and to specific securities transactions. It includes all
aspects of market trading as well as the financing and financial reporting by public companies so
as to present all investors with a level playing field. Insider trading activities could undermine
confidence of securities market. If the rules of the game are perceived to be uncertain and unfair,
these could have the effect of reducing the trading activity. The markets would be less efficient
unless the level playing field is perceived to be fair for all. By level playing field we mean equal
opportunities for everybody in the system. Therefore, these activities are required to be identified,
addressed and regulated properly for greater interest of the large number of investors as well as
securities markets. Insider trading has been recognized as one of the important problems for
destabilizing of the securities market. For smooth development and functioning of securities
market like India, it is required to be regulated and controlled properly.

The call for regulation is not merely an illogical response based on vague notions of fairness and
morality. “Factors that influence public confidence might not necessarily be articulated in a logical
expression but the need to eliminate abuses in the market follows logically from the recognition
that it is imperative to preserve public confidence. Regulation is framed in order to combat a
problem. Civil society cannot tolerate criminal activity and therefore we frame criminal laws. The
society cannot tolerate white-collar-crime and we frame insider trading regulation. The concept of
civil society again is based on a very strong foundation of level playing field.” One of the purposes
of insider trading regulation is to offer level playing field to all the market participants and at the
same time it is expected that the market regulators like SEBI, SEC or others would not interfere at
the individual level for micro-level commercial decisions.

In the context of insider trading regulation, the concept of level playing field deserves a special
attention. The concept of level playing field that is desirable in the area of sports cannot be

7
applicable in economics with equal spirit because the later is based on unequal strength of the
market participants. Making balance between a free and fair trade is the consistent challenge in the
market economy. Regulators should be cautious that their regulation would not result into
inefficiency in order to create level playing field. Maintaining these two contradictory philosophies
is a consistent challenge on the part of the securities market regulators. 7

Law in a free society should seek to force people to change the way they conduct their everyday
affairs. At the same time it continues to act within the framework of set of rules that promote the
common good without altering the basic rhythm of the society. The case for insiders trading laws
therefore, falls even on fairness ground. Hence insider trading laws are supported on the basis of
fairness. However, the situation in the financial markets in the world governed by insider trading
laws is not fair. In most of the developed countries with relatively transparent market, insider
trading is quite common and accepted in some situations. A law that prohibits an activity as
common and accepted as insider trading can hardly be described as fair.

Applicability on Private Companies

The Companies 2013 Act8 restrains the directors and KMPs of a company from engaging in
insider trading, without distinguishing between a public or private company. Thus, ipso facto, the
provision seems applicable uniformly to all companies, irrespective of it being private, public,
listed or unlisted.

Nonetheless, academic interpretation of the provision suggests another conclusion. Section 195
of the 2013 Act defines the overt act of ‘insider trading’ to involve certain activities of dealing in
securities of a company. 9 The term ‘securities’ would have the same meaning as under the
Securities Contracts (Regulation) Act, 1956 (the ‘SCRA’).10 As per the SCRA, securities refer
primarily to marketable securities only. Further, the judiciary has pronounced in Norman J.

7 Insider trading and regulations available at:

http://shodhganga.inflibnet.ac.in/bitstream/10603/174708/11/11_chapter%206.pdf.
8 Companies Act. 2013 §195(1).
9 Explanation (a)(i) to §195(1), Companies Act, 2013 reads as ‘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.
10Companies Act. 2013 §2(81), reads as ‘“securities” means the securities as defined in clause (h) of section 2 of the
Securities Contracts (Regulation) Act, 1956.

8
Hamilton v. Umedbhai Patel 11 and B.K. Holding v. Prem Chand Jute Mill 12 that securities of
private companies are not marketable since there are restraints on its transferability thus
disqualifying it to be a security under the SCRA. Thus, the contentions arises that Section 195
makes a reference to only the securities of a public company and not private companies. This
argument is in line with the Sodhi Committee Report which stated that ‘any security that fits within
definition of the term under the SCRA would be amenable to insider trading. Moreover, it is
contended that the Sodhi Committee Report assumed that the only contribution of Section 195 to
the existing insider trading mechanism was the extended coverage to companies which intended
to get their securities listed. The 2013 Act 13 vests SEBI with the power to prosecute insider trading
in securities of ‘listed companies or those companies which intend to get their securities listed.
This has been used to argue that private companies are still not the subject of insider trading laws.

My contentions are supplemented by the legislative intent present in the drafting committee reports
on Companies Bills. The 2009 Report incorporates a plea by certain business associations like
Bombay Chamber of Commerce and Indian Merchants' Chamber to recommend Section 195 since
it overlapped with SEBI regulations. 14 Responding to the plea, MCA reasoned that the definition
of ‘insider trading’ was not existent in either the SEBI Act or the SCRA, and therefore the
incorporation of ‘insider trading’ in ‘principal legislation for corporate entities’ would bestow
SEBI with the power to curb such pernicious activity.15 Further, MCA explained that legislative
intent behind Section 195 was not to modify the existent regulatory mechanism and the provision
shall always remain in conformity with the SEBI regulations. The 2011 Report subsequently
suggested that an exception be whittled out to prevent the applicability of Section 195 on private
companies16 since the insider trading regime only applied to listed companies. The MCA reacted
by stating that Section 458(1) empowered SEBI to enforce these provisions, and consequently,
there could not be any conflict between Section 195 and SEBI regulations.

11 Norman J. Hamilton v. Umedbhai S. Patel, 1978 S.C.C. OnLine Bom. 187.

12 1980 S.C.C. OnLine Cal. 135.
13 Companies Act, 2013 §458(1).
14 Report of the Parliamentary Standing Committee on Finance on Companies Bill 2009, Ministry Of Corporate
Affairs, August, 2010.
15 Id.
16 Report of the Parliamentary Standing Committee on Finance on Companies Bill 2011, Ministry Of Corporate
Affairs, June 2012.

9
Thus, it is a humble submission that there lays substance in the author's contention that Section
195 did not intend to extend the applicability of insider trading regulations to private companies.
However, literal construction and subsequent interpretation does not negate the possibility of
bringing private companies under the ambit of insider trading. The MCA could have evaded such
ambiguity by the issuance of a clarification/notification in this regard, however; that does not seem
to be forthcoming. The MCA issued a notification exempting private companies from complying
with certain provisions of the 2013 Act17, but no proposal was made in the context of Section 195.

17Ministry Of Corporate Affairs Notification, GSR 464(E), as available on

http://www.mca.gov.in/Ministry/pdf/Exemptions_to_private_companies_05062015.

10
 INSIDER TRADING REGULATIONS, 2015
With an intention to overcome with the inadequacies of the previous Regulations, SEBI has
revamped the entire framework governing insider trading in India. The introduction of the
Regulations, the scope of who an ‘insider’ or a ‘connected person’ is, will stand significantly
widened. Therefore, any person, whether or not related to the company, may come within the
purview of the Regulations if he is expected to have access or possess UPSI. Applicability of the
Regulations shall extend to UPSI in relation to a company as well as securities listed or proposed
to be listed on a stock exchange. SEBI has overhauled the entire framework for regulation of
insider trading, which is seen to be a deep rooted problem in India, with a view to ensure a level-
playing field in the securities market and to safeguard the interest of the investors. This move by
SEBI will provide a much-needed boost to Indian capital market and facilitate further economic
buoyancy.

In 2014, Indian market capitalization crossed some USD 1.6 trillion, making it world's ninth largest
economy by market capitalization. SEBI has been constantly focussed on the development and
regulation of the Indian capital market to improve the investors’ confidence to retain this
momentum. The 1992 Regulations was not adequate in terms of their drafting, legal interpretation
and outreach and over time, SEBI had introduced some amendments to certain provisions of the
1992 Regulations to fill in the gap and deal with the current scenario. It was felt that there is a need
to review and provide a more strong and efficient method in line with the global norms and
standard to control insider trading in India. Thus, the new regulations i.e. SEBI (Prohibition of
Insider Trading) Regulation, 2015 was introduced.

In the new regulation the charge of insider trading has been extended to not only securities listed,
but also to be listed on stock exchanges. This is one of the expansions from 1992 regulation which
applied with the companies which were listed. 18

Moreover, the regulations also strengthen the definition an ‘insider’. Also the scope of ‘connected
persons’ under the regulations has been widened to include persons related with the company in a
contractual, fiduciary or employment association or having direct or indirect access to unpublished
price-sensitive information. Further the definition of ‘unpublished price sensitive information’ has

18Shubham Aparajita & Rishee Rudhra, Insider Trading Regulation 2015, (2013) 2 G.N.L.U. L. Rev. (April) 69.

11
been extended to both the company and securities. Under the regulations, the criteria for what
constitute ‘unpublished price sensitive information’ will be on the basis of whether the information
is ‘generally available’ or not and trading, communication or trading based on UPSI, introduction
of trading plan and disclosure requirements.

12
 CASE LAWS
Hindustan Lever Limited v. SEBI (1996)19

This case mainly concerns the purchase of 8 lakh shares by HLL of BBLIL from the Unit Trust of
India on March 25, 1996. This purchase was made barely two weeks prior to a public
announcement for a proposed merger of HLL and BBLIL. Upon investigation, SEBI found that
HLL was an insider at the time of purchase.

SEBI upon investigation found that at the time of purchase of shares of BBLIL from UTI, HLL
was an insider under Section 2(e) of the 1992 Regulations. HLL filed an appeal before the appellate
authority asking on what grounds they can be termed as an insider. But after hearing on the
evidence of HLL, the authority appreciated the evidence but it was not enough to prove it.
Consequently, the appellate authority found the SEBI investigations right. The matter is currently
pending before the Supreme Court.

DSQ Holdings Ltd. v. SEBI (1994)20

DSQ biotech ltd. (DSQB) was originally promoted by KND engineering and technologies ltd.,
jointly with Tamil Nadu industrial development corp. DSQ Holdings Ltd. Is a same promoter
group company of DSQB. The board of directors held a meeting on 30 July 1994 considered rights
issue and same was communicated to the stock market. The purpose of sending information to the
public was to properly disseminate it.

The erstwhile management of DSQB entered into an agreement in April 1994 with DSQH Ltd.
promoted by Shri Dinesh Dalmia (DD) group. Through the agreement, the DSQ Holdings Ltd.
(DSQH) purchased 44, 98,995 shares of DSQB at the rate of Rs. 15.94 per share from the erstwhile
promoters. Thereafter DSQ group made an offer as per clauses 40A and 40B of the Listing
Agreement to acquire a further 17,66,400 shares (20% of the paid-up capital of the company)
during the last quarter of 1994. The scrip of DSQB prior to the takeover of the company by the
DSQ group in April 1994 was not actively traded on the exchanges with the price hovering in the
region between Rs.12 and Rs.18 during most part of 1993 and also during the first half of 1994.

19Hindustan Lever Ltd v SEBI (1998) 18 S.C.L. 311 M.O.F.

20Vyas Amit K., Insider Trading : Review of Some Important Cases Chartered Secretary, I.C.S.I., August 2006, pp-
1133-1138.

13
The scrip witnessed considerable movement both in terms of price and volume immediately after
the DSQ group took over the company.

A detailed investigation was carried out by SEBI. It was found that there was a steep jump in
shares of DSQB from RS. 20 to RS. 92. From the investigation of SEBI, the DSQB failed to give
the actual proof of dispatch of AGM notice. Regulation 2(k)(iii) of the SEBI (Prohibition of Insider
Trading) Regulations, 1992 considers the information regarding the issue of shares by way of
public, rights, bonus etc. as unpublished price sensitive information. In this case, it was clear that
DSQB made an advantage over other investors. So DSQH was a ‘connected person’ under
regulation 2(c) of SEBI Insider trading regulations.

Samir Arora vs. SEBI (2004)21

Alliance Capital Mutual Fund (ACMF) is a mutual fund registered with the SEBI. This fund is
sponsored by Alliance Capital Management Corporation of Delaware, USA, where parent
company is Alliance Capital Management LP (ACM), U.S.A. Alliance Capital Asset Management
(India) Ltd. Towards the second half of 2002, ACM decided to sell its India business. Samir C.
Arora who was then working as head, Asian Emerging Markets with Alliance, Singapore - an
affiliate of ACM - was managing equity funds of several affiliates of ACM group companies
including ACMF. He was also in-charge of ACM investments in India through the Foreign
Institutional Investments (FII) route. On April 10, 2003 ACML and ACM managed 14.66 lacs
shares of Digital Global Soft (DGL) constituting 4.45 percent of the paid up equity capital of DGL.

The merger of DGL and Hewlett Packard (HP) at the global level had been in the offing for quite
some time since October, 2002. The due diligence process was on and the negotiations seem to
have reached a critical stage around May/June 2003. On May 2, 2003, DGL appointed M/s Bansi
S Mehta &Company (BMC) to recommend a merger ratio for the proposed de-merger of HP ISO
Division of Hewlett Packard (HP) and its merger with DGL. BSM finalised the valuation ratio for
the de-merger on May 7, 2003 and this ratio was discussed in the Board meeting of DGL on May
12, 2003. The Board however, did not announce the merger and decided to seek fairness opinion
from third party. The ratio was finally announced by DGL after another Board meeting on June 6-
7, 2003. The merger ratio was perceived to be adverse to the stock market and the price of DGL

21 Samir Arora v S.E.B.I. 63 C.L.A. 38 (S.A.T.).

14
scrip felt from Rs.500.50 to Rs.371 on June 9, 2003 because of the announcement ofthe merger
ratio. The charge that was brought against Samir Arora is that he had inside information that the
Board meeting of DGL on May 12, 2003 would announce the merger ratio which was supposed to
create an adverse impact on the value of the scrip. On the basis of this inside information he sold
the entire holdings between May 8, and May13, 2003.

As a result price moved from Rs.537.55 on 2nd May, 2003 to Rs.579.25 on 7th May, 2003.
Consequentially made a favourable statement regarding business prospect of DGL consequent to
the proposed merger with HP-ISO on April 30, 2003 and published the same on May 5, 2003 in
the Business Standard. Then he sold all his holdings of the funds of ACMF and ACM managed by
him averting a loss ofRs.23 crore over the next four days. SEBI alleged that the price of DGL scrip
moved up from Rs.575.5 to Rs.597.25 by making a promising statement that the scrip would be
promising which appeared in the Business Standard on May 5, 2003. SEBI observed that there
was no other reason for Samir Arora to dispose off all of his holdings when he had made a
statement that the scrip was promising. SEBI also based its charge on the statement made by
Managing Director of DGL that he had known Samir Arora for the past 5-6 years.

SEBI concluded that Samir Arora had indulged in insider trading by liquidating the holdings of
DGL on the basis of prior knowledge ofthe valuation ratio which was unpublished as well as price
sensitive. The Securities Appellate Tribunal (SAT) overruled SEBI’s charge. The price- sensitive
information which Samir Arora had alleged to have access did not turn out to be correct because
the merger was not announced on May 12, 2003. Information which finally turned out to be false
or least uncertain cannot even be labelled as information. The sale of securities prior to the board
meeting therefore, can only be considered to be based on his analysis and assessment of the
information available in the public domain. Besides there was an attempt by SEBI to show as to
how the valuation ratio worked out by a renowned Chartered Accountant ( Bansi S Mehta) which
was given to Samir Arora in a sealed cover with instructions to open the same only at the Board
meeting on 12 May, 2003. It was also found that Samir Arora had also disposed off holdings in
many other reputed types of scrip like Infosys, Satyam, MTNL and Century Textiles. Liquidation
of entire stock in DGL cannot be construed as insider trading. No independent proof was available
to establish this charge.

15
Satyam Computer Services Ltd. Case (200922)

Satyam scam is the largest corporate fraud so far in the Indian stock market. B.Ramlinga Raju, the
promoter siphoned off around Rs.7000 crore from his company. Raju in his letter claimed that
neither he nor the Managing Director (Rama Raju, Brother of Ramalinga Raju) took even one
rupee/dollar from the company and had not benefited in financial terms on account of the inflated
results. He also stated that neither he nor his managing director (including their spouses) sold any
share in the last eight years except for a small proportion declared and sold for philanthropic
purposes. In another statement he claimed that in the last two years net amount of rupees
amounting to Rs. 1230 crores was arranged to Satyam (not reflected in the books) to keep the
operations going by resorting to pledging all the promoters shares and raising from known sources
by giving all kinds of assurances. Since 2001 the promoter’s stake has come down from 25% to
less than 3.45% in January 2009. He took loans from time to time against pledging shares and
willing to forgo them if he could not repay in time or if the margins calls were triggered. During
the last eight years he realised Rs. 2530.87crores by transferring or selling of shares of the
company.

Even the top executives of the company including the interim CEO of Satyam Mr. Ram Mayanpati
sold 60 lakh shares in 2008. He sold 9.5 lakh shares when Satyam scrip was around Rs. 300-500
per share. DSP Merrill Lynch was appointed by Satyam to review the acquisition deal with Maytas
Infra and Maytas Properties Ltd. Both these companies were controlled by Raju and his son. After
examining the books of accounts of Satyam, DSPML had sent a letter to Satyam stating the
material accounting irregularities had been found in their books of accounts. Thereafter DSPML
had terminated their assignments on 6th January 2009. DSP ML also sent the letter to the SEBI on
the following date. This scam really hurted the stock market sentiment. Investors found themselves
in great distress due to share prices felt down drastically. Foreign Institutional Investors (FIls) were
also in a dilemma to invest in Indian stock market.

22 Keshabdev V & Mahalingam Kripa, Truth be Damned, Outlook Profit, January 23, 2009, pp-38-42.

16
 SEBI (PROHIBITION OF INSIDER TRADING) (AMENDMENT) REGULATIONS, 2018
The PIT Amendment Regulations will come into force on April 1, 2019 and will have significant
impact on the manner in which listed companies and intermediaries navigate the market conduct
framework. Though the SEBI Regulations, 2015 are not very dated, there existed a need to review
and tweak certain aspects of the law. Accordingly, in 2017, SEBI constituted the Committee on
Fair Market Conduct under the chairmanship of Mr. T.K. Viswanathan (FMC Committee) to,
amongst other things, identify opportunities to improve the PIT Regulations. 23 The PIT
Amendment Regulations have incorporated almost all of the recommendations made by the FMC
Committee in mid-2018 relating to the legal framework, as well as compliances. The key changes
introduced by the PIT Amendment Regulations are briefly discussed below.

Greater Clarity on Key Concepts

In line with the FMC Committee Report, the PIT Amendment Regulations seek to bring clarity by
defining a number of terms, such as ‘financially literate’, ‘proposed to be listed’, etc., whose
meaning had been gleaned from other regulations or judicial precedents. The principle that all
material information may not necessarily be price sensitive has also been confirmed through an
amendment to the definition of UPSI in the PIT Regulations.24

Specifically, the PIT Amendment Regulations have taken an important step towards determining
the contours of the amorphous concept of ‘legitimate purpose’, as a valid ground for
communication of UPSI. Currently, the PIT Regulations prohibit communication of UPSI other
than in furtherance of legitimate purpose, performance of duties or discharge of legal obligations.
None of these phrases have been defined and the scope of ‘legitimate purpose’, in particular, has
been the subject of a fair amount of debate over the years. While the onus of circumscribing what
would constitute legitimate purpose has been put on the boards of listed companies, this
development is crucial, in that it recognises that companies should have the ability to determine
the manner and contours within which, they share their information.

23Bharat Vasani, A New Year Ushers in the Insider Trading Regulations, 2015 Version 2.0 Indian Corporate Law
blog: Cyril amarchand mangaldas, available at: https://corporate.cyrilamarchandblogs.com/2019/01/prohibition-of-
insider-trading-regulations-new-amendments/more-2656
24Report Of Committee On Fair Market Conduct available at: https://www.sebi.gov.in/reports/reports/aug-
2018/report-of-committee-on-fair-market-conduct-for-public-comments_39884.html.

17
Disclosure During Due Diligence

Regulation 3(3) of the PIT Regulations, which dealt with disclosure of UPSI during due diligence
exercises, has been amended to clarify that the board of the listed company should approve such
disclosure after assessing whether the sharing of UPSI is in the best interests of the company. This
provision has caused some difficulty in the past, since the requirement for the board to assess the
viability and impact of the transaction at the preliminary stage of information sharing, was felt to
be unviable. The amendment, therefore, should enable boards to breathe easier since it realigns the
basis on which communication of UPSI may be permitted.

Additional Defences to Insider Trading

This is, undoubtedly, the headline-making change in the PIT Amendment Regulations. A number
of additional defences to insider trading have been introduced. Illustratively, a safe harbour has
been extended to (i) off-market trades between insiders with the same UPSI (earlier limited only
to promoters); (ii) trades executed on the block trade window, between persons who possess the
same UPSI; (iii) trades undertaken pursuant to exercise of stock options at a pre-determined
exercise price, etc.

While an explanation has been added to reiterate that trades by a person in possession of UPSI
would be presumed to have been motivated by such information, the inclusion of the varied
defences provides multiple channels to rebut such a presumption and will certainly grant relief to
employees exercising stock options as well as facilitate big boy transactions.

Code of Conduct and Institutional Compliances

In addition to altering substantive features of the PIT Regulations, the compliance obligations of
listed companies and intermediaries have also undergone a change. For instance, the PIT
Amendment Regulations require the board of a listed company to ensure that a structured digital
database is maintained with details of persons who receive UPSI pursuant to a due diligence
exercise. Also, periodic shareholding disclosures have been limited to designated employees only.

The primary change from a compliance standpoint is the prescription of separate codes for
listed companies and intermediaries. The introduction of a unified model code in the PIT
Regulations in 2015, had led to a number of challenges and difficulties for market participants,

18
such as maintenance of a restricted/grey list by listed companies, and the applicability of the
trading window to intermediaries, etc. Consequently, the PIT Amendment Regulations reverts to
the pre-2015 practice of stipulating two separate codes for listed companied and intermediaries
and also outlines the categories of persons who would qualify as ‘designated persons’.

Additionally, in what may be an outcome of the furore around leaks of UPSI using social media
and messaging platforms, the PIT Amendment Regulations places a great deal of focus on
institutional responsibility for implementing and periodically reviewing internal controls and
processes to prevent insider trading. Listed companies are specifically required to formulate
written policies to ensure inquiry in the case of leaks of UPSI and also put in place a whistle-
blower policy. Responsibility has also been placed on the boards and audit committees to ensure
compliance and verify the systems and controls implemented by the entity. 25

An incremental compliance introduced by the PIT Amendment Regulations is the requirement

for designated persons to provide details of persons with whom they share a ‘material
financial relationship’, i.e., where one person is a recipient of any kind of payment (other than
arms’ length transactions) in the preceding 12 months, equivalent to at least 25% of the payer’s
annual income.

25Bharat Vasani, A New Year Ushers in the Insider Trading Regulations, 2015 Version 2.0 Indian Corporate Law
blog: Cyril amarchand mangaldas, available at: https://corporate.cyrilamarchandblogs.com/2019/01/prohibition-of-
insider-trading-regulations-new-amendments/more-2656

19
 CONCLUSION
Since its inception in 1992, SEBI has undertaken huge responsibilities to develop securities market
as well as to protect interest of investors. Before enactment of the SEBI insider trading regulations,
no securities regulatory authority was taken specific measures for regulating and controlling
insider trading. SEBI (Insider Trading) Regulations, 1992 became the first comprehensive
regulations adopted in Indian securities market to combat insider trading. Insiders may purchase
or sale securities in their own name or tipping inside information to his relatives, friends or other
parties who are connected to him in the context of purchase or sale. It has been found that
regulators’ choice in favour of noncontroversial decisions were the main reasons for not being
successful in insider trading cases. Loosely drafted regulations, technical incompetency’s on the
part of the investigation squad were some of the main reasons of not winning the cases of insider
trading. Findings are common almost in all cases within India.

The distinction between legally permitted trading and illegal insider trading must be carefully
understood. “It is but natural for an Insider to know some inside information of a company which
is expected of their job. It would be violation of human rights and would defy the logic freely
tradable securities if Insiders are not permitted to trade for themselves. That would be
unreasonable. It would be irrational to stop promoters of a company from dealing in their
securities. Thus the restriction on the corporate insider is directly or indirectly using the price
sensitive information that they hold to the exclusion of the other shareholders in arriving at trading
decisions.” There is absolutely no restriction on insiders in trading in securities of the company if
they do not hold any price sensitive information that the public is not already aware of. During the
short while promoters and insiders can use the information to their advantage by guessing market
reaction to the news or information

As it is with all regulatory changes, the PIT Amendment Regulations are also likely to cause some
upheaval, specifically in respect of the compliance obligations that it seeks to cast on listed
companies and intermediaries. The heightened focus on individual rights and privacy in current
times may also require organisations to put in place balanced, workable solutions in order to
implement the requirement for designated persons to provide details of ‘material financial
relationship, However, these amendments coming in within months of the committee’s
recommendations reinforce the importance placed by the regulator on a consultative law-making

20
process. It is indeed inspiring to see SEBI keep pace with the market and gives us a lot to work on
and think about in the new year.

21
 BIBLIOGRAPHY

• Bhattacharyya Utpal and Daouk Hazem, (2002) “The World Price of Insider Trading”,
Journal ofFinance , Vol-54, pp- 75-108
• Bose Suchismita (2005), “Securities Market Regulation: Lessons from US and Indian
Experience”, ICRA Bulletin. Money andFinance, Jan-June, 2005, p 83
• The Institute of Company Secretaries of India, (2007), “Prohibition ofInsider Law and
Practice ”, New Delhi, p-9
• Bharat Vasani, A New Year Ushers in the Insider Trading Regulations, 2015 Version 2.0
Indian Corporate Law blog: Cyril amarchand mangaldas
• Shubham Aparajita & Rishee Rudhra, Insider Trading Regulation 2015, (2013) 2 GNLU
L. Rev. (April) 69.
• Use of Modern Finance Theory in Securities Fraud Cases Involving Actively Traded
Securities”, 38 Bus.Law. (1982)
• Vyas Amit K. (2006), “Insider Trading : Review of Some Important Cases”, Chartered
Secretary, ICSI, August 2006

22