Insider Trading And Covid-19 Preparedness: SEBI On Closure Of Trading Window & What It Means For Investors, Promoters

Over the past few weeks, SEBI has come out with a series of relaxations on filing requirements by listed companies in light of the COVID-19 pandemic, however, the industry has not gotten any respite from the strict contours of trading restrictions under the insider trading regime. The same standard of compliance under the SEBI (Prohibition of Insider Trading) Regulations 2015 continues to apply albeit with a newer, more complex, set of challenges the pandemic poses.

The extension granted for filing of annual audited financial results till 30 June 2020 1 is a seemingly procedural relief for the predominantly promoter driven listed Indian companies, however, for several market players it is more of a restraint, than a facilitation. This latitude directly impacts the trading window restrictions on promoters, directors and designated persons, as it is linked to the declaration of financial results. Until the expiry of 48 hours after the financial results are made public, insiders will be restricted from trading in the listed securities. SEBI has clarified 2 that these restrictions will continue to apply, irrespective of the leeway granted in the filing timelines.

This move from SEBI has not only affected promoters / directors, but also increased potential insider trading contravention risks for investors who may be privy to unpublished price sensitive information (UPSI). This necessitates that every stakeholder of the securities market is aware of the impact of COVID-19 related relaxations and adopts relevant checks and balances to prevent insider trading.

What has changed: Increased Insider Trading Concerns in Times of COVID-19

Constantly Evolving Government Policies and Determination of ‘Price Sensitivity’

In the ordinary course of business, listed companies are required to make timely stock exchange disclosures of all material events. Given the pandemic, there are various extensions being granted. That aside, the rising uncertainty in business and rapidly evolving geo-political and economic policies renders the already subjective determination of ‘price sensitivity’ – even more ambiguous. Further there may be logistical challenges in communication with the investor body resulting in ‘non- discriminate access’ of information remaining with a chosen few.

Employee Conduct and Alternate Communication Modes (such as WhatsApp)

With governmental lockdowns enforcing work from home protocols, incidents of information leakage, questionable employee conduct and relatively unsecure network lines / data privacy standards, are issues which companies are facing. Messaging apps, such as WhatsApp, continue to remain important modes of information dissemination, especially since the lockdown limits the means of interaction.

It is interesting to see SEBI’s stance on the use of WhatsApp in its recent order of 29 April 2020 (commonly referred to as the WhatsApp leak case 3 ). In this case, WhatsApp chats were examined and SEBI reasoned that messages relating to financial results (unpublished on stock exchanges) even if widely circulated, would be UPSI as it perpetuated information asymmetry. These details were not generally available to the public, as the messages were circulated prior to the official announcement of the financial results.

Shift in SEBI’s Approach: A more Proactive Regulator

While SEBI is yet to get enhanced powers comparable to the US Securities Exchange Commission’s wiretapping authority 4 , we have seen a more stringent approach being adopted by the regulator in recent times.

SEBI has taken up 70 insider trading cases for investigation in fiscal 2019 — an over 400% increase from the previous year. 5 In June 2019, SEBI joined hands with the Ministry of Corporate Affairs 6 to ensure seamless transfer of information for investigation in corporate frauds and related matters. Further, in December 2019, the insider trading regime underwent a major overhaul, tightening the rules on this aspect. A separate ‘informant incentive scheme’ was introduced to encourage whistle blowers providing leads in insider trading cases, for a monetary ‘reward’ of up to INR 1 crore.

The Way Forward: What listed companies and investors can do?

With increased surveillance from SEBI in the current scenario, the reputational hazards which insider trading poses can cost much more than the monetary penalties being levied. 

This warrants that investors and listed companies should communicate with their employees and representatives on a ‘need to know’ basis while strictly following their respective code of conduct. 

Importance of evaluating whether one is in possession of UPSI prior to investing, cannot be over- emphasized. Determination of ‘price-sensitivity’ of information is a mixed question of fact and law, and consequently should be run past legal experts.

Regulated use of communication platforms, adopting IT related safety protocols and ensuring that employees are adhering to these measures and the code of conduct, is the need of the hour. Particularly, while disseminating information, listed companies must ensure that such information is made available on platforms that are non-discriminatory in nature.

Regardless of the hardships in implementation, the SEBI directives on trading window restrictions are a step in the right direction. Whether COVID, or no COVID, all stakeholders must find ways and means to operate within the given parameters.