About a week ago, the country’s largest bourse, National Stock Exchange (NSE) shared a compliance certificate format with many companies which have to give specific declaration on whether they have control over who can access unpublished price sensitive information (UPSI), if information shared are time-stamped to keep a track on who is receiving it and when, and whether there is chance of anyone tampering with the records.
“NSE has sought a confirmation of compliance from companies-probably to ensure whether companies have been maintaining information in a duly compliant manner. The current move seems to be in line with Sebi’s objective of curbing insider trading and to review the compliance status of databases maintained by listed entities,” said Moin Ladha, partner at the law firm Khaitan & Co.
Cos Need to Maintain SDD
“This comes at a time when Sebi has also taken other actions including automation of restrictions for trading during the close window period,” Ladha said.
Under the insider trading prohibition regulations of the Securities and Exchange Board of India, listed companies have to maintain a structured digital database (SDD) to store UPSI, which includes a range of information like financial numbers, business plan, decision to sell off a factory, merger, demerger, dividend etc that can move the stock price. But market circles as well as some of the officials with regulatory authorities always suspected that only a handful of companies had a proper SDD in place. The regulation, whose scope was widened in 2020, has existed for the past few years. The exchange is now tracking to what extent firms are following the rules.
In the compliance certificate for the quarter ended June 2022, a company, besides declaring if it maintains an SDD, will have to confirm whether names of persons with whom information is shared have been captured along with permanent account number (PAN) or any other identifier, whether all UPSI have been captured in the database (and, if not why), and if persons receiving information were informed upfront that the information they were about to receive is UPSI and the entry has been captured in the database. The companies were told to submit their declaration in the prescribed compliance certificate by August 9.
“When companies have to comment on why some UPSI were not recorded, or why there was no time stamp in some cases, they would come under pressure. Audit, time stamp and identities of persons sharing and receiving information is crucial.
For instance, certain sensitive information may have to be shared with a lawyer or investment banker or a consultant. Here it’s important to keep a record on when the information was shared so that there is a check on persons privy to insider information from using that information to trade. Audit and stamping would prevent tampering of the database,” said a compliance officer.
Besides board of directors and key management persons, companies have to share a list of names of people who had access to UPSI. Under insider trading regulations, all persons who are perpetually in possession of UPSI are considered as ‘designated persons’ of the listed entity. In order to curb trading of a listed entity during the trading window closure period (or Blackout Period), Sebi recently said it intends to freeze the PAN of designated persons to restrict them from trading during this period. The directive would come into effect on September 30, 2022.
