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Penalty for violation of Model Code of Insider Trading Regulations

Finsec Law Advisors

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The Adjudicating Officer of SEBI passed an order on October 03, 2016, against Piramal Enterprises Limited and others, imposing a penalty of Rs. 6 lakhs, for violations of the model code of conduct (Code) under Insider Trading Regulations, 1992, that allegedly occurred during the sale of their domestic healthcare formulation business to Abbott Laboratories Limited in May 2010 (the price sensitive information in this case).

Handling of price sensitive information: The Code stipulates that all price sensitive information (PSI) must be handled on a ‘need to know’ basis, i.e., disclosed only to those who need it to discharge their duties in the company. In this case, it was found that the sharing of PSI with the chairman’s son, who was only a part of the promoter group and had no other duties towards the company, was in violation of the Code.

Failure to close the trading window: The code stipulates that trading in the shares of a company by its designated persons must be suspended when PSI is unpublished. The AO found that by not closing the trading window in anticipation of or during the sale of business, the Company violated the Code.

Trades when trading window was to be closed: The AO found that a designated employee under the company’s code had undertaken trades in the scrip of the company at the time when PSI remained unpublished. Rejecting the employee’s argument of absence of any connection with the said transaction, the AO stated that it is not the employee’s prerogative to choose when is he a designated employee or whether he must seek pre-clearance. The AO held the company liable for its failure to close the trading window as this would have prevented the employee from trading.

Compliance with the Listing Agreement: Lastly, it was also alleged that the details of the proposed sale were not intimated to the board of the company, which was in violation of the listing agreement which requires communication of certain minimum information, which is not in the course of business, to the board. However, the AO opined that communication of such details at the initial stages, when the transaction had to be kept a close-guarded secret, was not necessary, hence rejecting the allegation.

In this order, the AO has maintained a strict approach for the meaning and usage of ‘need to know’ basis of sharing of information. Further, it must also be noted that with respect to seeking of pre-clearance for trades by a designated employee, such permission is also required when the trading window is not closed under the Code. However, the AO did not take any action in this regard.