The Securities & Exchange Board of India (Sebi) is all set to ammend the Prohibition of Insider Trading Regulations by proposing some major changes. It is aimed at reducing “Insider Trading”, a rampant malice in the Indian stock markets. 

On Tuesday,  Sebi posted a consultative paper on “Introduction of Short Swing Profit regulations in India” on its official website which wants profits made by insiders to be handed over to the company in question.  Sebi said the proposed changes seek to compel an ‘insider’ to surrender such profits to the company in any of his/her transaction concerning equity based securities of the company (including it’s parents or subsidiary’s shares) if both the buy and sell transactions are made within six months of the other.

It added that a similar rule is in force in the Securities Exchange Act of 1934 (of the United States), which requires ten per cent owners, directors and officers of a company to give up “any profit realised ... from any purchase and sale, or any sale and purchase, of any equity security” of the company within a six-month period.

Abusing information

Sebi feels that such changes in the regulation will check insiders, who have greater access to price sensitive company information, from taking advantage of information for the purpose of making short-term profits (Sebi calls it Short Swing Profits).

It is assumed that insiders have a long term investment in the company and are not expected to make rapid buy/sell transactions. Liability will be imposed without any necessity for guilt or wrongfulness, Sebi added.

A direction to surrender profits made in a short swing transaction shall not necessarily imply any form of guilt.
The surrender of profits made in such short swing transactions shall be automatically imposed as a part of good corporate governance requirement.

The short swing rule will get automatically attracted as soon as two things are established: first is the fact of being an insider or “designated insider” and secondly, same securities were bought and sold within six months of each other. In such a regulation, it appears that the intent of the person shall be immaterial. Merely the fact of the trade will be sufficient to take action.

Who are insiders?

For the ‘Short Swing Profit’ Regulation that “designated insider” will be people who are key management personnel by whatever name called, all directors of the company, all officers of the company who are the beneficial owners, directly or indirectly, of ten per cent or more of any class of equity securities. Alternatively, all officers of the company as well as all beneficial owners of the company in excess of 10 per cent holding, singly or in concert, would also be implicated in the definition of designated insider.

Sebi has suggested certain transactions such as: transactions approved by a regulatory authority, employee benefit plans, bona fide gifts and inheritances, mergers and acquisitions etc, will be exempted from the new Regulation.

The capital market watchdog now solicits comments and views from the public on the consultative paper.