The Compliance Officer’s Role: Upholding the Code of Conduct under PIT - MMJC

Introduction:

Compliance Officer under Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 [‘PIT Regulations’] is responsible for administering the code of conduct and other requirements under these regulations[1]. The Model Code of conduct as per PIT Regulations states that compliance officer would be responsible for closure of trading window, granting pre-clearance, relaxing provisions relating to contra trade, tracking of trades etc. This article highlights cases where compliance officer is held liable by SEBI for not administering the compliance with code of conduct and various other requirements under PIT Regulations and cases where he has been left without penalty.

Failure to administer code of conduct:

SEBI investigates suspicious trading activities in the scrips of any listed company and identifies trades undertaken in the scrip by designated persons, suspicious trade etc. On identifying the trading activities SEBI investigates whether all possible compliances pertaining to the suspicious trading activity were done or not viz. whether pre-clearance was granted, whether there was a contra trade, whether name was entered in SDD etc. In this regard following are cases where SEBI has held the compliance officer liable for failure to administer the code of conduct.

1. SEBI Adjudication order in the matter of Marksons Pharma Ltd: In this case SEBI had penalized compliance officer for failure to track the benpos received from Registrar and Transfer agent leading to trades by designated persons went scotfree. Compliance officer stated that the benpos received from registrar and transfer agent has lot of entries and due to shortage of manpower it is always not possible to scrutinize entire benpos. Hence the compliance officer stated he tracked selected trades of KMPs, directors etc. SEBI did not accept this argument and stated that compliance officer should have found out a way to track benpos. Reason that it is bulky enough to scrutinize cannot be an argument.[2]
2. Settlement order in the matter of Mannapuram Finance Ltd: In this case SEBI penalized the compliance officer for failure to administer the code of conduct due to which there was leak of UPSI and insider trading instances within the company. In this case the CFO inadvertently during an investor call stated that the company is expecting a loss in the upcoming quarter due to change in the RBI policy on gold loans. This information then got leaked in the market. In this regard the compliance officer was held responsible for failure to disclose the leaked information to market immediately and further administer the code of conduct[3].
3. Settlement order in the matter of DCB Bank Ltd: In this case DCB Bank had planned to open branches at a pace more than the average annual rate at which branches are being opened by that bank every year. As branches were going to be opened at a higher pace this information was considered as UPSI. This information of opening of branches was available with certain designated persons who traded in the shares of company. Compliance officer had given pre-clearance for same. SEBI penalized the compliance officer for not being diligent while giving pre-clearance as to whether the persons proposing to trade had access to UPSI or not?[4]
4. SEBI Adjudication order in the matter of Radico Khaitan Ltd: In this case it was seen that non-compliances under PIT Regulations of the erstwhile compliance officer were highlighted by the newly appointed compliance officer. The newly appointed compliance officer informed the management about various non-compliances, incorrect practices being followed with respect to administering the code of conduct, non-tracking of trades etc. by the company till now under the erstwhile compliance officer tenure. On investigation by SEBI in this regard the management and newly appointed compliance officer stated that all these lapses were under the tenure of erstwhile compliance officer. The erstwhile compliance officer deposed before SEBI that these lapses and non-compliances were due to lack of domain knowledge of PIT Regulations. Pursuant to this SEBI penalized the erstwhile compliance officer for not tracking trades, failure to administer code of conduct by not levying penalties for violation of code of conduct, not bringing to the notice of audit committee repeated non-compliances by designated persons etc.[5]
5. SEBI adjudication order in the matter of Tulsi Extrusions Ltd: In this case SEBI questioned the pre-clearances given by compliance officer to managing director of the company for dealing in shares of company that resulted in contra trade. In this case the compliance officer argued that while seeking pre-clearance managing director mentioned that “he is going to deal in shares of company”. Hence pre-clearance was given under the genuine belief that he is going to purchase shares of company. There was no intention to permit him to enter into opposite transaction. Further it was never known that managing director would be squaring off the transaction on the same day. Compliance officer accepted that due to work exigencies he could not scan the post transaction confirmation by managing director. In this regard SEBI stated that compliance officer should have been diligent while granting pre-clearances and strict adherence to rules and regulations is necessary to maintain integrity of securities market[6].
6. SEBI Adjudication order in the matter of Kwality Ltd: SEBI in this case held the compliance officer liable for not being diligent in implementing the code of conduct. In this case compliance officer placed details of violation of code of conduct under PIT Regulations before the managing director of the company and not before the board of directors. In this regard SEBI held that, “… The Noticee has not placed on records, any communication wherein the Noticee brought the non-compliance by all the erring entities to the notice of Board of Directors… The Company’s Code of conduct also requires the Compliance Officer to report on insider trading to the Board of Directors of the Company and in particular, provide reports to the Chairman of the Audit Committee or to the Chairman of the Board of Directors. The Noticee has contended that all details of transactions, responses in respect of the non-compliances were duly communicated to his reporting officer, Mr. Sanjay Dhingra, the then Managing Director of the Company. In this regard, I note that reporting of the non-compliances to Managing Director of the Company, is not equivalent to reporting the same to Board of Directors, especially given the fact that the said MD himself indulged in such non-compliances…”[7].  SEBI penalised the compliance officer for not being diligent in implementing the code of conduct.

Cases where compliance officer is not held liable for failure to administer the code of conduct.

1. SEBI Adjudication order in the matter of Infibeam Avenues Ltd: There have been cases where SEBI has not held compliance officers liable as they were not part of the transaction or were not made aware of any such transactions. In this case, it is seen that despite being aware of violation being undertaken under PIT Regulations the compliance officer had not taken immediate action or the actions taken were not appropriate. In one of the cases the compliance officer had given pre-clearance to the chief financial officer when there were discussions going on for stock split. SEBI on investigation held that, “Noticee granted the said pre-clearance on November 22, 2016, I.e., on the same day that the UPSI came into existence. However, there is no evidence on record to show that when Noticee gave the preclearance to CFO, which was on the same day as the start date of UPSI, Noticee was aware of any such meeting being held on that day or even if Noticee was aware of such a meeting, there is no evidence to show that Noticee was aware of the participants in the meetings or even what transpired in the meeting. In absence of any justifiable grounds brought on record to establish that Noticee was aware of Mr. Hiren Padhya’s access to UPSI, I am inclined to accept the contentions put forth by Noticee in this regard…”[8]. In this case SEBI had left the compliance officer as he could prove that he was not aware of UPSI or was not part of the UPSI discussion.
2. SEBI Adjudication order in the matter of Dynamatic Technologies Ltd: In this case the compliance officer was left without penalty as he demonstrated that there were systems in place to administer the code of conduct. Compliance officer demonstrated to SEBI various efforts taken in administering the code of conduct under PIT viz. Confidentiality undertakings by all employees and sharing information on “Need to Know” basis, separate audit staff, Trainings and sensitization programs, Physical demarcation of secretarial & finance team, Restriction on sensitive documents, Chinese walls concept of ring fence UPSI etc.[9] These efforts highlighted to SEBI that the compliance officer had taken best possible efforts to ensure compliance with PIT Regulations.

Conclusion:

These cases make us understand that whenever compliance officer had failed to demonstrate his efforts in compliance with PIT Regulations or was complacent towards the acts undertaken within the organisation by designated persons SEBI has held compliance officers liable. But where the compliance officers could demonstrate their efforts in ensuring compliance with PIT Regulations SEBI has not levied penalties.

This makes us understand that it is necessary for compliance officer under PIT Regulations to have processes for following:

1. Identification of UPSI
2. Processes for tracking of trades by designated persons on weekly basis
3. Processes for giving pre-clearance to designated persons within the organisation.
4. Set processes to demarcate between UPSI and material information under SEBI LODR that would also be helpful in closure of trading window.
5. Procedure for demarcation of teams handling UPSI and standard procedures on sharing of UPSI.

Standard Operating Procedures [‘SOP’] would bring in certainty and clarity throughout the organisation in the procedure for compliance with PIT Regulations. SOP would also act as a defense while deposing before enforcement authorities to demonstrate that there was no arbitrariness in complying with PIT Regulations.

This article is published in Taxmann. The link to the same is as follows: –

https://www.taxmann.com/research/company-and-sebi/top-story/105010000000024040/the-compliance-officers-role-upholding-the-code-of-conduct%C2%A0under%C2%A0insider-trading-norms-experts-opinion

This article is written by CS Vallabh M Joshi – Senior Manager – vallabhjoshi@mmjc.in

[1] Reg. 9(3): Every listed company, intermediary and other persons formulating a code of conduct shall identify and designate a compliance officer to administer the code of conduct and other requirements under these regulations.

[2] https://www.sebi.gov.in/enforcement/orders/mar-2021/order-in-the-matter-of-marksans-pharma-limited-_49413.html

[3] https://www.sebi.gov.in/enforcement/orders/jun-2020/settlement-order-in-respect-of-priyanka-jain-in-the-matter-of-manappuram-finance-limited_46944.html

[4] https://www.sebi.gov.in/enforcement/orders/mar-2021/settlement-order-in-respect-of-mr-hemant-v-barve-in-the-matter-of-dcb-bank-limited_49551.html

[5] https://www.sebi.gov.in/enforcement/orders/mar-2024/adjudication-order-in-the-matter-of-radico-khaitan-limited_82427.html

[6] https://www.sebi.gov.in/enforcement/orders/apr-2021/adjudication-order-in-respect-of-pradip-jasraj-mundhera-kiran-pradip-mundhera-sunil-taparia-sanajay-taparia-and-sudarshan-taparia-in-the-matter-of-tulsi-extrusions-limited_49944.html

[7] https://www.sebi.gov.in/enforcement/orders/jan-2024/adjudication-order-against-pradeep-k-srivastava-in-the-matter-of-kwality-limited_80552.html

[8] https://www.sebi.gov.in/enforcement/orders/dec-2021/adjudication-order-in-the-matter-of-infibeam-avenues-limited_55130.html

[9] https://www.sebi.gov.in/enforcement/orders/may-2021/adjudication-order-in-respect-of-naveen-chandra-in-the-matter-of-dynamatic-technologies-ltd_50054.html