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Upholding Compliance: The Compliance Officer’s Role in Adhering to the Code of Conduct while addressing Family Disputes within the ambit of Insider Trading Regulations - MMJC
Introduction:
In the intricate landscape of financial regulations, the role of a compliance officer stands as a crucial linchpin in ensuring adherence to the law. Amidst family disputes, particularly in contexts involving insider trading regulations, the responsibilities and challenges faced by compliance officers take on a multifaceted and delicate nature.
A bird eye’s view on arena of Family Dispute:
Family disputes in the context of control within a company refer to conflicts, disagreements, or tensions that arise among family members who have stakes or influence in the governance, management, or ownership of the company. These disputes often revolve around the control, decision-making authority, succession planning, or strategic direction of the business and can significantly impact the company’s operations, stability, and long-term viability.
Connect to Insider Trading Regulations:
Insider trading regulations often become intertwined with family disputes, presenting a complex scenario where personal conflicts intersect with legal obligations. In family-led businesses or enterprises multiple family members hold key positions, whereby they get access to or they have unpublished price sensitive information bringing them under the purview of code of conduct under Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 [PIT 2015’]. The stringent requirements outlined in PIT 2015 serve as a crucial framework, compelling involved family members to navigate conflicts while strictly adhering to legal boundaries.
Responsibility of Compliance Officer under PIT 2015:
As per schedule B Clause 6 of PIT 2015, “When the trading window is open, trading by designated persons shall be subject to preclearance by the compliance officer, if the value of the proposed trades is above such thresholds as the board of directors may stipulate”. Clause 6 casts responsibility on compliance officer under PIT 2015 to give pre-clearance. Compliance officer also must ensure that he/she is not biased and does not act on behest of any one promoter and should function as an independent person. PIT 2015 provides for certain checks and balances to be ensured by compliance officer before giving pre-clearance. Compliance officer will have to conduct a proper due diligence as to whether the person seeking pre-clearance has access to UPSI or has UPSI, before giving pre-clearance. If the compliance officer is reasonably assured that giving pre-clearance would be in violation of any other regulations (viz. SAST as it might be crossing threshold limit) then he can deny giving pre-clearance. But challenges arise when there are no legal hurdles in giving pre-clearance.
Balancing Personal Relationships and Professional Obligations:
One of the most daunting tasks for compliance officers is striking a balance between personal relationships within the organization and the professional obligation to enforce regulations impartially. This requires a nuanced approach, emphasizing the importance of transparency, open communication, and strict adherence to the prescribed code of conduct.
Recently it has been observed that compliance officers are alleged to have violated code of conduct by allowing or not allowing designated persons who are disputing family members to deal in shares of listed entity. Where a listed entity is jointly controlled by promoters who are now involved in dispute it becomes challenging for compliance officer to act in such scenarios. Such situations might create a dilemma for compliance officer. It is sometimes also alleged that compliance officer has acted in a biased manner.
There have been a series of cases where the promoters/co-promoters have alleged and accused the compliance officer of being biased by acting in favour of one promoter, not giving them the pre-clearance and depriving them of stake in the company. Such scenarios should be managed with utmost care considering involvement of various stakeholders. Also, in such cases there is a high probability that the compliance officer may fall to prey to penalties and be in the eyes of regulator.
Responsibility of Audit Committee and Board of Directors:
Regulation 9A(3) and (4) of PIT 2015 read with Schedule B Point 1 provides as follows, “9A(3): The board of directors of every listed company and the board of directors or head(s) of the organisation of intermediaries and fiduciaries shall ensure that the Chief Executive Officer or the Managing Director or such other analogous person ensures compliance with regulation 9 and sub-regulations (1) and (2) of this regulation.
9A(4): The Audit Committee of a listed company or other analogous body for intermediary or fiduciary shall review compliance with the provisions of these regulations at least once in a financial year and shall verify that the systems for internal control are adequate and are operating effectively.
Schedule B Point 1: The compliance officer shall report to the board of directors and in particular, shall provide reports to the Chairman of the Audit Committee, if any, or to the Chairman of the board of directors at such frequency as may be stipulated by the board of directors, but not less than once in a year”
On perusing the above provisions, it becomes clear that overall responsibility for compliance with PIT 2015 is with board of directors and audit committee. Compliance officer has to report to board of directors and in specific to chairman of audit committee atleast once in a year with respect to status on compliance with code of conduct. This makes it very clear that overall responsibility for compliance with code of conduct is with the board of directors.
Further regulation 9A(1) under PIT 2015 states as follow, “The Chief Executive Officer, Managing Director, or such other analogous person of a listed company, intermediary or fiduciary shall put in place adequate and effective system of internal controls to ensure compliance with the requirements given in these regulations to prevent insider trading.” This regulation emphasizes the pivotal responsibility placed upon the top-tier executives, such as the Chief Executive Officer (CEO), Managing Director, or their equivalents in listed companies, intermediaries, or fiduciaries in establishing internal controls to ensure compliance with requirements given under PIT 2015.
Role of compliance officers in case of disputing promoters:
Ensuring compliance with PIT 2015 is the responsibility of board of directors and audit committee. They have to ensure that all the internal controls in order to ensure compliance with PIT 2015 are adequate. So, in case of a scenario where the designated persons being part of disputing promoters’ groups seeks pre-clearance from compliance officer it would be prudent for the compliance officer to take up the same with Chairman of Audit Committee and Board of directors. Board of directors in a duly convened meeting arrive at a consensus by recording proper rationale whether the application of pre-clearance should be permitted or not? Compliance officer should then act accordingly. This eventually would lead to the board being aware of such transactions and accordingly a call can be taken with their collective wisdom thereby significantly taking care of corporate governance.
Conclusion:
In the realm of insider trading regulations, particularly under Regulation 9 and 9A, the role of compliance officers extends beyond mere enforcement; it encompasses the delicate task of maintaining ethical standards in the face of family disputes. Navigating family disputes concerning control within a company requires a delicate balance between familial relationships and the best interests of the business. In essence, their role in managing family-related conflicts while upholding insider trading regulations exemplifies the pivotal position, they hold in preserving both the ethical fabric and legal compliance within organizations.
This article is published in Taxmann. The link to the same is as follows: –
This article is written by CS Vallabh M Joshi – Senior Manager – RND Team – vallabhjoshi@mmjc.in and CS Hasti Vora – Research Team – RND Team – hastivora@mmjc.in