Challenges in Compliance with PIT Regulations by Intermediaries / Fiduciaries. - MMJC

Background

Unpublished Price Sensitive Information [‘UPSI’] is the most important aspect when it comes to enforcement of provisions relating to prohibition of insider trading. It is important to identify the flow of UPSI within and outside the organisation. Securities Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’) makes it mandatory for board of directors or head(s) of the organisation of every person required to handle UPSI and all other persons dealing with listed entities to maintain an SDD as per regulation 3(5) of PIT regulations. This requirement of having a SDD was introduced on recommendations from the Committee on Fair Market Conduct chaired by Dr. T.K. Vishwanathan (Ex-Secretary General, Lok Sabha, and Ex-Law Secretary) (‘Vishwanathan Committee Report’) in order to have a check on flow of UPSI.

In this article we shall see the challenges in implementation of provisions relating to SDD and other compliances under PIT Regulations by persons required to handle UPSI.

Challenges

• Relating to maintenance of SDD
• The first challenge that arises with respect to maintenance of SDD is identification of exactly which organisations are required to maintain SDD?

The requirement to maintain SDD is slated in regulation 3(5) of PIT Regulations. It clearly states that SDD is mandatory to be maintained by every entity who is required to handle UPSI viz. listed entities, intermediaries and fiduciaries who handle USPI of a listed company in the course of their business operation. The term “Fiduciaries” is referred to in Regulation 9(2) of the PIT Regulations which states that professional firms such as auditors, accountancy firms, law firms, analysts, insolvency professional entities, consultants, banks etc., assisting or advising listed companies shall be collectively referred to as fiduciaries for the purpose of the PIT Regulations. Let us understand this with the help of an example:

e.g. when a listed company is planning for a major acquisition and a firm of Practising Company Secretaries / Merchant bankers / law firms are involved in this process of acquisition for consultation/advisory purpose, then details of such firm, their partners and all other entities of the firm with whom such UPSI is shared needs to be maintained accordingly by the listed company as well as internally by the firms of Practising Company Secretaries / Merchant bankers / law firms.

Further if a listed company gets its raw materials from a supplier, then that supplier also needs to maintain SDD as it is possible for the supplier to ascertain the turnover of the listed company on the basis of supply of raw materials for a particular period.

Further unlisted group companies or promoter group companies who deal with listed companies are also required to maintain SDD in order to have a track of flow of UPSI from listed company to them and vice versa.

The next challenge which is frequently raised is that is it mandatory to maintain SDD for he above referred entities?

SDD helps in tracking flow of UPSI. Hence it is mandatory to maintain SDD for entities referred to above in question 1. Also, it is the responsibility of board of directors or heads of these organisations to ensure that SDD is in place and functioning.

Whether material subsidiaries companies need to maintain separate SDD for each such company or a common SDD can be maintained by listed entity?

Employees of material subsidiary companies designated on the basis of their functional role and having access to UPSI would be categorised as designated persons of listed entity. Hence, they would have access to SDD of listed entity. Further events or information at material subsidiary level is going to affect the listed entity. Hence UPSI pertaining to material subsidiary is also UPSI for listed entity. Due to this designated person can make entries for UPSI in SDD of listed entity and material subsidiary need not have SDD separately.   

If the subsidiary is a SEBI registered intermediary or is itself a listed entity, then they would be required to maintain SDD in order to comply with SEBI PIT.

What shall be the content of SDD for persons required to maintain SDD other than listed entities?

Regulations 3(5) of PIT regulations says that organizations handling UPSI must maintain an SDD documenting following details:

• the nature and type of UPSI  
• name and PAN of the entity sharing the UPSI,
• the name and PAN of individuals sharing the UPSI,
• the name and PAN of the recipient with whom UPSI was shared.

If any fiduciary/intermediary is not dealing with listed companies, are they still required to maintain SDD?

Persons required to deal with listed entities are required to maintain SDD. So, if any person viz. chartered accountant firm or law firm or any intermediary had dealt with any listed entity then they are required to maintain SDD. But if they have not dealt with any listed entity at all then they are not required to maintain SDD.

In case of intermediaries / fiduciaries who are dealing with various listed entities, whether one SDD shall suffice for all clients OR whether separate SDD is required for each listed company client?

As per reg 3(5) of PIT regulations persons required to handle UPSI are required to maintain SDD. This SDD shall have details of UPSI received from all clients. SDD shall have internal controls to ensure that UPSI pertaining to a client is only accessible on need-to-know basis. Hence, there is no requirement to maintain separate SDD for each client. Only one SDD shall suffice at the organisation level.

• UPSI and trading window closure related.
• At what time will UPSI be considered to be given to intermediary/fiduciary?

When UPSI is actually shared, or access is provided to UPSI by listed entity to intermediary/fiduciary that is considered as the start date of UPSI. e.g., auditors getting access to database or tally access for auditing entries or sharing of resolution of bonus issue with any PCS firm or seeking a valuation report from a chartered accountant firm or merchant banker for a proposed corporate action etc.

• Can intermediaries/ fiduciaries have same trading window closure as that of the listed companies?

As seen above fiduciaries and intermediaries get access to UPSI only after listed company has shared it with them or has provided access of UPSI to them. Hence the trading window shall be closed for such entities from the date on which they receive UPSI or get access to UPSI.

Other compliances to be done under PIT Regulations

Apart from maintaining SDD what are the other obligations on intermediaries and fiduciaries under PIT regulations?

Apart from maintaining SDD fiduciaries and intermediaries are required to ensure compliance with following:

• Formulate a code of conduct as per reg. 9(1) of PIT regulations. Minimum standards for framing code of conduct are given in schedule C of PIT regulation. Further it also states that violation of code of conduct shall be intimated to SEBI.
• Designated a compliance officer to administer the code of conduct and comply with other compliances under PIT regulations.
• Lay down criteria for ascertaining designated persons.
• The Chief Executive Officer, Managing Director, or such other analogous person of an 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.
• 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.

Conclusion

Intermediaries and fiduciaries dealing with listed entities play an important role in ensuring compliance with PIT Regulations. This underscores the importance of robust internal controls and meticulous documentation to be maintained by them in safeguarding UPSI. As fiduciaries and intermediaries embrace these guidelines, the overall market environment will become more transparent, ethical, and resilient to insider trading practices.

https://www.sebi.gov.in/reports/reports/aug-2018/report-of-committee-on-fair-market-conduct-for-public-comments_39884.html

 Reg 9(4)(ii) of SEBI PIT