Information sharing under SEBI’s insider trading rules

The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (PITR), prohibits communication of unpublished price sensitive information (UPSI) to any person except where it is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations.

A company may provide access to UPSI if its board is of the informed opinion that a proposed transaction is in the company’s best interest. However, if it is not an open offer transaction, UPSI is to be made generally available at least two trading days prior to the proposed transaction being effected. Practical issues in this regard include determining company’s best interests and timing and content of cleansing announcements. PITR also does not expressly legislate against “market sounding”, i.e. communication of information to gauge interest of potential investors.

The Securities and Exchange Board of India (SEBI) has issued amendments to PITR effective from 1 April 2019, which accept the recommendations of the Fair Market Conduct Committee, and which require boards of listed companies and intermediaries to define their own policy relating to “legitimate purposes”, and determine if sharing of UPSI for due diligence (instead of the proposed transaction itself) is in the company’s best interest. For illustrative purposes, “legitimate purposes” is defined as including sharing of UPSI in the ordinary course of business with inter alia lenders, customers and legal advisors. Companies will be required to maintain a digital database of UPSI recipients with adequate internal controls.

Tanya Aggarwal is a partner and Lakshmi Pradeep is an associate at S&R Associates, a law firm with offices in New Delhi and Mumbai.