India - Changes To Insider Trading Law: New Informant Policy.
Legal News & Analysis - Asia Pacific - India - Regulatory & Compliance
1 November, 2019
On September 17, 2019 the Securities and Exchange Board of India (“SEBI”) notified amendments to the insider trading regime by notifying the SEBI (Prohibition of Insider Trading) (Third Amendment) Regulations, 2019 (the “Amendment”)1 which shall come into force on December 26, 2019.
The Amendment is brought in place to encourage individuals to come forward and inform SEBI about violations of insider trading laws that have occurred, are occurring or may occur and also aims to reward such persons.
2 KEY HIGHLIGHTS
The key highlights of the Amendment are discussed below.
2.1 New Definitions
The Amendment has introduced the following key definitions.
An “Informant” is any individual who voluntarily provides Original Information to SEBI relating to any violation of insider trading laws that has occurred, is occurring or has a reasonable belief that it is about to occur.
Voluntarily providing information means the voluntarily submission of information to SEBI not being at the instance of SEBI, Central or State authorities or any other authority.
“Original Information” is defined as “any relevant information submitted in accordance with the Regulations pertaining to any violation of insider trading laws that is:
(a) derived from the independent knowledge and analysis of the Informant;
(b) not known to the SEBI from any other source, except where the Informant is the original source of the information;
(c) is sufficiently specific, credible and timely to -(1) commence an examination or inquiry or audit, (2) assist in an ongoing examination or investigation or inquiry or audit, (3) open or re-open an investigation or inquiry, or (4) inquire into a different conduct as part of an ongoing examination or investigation or inquiry or audit directed by the SEBI;
(d) not exclusively derived from an allegation made in a judicial or administrative hearing, in a Governmental report, hearing, audit, or investigation, or from the news media, except where the Informant is the original source of the information;
(e) not irrelevant or frivolous or vexatious; and
(f) information which does not in the opinion of the SEBI add to the information already possessed by the SEBI is not original information.”
2.2 Informant confidentiality
The Amendment does not require the Informant to disclose its identity for submitting Original Information to SEBI but the Informant may disclose it if the same cannot be expunged from the submission.
The Original Information and the identity of the Informant is required to be held in confidence by SEBI and is exempted from disclosures under the Right to Information Act, 2005. A prohibition is also prescribed against the act of any person compelling disclosure of the identity, existence of an Informant or of the information provided by an Informant.
2.3 Duty of the Informant to ensure the sanctity of information submitted to SEBI
The information provided by the Informant must satisfy all the tests laid down in the definition of
Original Information, including not being irrelevant, frivolous or vexatious.
If the Informant tries to mislead or misinform, SEBI may penalize such an Informant by imposing a penalty, sanction, direction or settlement.
2.4 Protection against retaliation and victimization
Organizations having a code of conduct2 are now required to ensure that the code provides for suitable protection against any discharge, termination, demotion, suspension, threats, harassment or discrimination, directly or indirectly, against any employee who submits information to SEBI.
The Amendment further allows the Informant access to legal recourse if the Informant has been subjected to retaliation or victimisation by the Informant’s employer. Upon violation of the Amendment, the Employers may be made liable and either penalized, debarred, suspended, or prosecuted against.
Any agreement (written or oral) or code of conduct prohibiting an Informant to submit information to SEBI will be deemed void and any threat or act to impede an individual from communicating to SEBI is also prohibited.
2.5 Informant Reward
An Informant may become eligible to claim a reward or an interim reward (payable out of the total reward) from SEBI. The reward may extend upto 10% of the monetary sanctions collected or recovered, but not exceeding INR 1,00,00,000 and an interim reward may extend upto INR 10,00,000.
The amount of the reward is based on the collection or substantial recovery of monetary sanctions by SEBI. Whether a substantial amount is recovered or not is at the sole discretion of SEBI. Upon recovering twice the amount of the reward, SEBI may declare an Informant eligible to claim a reward.
SEBI has been facing constant challenges to prevent and obtain direct evidence on the violation of insider trading laws, since most of the evidence is circumstantial, making the investigations and legal processes long.
With a view to provide a robust framework and ensure that individuals can come forward without fear of retaliation, SEBI issued a consultative paper3, highlighting the (a) importance of an effective informant policy; and (b) need for an informant reward policy.
The Amendment seeks to address these issues and policies by allowing individuals to submit information to SEBI. The Amendment is expected to increase early detection of insider trading, provide better enforceability and ensure timely reporting of instances of insider trading violations.
Informants are incentivized to report against insider trading with rewards upto Indian Rupees 1 Crore, confidentiality and other safeguards. The regulations also bear the interests of listed companies in mind and deter malicious and false complaints by imposing penalties and sanctions.
For further information, please contact:
Pallavi Kanakagiri, Partner, Induslaw
2 Certain organizations were mandated to have a code of conduct by virtue a circular in July. Available at
3 ‘Discussion Paper on amendment to the SEBI (Prohibition of Insider Trading) Regulations, 2015 to provision for an Informant mechanism’. Available at https://www.sebi.gov.in/reports/reports/jun-2019/discussion-paper-on- amendment-to-the-sebi-prohibition-of-insider-trading-regulations-2015-to-provision-for-an-Informant- mechanism_43237.html