Executives whose spouses trade in their firms’ stock can’t use alibi on independence, not privy to insider info
Executives whose spouses buy or sell their companies’ shares will not be able to offer the alibi that their husbands or wives are financially independent and aren’t privy to any inside information when they defend themselves against insider trading charges
In a guidance note issued on Monday, the Securities and Exchange Board of India (Sebi) clarified that under the Sebi (Prohibition of Insider Trading) Regulations, 2015, a spouse is presumed to be an “immediate relative” unless the company official is able to prove otherwise.
Sebi also said that this would be the accepted norm even if the spouse is financially independent and claims not to be consulting the husband or wife in taking trading decisions.
According to a Sebi official, the clarification was issued as part of the guidance note as many such alibis had been offered in investigations of insider trading cases. The capital market watchdog also received many queries on this subject from company officials, the official said.
“There has been a recent order on this issue where the spouse of a director of a listed company traded in the company’s shares without taking the mandatory pre-clearance. It was not the first such case though. This issue has come up on many occasions during discussions between Sebi and industry representatives. With the clarification explicitly stated, the onus will be on the accused to rebut the assumption even if the spouse is financially independent,” the official said on condition of anonymity as he is not authorized to speak to the media.
On 19 August, Sebi imposed a penalty of Rs.10 lakh on a former independent director of Manappuram Finance Ltd for failing to obtain the mandatory pre-clearance for his wife to trade in the company’s shares.
As per the order, the director submitted to Sebi that the shares were sold by his wife, who he said was economically independent and argued the pre-clearance was not required. He also submitted a legal opinion of law firm Amarchand Mangaldas and Co. stating that the breach, if any, was only technical in nature and does not warrant a penalty.
In another high-profile investigation in April 2009, Sebi found that the then chief financial officer of Wockhardt Ltd Rajiv B. Gandhi, along with his wife and sister, had dealt in shares of the company on the basis of “unpublished price-sensitive information”, thereby violating Sebi’s insider trading norms.
The matter was settled through the consent mechanism, with Gandhi agreeing to pay Rs.5 lakh and undergo voluntary debarment from the securities market for 18 months.
The provisions pertaining to relatives becoming deemed connected persons have been narrowed down under the new insider trading regulations notified in 2015, compared with the provisions contained in the erstwhile 1992 regulations, said Tejesh Chitlangi, a partner at IC Legal, a law firm.
“Sebi has clarified in its recent guidance note that a spouse of a connected person will be deemed to be connected unless proven otherwise even though such spouse is financially independent and also doesn’t seek any investment consultancy from the connected person,” said Chitlangi.
Sebi is not the only capital market regulator to have faced the issue of exchange of insider information between a spouse or any other immediate relative. In the US, there are similar instances wherein the Securities Exchange Commission (SEC) has charged company officials for insider trading when their spouses transacted in shares based on stock-sensitive information.
Last year, SEC announced two separate cases against men who profited by insider trading on confidential information they learnt from their wives about Silicon Valley-based technology companies.
“Spouses and other family members may gain access to highly confidential information about public companies as part of their relationship of trust. In those circumstances, family members have a duty to protect and safeguard that information, not to trade on it,” said an SEC statement issued on 31 March 2014. There were similar orders by SEC in 2011 and 2013 as well.
HT Mint, New Delhi, 28th August 2015
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