In the world of capital markets, Insider Trading is a term that carries significant weight.
Insider trading refers to the act of trading securities based on non-public information or UPSI, which is often obtained by individuals with a position of trust or access to confidential information. To combat this unethical practice, the Securities and Exchange Board of India (SEBI) has put in place guidelines for the prevention of Insider Trading. One key aspect of these guidelines is the definition of a designated person. In this article, we will break down the definition of a designated person.
According to SEBI (Prevention of Insider Trading) Regulations, 2015, a designated person is any person who is reasonably expected to have access to unpublished price-sensitive information (UPSI) relating to a company, by virtue of their position or role within the company.
The regulations define a designated person as:
“Any person, who is or was connected with the company or is deemed to have been connected with the company and who is reasonably expected to have access to unpublished price-sensitive information in relation to that company.”
This is called an inclusive definition (essentially, a qualitative definition rather than an exclusive definitions which tend to be narrower).
The definition is therefore quite comprehensive and includes a wide range of individuals. The term “connected with the company” refers to not only employees, but also directors, promoters, key managerial personnel, auditors, consultants, and agents of the company, among others. While it is not the same as the requirements for a Structured Digital Database (which is more relevant to the flow of UPSI in general), it is a related concept within the world of Insider Trading Compliances.
The regulations go on to clarify that individuals who may have access to UPSI on an occasional basis, such as service providers or vendors, may also be considered designated persons. Furthermore, individuals who have access to UPSI due to their relationship with a designated person, such as family members or close associates, are also included in this definition.
Being designated as a designated person is a regulatory classification that imposes certain additional obligations and restrictions on these individuals concerning trading in securities of the company. In addition, it imposes significant regulatory obligations on compliance managers as well, since they would need to identify and evidence the trail of logic that leads a person to be designated or otherwise.
The regulations impose certain obligations and restrictions on designated persons to prevent the misuse of UPSI for personal gain, including, for listed entities, restrictions on communication and trading in securities of the company during the “Trading Window Closure Periods,” which is typically around the time of the publication of financial results, dividend announcements, and other similar events.
Additionally, Designated Persons are required to adhere to stringent disclosure requirements for themselves, their connected persons and their material financial relationships. This too adds burden on compliance management to collect, collate, track and manage in an ‘evidencable’ manner.
In conclusion, designated persons play a critical role in ensuring the smooth functioning of securities markets and maintaining public trust in the market system. It is important for designated persons to adhere to the regulations and maintain the highest ethical standards. By doing so, they can help promote transparency, accountability, and trust, which are essential to maintain the health of the securities market. At the same time, it is essential that to properly manage and track compliances with such requirements, well-designed tools will be needed.
Regulatory reference: SEBI (Prevention of Insider Trading) Regulations, 2015, Regulation 2(c)