Thursday, December 26, 2013

SAT on Insider Trading and the Role of the Compliance Officer

A couple of years ago, we had discussed the order of SEBI’s adjudicating officer imposing a penalty of Rs. 5 lakhs (Rs. 0.5 million) on the compliance officer of Satyam Computer Services Limited. We had noted that this imposed a somewhat unduly onerous obligation on compliance officers and wondered “whether a different outcome would ensue if the compliance officer in Satyam’s case were to go on appeal”.

As it happens, the compliance officer did prefer an appeal but a different outcome did not ensue, as earlier this week the Securities Appellate Tribunal passed an order confirming the findings of SEBI’s adjudicating officer. The background to the role of the compliance officer under the SEBI (Prohibition of Insider Trading) Regulations, 1992 (the “PIT Regulations”) and the more detailed facts of the case are set out in the previous post discussing SEBI’s order. To summarise, the primary issue is whether the compliance officer had a duty to close the trading window in Satyam’s shares, which he failed to discharge. On December 6, 2008, the compliance officer was informed by the chairman of the company about the potential acquisition of two other companies. On December 13, 2008, notices were sent to the board members scheduling a meeting on December 16, 2008 to discuss the acquisition proposal. In this background, SAT notes:

15. Short question, therefore, to be considered herein is, whether information relating to acquisition of two infrastructure companies by Satyam disclosed by Chairman Mr. Ramalinga Raju to appellant on December 6, 2008 was a price sensitive information warranting closure of trading window by appellant as Compliance Officer and if so, for failing to close the trading window when in possession of such price sensitive information, whether, imposition of penalty of ` 5 lac upon appellant is justified?

The SAT found an obligation on the compliance officer to close the trading window on December 6, 2008 upon receipt of information regarding the fact that the company was considering the acquisition proposal. This was despite the premature nature of the proposal, which was only tentative at that stage and was yet to be considered by the board, which may or may not have approved the proposal at the scheduled board meeting. SAT states:

18. … Model Code contained in PIT Regulations further requires Compliance Officer to keep the trading window closed during the period when information referred to in para 3.2.3 is unpublished. Object of keeping the trading window closed under para 3.2.3 of Model Code in addition to prohibition contained in regulation 3 of PIT Regulations is to doubly ensure that directors/officers and designated employees of the Company do not misuse ‘Price Sensitive Information’ and trade in securities of the Company while in possession of such unpublished price sensitive information. Therefore, Compliance Officer is mandatorily obliged under Model Code to keep the trading window closed when in possession of price sensitive information specified in para 3.2.3 of Mode Code. If Compliance Officer fails to close the trading window inspite of being in possession of price sensitive information, then he would be violating PIT Regulations. In such a case, whether any employee/director by taking undue advantage has traded in securities of that company or not, Compliance Officer would be liable for violating PIT Regulations.

The onerous nature of responsibilities imposed by SEBI have been confirmed by the SAT, which therefore requires careful consideration of situations in which compliance officers must act in order to close the trading window so as to not fall afoul of their obligations under the PIT Regulations.

1 comment:

vswami said...

Offhand: Ref.the concluding para- The caution rightly given for future conduct of a 'compliance officer' of any company is, in the context herein, confined/addressed to the governing SEBI rules. To extend the same rationale / logic, there appears to be no rhyme or reason why the view taken should not be regarded and made a serious note of , as sufficient caution, also to any officer or other person appointed/assigned / entrusted by a company, with the duties and responsibilities statutorily attached to / expected to be discharged as a 'Secretary', whatever be his designation. To put it differently, the point to be noted is, - in a case where cause of action arises by reason or as a consequence of dereliction of duties by company secretary (in-house or external), he should be imp-leaded as a necessary party to dispute / litigation.