4.1 Listed Company Code of Conduct
Schedule B to the PIT Regulations prescribes a model code of conduct for listed companies. Every listed company must adopt, implement, and monitor compliance with such a code to prevent insider trading.
Minimum Requirements
- Board Adoption: Code must be approved by the Board of Directors
- Compliance Officer: Appointment of a senior officer as Compliance Officer
- Designated Persons List: Identification and maintenance of designated persons
- Trading Restrictions: Rules for trading window and prohibited periods
- Pre-clearance: Mechanism for approving trades above threshold
- Disclosure Requirements: Timely reporting of trades
- Annual Declarations: Confirmation of compliance by designated persons
The Board of Directors is ultimately responsible for ensuring adequate and effective insider trading compliance. Directors can be held personally liable if they fail to exercise proper oversight.
Compliance Officer Responsibilities
- Maintain list of all designated persons and their immediate relatives
- Grant or deny pre-clearance for trading
- Maintain and operate the structured digital database
- Monitor trading by designated persons
- Report violations to SEBI and stock exchanges
- Conduct annual compliance training
- Submit annual compliance certificate to the Board
4.2 Designated Persons
Designated persons are individuals who are likely to have access to UPSI by virtue of their role in the company. Proper identification and management of designated persons is crucial for compliance.
Categories of Designated Persons
| Category | Examples | Rationale |
|---|---|---|
| Directors | Executive, Non-Executive, Independent Directors | Access to board-level information |
| KMPs | CEO, CFO, Company Secretary, Whole-time Directors | Direct involvement in company operations |
| Senior Management | CXO-level, Business heads, Function heads | Access to divisional/functional UPSI |
| Support Functions | Finance, Legal, Secretarial, IT teams | Handle sensitive information |
| Material Subsidiaries | Persons in equivalent positions | Subsidiary UPSI affects parent |
| Board Determination | Others identified by Board | Role-based UPSI access |
2019 Amendment: Board Determination
The 2019 amendment empowered the Board to identify additional categories of designated persons based on role and access to UPSI:
- Employees who report to KMPs
- Employees with decision-making authority
- Employees handling price-sensitive projects
- External consultants with regular UPSI access
Conduct annual review of designated persons list. Roles change, new positions are created, and organizational restructuring may affect UPSI access patterns. Document the rationale for inclusion/exclusion.
Immediate Relatives
The trading restrictions extend to immediate relatives of designated persons:
- Spouse
- Parent (including in-laws)
- Sibling (including in-laws and their spouses)
- Child (including step-children and their spouses)
- Any other person who is a dependent
4.3 Trading Window
The trading window mechanism restricts trading by designated persons during sensitive periods when UPSI is likely to exist. Proper management of trading windows is one of the most important compliance controls.
Trading Window Closure
The trading window must be closed when designated persons can reasonably be expected to have access to UPSI. Typical closure periods include:
| Event | Typical Closure Period | Reopening |
|---|---|---|
| Quarterly Results | Beginning of quarter-end till 48 hours after results | 48 hours after announcement |
| Annual Results | April 1 (or year-end) till 48 hours after results | 48 hours after announcement |
| Board Meeting (material agenda) | 7 days before till 48 hours after | 48 hours after announcement |
| M&A Transactions | From decision till public announcement | 48 hours after announcement |
| Dividend Declaration | From recommendation till announcement | 48 hours after announcement |
For particularly sensitive transactions (large M&A, major contracts), the Compliance Officer may extend the closure period. The window should not reopen until the information is fully disseminated and absorbed by the market.
Contra-Trade Restriction
Designated persons who have traded cannot execute a contra trade (opposite transaction) within 6 months:
- If you buy shares, you cannot sell any shares of the same company for 6 months
- If you sell shares, you cannot buy any shares of the same company for 6 months
- Violation requires disgorgement of any profit to SEBI Investor Protection Fund
- Compliance Officer may grant exemption in genuine hardship cases
Exercise of ESOPs does not trigger contra-trade restriction for subsequent sale. However, the sale of ESOP shares triggers the 6-month restriction on buying. Plan ESOP exercises carefully around this restriction.
4.4 Pre-clearance Mechanism
The pre-clearance mechanism requires designated persons to obtain approval before trading. This creates a checkpoint to verify that no UPSI exists and the trading window is open.
Pre-clearance Process
- Application: Designated person submits pre-clearance request to Compliance Officer
- Declaration: Declaration that applicant does not possess any UPSI
- Review: Compliance Officer verifies trading window status and UPSI position
- Approval/Denial: Written approval or denial with reasons
- Validity: Pre-clearance typically valid for 7 trading days
- Trade Execution: Trade must be executed within validity period
- Reporting: Actual trade reported within 2 trading days of execution
- Name, designation, and department of applicant
- Number and type of securities proposed to be dealt in
- Nature of proposed trade (buy/sell/pledge)
- Current holdings in the company
- Estimated price range for the trade
- Declaration of no UPSI possession
- Declaration of compliance with contra-trade restriction
- Signature and date
Pre-clearance Thresholds
Companies may set thresholds below which pre-clearance is not required:
- Common threshold: Trades below Rs. 10 lakh in aggregate in a quarter
- Some companies require pre-clearance for all trades regardless of value
- Promoters and KMPs typically need pre-clearance for all trades
If an approved trade is not executed within the validity period, the pre-clearance lapses. A fresh application is required if the designated person still wishes to trade. The Compliance Officer should track lapsed approvals.
4.5 Structured Digital Database
The 2019 amendments mandated maintenance of a structured digital database recording details of persons with whom UPSI is shared. This database serves as an audit trail and aids investigation of leaks.
Database Contents
| Field | Description | Purpose |
|---|---|---|
| Name | Full name of person receiving UPSI | Identification |
| PAN | Permanent Account Number | Unique identifier, trading records |
| Designation/Relationship | Role or connection to company | Categorization |
| Contact Details | Address, phone, email | Communication |
| Nature of UPSI | Description of information shared | Scope of restriction |
| Date and Time | When UPSI was shared | Timeline tracking |
| Purpose | Legitimate purpose for sharing | Justification |
Technical Requirements
- Time-stamping: Automatic, tamper-proof date-time stamps
- Audit Trail: Complete log of all entries and modifications
- Non-tampering: Technical controls preventing deletion or modification
- Access Control: Role-based access limited to authorized personnel
- Retention: Records maintained for minimum 8 years after entry
- Backup: Regular backup and disaster recovery provisions
Options include: (1) Dedicated compliance software with blockchain-based immutability, (2) Cloud-based SaaS solutions with audit features, (3) In-house systems with strong access controls. Choose based on company size and compliance budget.
Entry Triggers
An entry must be made whenever UPSI is shared with any person:
- Board and committee meetings where UPSI is discussed
- Due diligence for M&A transactions
- Sharing with advisors (lawyers, accountants, bankers)
- Rating agency interactions
- Internal team discussions on price-sensitive matters
- Any other instance of UPSI communication
"The structured digital database is not merely a compliance checkbox. It is an essential tool for tracking information flow and investigating potential leaks. Companies that maintain robust databases are better positioned to defend against allegations."SEBI Circular, 2019
Key Takeaways
- Every listed company must adopt a code of conduct approved by the Board
- Board can determine additional designated persons based on UPSI access
- Trading window must close during sensitive periods (results, M&A, etc.)
- 6-month contra-trade restriction applies to all designated persons
- Pre-clearance required above threshold (typically Rs. 10 lakh quarterly)
- Structured digital database with audit trail is mandatory since 2019