In an effort to maintain transparency and ethical conduct of business, the Securities and Exchange Board of India (SEBI) has outlined strict internal controls on sharing of information. The board’s decision is based on the recommendations of the TK Viswanathan committee on fair market conduct. They are designed to reinforce good corporate governance by holding company promoters accountable for violations of insider trading norms, regardless of their shareholding status, should they hold unpublished price-sensitive information (UPSI) without a ‘legitimate’ purpose.
Understanding the “Legitimate Purpose”
According to SEBI, the term “legitimate purpose” applies to the sharing of UPSI during normal business operations by an insider with collaborators, partners, lenders, suppliers, customers, merchant bankers, auditors, insolvency professionals, legal advisors, or other consultants or advisors. However, this sharing must not be done with the intent to evade or circumvent the regulations. In other words, a promoter who doesn’t hold an official advisory position or any board position is not considered to possess a “legitimate purpose” to hold the UPSI.
Role of Board Directors in Maintaining a Digital Database
SEBI has strongly recommended that the board of directors ensure the maintenance of a structured digital database, which will contain the names of entities or persons with whom information is shared. This step is crucial in ensuring transparency and protecting shareholder interests.
Details on Insider Trading
Insider trading involves buying or selling a company’s publicly-traded securities while in possession of material information that hasn’t been made public yet. Material information refers to information that can significantly impact an investor’s decision about whether to buy or sell the security.
| Fact | Explanation |
|---|---|
| Insider Trading | Buying or selling securities in possession of material information not yet public. |
| Material Information | Information that can significantly impact an investor's decision to buy or sell the security. |
| Legitimate Purpose | Sharing UPSI during normal business operations by an insider with business associates. |
| SEBI | The regulatory body responsible for governing and controlling companies in India. |
Understanding Corporate Governance
Corporate governance refers to the systems, processes, and principles that manage and control a company. ‘Good corporate governance’ ensures transparency in business transactions, effective decision-making to achieve corporate objectives, statutory and legal compliance, protection of shareholder interests, and a commitment to ethical business conduct.
Changes in Corporate Governance Norms: Kotak Panel Report
The panel under the chairmanship of Uday Kotak, constituted by SEBI, has recommended various changes for improving corporate governance standards within companies. Some notable recommendations include having a minimum of six directors on the board with at least half being independent directors, prohibiting the board chairman from simultaneously serving as CEO/Managing Director, and establishing minimum qualifications for independent directors.
Recommendations by TK Viswanathan Committee on Fair Market Conduct
The TK Viswanathan committee on fair market conduct made numerous recommendations addressing insider trading, such as creating two separate codes of conduct, setting minimum standards on managing insider information, and recommending giving SEBI direct power to tap into telephones and other electronic communication devices to curb insider trading and other frauds. This committee’s recommendations formed the basis for SEBI’s current guidelines on information sharing, reinforcing the commitment towards good corporate governance in India.
