What does insider trading mean in 2015?

DeekshaSinghThe legal framework for insider trading has recently been overhauled. Provisions relating to insider trading were introduced in the Companies Act, 2013 (“Companies Act”) and the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 (“Old Regulations”) were replaced by the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (“Insider Trading Regulations”).

The prohibitions

Under Regulation 3 of the Insider Trading Regulations, no insider should “communicate, provide, or allow access to any unpublished price sensitive information, relating to a company or securities listed or proposed to be listed, to any person including other insiders”. However, it specifically excludes communications for legitimate purposes, the performance of duties, or the discharge of legal obligations.

The Insider Trading Regulations also apply to people in general. It prohibits them from procuring unpublished price sensitive information from an insider, or causing an insider to communicate such information. Again, this does not include communications for legitimate purposes, performance of duties, or discharge of legal obligations.

Regulation 4 of the Insider Trading Regulations contains the prohibition on trading in listed securities or securities that are proposed to be listed. This prohibition applies to insiders in possession of unpublished price sensitive information.

Who is an insider?

To understanding these prohibitions, it is fundamental to understand who an insider is. According to Regulation 2(g) of the Insider Trading Regulations, an ‘insider’ means any connected person or a person in possession of or having access to unpublished price sensitive information in respect of the securities of a company.

The term ‘connected person’ refers to any person who is, or has during a period of six months prior to the act of insider trading been, associated with a company, directly or indirectly, in any capacity. This association can be because of frequent communication with the company’s officers or from being in any contractual, fiduciary, or employment relationship with the company.

It can also be as a result of being a director, officer, or an employee of the company or as a result of holding any position including a professional or business relationship between the person and the company (whether temporary or permanent), which allows the person, directly or indirectly, access to unpublished price sensitive information or is reasonably expected to allow such access. Regulation 2(d)(ii) provides a list of persons who are deemed to be ‘connected persons’.

What is unpublished price sensitive information?

first_image_newUnpublished price sensitive information has been defined under Regulation 2(n) of the Insider Trading Regulations to include “any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities…” A similar definition for price sensitive information has also been stated in sub-clause (b) of the Explanation to Section 195 of the Companies Act.

Regulation 2(n) also provides the following illustrative list matters information about which can be considered as unpublished price sensitive information:

– financial results;

– dividends;

– change in capital structure;

– mergers, de-mergers, acquisitions, delistings, disposals, expansions of business, and such other transactions;

– changes in key managerial personnel; and

– material events in accordance with the listing agreement.

In order to be considered price sensitive, the information should be likely to materially affect the price of securities of the company in the market. This requirement is inherent in the concept of price sensitivity.

Exception for due diligence

Rajat Kumar Gupta, an Indian-American businessman and philanthropist, is currently serving a two-year term in a U.S. federal prison for insider trading. Published under a CC BY-SA 2.0 licence.

Rajat Kumar Gupta, an Indian-American businessman and philanthropist, is currently serving a two-year term in a U.S. federal prison for insider trading. Published under a CC BY-SA 2.0 licence.

The Insider Trading Regulations recognise some practical reality of commercial transactions. Prospective investors could often require non-public information about a company in order to assess the merits of a particular transaction. In these situations, investors look to obtain unpublished price sensitive information not for insider trading but for due diligence on a company’s finances and business. Taking these factors into account, Regulation 3(3) of the Insider Trading Regulations allows for firms to communicate unpublished price sensitive information in connection with a contemplated transaction subject to certain conditions:

– for transactions that would entail an obligation to make an open offer under the takeover regulations laid down by the Securities and Exchange Board of India (“SEBI”), only if the board of directors of the company is of the informed opinion that the proposed transaction is in the best interests of the company; or

– for transactions that would not attract the obligation to make an open offer under the takeover regulations, if the board of directors of the company is of the informed opinion that the proposed transaction is in the best interests of the company and the information that constitutes unpublished price sensitive information (and is to be communicated to proposed investors) is made generally available at least two trading days prior to the proposed transaction being effected.

This clause has been included to ensure that in an open offer, all the information necessary to enable an informed divestment or retention decision by public shareholders is made available to all shareholders in the letter of offer under the takeover regulations.

The second point ensures that where the proposed transaction is for the benefit of the company (even though its not a regulatory mandate), the board of directors ensures that there is no information asymmetry in the market.


Note that insiders can prove their innocence by demonstrating the following circumstances:

– If the insider is an individual: That the transaction is an off-market transfer between promoters who were in possession of the same unpublished price sensitive information without being in breach of Regulation 3 and that both parties had made a conscious and informed trade decision;

– If the insider is not an individual: That-

(1) the individuals in possession of the unpublished price sensitive information were different from the individuals taking trading decisions and that the decision-making individuals were not in possession of the unpublished price sensitive information when they took the decision to trade; and

(2) appropriate and adequate arrangements were in place to ensure that the Insider Trading Regulations are not violated and that no unpublished price sensitive information was communicated by the individuals possessing the information to the individuals taking trading decisions and there is no evidence of such arrangements having been breached.

Note that connected persons bear the onus of proving that they were not in possession of unpublished price sensitive information. In case of all other persons accused of insider trading however, the onus of proving that they possessed the unpublished price sensitive information is on SEBI.

Penalty for violation

We should note that the Insider Trading Regulations do not specify a specific penalty for violation of the prohibition contained therein. However, Regulation 10 gives the SEBI the power to deal with any violation in accordance with the Securities and Exchange Board of India Act, 1992 (“SEBI Act”).

Section 15G of the SEBI Act prescribes a penalty of not less than Rupees Ten lakh, extending up to Rupees Twenty-five crore or three times the profit made from the insider trading activity, whichever is higher.

Deeksha Singh is part of the faculty on


With new proposals on related party transactions, India will turn back on corporate governance reform

DeekshaSinghThe Companies Act, 2013 (“Act”), the statute that transformed India’s six-decade-old company law and containing provisions geared towards a stronger corporate governance regime, was almost unanimously welcomed. Most of its provisions were notified last year. Earlier this month however, even before all the provisions of the Act could be notified, the Union Cabinet, announced through a press release, its approval for the introduction of amendments to this Act. Some of the proposals in the Companies (Amendment) Bill, 2014 (“Amendment Bill”), if they end up becoming law, will dilute the impact of India’s corporate governance reforms.

The press release lists the proposed amendments along with a rationale and they are categorised below.

Proposals that will increase the ease of doing business

1. Omitting the requirement for minimum paid up share capital and consequential changes.

2. Making a common seal optional and consequential changes for the authorisation for the execution of documents.

3. Empowering the Audit Committee to give omnibus approvals for related party transactions on an annual basis. (This amendment was made to align the provision with SEBI policy and to increase the ease of doing business.)

Proposals to meet corporate demand

1. Prohibiting public inspection of Board resolutions filed in the Registry.

2. Rectifying the requirement of transferAPCCLP_CompanyLaw-Bannerring equity shares for which unclaimed or unpaid dividend has been transferred to the IEPF even though subsequent dividend(s) has been claimed.

3. Replacing ‘special resolution’ with ‘ordinary resolution’ for the approval of related party transactions by non-related shareholders. (The specific rationale provided here is that this amendment is to meet the problems faced by large stakeholders who are related parties.)

4. Exempt related party transactions between holding companies and wholly owned subsidiaries from the requirement of approval of non-related shareholders.

Proposals to address errors

1. Prescribing specific punishment for deposits accepted under the new Act.

2. Including provision for writing off past losses or depreciation before declaring dividend for the year.

3. Exemption under Section 185 (Loans to Directors) provided for loans to wholly owned subsidiaries and guarantees or securities on loans taken from banks by subsidiaries.

4. Winding up cases to be heard by a two-member bench instead of a three-member Bench.

Other proposals

1. Enabling provisions to prescribe thresholds beyond which fraud shall be reported to the Central Government (below the threshold, it will be reported to the Audit Committee). Disclosures for the latter category are also to be made in the Board’s Report. (This amendment is being introduced as a result of demand from auditors.)

2. Bail restrictions to apply only for offence relating to fraud under Section 447.

3. Special Courts to try only offences carrying imprisonment of two years or more. (This amendment is being made to allow magistrates to try minor violations.)

It appears that the BJP government is demonstrating its adherence with its ‘development’ manifesto. The amendments ostensibly made “for ease of doing business” and “to meet corporate demand” are probably a response to the lobbying that the corporate sector commenced shortly after the Act was notified.

Proposals dilute regime governing related party transactions

Some of the proposals however, may have the effect of reversing the positive steps towards sound corporate governance that the Act had introduced. One such proposal is that of diluting the requirement for a special resolution of disinterested shareholders for the approval of material related party transactions (“RPTs”). The amendment proposes to change this to only an ordinary resolution. A second proposal in relation to RPTs proposes to exclude RPTs between holding companies and wholly owned subsidiaries from the requirement of disinterested shareholder approval.

The provisions relating to the regulation of RPTs were key corporate governance reforms introduced by the Act. If these proposals become law, they will dilute the impact of these reforms.

The Amendment Bill is an opportunity for the government to address some errors and essential requirements. While evaluating these proposals, it is crucial that the interests of all stakeholders, large and small, and indeed, the principles of sound corporate governance are given as much importance by our legislators as “corporate demand” and “ease of doing business”.

Deeksha Singh is part of the faculty on


Five tips to help you negotiate an M&A transaction like a boss

Drafting_for_Business_Deepa_Mookerjee.jpgThinking about negotiations, we may picture lawyers from opposite sides meeting in a conference room. Negotiations however, can take place over the phone or even through email. While most ‘big-ticket’ M&A transactions will comprise at least one meeting where the parties and lawyers are physically present to discuss all the major issues, minor issues can always be discussed through email or over a phone call. Remember, after having studied how to conduct an effective due diligence exercise and draft a comprehensive report, we are now moving ahead in the timeline of an M&A transaction. Actually, as you will see below, it often happens at the same time as the due-diligence.

Consider this scenario. Care Insurance Limited, a foreign insurance company, is investing in 26% of the equity share capital of Happy Life Insurance Limited, an Indian insurance company, and both companies have entered into a memorandum of understanding (a preliminary document about which we have already learnt), quite a few issues remain open. Care Insurance has two options. It can (a) wait to see the results of the due diligence exercise and then commence negotiations; or (b) if it is reasonably sure about its intention to invest, it can commence negotiations while the due diligence exercise is going on and then decide on any issues that may arise from the due diligence. More often that not, parties chose the second option unless they expect to see major red flags after the due diligence.

M&A negotiations can start in one of two ways — either one of the parties will circulate a first draft of the definitive documentation that can then be negotiated at a meeting or the parties will circulate a list of major negotiation points, which once decided, will then be inserted into definitive documentation. The choice of process is entirely up to the parties.

NegotiationInProgressRemember that a negotiation process is very sensitive and delicate as parties (sometimes with completely opposing positions), need to arrive at a mutually acceptable solution. Your job as a lawyer is to facilitate the closing of a deal. Here are five points you should keep in mind while preparing for a negotiation. Some of these may seem pretty obvious but after several negotiations, you will realise that even the smallest issue can make a difference.

1. Think about what to negotiate

Always sit with your clients to prepare a comprehensive list of issues that you would like to negotiate, before any meeting with the opposing counsel. Unless your clients would like to keep their position confidential till time the negotiation commences, it is best to set out their positions on these issues and circulate it to the other side. At times, the opposing counsel will also set out their responses to the issues you have circulated. The result is that before the negotiation commences, you will have a document that lists the major negotiating points and the views of both sides on each. This will help structure the discussion as the parties will be focused on the issues at hand. It will also give each side some time to consider the other party’s position before the negotiation commences, often aiding in a smoother negotiating process.

2. Be on the same page as your client

It is best to have a few meetings with your client (whether over the phone or in person) before your meeting with the opposing counsel. You should know how your client would like to see each individual issue resolved. Make sure that you have discussed possible outcomes with your clients and that you have taken them through both the best and the worst-case scenarios. Think about how the issues might relate to each other—for instance, is there some issue your client might be willing to concede in order to succeed in another aspect of the case? Finally, and importantly, make sure that you have determined—in consultation with your client—your ‘bottom line’, that is the point beyond which you cannot concede in a negotiation. If for example, Happy Life believes that Care Insurance must at least invest Rupees One Hundred crore for purchasing 26% shares in the company, then Rupees One Hundred crore is the bottom line. You cannot go below this number in your negotiations.

3. Know the transaction

APCCLP_CompanyLaw-BannerKnow the contours of the transaction and the several issues that can arise. Be aware of the law and the manner in which it relates to the transaction. This will ensure that you never agree to anything that is illegal (due to your ignorance of the law) which you will have to go back on later. For instance, you should be aware that the maximum permissible limit of foreign investment in any insurance company is 26%. Also, be aware of the manner in which the Foreign Investment Promotion Board allows a company to make this investment. Is investment allowed by way of preference shares or only equity shares? How can a foreign partner exit the company? Is there any guidance on the number of directors that can be appointed by a foreign partner? You should have answers to all these questions before you start negotiations.

4. Keep copies of all supporting documents ready

Make sure that you have enough copies of all supporting documentation (emails, preliminary documents, term sheet, reports and the like) that you might need before you enter into a negotiation. Keep additional copies in case anyone needs it. It is always best to have more copies so the negotiation does not need to be halted for something as trivial as taking printouts or photocopies. Also, make sure you have enough stationery – pens, papers, and notepads — for all participants in the negotiation.

5. Plan the conference

Make sure you have a comfortable environment for the negotiation. It should take place in a private room, such as a conference or meeting room. If possible, you can provide a smaller, private room for the other side to go to if they need to discuss anything in private during the course of the negotiation. This is typically called a break out room.

Ensure that facilities such as printers and photocopying machines are available through the duration of the conference. Finally, keep in mind that refreshments such as water, juice, lunch, and dinner should be provided to all the parties with minimal fuss so that they can be focused on the discussion rather than deal with ancillary issues.

Remember planning the meeting is as important as your conduct in negotiations. Good planning leads to an effective negotiation while incomplete planning will result in a bumpy negotiation process.

In my next post, I will discuss the manner in which you should conduct yourself at negotiations and the steps you should take to conclude your negotiation successfully.

(Deepa Mookerjee is part of the faculty on


Learn to structure and communicate a good due diligence report

Drafting_for_Business_Deepa_Mookerjee.jpgIn my last post here, I listed out some points that are important for a due diligence exercise. Completing the investigation (or the due diligence) however is just half the job. The latter half – often more confusing – is to organise all the information you have collected in a structured manner and communicate it effectively to your client.

Before starting to draft, determine the type of due diligence report your client wants. Typically, though there is no formal classification, there are two types of due diligence reports.

A comprehensive due diligence report

You will come across this type more frequently. Many pages long, often going into hundreds of pages, it will contain all the information that you have found from your investigations about the company. It is usually divided into many chapters, each containing information about a specific part of the company.

Generally the chapters include:

Corporate information: This chapter contains details about all corporate matters related to the target company, including its date of incorporation, number of directors, provisions in the articles of association, corporate compliances, and key decisions of the board and the shareholders.

– Litigation: This chapter lays out the details of all the litigation pending against, and filed by, the target company and their impact on the transaction, if such litigation is decided against the target company.

– Material agreements: Here, all the material agreements that a company has with its suppliers, consumers, and retailers, are reviewed to understand the important terms of such agreements, and determine whether there are any particular clauses that will hinder the transaction.

– Human resources: Here, a broad overview is provided of the employee structure, the key employees, their terms of employment, and conditions of their contracts.

– Financial information or indebtedness: In this chapter, all information about loans or financial indebtedness of the company is reviewed, and key issues such as requirement of consents from lenders, and restrictions on transfer of shares or assets, are highlighted.

– Compliances: In this chapter, there is a detailed investigation into the registration and licenses required under law to carry on the business of the company. Information regarding all statutory compliances is found in this chapter.

– Property: Information about all property (movable and immovable), whether owned or leased by the company, and their terms and conditions, is reviewed and outlined in this chapter.

– Intellectual property law issues: This is important if the target company has registered trademarks, copyrights, or patents. All documents in relation to their registration, ownership, or assignment are analysed, to examine any restrictions present on such intellectual property rights.

– Environmental law issues: If the target company is a manufacturing, construction, or engineering company, acquirers ensure that the company is in compliance with all environmental statutes in India and does not violate any pollution standards that have been prescribed.

– Insurance law issues: This chapter outlines the insurance policies taken by the target company, to provide the acquirer with a general idea of the protection available to the target company.

Since such a report runs into many pages, a client often asks for a separate document listing key issues to accompany this report. The list of key issues is a three-or-four-page document (maybe more depending on the transaction) which only lists out the problem areas of the company and provides concrete suggestions on how to solve these problems. Remember that the client will always want a solution to the problems. It is not enough to only identify the problems in the company. As a lawyer it is your duty to provide a solution. Therefore, while drafting, take some time out to think clearly about the manner in which a particular problem can be solved, and then specify that.

An “exceptions only” due diligence reportAPCCLP_CompanyLaw-Banner

Here, a lawyer is only supposed to list out the problem areas or issues with the company. The due diligence report will have language to the effect that “everything is in order with the company except the following…”. This is a report where the client assumes that all the items are in order except those listed in the report. The only problems with the company or its operations are those identified in the report. In other words, while drafting, you will only list out the problems with the company that you have investigated. You will not spend your time stating facts about the company that are in order.

In a comprehensive due diligence report, you will provide the client with all the facts (whether they are in order or not). You will obviously identify problem areas specifically but provide a complete picture as well. In an “exceptions only” report, the client will assume everything is in order except those issues that you have mentioned. Reports like this are becoming common and clients often ask for such reports as they are more concise and much easier to plough through.

Obviously the manner in which you will draft will depend upon the type of report that your client asking for. However, there are some basic drafting points to keep in mind for any report. See the image below.

DraftingaDueDiligenceReport_DosAndDon'tsKeep these points in mind while drafting your report. While some of these seem very simple and obvious, browsing through it before starting to draft will always help refresh your memory and hold you in good stead in your career as a commercial lawyer.

(Deepa Mookerjee is part of the faculty on


Six tips for an effective due diligence process

Drafting_for_Business_Deepa_Mookerjee.jpgEven though Ray Limited has agreed in principle to acquire 30% shares in Whirl Limited and has signed a memorandum of understanding to this effect; it does not have enough information about that company. For instance, it does not know whether and to extent the company is in debt, how its business is doing, and who its main customers are. Obviously, just as you will not buy a car or a home theatre without a thorough investigation of its benefits, Ray Limited will never purchase shares in Whirl Limited without having complete knowledge about that company. Ray Limited will only invest in Whirl Limited once it carries out a thorough investigation of Whirl Limited. Such an investigation, called a ‘due diligence’ process, helps an investor carry out a cost-benefit analysis of whether the investment is beneficial. During this process, an investor investigates the financial, commercial, and litigation-related details and contractual and other information about the target company.

Such investigations can be of different types. They include:

Commercial due diligence: This consists of a review of the industry, market, and business model of the target company;

– Reputational due diligence: This includes a review of the credit worthiness and reputation of the target company;

Financial due diligence: This includes a review of the tax, financial position, policies, and internal controls of a target company; and

Legal due diligence: This is usually very broad in nature, and consists of a review of all relevant documentation and material contracts. This due diligence process, which is the focus of this post, aims to understand the business and identify potential legal issues that can impede the transaction or affect the transaction value.

Requisition list

As a lawyer carrying out a legal due diligence, the first step is to send to the target company, a questionnaire or list of the documents you require. This list is typically called a requisition list or a due diligence checklist. It helps the other side of the transaction organise documents in the manner you want and ensure that all the documents you require are provided to you. In the absence of such a list, confusion is likely to arise about the nature of documentation required.

APCCLP_CompanyLaw-BannerThis information is provided by the target company in a data room, set up for the purpose of the diligence. Such a data room is either a physical data room or an online data room, which is becoming more prevalent these days. Depending upon the nature of the deal and the extent of confidentiality required for the documents, the target company can grant limited access to the advisors of the acquirers or permit them to examine the records, contracts, and information about the company in person (in a physical data room) or download or edit them (in an online data room).

You will always have to comply with the directions of the target company in relation to handling sensitive information. For instance, you may be asked to not make copies of any documents. You will have to strictly comply with that direction.

While carrying out this investigation, bear in the mind the following:

1. Remember, what you are doing can make or break a deal.

You are the one who has access to all the company’s records and therefore, you have a responsibility to provide a complete and true picture of the company you are investigating. Your client will depend on your report to make a final decision. Never cut corners while investigating. Ensure that all the information is made available to you. If you face a problem accessing any information about the target company (which you feel is vital), let your client know that your investigation will be incomplete unless the information is provided to you.

2. Never assume any fact.

Always ask for documents or written evidence to confirm any statement made by the company. For instance, if a company says it has paid off a loan of Rupees 10 crore in the last two months, ask for written evidence (such as a letter or undertaking from the bank) stating that the loan has in fact ben repaid. If you don’t get what you have asked for in the beginning – ask again.

3. Never forget the nature of the transaction.

The type of documents you will ask for depends on the type of transaction. For instance, if you are only going to buy a specific part of the business, ask only for the documents relevant to that part. If you are acquiring the whole company – you need documents pertaining to the whole company.

4. Always be polite and courteous to those who are providing you the documents.

A Business Men Climbing a Pile of Papers
It can often seem like this but make sure you retain your cool during a due diligence process.

Remember, the documents will often be provided to you by employees or company secretaries who have little or no background to the deal and may not know the reason why the document may be important to your investigation. Patience is key to a successful due diligence investigation.

5. Where you can, make copies of documents.

Always keep copies of all documents you have looked at (if you are permitted to photocopy documents). If not, make detailed notes of every document. This will be helpful while preparing the report as you can look at your notes to refresh your memory. Remember, once the target company has provided some information, it is unlikely to provide it again. So, your notes will form the basis of the report and your conclusions regarding the deal.

6. Be efficient.

Almost all due diligence investigations are carried out within a limited time period. Parties are eager to close the deal and there is immense pressure on lawyers to carry out a diligence efficiently and effectively. While actions such as sending a requisition list will help save time, never hurry up the investigation and ignore documents just to complete the process on time. If necessary, ask your client for more time after providing a detailed explanation about why you need more time.

After this process is complete, as a lawyer you will be asked to prepare a due diligence report setting out details about the investigation and your conclusion about the legal issues in the deal. I will discuss the important points to keep in mind while drafting the due diligence report in my next blog.

(Deepa Mookerjee is part of the faculty on