Trading Window Breach by the Managing Director’s Spouse

The proposed acquisition is unpublished price sensitive information from the time the term sheet was circulated on 25 July 2024, because it is information that is not generally available and is likely to materially affect the price of the securities. The board approval on 5 August and the announcement on 6 August confirm its price sensitivity.

The MD is an insider. The spouse is a connected person and an immediate relative. The spouse’s purchase on 2 August occurred while the trading window was closed and while the acquisition was UPSI. Under Regulation 4(1), no insider may trade in securities while in possession of UPSI. The spouse’s independence claim does not answer the issue if the information was communicated or if the trade was otherwise connected to the MD.

The MD’s failure to disclose the trade is a separate violation. Under Regulation 7(2), directors and designated persons must disclose dealings above the prescribed threshold; 20,000 shares at ₹410 is ₹82 lakh, well above ₹10 lakh. The company’s code of conduct may also require disclosure by immediate relatives.

The circulation of the term sheet to an executive who is the spouse’s brother raises a tipping issue. If he communicated UPSI to his sister, Regulation 3 prohibits communication of UPSI except in furtherance of legitimate duties.

The CS should not treat the matter as a private family issue. The CS should immediately place the facts before the audit committee and the board, preserve the trade records, the term sheet circulation list, the trading-window circular and the MD’s disclosure records, and recommend an internal investigation.

The company should:

• Require the MD and the spouse to provide disclosures under the PIT Regulations and the code of conduct.
• Determine whether the spouse’s trade was made on the basis of UPSI or after a tip from the brother-in-law.
• Consider reporting the prima facie violation to SEBI after legal advice; concealment by the company can worsen the regulatory position.
• Determine whether the incident is a material event under Regulation 30; if the acquisition or the breach materially affects the company, disclose promptly and generally within 24 hours.
• Review whether the trading window closure, pre-clearance and restricted-access controls were followed.

The CS should record dissent if the board decides to suppress the matter. The audit committee should oversee the investigation, and the company should avoid any retaliation against employees who report the breach.

The brother-in-law is an insider if he received the term sheet in the course of his employment or is a designated person under the code. Regulation 3 prohibits an insider from communicating UPSI to any person, except where the communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations. Leaking the term sheet to his sister would be tipping. He would be liable for communication of UPSI, and the spouse would be liable for trading while in possession of UPSI.

The controls that failed include:

• The restricted circulation list was not limited to persons who needed the term sheet.
• The trading window was closed, but the company did not monitor trades by immediate relatives or enforce pre-clearance.
• The code of conduct did not effectively address sharing of UPSI with relatives.
• There was no prompt escalation of the spouse’s trade to the compliance officer.

The company should strengthen access controls, maintain a list of connected persons, require annual PIT training, monitor exceptions, and require designated persons to certify compliance by immediate relatives. The investigation should also consider whether the brother-in-law’s access should have been restricted until the term sheet was anonymised or limited.