| Getting insider trading norms right |
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The new insider trading norms, which replaced the prohibition of insider trading norms of 1992, kicked in on May 15. These mandate every listed firm, registered intermediary, law firm and audit firm to have their own model code of conduct to prevent insider trading. The Securities and Exchange Board of India (Sebi) guidelines clearly state companies have to come out with specific customised codes of conduct, based on guiding principles provided by the regulator. The regulations stipulate a company draft a minimum standard and principle- based code of conduct and have fair disclosures to prevent insider trading by employees or the management. "It is a very important departure from the prevention of insider trading regulations of 1992. In the earlier regime, the regulator had defined the model conduct of conduct. Now, however, Sebi has defined minimum standards that need to be followed to regulate insider trading, as well as principles to be followed for fair disclosure of material information," says Lalit Kumar, partner, J Sagar Associates. This ensures companies have to follow the model code of conduct guidelines devised by them, against a tick- the- box approach earlier. "Unlike the previous insider trading regulatory regime wherein the vast majority of listed companies and market intermediaries would simply replicate the model code of conduct prescribed in the regulations, the new regulations require them to be more creative in drafting their own codes, while following certain basic standards and governance principles," says Tejesh Chitlangi, partner, IC Legal. But even after 15 days of the new norms kicking in, many listed firms and other entities are yet to have a code of conduct with the new insider trading regulations in place. While some claim ignorance of the fact that they need to have a company- specific code, others are waiting for contemporaries to start the process. "Out of ignorance or due to lack of deterrence in the absence of precedents wherein strict actions have been taken for violation of non- maintenance of such codes of conduct, the number of listed companies and market intermediaries that have already complied with the new requirements seems to be low," said Chitlangi. A consultant who interacts with companies on insider trading regulations pointed to the fact that companies largely in line with the new regulations might not want to revisit their code of conduct to prevent insider trading. Vaneesa Abhishek, advocate in the Bombay High Court, says, " As a good corporate governance practice, companies should revisit their code of conduct and tailor these according to the new requirements and profile of the company. This will help minimise the risk of individuals inadvertently indulging in insider trading." Some privy to the developments say companies are yet to realise the importance of complying with the new regulations and having a code of conduct in place. For instance, the recent order by the markets regulator against the Murugappa Group chief and three others on charges of insider trading was an ex- parte order — it didn't require all parties to be present. "The regulator is going to increase its enforcement action against cases of insider trading. It won't only attach assets equivalent to the trade, but also include penalties," said a source. At a recently concluded Sebi international advisory board meeting, it was sought the regulator step up enforcement on cases of insider trading. With stringent regulations in place and the regulator's intent to boost enforcement, it is imperative that companies tailor- make their codes of conduct. Companies could also consider roping in lawyers to brief employees on what construes as insider trade, as well as the disclosures needed to prevent such practices. The new insider trading regulations do not consider mutual funds as securities. However, the regulator will charge any purchase and sale of a security on prior knowledge that an asset management company intends to trade in the same security under front running, as part of mutual fund regulations. " To ascertain that the employee had no prior knowledge of the mutual fund's intended transactions, the compliance officer may take a declaration in this regard from the employee," the mutual fund regulations state. MUTUAL FUNDS TO BE CHARGED UNDER FRONT- RUNNING |A compliance officer has to be designated; he will report to the board of directors |The compliance officer will put in place policies and enforce these to preserve price- sensitive information |He will formulate and publish ( on the company's official website), a code of practices and procedures for fair disclosure of unpublished price- sensitive information |He will define all the relevant terms in conformation with new prohibition of insider trading norms; these terms include securities, insiders and unpublished price- sensitive information |The officer has to ensure the senior management reports transactions in securities SEBI'S INSIDER TRADING CODE OF CONDUCT CHECKLIST New Sebi guidelines seek customised codes of conduct, doing away with a tick- the- box approach In the earlier regime, the regulator had defined the model conduct of conduct. Now, Sebi has defined minimum standards that need to be followed to regulate insider trading |
| BRIEF CASE N M J ANTONY |
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Developers of housing projects with commercial complexes imbedded in them can claim deduction of 100 per cent of profits subject to certain conditions. The income tax authorities have been denying this benefit so far though several high courts had granted it to the builders. The tax authorities appealed against each of the high court judgment to the Supreme Court. In one sweep, the court has dismissed all the appeals and upheld the high court decisions in the judgment, CIT vs Sarkar Builders. The tax authorities denied the benefit arguing that they were not " housing projects" inasmuch as some commercial activity was also undertaken there, like shops, clinics, offices of lawyers and chartered accountants. The benefit of the judgment will go to builders who finished their projects on or after April 1, 2005, though the local authorities might have sanctioned them much earlier, and the construction started before that date. The relevant provision, section 80IB ( 10)( d) of the Income Tax Act, was amended prospectively on that date. The dispute was over a condition inserted in 2005 stipulating that the built- up area of commercial establishments in the housing projects would not exceed three per cent of the aggregate built- up area of the housing project or 5,000 sq feet, whichever was higher. The court ruled that the housing projects with commercial elements could claim the deductions prospectively. Claim of back- to- back contract rejected The contract between an authority and its contractor cannot be linked "back- to- back" with the subcontractors of the contractor, Supreme Court has stated in its arbitration judgment, Ircon International Ltd vs Vinay Heavy Equipment. In this case, Ircon was a successful tenderer for building roads in an industrial complex in Tamil Nadu. It sub- contracted two packages of work to Vinay firm. The latter did not complete its part, leading to two arbitration cases, Ircon wanted the authority to make the payment to it while the subcontractor wanted its payment from Ircon. The latter said it would pay the dues when it received payment from Ircon, arguing that it was a back- to- back contract. The arbitrator did not agree with it and gave the award in favour of the sub- contractor. He ruled that Ercon, was primarily liable to its sub- contractor, rejecting the argument of back- to- back liability. Ercon appealed to the Madras High Court, but both the single judge and the division bench dismissed its petition. Supreme Court affirmed the high court view starting that " in the absence of a covenant in the main contract to the contrary, the relationship between the employer and the main contractor on the one hand and between the sub- contractor and the main contractor on the other will be quite distinct and separate." Road victim can choose who will pay When a person suffers injuries in a road accident due to the combined negligence or wrong- doing of others, the victim can sue any one of the guilty persons and that person is bound to pay the full compensation. The victim can choose the person against whom he wants to make the claim, weighing that person's capacity to pay. This rule of torts was reiterated by Supreme Court last month in its judgment, Khenyei vs New India Assurance. This was a group of appeals by victims. In one typical case, the victim was injured in a collision between a bus, insured by New India, and a trailer truck. The liability for compensation was disputed by all the parties including the insurer. The judgment summed up the law on the subject thus: i) the owner, driver and insurer of one of the vehicles can be sued and it is not necessary to sue the owner, driver and insurer of both the vehicles. The claimant may implead the owner, driver and insurer of both the vehicles or anyone of them. ( ii) There cannot be apportionment of liability of the guilty persons. In case all of them are sued, the claims tribunal shall decide the issue. After satisfying the demand of the victim, the guilty persons can sue each other and recover their entitlements. Taxmen lose case against Lufthansa The Delhi High Court last week dismissed the appeal of the Director of Income Tax against Lufthansa Cargo India Ltd which had paid for technical services from a German firm. The firm wet- leased four jets and it was granted the licence by the DGCA to operate them on international routes only. The aircraft were not used by any other airline in India. Consequently, there were no facilities in India for their overhaul and repairs. However, according to DGCA directives various components and the aircraft themselves had to undergo periodic overhaul in workshops authorised for the purpose by the manufacturer as well as duly approved by the DGCA. The overhaul was done by another firm in Germany. The revenue authorities noticed that no tax was deducted at source on payments to the German unit though the payments were in the nature of " fees for technical services" defined in section 9( 1)( vii)( b) of the Income Tax Act. They rejected the firm's plea that the payments for repairs were incurred for earning income from sources outside India and therefore exempted. The tax tribunal and the high court ruled that the firm was right stating that " the operations were abroad, and the expenses towards maintenance and repairs payments were for the purpose of earning abroad."> Insurer to pay forwrong weatherdata The National Consumer Commission, last week, directed ICICI Lombard General Insurance Co to settle the claims of 73 farmers of Durg district of Chhattisgarh who had suffered wheat crop damage due to reliance on wrong weather data. They were covered by the Pilot Weather Based Crop Insurance Scheme. The insurance premium is paid in equal proportion by the central and state governments. The scheme was devised to protect farmers from the vagaries of the weather, especially the availability of the requisite moisture and ambient temperature, all through the agricultural operations from sowing to harvest. Under the scheme, ICICI is responsible for establishing and operating weather centres for monitoring of the temperature and rain parameters for the purposes of determination of loss. The farmers complained that the insurer gave them a " manipulated chart" relating to temperature and they suffered losses. The response of the company was scant, " except bland denials". It did not even explain the basis of calculations adopted by it for rejection of the claims of these farmers. So the commission directed the authorities to settle the claims within three months on the basis of the Indian Meteorological Department data of the relevant period. A weekly selection of key court orders |
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