Unlocking Transparency: Revolutionizing Insider Trading with a Structured Digital Database
In the ever-evolving landscape of financial markets, regulations play a pivotal role in maintaining transparency, fairness, and investor protection. Among these, the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”) introduced a transformative concept known as Structured Digital Database (“SDD”). This innovative framework aims to revolutionize the monitoring and regulation of insider trading while fortifying the legal framework to align with the evolving market dynamics. This blog takes a deep dive into the essence of a Structured Digital Database, delving into its significance and the transformative impact it wields within the financial ecosystem.
Dr. T.K. Viswanathan Committee’s Report on Fair Market Conduct for public comments succinctly justifies the need for such a digital database, “Once UPSI is shared for legitimate purposes, the company loses control over further use of that information by those who come into its possession. If such information is misused for insider trading, it becomes difficult to establish a connection between the company and the recipient of information. It would thus be prudent to have a physical and/or digital trail of information flows of such legitimately shared information. It would also be prudent to intimate the persons receiving the UPSI of their obligation towards preventing misuse of such information for insider trading, by way of an advance notice.”
What is SDD?
SDD refers to a digital database of unpublished price sensitive information (UPSI), shared internally or externally, with the intent of keeping track of persons in knowledge of the UPSI before it becomes public knowledge. SDD finds its legal basis from Regulation 3(5) and 3(6) of the PIT Regulations.
In October 2022, the Bombay Stock Exchange (BSE) issued a circular with detailed FAQs for ensuring compliance with SDD along with the revised format of SDD Compliance Certificate.
What Does an SDD Contain?
◉ The nature of the unpublished price-sensitive information
◉ The names of persons who have shared the information
◉ The names of persons with whom information is shared along with their Permanent Account Number (PAN) or any other identifier.
Who Should Maintain a Structured Digital Database?
Listed entities and those proposed to be listed, are required to maintain an SDD. Regulation 3(5) of the PIT Regulations mandates the board of directors or head(s) of the organization to ensure that an SDD is maintained. SDDs cannot be outsourced and are mandated to be maintained internally with adequate internal controls and checks, such as time stamping and audit trails to ensure non-tampering of such databases. The Board may authorize any other person internally to maintain the database but should ensure that the information of those who are maintaining the database also gets captured as they have access to UPSI.
Any intermediary or fiduciary including partners, collaborators, lenders, customers, suppliers, merchant bankers, legal advisors, auditors, insolvency professionals, advisors, or consultants are required to maintain a separate SDD internally, to record details of UPSI shared, the persons with whom such UPSI has been shared and the persons who shared such UPSI with the intermediary fiduciary / entity, complying with Regulation 9A(2)(d).
What Is the Use of a Structured Digital Database?
SDD is used to track individuals with whom UPSI or unpublished price-sensitive information has been exchanged. This database will serve as a deterrent to prevent people in possession of UPSI from exploiting the unpublished information to trade in securities for their own benefit. This database may also be used as evidence in any inquiry into potential insider trading violations.
How Long Should a Structured Digital Database Be Preserved?
After the relevant transactions have been completed, the SDD should be preserved for at least eight years. This is in line with the similar provision in SEBI (LODR) Regulations, 2015. If SEBI provides any information regarding an investigation or enforcement action, the relevant information in the SDD should also be preserved for an additional eight years, or until the completion of such proceedings.
What Are the Consequences of Not Maintaining a Structured Digital Database?
The filing of a Compliance Certificate by the Compliance Officer of a Listed Entity, which certifies the maintenance of SDD in their respective organizations, has been mandated by the stock exchanges, who would publish the names of non-compliant entities along with the names of their compliance officer, in the “get quote” page of the exchange website of the listed entity, until exchanges have satisfactorily verified that the company has completely complied.
Parting Thoughts
Structured Digital Databases have emerged as a transformative force within the regulatory landscape, redefining how insider trading is approached and managed. By leveraging technology, these databases amplify surveillance, detection, and deterrence mechanisms, fostering a financial environment characterized by fairness, transparency, and accountability. As SDD continues to evolve, its impact on the financial ecosystem is poised to be revolutionary, bolstering investor confidence and the integrity of the markets as a whole. As we move forward, embracing this innovation can herald a new era of regulatory oversight that is well-equipped to navigate the complexities of modern financial markets.