Chinese Wall in the securities industries

Dear ,

It is a concept followed in Industry for better security

1. CHINESE WALL IN THE SECURITIES INDUSTRY
•CA. Manmohan Jindal
•Ex-Canara Bank,
•Registered Valuer in Security and
Financial Assets
•[email protected]
•8850385224

2. •Companiesandbusinessorganisationsusuallycompriseseveral
differentdepartments,nevertheless,theyareregardedasan
independententitybylaw.
•Thisincludesintermediariessuchassecuritiesfirmswhich,asa
commercialreality,needtoundertakecomprehensivebusiness
throughmultipledepartmentssoastoimprovetheirmarket
competitiveness.
•Thiscausesconflictsofinterest,andincaseoflistedcompaniesand
associatedorganisations,givesrisetoconcernsofinsidertrading.

3. •Indiansecuritiesregulationsprohibittheoffenceofinsidertrading,
whichiscommittedwhenapersonwho“possesses”unpublished
price-sensitiveinformation(“UPSI”)relatingtosecuritiesofapublic
listedcompanytradedinsecuritiesofsuchcompany.
•Thetriggerfortheprohibitionisthe“possession”,whichneednot
riseto‘use’oftheinformation.

4. •Thepolicyobjectiveforthismeasureistoensurethatsecurities
tradingoccursona“levelplayingfield”.
•Inotherwords,itseekstopreventaninsiderfrompossessingan
unfairadvantageoverpublicinvestorsarisingoutofthemere
possessionofUPSI,knowninthecontextofinsidertradingas
‘informationasymmetry’.

5. •TopreventthemisuseofinsidertradingIndiahastheSecuritiesand
ExchangeBoardofIndia(ProhibitionofInsiderTrading)Regulations,
2015(“InsiderTradingRegulations”)whichprovidecertaindefences
tothepresumptivechargeofinsidertrading.

6. •Theuseof“ChineseWalls”isanotherdefencethatisavailabletonon-
individualinsiders,whoseconstituentmembersmaypossessUPSI.
•Itrepresentsaself-enforcedinformationalbarrierconsistingof
systematic,asopposedtoad-hoc,proceduralandstructural
arrangementsdesignedtostemtheflowofinformationinsuch
organisations.

7. •InIndia,theSEBIprohibitedinsidertradingforthefirsttimein1992
undertheSEBI(ProhibitionofInsiderTrading)Regulations,1992.
•Originally,theseregulationsdidnotprovideforChineseWalls,either
asadefencetoinsidertradingorasameanstomanageUPSI.
•Regulation3Bwasintroducedbyanamendmentin2002,which
broughtintheChineseWalldefenceintothe1992Regulations.

8. •To establish this defence, Regulation 3B required an organisation to
prove:
•(i)thatthedecisiontoenterintothetransactionoragreementwas
takenonitsbehalfbypersonorpersonsotherthantheofficeror
employeeoftheorganisationthatpossessesUPSI;and
•(ii)thatthecompanyhasputinplacesuchsystemsandprocedures
whichdemarcatetheactivitiesofthecompanyinsuchawaythatthe
personwhoentersintotransactionsinsecuritiesonbehalfofthe
companycannothaveaccesstoinformation(includingUPSI)whichis
inpossessionofotherofficeroremployeeofthecompany;and

9. •(iii)ithadinoperationatthattime,arrangementsthatcould
reasonablybeexpectedtoensurethattheinformationwasnot
communicatedtothepersonorpersonswhomadethedecisionand
thatnoadvicewithrespecttothetransactionsoragreementwas
giventothatpersonoranyofthosepersonsbythatofficeror
employee;and
•(iv)factually,theinformationwasnotsocommunicatedandnosuch
advicewassogiven.

10. •UndertheInsiderTradingRegulations,theChineseWallsdefenceis
setforthinthefollowingwords:
•“(a)theindividualswhowereinpossessionofsuchunpublishedprice
sensitiveinformationweredifferentfromtheindividualstaking
tradingdecisionsandsuchdecision-makingindividualswerenotin
possessionofsuchunpublishedpricesensitiveinformationwhenthey
tookthedecisiontotrade;and

11. •(b)appropriateandadequatearrangementswereinplacetoensure
thattheseregulationsarenotviolatedandnounpublishedprice
sensitiveinformationwascommunicatedbytheindividuals
possessingtheinformationtotheindividualstakingtradingdecisions
andthereisnoevidenceofsucharrangementshavingbeen
breached”

12. •TheChineseWallsdefence,ismulti-tieredandshouldbeestablished
inthefollowingmanner:
•(i)itmustbeidentifiedifanyofthemembersofacorporateinsider
possessUPSI;
•(ii)thecorporateinsidershouldestablishthattheindividualsthat
tookthetradingdecisionweredifferentfromthememberswho
possessUPSI,identifiedinthefirststep;and
•thatappropriateandadequatearrangementswereinplaceto
ensurecompliancewiththeInsiderTradingRegulationsandthat,no
UPSIwascommunicatedbythepersonsindividualspossessingUPSI,
totheindividualswhotookthetradingdecision;and

13. •(iii)lastly,thereshouldbenoevidenceofsucharrangementshaving
beenbreached.
•Thiscannotbetreatedassomethingthattheinsidermustprove,asit
wouldrequireproofofanegative,particularly,whentheSEBIheavily
reliesoncircumstantialevidencesuchastelephonecalls,common
addresses,etc.,tosupportfindingsofviolationsofinsidertrading
regulation.

14. •Inviewoftheabove,thedefenceshouldbereadsuchthat
•oncethefirsttwostepshavebeenestablished,theSEBImustcarry
theburdentoprovethatthereisevidenceofabreachoftheChinese
Wallsbysuchinsider.
•Iftheinsidersatisfiesthefirsttwoconditions,andtheSEBIisunable
toprovethattheChineseWallsfailed,thedefencemuststand.

15. •Thanks
•CA. Manmohan Jindal
•Ex-Canara Bank,
•Registered Valuer in Security and Financial Assets
•[email protected]
•8850385224