Defining Duty: Extent of Liability of a Compliance Officer under Insider Trading Regulations

– Darshan Rao, Executive | corplaw@vinodkothari.com

1. Introduction

The position of a compliance officer is a reflection of challenges. As much as the individual holding this position enjoys reputation and superintendence, there is a constant expectation from regulatory authorities of ensuring compliance and active enforcement of the law. In the context of PIT regulations, SEBI does not expressly specify the extent of a Compliance Officer’s role(hereinafter referred to as CO) in supervising a particular compliance; however, various adjudication orders throw light on the expectations from CO. In recent cases, the regulatory watchdog has held the CO, amongst others, liable for lapses in complying with the PIT regulations, whereas in some cases, it has exonerated the CO from any liability imposed by default, owing to its superlative position in the company. The article delves into the nuances of the role of a CO, aiming to propose a clear, definitive line of duty to be observed and appreciated by the SEBI during instances of violation of this law.

2. Identifying a CO- SEBI (PIT) Regulations 2015

Reg 2(1)(c) of the SEBI (PIT) Regulations defines a Compliance Officer as:
1. Any senior officer, designated so and reporting to the board of directors
2. A financially literate person capable of deciding compliance needs.
3. A person responsible for compliance with policies, procedures, maintenance of records, and monitoring adherence to the rules for the preservation of:

Unpublished price-sensitive information (hereinafter referred to as UPSI)
Monitoring of trades, and
The implementation of the codes specified in these regulations is under the supervision of the board of directors of the listed company.

It is to be noted that the definition gives way for any senior officer to be a compliance officer to perform obligations^[1] stated in the following segment. The SEBI had also noted in a matter that the interim company secretary of a company who has not been appointed as the compliance officer under PIT during the UPSI period cannot be forthwith held liable.^[2] The above duties (monitoring, implementation, maintenance, etc) are, though explanatory of the role of a compliance officer, not definitive or fenced in form and substance. The SAT held in a case that a CO cannot be blamed for disclosures under the above regulation, of board-approved misstatements.^[3] Relevant extracts are given below:

“The Compliance Officer works under the direction of the Board of Directors of the Company. It was not open to the Compliance Officer to comply with Clause 36 of the Listing Agreement. At the end of the day, the Compliance Officer is only an employee of the Company and works on the dictates and directions of the management of the Company. Thus, when the entire management is being penalised, it was not open to the AO to also book the Compliance Officer for the said fault.”

Now this brings us to the question as to the actual duties and obligations of a CO, and its viable extent to avoid stretched expectations. There cannot be a straight-jacket formula, as this depends on the nature of the violation of a particular category of regulations under SEBI PIT.

3. Responsibilities of a CO – SEBI (PIT) Regulations 2015

Before proceeding to the liabilities of a CO, it is important to delineate the main obligations of a CO as per SEBI (PIT) Regulations. These are given below:

Every listed company, intermediary and other persons formulating a code of conduct shall identify and designate a compliance officer to administer the code of conduct and other requirements under these regulations [Reg 9(3)].
The CO must review the trading plans submitted by designated persons. For doing so, he can ask them to declare that he does not have UPSI or that he must ensure that the UPSI in his possession becomes generally available before he commences his trades [Reg 9(3)].
The CO shall report to the board and shall provide reports to the Chairman of the Audit Committee, or to the Chairman of the board at such frequency stipulated by the board, being not less than once a year [Reg 9(3)].
All information shall be managed within the organisation on a need-to-know basis, and no UPSI shall be conveyed to any person except in furtherance of legal duties, subject to the Chinese wall procedures [Reg 9(3)].
When the trading window is open, trading by designated persons shall be subject to pre-clearance by the compliance officer if the value of the proposed trades is above such thresholds [Reg 9(3)].
The timing for re-opening of the trading window shall be determined by the CO, upon considering several factors, including the UPSI becoming generally available and being capable of assimilation by the market, which shall not be earlier than forty-eight hours after it becomes generally available [Reg 9(3)].
Before approving any trades, the compliance officer shall seek declarations to the effect that the applicant for pre-clearance is not in possession of any UPSI. He shall also have regard to whether such a declaration is capable of being inaccurate. The compliance officer shall confidentially keep a list of certain securities as a “restricted list”, which shall be the basis for reviewing applications for pre-clearance of trades [Reg 9(3)].

These are some of the duties specified in the Regulations. However, the extent of liability of the CO arising from the aforesaid duties requires determination.

4. Potential liabilities of CO:

To determine the extent of obligations of a CO with respect to disclosures, records, or any compliance, there is a need to segregate the duties of a CO into specific categories crafted according to the several aspects to be considered while ensuring adherence to the PIT regulations. In this direction, an effort has been made below:

Closure of Trading window:

A CO cannot be held responsible for not closing the window for certain traders, if the UPSI was not disclosed by the designated person or if the person executed a trade much before the UPSI becomes generally available, in contravention of the trading plans approved or if the disclosure was concealed inadvertently by the board^[4].

A CO can also not be held liable if an insider trades in the securities of the company with UPSI, without obtaining pre-clearance from him, even after asking the person to disclose UPSI. He cannot claim that he did not close the trading window on the grounds of lack of awareness of a demand notice received from an operational creditor, which was the start date of UPSI, upon being disclosed to the stock exchange.^[5]

So, it is important to understand that a Compliance Officer is not expected to possess perfect foresight, but to exercise prudent diligence. When the trading window is closed in good faith, established procedures are adhered to, and no proof of negligence or systemic failure exists, regulatory liability cannot be imposed on a CO merely on the basis of retrospective evaluation of his inherent duty^[6]. He must tend to certain nuances (such as whether the issue of ESOPs is permissible during the window closure)^[7], and employ the best professional judgment to red-circle information as UPSI to ensure effective closure of the trading window without breaches.^[8]

Maintenance of structured digital database (SDD):

A CO can be held liable for not maintaining SDD as per Annexure 9 of the guidance note on insider trading. However, the SDD must be “real-time and tamper-proof”. The CO would not be held liable if no particular system/controls existed, such as an audit trail mechanism to secure the SDD and prevent leaks. However, citing delay in procurement of software, accidental omissions^[9] or the lack of manpower to scrutinise bulky entries of transactions^[10] cannot be regarded as valid arguments by a CO.

It is also pertinent that the CO of a listed company adheres to the standard operating procedure for filing the SDD certificate with the stock exchange within a particular deadline. Failure to do so shall attract the following actions by the exchange within 30 days from the due date of filing the SDD certificate:
a. Display the name of the company as “non-compliant with SDD” and the name of the compliance officer on the SE website;
b. No new listing approvals will be granted (except for bonus issue and stock split); among other actions.^[11]

Verifying documents given by the Board:

The SAT has held in the appellate order of V Shanker vs SEBI, taking reference from the case of Prakash Kanungo, that compliance officers are not responsible for re-auditing board-approved documents related to any information on securities, transactions, etc, to test their financial literacy^[12]. As seen in the definition, a CO shall work under the supervision of the board and cannot question the decisions of the board. Ergo, he cannot be held liable for making invalid, board-approved disclosures per Reg 7 of the regulations.

Trading by designated persons: Granting of Pre-Clearance and Contra trade restrictions

Pre-clearance becomes a mandatory action in cases where a trading plan has not been submitted/approved by him. The CO must ensure that no designated person executes a trade after expiry of 7 days from the date of granting pre-clearance ^[13] and must consider the possibility that the declaration given by the person may turn inaccurate.

Prima facie, it is important that the CO can effectively assess and discern a piece of information as UPSI, and the possibility of traders possessing UPSI, before giving a nod. The SEBI has held that a CO is expected to comprehend that the materiality of an event lies not only in its price tag but in its ability to shape market perception. He can be held liable if he limits his view to on-record numerical data, and not the quantum of the event.^[14] For instance, the knowledge related to setting up a branch in a higher strategic area amounts to UPSI, and if clearance was granted to those in possession thereof, the CO will be penalised for lack of diligence.^[15] Furthermore, his inaction is tagged as dereliction of duty when he couldn’t foresee a contra trade by a person who was granted pre-clearance for “dealing in the shares of the company”, on grounds of being “occupied with work”.^[16]

However, a CO cannot be held liable for a bona fide lack of knowledge of the exposure of a Designated person to UPSI on the very date of granting pre-clearance to that person. In such a case, the CO cannot be held responsible for any trade executed by such a person while in possession of UPSI ^[17], but compelling evidence must be furnished by the CO to back his claim of genuine unawareness.

Finally, it is the core duty of the CO to promptly inform the same to the stock exchange(s) where the concerned securities are traded, in case any violation of Regulations is observed^[18]. The CO can take assistance from the chief investor relations officer (CIRO) if it is the company’s discretion to designate two separate persons as CIRO and CO, respectively, for meeting specified responsibilities as to the dissemination of information or disclosure of UPSI^[19].

5. Conclusion

A compliance officer is designated as a key managerial person. His role is not one of flawless foresight but of demonstrable diligence. As underscored in Rajendra Kumar Dabriwala v. SEBI^[20], the responsibility for compliance must not be burdened on a single individual—it must be embedded within the organisational fabric in the backdrop of PIT regulations. To that end, building a resilient compliance ecosystem can enable a CO to define its limitations effectively while ensuring that inherent obligations are fulfilled with efficiency. This requires adopting formalised Standard Operating Procedures (SOPs), automated monitoring tools, structured checklists^[21] for promoters, directors, and intermediaries to map recurring corporate events, and AI-assisted detection of UPSI, among other measures.

^[1]https://www.sebi.gov.in/enforcement/informal-guidance/oct-2015/informal-guidance-in-the-matter-of-mindtree-ltd-regarding-sebi-prohibition-of-insider-trading-regulations-2015_31580.html

^[2]https://www.casemine.com/judgement/in/60226eb4342cca1da5046e4e

^[3]https://taxguru.in/wp-content/uploads/2019/09/New-Delhi-Television-Limited-Vs-SEBI-SAT-Mumbai.pdf?utm

^[4]https://www.sebi.gov.in/enforcement/orders/mar-2024/adjudication-order-in-the-matter-of-radico-khaitan-limited_82427.htmlappellate ?utm_

^[5]https://www.sebi.gov.in/enforcement/orders/jul-2023/adjudication-order-in-the-matter-of-insider-trading-activities-in-the-scrip-of-shilpi-cable-technologies-ltd-_73848.htmisl

^[6]https://www.sebi.gov.in/enforcement/orders/jun-2019/adjudicathe ,tion-order-in-respect-of-kemrock-industries-and-exports-limited-kalpesh-mahedrabhai-patel-navin-r-patel-mahendra-r-patel-and-n-k-jain-in-the-matter-of-kemrock-industries-and-exports-limited-_43396.html

^[7] Yes it is permissible. Refer Guidance from SEBI (29th April, 2021)

https://www.icsi.edu/media/webmodules/GN7_Guidance_Note_on_Prevention_of_Insider_Trading.pdf

^[8]https://www.livelaw.in/law-firms/law-firm-articles-/insider-trading-sebi-compliance-corporate-governance-upsi-market-integrity-securities-law-pit-regulations-compliance-abilitypre-clearanceofficer-key-managerial-personnel-sebi-corporate-professionals-advisers-advocates-lodr-293914

^[9] Refer https://www.moneycontrol.com/news/business/markets/radico-khaitans-former-legal-head-and-compliance-officer-fined-rs-5-lakh-for-violating-insider-trading-norms-12497061.html

^[10]https://www.taxmann.com/research/company-and-sebi/top-story/105010000000024040/the-compliance-officers-role-upholding-the-code-of-conduct%C2%A0under%C2%A0insider-trading-norms-experts-opinion

^[11] https://vinodkothari.com/wp-content/uploads/2024/10/Snippet-_-SOP-on-SDD-compliance.pptx.pdf