Section 195: Prohibition on Insider Trading of Securities

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Section 195 of Companies Act, 2013 was part of chapter XII that deals with meetings and powers of boards, primarily laid down the provision with respect to prohibition on insider trading of securities. This section was omitted by Companies (Amendment) Act, 2017, as now the concept of insider trading is regulated by SEBI (Prohibition on Insider Trading) Regulation, 2015. It was in effect for a very short time. This analysis will give a brief about this section before it was omitted.

Purpose of this Section 195

This was a very important section of the act, 2013. It was quite brief and supplemented the provisions of SEBI (Prohibition on Insider Trading) Regulation, 1992. This section before its omission, laid down following:

  • The section: (1) Prohibited insider trading of securities (2) prohibited any person including any director or KMP of a company to enter insider trading.
  • This section defined “insider trading” and “price sensitive information”. The former is defined as an act of subscribing, buying, selling, dealing in any securities by any director or key managerial personnel or any other officer of a company either as principal or agent if such director or key managerial personnel or any other officer of the company is reasonably expected to have access to any non- public price sensitive information in respect of securities of company. The latter is defined as an act of counseling about, procuring or communicating directly or indirectly any non- public price sensitive information to any person.
  • Price sensitive information mentioned in this section is information about the company, which is material and if published would affect the price of the securities of the company.
  • On contravention, the person was to be punished with imprisonment for a term which could have extend to 5 years or with fine which should not have been less than Rs. 5 lakh but which could have extended to Rs. 25 crore or 3 times the amount of profits made from insider trading, whichever is higher, or with both.
  • However, conditions prescribed herein related to insider trading were not applicable to any communication in the ordinary course of business or profession or employment or under any law.

Situation Before Enactment of Section 195

There was no corresponding section under the act, 1956. Before the act of 2013, the insider trading of securities was prohibited and governed by SEBI (Prohibition of Insider Trading Regulations), 1992. This section was applicable to all companies i.e. even the unlisted companies, which do not go in line with the objective of insertion of this provision in the act, 2013. The definition of the term “price sensitive information” is the same as defined under the SEBI (Prohibition of Insider Trading Regulations), 1992, with the only exception that the “explanation” given under the definition in the said SEBI guidelines is not provided under the act, 2013.

Application of Section 195

This section has no present application; the SEBI regulation must be now adhered to by the company. Before its omission, every director and Key managerial personnel of the company had to adhere to this section’s requirements on insider trading.

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This section has not been amended but was omitted by Companies (Amendment) Act, 2017. This section no longer forms part of the act, 2013. 

Concluding Summary

This section was important but is held that it was creating practical problems and challenges in context of private limited companies and since listed companies are anyway subjected to SEBI regulation and other securities regimes which deal with these aspects, it was considered that these sections are not necessary. This was a much-needed step as there were a lot of conflicts especially with respect to defences under the act, 2013 and the SEBI regulation for insider trading, 2015, which was creating confusion and chaos in the market. This analysis gives a brief understanding of the section as it was before its omission from the act, 2013.

Also read, Insolvency Laws and its Applicability in India: Concept of Insolvency Laws in India.