BRIEF BACKGROUND

To ensure that the regulatory framework dealing with insider trading in India is further strengthened, SEBI had notified SEBI (Prohibition of Insider Trading) Regulations, 2015 [PTI Regulations] in place of an earlier Regulations.

The objective of PTI Regulations is prohibition of trading in the listed securities of a company based on its unpublished price sensitive information by those persons who are in the know of the internal workings of the company, known as “insiders”, and ensuring adequate disclosures in the market place of price sensitive information of the company and its securities.

To fulfill the objectives, among others, the concept of trading window norms has been provided in the code in respect of employees/connected persons {designated persons}/their immediate relatives, in the organization. The trading window is to be closed when designated persons can reasonably be expected to possess unpublished price sensitive information. No trading is permitted by such persons during the closure period.

It may be noted that, among others, financial results are unpublished price sensitive information which remains in that state, till they are approved by the audit committee and board of directors of a listed company and then intimated to the stock exchanges and published, thereby disclose these results in the market place constituting public domain.

Here we will discuss in brief the amended law of SEBI effective from 1st April 2019 with regard to trading window closure also referred to as “trading restriction period”.

 THE SPECIFIC LAW

[A] Clause 4 of the Schedule B of  SEBI (Prohibition of Insider Trading) Regulations, 2015   as  amended  {HIGHLIGHTED}, effective from April 01, 2019 reads as follows :

“4. Designated persons may execute trades subject to compliance with these regulations.  Towards this end, a notional trading window shall be used as an instrument of monitoring trading by the designated persons. The trading window shall be closed when the compliance officer determines that a designated person or class of designated persons can reasonably be expected to have possession of unpublished price sensitive information. Such closure shall be imposed in relation to such securities to which such unpublished price sensitive information relates.  Designated persons and their immediate relatives shall not trade in securities when the trading window is closed. 

Trading restriction period can be made applicable from the end of every quarter till 48 hours after the declaration of financial results. [AMENDMENT HIGHLIGHTED BY AUTHOR}

The gap between clearance of accounts by audit committee and board meeting should be as narrow as possible and preferably on the same day to avoid leakage of material information.” 

[B] National Stock Exchange [NSE], vide its letter dated 2nd April 2019 has issued a clarification in this regard in consultation with SEBI, inter alia, as follows:-

“4. As discussed with SEBI, this amendment has to be read in conjunction with the existing provision of Clause 4 of the Schedule B (wherein compliance officer determines that a designated person or class of designated persons can reasonably be expected to have possession of unpublished price sensitive information). In any case, the trading restriction period is required to commence not later than end of every quarter till 48 hours after the declaration of financial results. { Highlighted by NSE}

DISCUSSION

  • As can be seen from the highlighted portion of PTI Regulations, the obligation of a listed company to stipulate trading restriction period is that the company “can” make such period applicable from the end of every quarter till 48 hours after the declaration of financial results.  Hence due to the use of the word “can” here, it seems that there is an option to the company in this provision. It also seems that this type of option was not intended by SEBI.
  • Hence the clarification by NSE has come vide its letter dated 2nd April 2019, as mentioned above. Here the option denoted by use of the word “can” has been diluted and a listed company is now “required” to commence, the trading restriction period, not later than the end of every quarter till 48 hours after the declaration of financial results.
  • It appears that, with this clarification, the company is mandated to fix a trading restriction period as per amended provision. This will be understood from a practical example given below.
  • By way of an example:- during the quarter from 1st April 2019 to 30th June 2019, the listed company, which has fixed a date of audit committee and board of directors meetings for say, 7th May 2019, for approval/declaration of financial results, will stipulate  the trading restriction period from  25th April 2019  to  9th May 2019.
  • Therefore, the commencement of the trading restriction period on 25th April is well before the end of the quarter, i.e.  30th June 2019, as stipulated by the amendment.   And, fixing of 9th May 2019 will be the period of 48 hours after the conclusion of the board of directors and audit committee meetings on 7th May, also as per amended stipulation.
  • It may be noted that pursuant to SEBI {LODR} Regulations 2015, soon after the audit committee and board meetings, within statutory time, financial results as approved/ declared therein, will be intimated by a listed company to the stock exchanges, and published. This will, therefore, be the disclosure of the financial results in the market place constituting public domain and hence these results will cease to be unpublished price sensitive information.
  • It is pertinent to note that in the above example, the trading restriction period is permitted to be of a much larger period, say from 12th April to 9th There is flexibility.
  • For the next quarter from 1st July 2019 to 30th September 2019, a listed company shall do similar compliance, and, so on, for the subsequent quarters.

CONCLUSION

In the end, it may be said that SEBI has tried to do a commendable job through the amendments so that the menace of insider trading is further curbed, although the onus will always remain on a company and its officer/s to take action/s as per law in this regard.

Author Bio

Qualification: CS
Company: N/A
Location: NEW DELHI, New Delhi, IN
Member Since: 30 Jun 2018 | Total Posts: 30
Mr. Amitav Ganguly is a Law Graduate and qualified Company Secretary with more than three decades of rich experience in senior positions; company secretarial, corporate legal affairs, management and corporate governance; in different industry sectors like investment, manufacturing and real estate. View Full Profile

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2 Comments

  1. amitavganguly says:

    The example has been given on the basis of the new law of SEBI which has been clarified by NSE to make it very unambiguous .

  2. Rhea Singh says:

    Dear Sir, on what basis have you given that example? Can you please clarify what “end of the quarter” means and also how its different from the previous provision?

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