Understanding Provisions w.r.t, dealing of securities by promoters in the light of SEBI (Prohibition of Insider Trading Regulation) 2015

The objective of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”) is to prevent Insider Trading by prohibiting trading, communicating, counseling or procuring Unpublished Price Sensitive Information. Insider trading is an unethical practice by those in power and privy to certain unpublished price sensitive information relating to a company to profit at the expense of the general investors who do not have access to such information.

As per Sub- regulation 4 of Regulation 9 of the aforesaid regulation, promoters are included in the definition of “Designated Person”. Regulation 9 (4)- For the purpose of sub regulation (1) and (2), the board of directors or such other analogous authority shall in consultation with the compliance officer specify the designated persons to be covered by the code of conduct on the basis of their role and function in the organisation and the access that such role and function would provide to unpublished price sensitive information in addition to seniority and professional designation and shall include:-

  • Employees of such listed company, intermediary or fiduciary designated on the basis of their functional role or access to unpublished price sensitive information in the organization by their board of directors or analogous body;
  • Employees of material subsidiaries of such listed companies designated on the basis of their functional role or access to unpublished price sensitive information in the organization by their board of directors;
  • All promoters of listed companies and promoters who are individuals or investment companies for intermediaries or fiduciaries;
  • Chief Executive Officer and employees upto two levels below Chief Executive Officer of such listed company, intermediary, fiduciary and its material subsidiaries irrespective of their functional role in the company or ability to have access to unpublished price sensitive information;

Any support staff of listed company, intermediary or fiduciary such as IT staff or secretarial staff who have access to unpublished price sensitive information.

What is Trading windows?
 

It is a notional trading window used as an instrument of monitoring trading by the designated persons. Earlier (Before April 2019), listed companies were required to close the trading window for four days – 48 hours before the board meets for results and 48 hours after their declaration. According to the new rules, trading restrictions for company insiders start from the end of every quarter and are lifted 48 hours after the declaration of results. That could mean an extended period for companies that report late in the season.

The trading window is required to be closed when the compliance officer determines that a designated person or class of designated persons can reasonably be expected to have possession of UPSI. Such closure may be imposed in relation to such securities to which such UPSI relates. The timing of re-opening shall be determined by compliance officer. However, in all cases trading window shall be opened atleast 48 hours after the information becomes generally available.

Clause 4 of Schedule B of PIT regulation provides that 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.

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:-

“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.”

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.

What is Contra Trading?

Contra trading means reverse trading. Designated person shall not execute contra trade in next 6 months. The compliance officer can be empowered to grant relaxation from strict application of such restriction for reasons to be recorded in writing. However, such relaxation should not violate the regulations.

As per regulation “compliance officer” means any senior officer, designated so and reporting to the board of directors or head of the organization in case board is not there, who is financially literate and is capable of appreciating requirements for legal and regulatory compliance under these regulations and who shall be responsible for compliance of policies, procedures, maintenance of records, monitoring adherence to the rules for the preservation of confidentiality of unpublished price sensitive information, monitoring of trades and the implementation of the codes specified in these regulations under the overall supervision of the board of directors of the listed company or the head of an organization, as the case may be;

Explanation 1 –For the purpose of this Regulation, “financially literate” shall mean the ability to read and understand basic financial statements i.e. balance sheet, profit and loss account, and statement of cash flows”.

My observation: Earlier, listed companies were required to close the trading window for four days – 48 hours before the board meets for results and 48 hours after their declaration. According to the new rules, trading restrictions for company insiders start from the end of every quarter and are lifted 48 hours after the declaration of results. Company promoters looking to raise money by pledging shares have been covered in the case. Is pledge a case of trading? A pledge may be regarded as a “trading” in a wide sense, but it is difficult to envisage how a pledge could be regarded as “insider trading”. It cannot be said that the invocation of a pledge can be said to be in response to insider information. Hence, the compliance with the code in case of a pledge may merely be for technical reasons. Whether SEBI’s intent is to prohibit creation of pledge or invocation of pledge for enforcement of security while in possession of UPSI? and my answer is yes, However, the pledge or pledgee may demonstrate that the creation of pledge or invocation of pledge was bona fide and prove their innocence under proviso to sub-regulation (1) of regulation 4 of the Regulations.

(This Article is intended to initiate academic debate on a pertinent question. It is not intended to be a professional advice, The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided. Users of this information are expected to refer to the relevant existing provisions of applicable Laws.)

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