1. Introduction

The new Regulations aim at strengthening disclosure at different stages to ensure transparency for an orderly securities market. The provisions on disclosure are discussed hereinafter.

2. Provisions under the Regulations

Chapter III of the SEBI (Prohibition of Insider Trading) Regulations,2015 requires disclosures of trading by insiders. The term insider is defined under R 2(1)(g) to mean any person who is : (i) a connected person; or (ii) in possession of or having access to unpublished price sensitive information. R 2 (1)(d) defines `connected person’ as : (i) any person who is or has during the six months prior to the concerned act been associated with a company, directly or indirectly, in any capacity including by reason of frequent communication with its officers or by being in any contractual fiduciary or employment relationship between himself and the company whether temporary or permanent, that allows such person directly or indirectly, access to unpublished price sensitive information or is reasonably expected to allow such access. (ii) Without prejudice to the generality of the foregoing the persons falling within the following categories shall be deemed to be connected persons unless the contrary is established,- (a) an immediate relative of connected persons specified in clause (i); or (b) a holding company or associate company or subsidiary company; or (c) an intermediary as specified in S 12 of the Act or an employee or director thereof; or (d) an investment company, trustee company, asset management company or an employee or director thereof; or (d) an investment company, trustee company, asset management company or an employee or director thereof; or (e) an official of a stock exchange or of a clearing house or corporation; or (g) a member of the board of directors or an employee, of a public financial institution as defined in section 2(72) of the Companies Act,2013; or authorized by the Board; or (i) a banker of the company; or (j) a concern, firm, trust, Hindu undivided family, company or association of persons wherein a director of a company or his immediate relative or banker of the company, has more than ten per cent of the holding interest. Note to the definition states that a connected person is one who has a connection with the company that is expected to put him in possession of upsi. Immediate relatives and other categories of persons specified above are also presumed to be connected persons but such a presumption is a deeming legal fiction and is rebuttable. This definition is also intended to bring into it ambit person who may not seemingly occupy any position in a company but are in regular touch with the company and its officers and are involved in the know of the company’s operations. It is intended to bring within its ambit those who had access to or could access unpublished price sensitive information about any company or any class of companies by virtue of any connection that would put them in possession of unpublished price sensitive information.’  

R 6(1) of the Regulations requires `every public disclosure shall be made in the form as may be specified’. R 6(2) states that `the disclosures to be made by any person under the chapter shall include those relating to trading by such person’s immediate relatives, and by any other person for whom such person takes trading decisions’ . Note to the provision states that `it is intended that disclosure of trades would need to be of not only those executed by the person concerned but also by the immediate relatives and of other persons for whom the person concerned takes trading decisions. These regulations are primarily aimed at preventing abuse by trading when in possession of unpublished price sensitive information and therefore, what matters is whether the person who takes trading decisions is in possession of such information rather than whether the person who has title to the trades is in such possession’. R 2(1)(f) defines ‘immediate relative’ as `a spouse of a person, and includes parent ,sibling, and child of such person or of such spouse, any of whom is either dependent financially on such person, or consults such person in taking decisions relating to trading in securities’. Note to the provision states that `it is intended that the immediate relative of a “connected person “ too become connected persons of these regulations’. Indeed this is a rebuttable presumption.

R 6(1)(3) states that `the disclosures of trading in securities shall also include trading in derivatives of securities and the traded value of the derivatives shall be taken into account for purposes of this Chapter:

Provided that trading in derivatives of securities is permitted by any law for the time being in force’.

R 6(1)(4) states that `the disclosures made under this Chapter shall be maintained by the company, for a minimum period of five years, in such form as may be specified’.

3. Disclosures by certain persons

R 7(1) Initial Disclosures

(a) `Every promoter, key managerial personnel and director of every company whose securities are listed on any recognized stock exchange shall disclose his holding if securities of the company as on the date of these regulations taking effect, to the company within thirty days of these regulations taking effect.

(b) Every person on appointment as a key managerial personnel or a director of the company or upon becoming a promoter shall disclose his holding of securities of the company as on the date of appointment or becoming a promoter, to the company within seven days of such appointment or becoming a promoter.

(2) Continual Disclosures

(a) Every promoter, employee and director of every company shall notify the particulars of such trading to the stock exchange on which the securities are listed within two trading days of receipt of the disclosure or from becoming aware of such information.

Explanation – It is clarified for the avoidance of doubts that the disclosure of the incremental after any disclosure under this sub-regulation, shall be made when the transactions effected after the prior disclosure cross the threshold specified in clause(a) of sub-regulation (2)’.

Promoter, key managerial personnel, director have not been defined under R 2 of the Regulations as such reliance will have to be made to the provisions of Companies Act,2013 and SEBI( Issue of Capital and Disclosure Requirements) Regulations, 2009 for the meaning of the above positions. R 2 (1) (h) defines “ promoter” as meaning assigned to it under the SEBI ( Issue of Capital and Disclosure Requirements) Regulations, 2009 or any modification thereof.

S 2(69) of the Companies Act, 2013 defines “ promoter” means a person – (a) who has been named as such in prospectus or is identified by the company in the annual return referred to in s 92; or

(b ) who control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or

(c) in accordance with whose advice, directions or instructions the Board or Directors of the company is accustomed to act;

Provided that nothing in sub-clause © shall apply to a person who is acting merely in a professional capacity.

S 2(34) of the Companies Act,2013 , `director’ means a director appointed to the Board of the Company.

S 2(10) of the Companies Act,2013 , `Board of Directors’ or `Board’ in relation to a company means the collective body of the directors of the company.

S 2(51) of the Companies Act,2013 , `Key Managerial Personnel’ in relation to a company, means –

(i) the Chief Executive Officer or the managing director or the manager.

(ii) the company secretary

(iii)   the whole-time director

(iv) the Chief Financial Officer, and

(v) such other officer as may be prescribed.  

4. Disclosures by other connected persons

(3)` Any company whose securities are listed on a stock exchange may, at its discretion require any other connected person or class of connected persons to make disclosures of holdings and trading in securities of the company in such form and at such frequency as may be determined by the company in order to monitor compliance with these regulations.

Under note to the provision it is provided that it is an enabling provision of listed companies to seek information from those to whom it has to provide uspi. This provision confers discretion on any company to seek such information. For example, a listed company may ask that a management consultant who would advise it on corporate strategy and would need to review unpublished price sensitive information should make disclosures of its trade to the company’.

5. Discussion

Disclosures are important for trading on the stock exchange. By non-disclosures trading on exchanges can lead to serious issues and cause drainage of funds for small investors and gain by the persons in control of a company. Disclosures have been segregated for different category of persons. Promoters, key managerial persons, directors will have to initially make disclosure on their holding of shares in the company in the prescribed from and the company shall have to disclose the shareholding within 14th June, 2015 as per R 7(2)(a) of the Regulations. Such persons when they are appointed would have to make disclosure to the stock exchange within seven days of appointment. Thereafter, in case of transaction(s) over a period of a calendar quarter, aggregates to a traded value in excess of Rs 10 lac, includes acquisition or disposal then such transaction must be reported within 2 days to the company and the company will report such reporting within 2 days of receipt of disclosure to the company. The new regulations require connected persons to make disclosure of holdings and trading in securities of the company in such form as per the regulations. Drawing reference to the definition of connected person in R 2 (1) (d) , a company may the list of connected persons who are required to make disclosure to the company about their shareholding in the company.

6. Conclusion

Initial and continual disclosure of shareholding and subsequent acquisition or disposal of shares in such form as may be prescribed, to the company by the persons stated above is prescribed to bring about orderly trades on the stock exchanges for price discovery of during the trades. Disclosure and acknowledgement are the two modes that lead to fair price of shares. It is on this fair price arrived by transparency that all are drawn to stock exchanges where wealth is poured. Little this side or that side can drain the wealth poured within seconds. The Regulations has provided for disclosure by all persons connected with a company and that is why the regulator is always vigilant and looking towards market practices that ensure perfect competition.

Author : CS Saibal Chandra Pal, Advocate

Securities Law & Financial Sector Regulatory Practice

Edited by :   Soubhik Chakraborty, Advocate

[ Opinion expressed is that of the Author]

Copyright & Publishing Rights with Author.

Email: saibal2004@rediffmail.com

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October 2020