Sale of the Shares by the Promoters of a Company: SEBI Disclosures

Let’s start with a question – can promoters sell the shares they hold in a company? The short answer is – yes, they can sell the shares they hold subject to compliance with the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 and some other SEBI Regulations, which, inter alia, provide for the minimum promoters’ contribution, the lock-in period, and the disclosures to be made. When a promoter engages in trading activity, the SEBI regulations require him or her to make some disclosures, which I have covered in this article. Recently, I reported two cases in the latest edition of my weekly regulatory updates newsletter, Corporate Law Dispatch, in which the Securities and Exchange Board of India (SEBI) had imposed penalties on the promoters for their failure to make disclosures after trading in the shares of the company. To be specific, I have not covered the inter-se transfer between the promoters and promoter group, the disclosures in relation to which I have already covered in a different article. This article also does not cover the trades which are executed pursuant to any specific SEBI regulation, e.g., the sale of the shares in the open market to increase the minimum public shareholding.

Disclosures:

A. SEBI (Prohibition of Insider Trading) Regulations 2015: Regulation 7(2)(a)

As per Regulation 7(2)(a) of the SEBI (Prohibition of Insider Trading) Regulations 2015 concerning continual disclosures, “every  promoter, member  of  the  promoter  group, designated  person and director  of  every  company  shall  disclose  to  the  company  the  number  of  such securities  acquired  or  disposed  of  within  two  trading  days  of  such  transaction  if  the value  of  the securities  traded,  whether  in  one  transaction  or  a  series  of  transactions over any calendar quarter, aggregates to a traded value in excess of ten lakh rupees or such other value as may be specified.”

Comment:

• Based on the above provisions, the responsibility to make a disclosure is on the promoters, members of the promoter group, designated person and director.
• Accordingly, promoters engaging in trading activity, i.e., buying or selling the shares they hold in a company, are required to make a disclosure under Regulation 7(2)(a).
• The disclosure is made to the company within two trading days counted from the date of the transaction on which the value of securities traded in a calendar quarter exceeds ten lakh rupees.
• There may be one single trade or a series of trades whose traded value is aggregated to decide if the limit under Regulation 7(2)(a) has been breached.
• For example, if, I, as a promoter of XYZ Limited, sell certain shares for Rupees five lakh and thereafter, purchase certain shares worth five lakh and one rupee in the calendar quarter ending June 30, I shall make a disclosure to XYZ Limited within two trading days of the last trade. The SEBI Regulations provide specific formats in which these disclosures are made.

B. SEBI (Prohibition of Insider Trading) Regulations 2015: Regulation 7(2)(b)

As per Regulation 7(2)(b) of the SEBI (Prohibition of Insider Trading) Regulations 2015, “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 transactions 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).”

Comment:

• The disclosure under Regulation 7(2)(b) of the SEBI (Prohibition of Insider Trading) Regulations 2015 is made by the company.
• The disclosure is made within two trading days counted from the date of receipt of information or disclosure from the promoter or from becoming aware of such information.
• As a compliance officer, you may become aware of the trades in the promoter’s account based on the BENPOS statement provided by the depositories.
• In other words, if as a compliance officer of XYZ Limited, I become aware of the trades in a promoter’s account, I shall inform the stock exchanges where the securities are listed. Otherwise, I shall act on the information supplied by the promoter to make the disclosure.

C. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011: Regulation 29(2) read with Regulation 29(3)

As per Regulation 29(2) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011, “any person together with persons acting in concert with him, holds shares or voting rights entitling them to five per cent or more of the shares or voting rights in a  target company,  shall disclose the number of shares or voting rights held and change in shareholding or voting rights…such change exceeds two per cent of total shareholding or voting rights in the target company, in such form as may be specified (among others).” Further, as per Regulation 29(3), the disclosures required under sub-regulation (1) and sub-regulation (2) shall be made within two working days of the receipt of intimation of allotment of shares, or the acquisition or the disposal of shares or voting rights in the target company to a) every stock exchange where the shares of the target company are listed; and b) the target company at its registered office.”

Comment:

• The disclosure under Regulation 29(2) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 shall be made by the promoters, within two working days of the acquisition or disposal of shares.
• It is worth mentioning that there are two necessary elements that trigger disclosure under Regulation 29(2).
• The first requirement is having a pre-existing shareholding (or voting rights) of five per cent or more in the target company, and the second requirement is a change of more than two per cent in such holding from the last disclosure made under Regulation 29(1).
• For example, if you held six percent shares in the target company as per the disclosure made under Regulation 29(1), and now, post-acquisition your holding is found to be nine per cent, you shall be required to make a disclosure under Regulation 29(2). You would also be required to make a disclosure if your shareholding became three percent post disposal.
• A series of transactions since the last disclosure made under Regulation 29(1) may be taken into account to decide if there is a change of two per cent or more in the total shareholding or voting rights in the target company.

D. SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015: Regulation 31

As per Regulation 31 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015, “the listed entity shall submit to the stock exchange(s) a statement showing the holding of securities and shareholding pattern separately for each class of securities, in the format specified by the Board from time to time within the following timelines…(b) on a quarterly basis, within twenty-one days from the end of each quarter…listed their specified securities on SME Exchange, the above statements shall be submitted on a half yearly basis within twenty-one days from the end of each half year.

(4) All entities falling under promoter and promoter group shall be disclosed separately in the  shareholding  pattern  appearing  on  the  website  of  all  stock  exchanges  having nationwide  trading  terminals  where  the  specified  securities  of  the  entity  are  listed,  in accordance with the formats specified by the Board.”

Comment:

• The disclosure under Regulation 31 shall be made by the company.
• It shall be made on a quarterly basis within 21 days of the end of the quarter (unless you are an SME).
• The disclosure under Regulation 31 is required to be made to the stock exchanges where the company is listed.

Consequence of Non-Disclosure:

As per Section 15A (b) of the SEBI Act 1992, if any person, who is required under this Act or any rules or regulations made thereunder to file any return or furnish any information, books or other documents within the time specified therefor in the regulations, fails to file the return or furnish the same within the time specified therefor in the regulations, he shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees. Accordingly, the failure to make a disclosure would attract a minimum penalty of rupees 1 lakh and a maximum of one crore.

Note: I have not discussed the restrictions on the contra trades, which as per the Code of Conduct published under the SEBI (PIT) Regulations is six months.

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Disclaimer: This is not professional advice. You may not rely on the opinion expressed in this article to make a business or regulatory compliance-related decision. If you are looking for professional advice, please consult a company secretary. Any comments and/or suggestions concerning this article may be sent to shukla_ashutosh@outlook.com.