Oct 5, 2023

Concept of Freezing of Pan of Designated Person Under SEBI (Prohibition of Insider Trading) Regulations, 2015

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The Securities and Exchange Board of India (“SEBI”) vide circular dated August 05, 2022, has provided a framework for restricting trading [i.e. on-market transactions, off-market transfers, and creation of pledge in equity shares and equity derivatives contracts (Futures and Options)], by Designated Persons (“DPs”), at the time of declaration of financial results, in those listed companies which are or were part of benchmark indices i.e. SENSEX and NIFTY 50, by freezing their PAN at Company’s security level, during trading window closure period, in terms of the SEBI (Prohibition of Insider Trading) Regulations, 2015, (“PIT Regulations”) as amended from time to time.    

In line with the same, the Exchanges i.e. NSE and BSE issued notices dated August 05, 2022, and August 08, 2022 respectively, regarding the Trading Window closure period.

Further, SEBI vide circular dated July 19, 2023.

  • Outlined the timeline for the phased implementation of the said framework on the listed companies and the Company getting listed, as stated below:
  • Sr.No.

    Companies to be covered

    PAN freeze start date

    1

    Listed companies that are part of benchmark indices   i.e.   NIFTY   50   and   SENSEX

    Already applicable as on date

    2

    Top 1,000 companies in terms of BSE Market Capitalization as of June 30, 2023 (excluding companies part of benchmark indices)

    October 1, 2023

    3

    Next 1,000 companies in terms of BSE Market Capitalization as of June 30, 2023

    January 1, 2024

    4

    Remaining companies listed on BSE, NSE & MSEI

    April 1, 2024

    5

    Companies getting listed on Stock Exchanges post-issuance of this circular

    1st day of the second quarter from the quarter in which the company gets listed

    To provide further clarity on these SEBI circulars, the NSE and BSE have issued their own circulars in alignment with the SEBI directives dated June 28, 2023, and July 31, 2023.

    In said circulars the following has been stated: –

    1. to ensure smooth implementation of the provisions of said SEBI circular, which shall be applicable to the declaration of financial results by the listed company in a phased manner,
    2. the companies that qualify must include all Equity ISIN and ISINs that are Convertible into Equity.
    3. the Listed entities are required to designate one of the depositories as its Designated Depository and provide the information including PAN of Promoters, Promoter Group, Directors, and Designated Persons in the manner as specified by the depositories according to SEBI circular no – SEBI/HO/ISD/ISD/CIR/P/2020/168 dated September 09, 2020, with respect to System Driven Disclosures.

Various deliberations behind the rationale and practical challenges that listed entities may encounter while implementing and adhering to the aforementioned circulars are as follows:

Current Scenario

The Securities and Exchange Board of India (SEBI) has provided a framework for restricting trading by Designated Persons at the Security level during the Trading Window Closure through circulars dated August 05, 2022, and July 19, 2023. These circulars also outline the timeline for the phased implementation of the said framework. To provide further clarity on these SEBI circulars, the NSE and BSE have issued their own circulars in alignment with the SEBI directives.

SEBI takes on the rationale behind such a framework.

SEBI established a standard framework for reporting code of conduct violations in July 2019. After some time, it was determined that the majority of the reported violations were minor technical infractions of the company’s code of conduct, such as trades made by the portfolio manager in a non-discretionary account without the designated person’s knowledge, unintentional purchases made by the broker without the designated person’s knowledge, and a few specific violations by the designated persons involving very small amounts. So, after taking everything into consideration, it became clear that these are extremely minor non-compliances for which SEBI had to incur significant costs even to take action, adding to the regulatory costs.

As a result, SEBI made the decision to deploy technology to address these infractions and put into place the system-driven disclosure and PAN freezing processes.

Implementation Process

Every listed company will have to appoint either of the Depository as the designated depository for the facility of trading window closure.

A view of the PAN freezing from NSDL

The action below needs to be carried out if you choose NSDL as your authorized depository. The issuer services portal is the one that is made available, and it must be used for that purpose if listed companies already have user login IDs.

Every quarter, listed businesses will have access to a window, and only equity shares, equity derivatives, and securities convertible into equity would be taken into account, per SEBI, NSDL, and CDSL circular requirements.

The compliance officers must add the designated person’s information to the System Driven Disclosure database of the appropriate depositories, and that information will then flow to the trading window closing tab.

Two tabs, the system-driven disclosure tab, and the trading window closing tab, will be presented to the user after selecting the Company profile tab. To give a brief overview of the system-driven disclosure tab, it is a repository of all the designated persons that are kept up to date by the Compliance Officer of the relevant organizations. The trading window closure tab, which is the next tab, will automatically receive the data as it moves from the system-driven disclosure tab.

Further, the Trading window closure has a few tabs namely, define and update trading window closure tab; view/modify/defineTrading window closure period for the designated person; view details of Demat Account (held with NSDL) considered for Trading window closure.

Once the compliance officer of the issuing company clicks on the sub-tab labeled "define and update trading window closure", the issuer code, the issuer name and all the designated persons associated with that specific issuing company will automatically populate there. Next, the duration for which the window must be closed must be specified.

Lastly, if you want to grant an exemption to the designated persons for any reason, you will be given the option to do so in the second sub-tab of the Trading Window Closure.

Take on the PAN Freezing by the CDSL

The actions listed below must be taken if CDSL has been selected as your authorized depository. The issuer services portal is the one that is made available, and it must be used for that purpose if listed companies already have user login IDs.

There is no need to update the necessary details once the PAN has been uploaded to the System Driven Disclosure and there has been no change to any of these details or particulars. In addition to uploading, the system also offers an online alternative where PAN information can be added one at a time. If there are any modifications, they must be adjusted frequently.

The procedure for closing the trading window will be the same as for NSDL.

If an exemption is needed during the trading window period, the compliance officer can put up the exemption request to the system with the start and finish dates and the system will take care of it as needed.

Few dilemmas unravelled overtime are:

Queries

Answers

Designation and Procedural Queries

1.

Is designating one depository mandatory for a listed company under these regulations? What is the procedure for designating a depository?

– Yes, it is mandatory to designate one of the depositories as a designated depository.
–  A letter appointing any of such depository as designated depository to be issued to relevant depository.

ESOP Related Queries

2.

During Trading Window closure, if employee allotment is made under ESOP, are the shares credited to the employee’s demat account?

The credit of shares via Corporate Action by the Companies will be done by the Depositories.

3.

If a company has an ESOP Scheme with Trust Route, how can shares be credited from Trust Demat Account to DP Demat Account during trading window closure?

Exemptions has been provided for allotment of shares pursuant to a ESOP scheme. The credit of shares via Corporate Action by the Companies will be done by the Depositories.

Management of  Designated Persons who have left the company

Role of Compliance Officer

4.

After this circular, is the Compliance Officer required to intimate the Trading Window closure period to Designated Persons?

As the circular only applies to PAN of designated persons whereas there are other parties related to DP such as immediate relatives/Connected persons, it is recommendatory to still intimate the Trading window closure period.

Joint Demat Account and Trading Control

5.

If a Designated Person is the second holder in a joint demat account, how is trading in that account controlled?

As the freezing is at PAN Number, so whether it is first holder or second holder the transaction cannot be carried out.

Consequences of Non-Compliance

6.

What are the potential consequences for listed entities in case they do not update the PAN number of Designated Persons with the Designated Depository as per the Circular of System Driven Disclosure?

 No specific penal provisions have been specified.

Trading Window Closure Period

7.

Whether this PAN freeze will take place while the Trading Window is notionallyclosed for other UPSI activities?

As of now, PAN freezing is implemented in the case of Declaration of Declaration of Financial Results only.

Implementation

8.

Why the circulars are being implemented in a phased manner?

The implementation of PAN freezing across the depositories requires a technical co-ordination between the Stock exchanges and Depositories. To manage the implementation challenges, the phased wise implementation has been carved out.

9.

Whether the PAN of immediate relatives or firms over which the designated person has significant influence are also to be frozen?

Currently, only designated persons’ PANs are to be frozen,

The Corporate Professionals had conducted  a webinar on this topic , with the object of assessing the various regulatory aspects that the listed companies must keep in mind while implementing PAN freezing of the Designated Person in the trading window closure period, to get the benefit of reduced compliance burden, and prevention of unintentional non-compliance with the intent to uphold market integrity.

To watch the webinar please click on the:
“Webinar on "Freezing of PAN of Designated Person under PIT Regulations”

AUTHORED BY

Ms. Mohini Varshenya

Partner & Head-ESOP Services

FCS

mohini@indiacp.com

+91 9971673332

Request a Call
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