Sub-regulation (2) of Regulation 7 of SEBI (Prohibition of Insider Trading )Regulations 2015, casts an obligation on every promoter member of the promoter group, designated person and director of every company to disclose the details of trade in securities within two days of trade, 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. On receipt of requisite intimation, the company is obligated to report the same to stock exchanges within two trading days of receipt of the disclosure or from becoming aware of such information.
The obligation of a company to inform the stock exchange with respect to trade executed may arise on two circumstances i.e. on receiving intimation from the concerned person, who has undertaken the trade or when the company become aware of such information, which shall mean the information about the trade having been executed.
While intimation to stock exchange(s) on receipt of corresponding information from the person concerned is simple and devoid of any subjective inferences but it’s the obligation emanating on account of becoming aware of such a trade, which is subject to different interpretations among the professionals & corporates.
The question is when can a company be said to be in possession of information with respect to trade which has been carried out by a person covered in Sub-regulation (2) of Regulation 7. This becomes significantly difficult considering the fact that the execution of the trade is an information to which only the person executing that trade is privy to. So, what can be the ways through which a company can be said to becoming aware of any such trade by the concerned person.
The only document through which a listed company generally gets information about its shareholders and any change therein is BENPOS i.e. position of beneficial holders of its shares. BENPOS contains information according to the purpose for which it is downloaded. Companies these days tend to seek weekly BENPOS for different purposes like trading by employees and designated persons, shareholding position, position of institutional shareholders etc. Further BENPOS is also downloaded at the time of undertaking any corporate action related to shares, calling of annual general meeting or extra-ordinary general meeting, sending of any notices etc. Further it is also important that downloading of BENPOS on weekly basis is not mandatory.
Considering aforesaid, whether it can be said that just by downloading BENPOS, a company becomes aware of various trades which have been undertaken by its designated persons and out of which the company can also ascertain the disclosure requirements under the Insider Trading; If yes, then this would be creating a mandatory obligation on the company in respect of a disclosure requirement where the primary obligation is on the person executing the trade and render such person’s disclosure obligation under Regulation 7(2)(a) redundant and otiose.
Recently, an adjudication order of SEBI has actually dealt with the aforesaid issue as to when a company can be said to be becoming aware of trade executed by relevant person and whether downloading the BENPOS can be termed to meeting the said requirement. The facts of the case which was subject matter of the adjudication order are given below:
- 1SEBI vide letter dated January 18, 2019, received a reference from ITC Limited (‘ITC’/‘Company’/‘Noticee 1’), wherein ITC informed SEBI regarding non-compliance of SEBI (PIT Regulations), 2015 by Victor Peter Christopher ( ‘Victor’/‘Employee’) for his transaction dated October 01, 2018.
- In view of the said letter, SEBI conducted investigation in the scrip of ITC from April 01, 2018 to December 31, 2018 (‘Investigation Period’) to ascertain the same.
- During the investigation, it was observed by SEBI that ITC had allotted Employee Stock Options to Victor. Pursuant to the above, Victor had exercised his options and he was allotted 15,970 shares by ITC on September 24, 2018. Subsequently, Victor sold the aforesaid 15,970 shares on October 01, 2018.
- On the basis of the said investigation, it is alleged that ITC and its Compliance Officer, Mr. Rajendra Singhi ( ‘Noticee 2’ and collectively referred to as ‘Noticees’) had become aware of the said transaction by virtue of BENPOS Data for the week ended October 05, 2018 which the Company had downloaded on October 06, 2018. In view of this, it was alleged that Noticee 1, being the Company, and Noticee 2, being the Compliance Officer of the Company, had failed to make the necessary disclosure on time in respect of sale of shares of ITC by Victor which was required to be made by them under the relevant provisions of PIT Regulations within 2 trading days of ‘becoming aware of’ the said transaction
- A common Show Cause Notice ref. SEBI/EAD-8/PM/VC/14291/2020 dated September 03, 2020 (‘SCN’) was issued to the Noticees.
- In connection with the SCN, the Noticees made the following glaring submissions:
- The PIT Regulations are a principles-based regulatory framework giving out guidance on the interpretation of principles. The position adopted in the Notice, in interpreting the requirements of Regulation 7(2)(b), and that too a procedural provision, is an extraordinary disruption of the substantive implications of the PIT Regulations. If converted into an order, such a position would have far-reaching implications for every listed company, and in particular, those such as the Company, which has a very large base of employees and advisors.
- Without prejudice to the above, it is submitted that the disclosure obligation of a listed entity under Regulation 7(2)(b) of the PIT Regulations is subject to, and arises on, receipt of information by such listed entity under Regulation 7(2)(a) of the PIT Regulations or upon becoming aware of such information. There is no obligation on a listed entity to make disclosures with the stock exchanges under Regulation 7(2)(b) until it is intimated of the relevant trades pursuant to Regulation 7(2)(a). We submit that the words “or becoming aware of such information’” in Regulation 7(2)(b) do not lend themselves to the interpretation proposed in the Notice i.e. that the download of BENPOS data would lead to an extrapolation of an inference that transactions warranting disclosure have taken place. It is stated with all sincerity and seriousness that no listed company has this standard, and no guidance from SEBI has suggested such a requirement.
- Such an interpretation would necessitate every listed company to mine its BENPOS data every week to examine changes to every folio of every employee and every immediate relative of every employee and other persons for whom such employee takes trading decisions, and compare the same with the previous week’s BENPOS data and decide whether to make disclosures.
- Such an obligation, if intended, would have been explicitly stated in the PIT Regulations. Besides, if such an obligation is to be inferred from the existing provisions, it would create an unreasonable and arbitrary cost and burden on the listed company and its compliance officer, without any commensurate benefit.
- The primary onus of disclosure under Regulation 7 lies on the shoulders of employees and other persons mentioned therein.
- Further, it is a well settled principle of law that "A deeming fiction cannot be introduced by construction and it is the exclusive privilege of the Legislature to apply a deeming fiction in a given case.”
- The Assessing officer made the following key consideration and findings:
- BENPOS data cannot be termed as ‘becoming aware of’ any transaction of any employee as it contains only the demat position as on last day of week of all the shareholders of the Company on that particular day. The said data is not a transaction statement and lot of transactions don’t get captured in the said data. Further BENPOS data is not sufficient to make the relevant disclosure under regulation 7(2)(b) in terms of the format prescribed by SEBI under circular ref. CIR/ISD/02/2015 dated September 16, 2015.
- Provision of regulation 7(2)(b) of PIT Regulations is required to be read in conjunction with regulation 7(2)(a) of the said Regulations which puts the onus on the said disclosure on the employee who has actually done the transactions.
- BENPOS data of a scrip is list of all its shareholders on a particular date (last trading day of a week in present matter). It shows position taken by a shareholder as on the said date, as per his Demat statement. Therefore, it only shows the number of shares held by a particular shareholder in his Demat Account as on the date of BENPOS data
- While other information can be acquired by extensive examination of the said BENPOS data in the case of the present Noticees, keeping in mind it is employing more than 28,000 employees, it is impossible to acquire type of transaction, whether single or a series of transactions, and value of the said transaction from BENPOS data. In light of all these I am of the view that, at best, only an inference can be drawn regarding trading of a person from comparison of BENPOS data of two dates. However, crucial details required for making disclosure under regulation 7(2) of PIT Regulations can never be acquired by the said BENPOS data.
- Further, BENPOS data only provides holding of a person in a scrip in cash segment at the end of the last trading day of the week. No other information such as transaction type, price, date of trade, market/off-market transaction, etc. gets captured, making it insufficient for the purpose of disclosure under regulation 7(2)(b) of PIT Regulations. It is therefore not possible for a company to make disclosure under regulation 7(2)(b) of PIT Regulations merely on the basis of information received from BENPOS data.
- Role of compliance officer is to administer code of conduct, which mainly applies on designated employees, and to monitor compliance with PIT Regulations. Therefore, in the absence of any requirement on the part of the company, merely on possession of BENPOS data, there cannot be a case of vicarious transmission of any obligation on the compliance officer.
Based on above, SCN was disposed of in favor of the Company and the Compliance officer vide order dated April 22,2021 (“Order”) .
The Order also seeks to highlight the role of compliance officer vis-à-vis PIT Regulations. As per PIT Regulations, amongst other things, the compliance officer is responsible for monitoring of trades and the implementation of the codes specified in these regulations. Further, Schedule B to the PIT Regulations places specific obligations on the compliance officer with respect to administration and monitoring of compliance of the code of conduct by designated persons. The Order very clearly outlines the fact that the responsibility cast by PIT Regulations on the compliance officer is with respect to monitoring of trade by designated persons and not all the employees of the company.
While the aforesaid Order, seems to have provided clarity on the significance of BENPOS vis-à-vis with respect to obligation of the company to disclose but then it also makes the obligation of a company as outlined in “from becoming aware of such information” completely redundant. While so far as BENPOS is concerned, it seems that the adjudicating officer has rightly concluded that it can’t be treated as knowledge of trade but then when the deeming responsibility of a company would trigger under Regulation 7 since there could be no other possible way a company can find about trade by a person unless he/she informs the same at its own. The intention of legislature on casting deeming obligation on the company wouldn’t be to make company just as a reminder machine. The order may also force companies which were themselves seeking trade details of designated persons on weekly basis, to ensure compliance of Insider Trading Regulations, from abandoning such practice.
While much is discussed with respect to obligation of a company and employee to report trade under the PIT Regulations but with the mechanism of system driven disclosures implemented by SEBI, designated depositories will report the trade in demat account of the employees to stock exchanges and they will do the reporting under PIT Regulations as and when disclosure is triggered, any question on obligation on reporting or even non-reporting will be a thing of past.