By Deepika Vijay Sawhney is Partner (Securities Laws & Transaction Advisory)
In recent years, corporate governance standards have been tightened all over the world. This is in response to a spate of corporate failures and a strong negative stock meltdown over governance issues, especially insider trading issues. In India, allegations under insider trading, whistleblower and auditor resignations have shaken the confidence of investors —both retail and institutional in recent years.
The Securities and Exchange Board of India (SEBI) introduced insider trading rules through SEBI (Prohibition of Insider Trading) Regulations in 1992. These regulations were replaced by SEBI (Prohibition of Insider Trading) Regulations of 2015. Ever since the promulgation of the 2015 regulations, there have been amendments and strengthening of regulatory provisions. Recently, in December 2018, SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2018 (PIT Amendment Regulations) was introduced. The PIT amendment regulations came into force on April 1, 2019, and will have a significant impact on the manner in which listed companies and intermediaries navigate the market. The market regulator has revamped these regulations to bring several new provisions, including the concept of ‘material financial relationships’ and also specifically lays down the basis of determination of “Designated Person”. The listing includes the promoters of the company, board members, and other key functionaries.
The new rules also mandate insiders to provide personal details of all their immediate relatives, including their PAN details. Further, listed companies have also been asked to maintain a structured digital database with details of everyone who had access to unpublished price sensitive information (UPSI). The market regulator has brought in material financial relationship to help crack cases where an insider may have funded an unconnected person to trade on his behalf. Schedule B of the PIT regulations prescribes the minimum standards for the code of conduct for listed companies to regulate, monitor and report trading by designated persons and their immediate relatives.
While the above notification drew attention and company officials rushed to comply by March 31, 2019, there is a new circular which will have a far greater impact on companies and its senior management as well as shareholders.
Subsequent to the notification of Amended Regulations 2018, recently, on April 02, 2019, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), came out with a circular for all listed entities in the nature of clarification to the clause 4 of schedule B, dealing with the closure of trading window.
The circular withdraws the liberty and prudence of the compliance officer to determine the time of closure of trading window on the origination of UPSI in case of financial results and provides that Clause 4 of the Schedule B be read as the trading window of a listed company is to be mandatorily closed at the end of each quarter and shall remain closed up-till the expiry of the 48 hours from the declaration of the financial results of the previous quarter.
The aforesaid circular, which has been issued in the form of a clarification, based on discussions with SEBI, has far-reaching implications for listed companies, their promoters and employees, along with the industry at large. This mandatory closure of trading window immediately at the end of each quarter till the date of result announcement would mean that the trading window of a listed company shall practically remain closed for approximately 200 days out of 365 days of a calendar year. The restriction on trading would therefore also affect the planning and execution of transactions such as preferential allotments, right issues, takeover offers, ESOPs, warrant conversion, pledging of shares for raising funds and other similar transactions which need not be in the nature of insider trading.
The fact that is going to lead confusion among corporates is that the legal validity and enforceability of the circular is uncertain, as it is issued by stock exchanges in “consultation with SEBI” and not by SEBI. The stock exchanges are only market infrastructure institutions and do not have any regulatory powers under any statute.
The trading window closure was introduced to ensure a level playing field between the person(s) who can be reasonably expected to have access to unpublished price sensitive information of a listed company and a common investor who trades in the stock market. However, this circular not only places promoters and employees of a listed company at a detrimental position but also poses challenges for the company itself in terms of planning of corporate actions and raising funds. Unless any clarifications or exemptions are explicitly provided by the regulator itself or legal precedents created, the circular is surely set to lead to confusion among listed companies and its promoters and employees and overall chaos and ambiguity within the capital market.