FAQs on Prohibition of Insider Trading - MMJC

FAQs on Prohibition of Insider Trading:

With an objective to provide greater clarity on several concepts related to the SEBI (PIT) Regulations, 2015, as also to shed more light on the nuances of various requirements of the regulations, SEBI has issued comprehensive Frequently Asked Questions (FAQs) on April 29, 2021, which consolidated all the FAQs and guidance notes issued earlier.

Structured Digital Database

SEBI had vide its FAQ no. 7 April 2021 had stated thatDatabases/servers provided by third party vendors whether within India or outside India will be considered as outsourced. Now SEBI has without agreeing in principle, stated that board of directors of the listed entity would be solely accountable for all aspects related to the maintenance of data on cloud or any other method. SEBI has further stated that it would be responsibility of Board of Directors and Compliance Officer to ensure the confidentiality, integrity and security of its data and logs, and ensure compliance with the laws, regulations, circulars, FAQs etc. issued by SEBI/ Exchanges from time to time. So, responsibility and accountability for maintenance of data on cloud or any other method is of Compliance Officer and Board of Directors of Listed Entity.

Nominee Director of a bank or financial institution

SEBI has further clarified FAQ no. 11 of April 2021. It was earlier not clear whether Nominee Director would be of Bank or Financial Institution would be considered as Designated Person if UPSI was shared with him? It has now been clarified by SEBI that Nominee Director be it of a bank or financial institution if he is falling under the list of designated persons or is an Insider as per PIT Regulations as he has access to UPSI and shares UPSI with the Bank/FIs he is representing for the legitimate purpose then it will require an entry in SDD.

Transfer of shares from one demat account to another

SEBI has clarified that transfer of shares from one demat account to another where one of the demat accounts has more than single ownership would trigger disclosure requirements.

So, for example: Mr A has two demat accounts. First demat account is with Zerodha where he is sole holder. Second demat account is with Motilal Oswal where there are two holder viz. Ms B and Mr A. So, in demat account with Motilal Oswal Mr A is jointly holding shares with his wife. Now if shares of a company are transferred from ‘Demat account with Zerodha’ to ‘demat account with Motilal Oswal’ then it would amount to trading in shares. This would be irrespective of whether Mr A is first holder in Motilal Oswal Demat account

Till now it was stated that where beneficiary ownership remains same transfer of shares from one demat account to another demat account will not qualify as trading.

Contra Trade

ESOP Execution: SEBI has elaborated that subscribing, exercising, and subsequent sale of shares (either in tranches or in bulk) so acquired under ESOP shall not attract contra trade restrictions if they are executed within a period of six months. It is further clarified that other provisions of PIT viz. pre-clearance, trading window closure, disclosure requirements would be applicable to disposal of shares so acquired through ESOP. Further by way of giving various scenarios SEBI has explained as to when buying and selling of ESOP shares would be considered as Contra Trade. It can be summarised that if a designated person buys or sells shares in open market in six months either before or after acquisition of ESOP then it would be considered as Contra Trade.

Corporate Actions: SEBI has further elaborated the list of corporate actions wherein restriction of contra trade in securities would not be applicable. SEBI has now added following corporate actions wherein contra trade restrictions would not be applicable, “OFS, share split, bonus, exit offers, merger/amalgamation, demerger”. These are in addition to existing corporate actions that were notified by SEBI earlier buy back offers, open offers, rights issues, FPO.

Holding shares under single PAN: SEBI has now by way of FAQ stated thatif designated person is holding shares under single PAN but in different capacities restriction to engage in contra trade would be applicable to all the shares held under the PAN of the Designated Person, irrespective of the capacities in which such Designated Person holds such shares in the Company. This makes clear that restrictions of contra trade would be based on PAN. This view was also given by SEBI in an Informal Guidance[1]

Trading in Rights Entitlement: SEBI has clarified thatTrading in Rights Entitlements tantamount to open market trade in the Company securities and contra trade provisions are applicable on them.

Applicability of PIT to entities under CIRP

If Entities who have participated as a prospective bidder in the bidding process of a listed company, under the Corporate Insolvency Resolution Process (CIRP) have access to UPSIduring the bidding process of the company under CIRP then the provisions of PIT Regulations would be applicable to them.

Vallabh Joshi – Senior Manager – vallabhjoshi@mmjc.in

[1] https://www.sebi.gov.in/enforcement/clarifications-on-insider-trading/oct-2022/compilation-of-informal-guidance-relating-to-sebi-pit-regulations-2015-for-the-period-oct-2015-sept-2022_64336.html – IG to Arvind Ltd

Link to SEBI FAQs:

https://www.sebi.gov.in/sebi_data/faqfiles/apr-2023/1680758865899.pdf