Safeguarding Market Integrity: Compliance Officer’s Role in Trading Window Closure under Insider Trading - MMJC

Introduction

The Compliance Officer under the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 [‘PIT Regulations’] is responsible for administering the code of conduct and other requirements under PIT Regulations¹. The Model Code of Conduct, as per PIT Regulations, states that the compliance officer would be responsible for closing the trading window, granting pre-clearance, relaxing provisions relating to contra-trade, tracking of trades, etc. There have been cases where SEBI holds a compliance officer liable for not administering compliance with the code of conduct and various other requirements under PIT Regulations. This article highlights orders passed by SEBI where a compliance officer is held liable for non-closure of trading window and cases where he has been left without penalty.

Trading window closure-related casesSEBI’s penalties levied on the Compliance Officer for not closing the trading window were prima facie related to Unpublished Price Sensitive Information [‘UPSI’] other than financial results.

a. SEBI Adjudication order in the matter of Edelweiss Financial Services Ltd: Edelweiss Financial Services is an NBFC listed on recognized stock exchanges. The Compliance Officer of Edelweiss Financial Services was penalized for not closing the trading window when an acquisition was being considered by a step-down subsidiary company. This acquisition, being made by a down subsidiary company, was of around Rs 4 crore. This acquisition of Rs 4 crore was a miniscule amount as compared to the turnover and net worth of Edelweiss Financial Services. The compliance officer argued that as the acquisition being considered by a down subsidiary company was of negligible value, UPSI was not considered. While analyzing the stock exchange disclosure in this regard, SEBI stated that the disclosure of this acquisition to the stock exchange showed that it was a strategic acquisition for Edelweiss Financial Services. As it was a strategic decision this acquisition was considered UPSI irrespective of the amount. SEBI penalized the compliance officer for not closing the trading window in this regard².

b.SEBI Adjudication order in the matter of Essar Shipping Ltd: In this case, the compliance officer was penalized by SEBI for not closing the trading window when “Conversion of Foreign Currency Convertible Bonds into equity shares” was due. SEBI alleged that this period during which conversion of FCCB into equity shares was due was the UPSI period. The compliance officer argued that the fact that FCCBs would be converted into equity shares at a certain time was already available in the public domain through annual reports. SEBI stated that even if it was known that FCCBs were due for conversion during this period, it was unclear whether FCCBs would be converted into equity shares or repaid. SEBI further stated that the company’s decision to convert FCCB into equity shares and not repay the bonds shows that the company was facing a cash crunch. Hence, SEBI affirmed that the decision not to repay the FCCB holders and instead convert it into equity shares was UPSI³.

c. SEBI Adjudication order in the matter of CARE Ratings Ltd: In this case the compliance officer was penalized for non-closure of trading window when there was a credit rating downgrade by CARE Ratings on a particular security of the company. In this the compliance office argued that on receipt of intimation of downgrade of credit rating, discussion were going on within the management to challenge credit ratings granted by CARE Ratings. As discussions were on and we were confident that CARE Ratings would cancel the downgrade of credit rating trading window was not closed. SEBI did not accept this argument, stating that even though discussions were on with CARE Ratings, the fact remained that there was a downgrade, which was a UPSI and hence, that required trading window closure⁴.

d. SEBI adjudication order in the matter of Future Retail Ltd: In this case, the compliance officer was penalized for not expressly closing the trading window during demerger transactions and merely taking undertakings from designated persons associated with the demerger transactions. In this case, the compliance officer argued that as few people were involved in the transaction for demerger, it was decided not to close the trading window for all designated persons at large. SEBI did not accept this argument and stated that even if all designated persons were not involved in the transaction, but the trading window cannot be closed selectively for few designated persons⁵.

e. SEBI adjudication order in the matter of Shilpi Cable Technology Ltd: In another case, the compliance officer was penalized for not closing the trading window when a demand notice was received by the company. This company received a demand notice from an operational creditor under section 8 of the Insolvency and Bankruptcy Code, 2016. SEBI alleged that this was UPSI’s start date. This UPSI became public on the date of disclosure to the stock exchange of the filing of an application by an operational creditor before the National Company Law Tribunal, Delhi, under sections 8 and 9 of the Insolvency and Bankruptcy Code, 2016⁶. Compliance Officer in this case argued that he was not made aware of such notice being received and hence had not closed trading window. SEBI did not accept this argument and penalized the compliance officer.

f. Settlement orders in the matter of Bliss GVS Pharma Ltd and Kanoria Chemicals and Industries Ltd: In these cases, Compliance Officers have settled the matters pertaining to the non-closure of the trading window with SEBI. One case concerned non-closure of trading window during UPSI period relating to entry of a subsidiary of the listed company into a new business, and another involved the sale of one of the divisions that was contributing 70% of the revenue of the listed company⁷.

Case where penalty not levied by SEBI for non-closure of trading window.

SEBI adjudication order in the matter of NIIT Technologies Ltd: 

In this case, SEBI left the compliance officer without levying a penalty for not closing the trading window when “default notice was received from a customer for a significant amount’. This information was considered as unpublished price-sensitive information. A question had arisen whether the interim company secretary was in possession of UPSI and was required to close the trading window. In this case, SEBI, on investigation, stated that the appointment of the Noticee was made as an interim company secretary. The interim company secretary did not have access to many documents, and their role was limited to secretarial work. Further, the interim company secretary did not have permission to attend the board meetings. SEBI further noted that the interim company secretary was not appointed as the compliance officer under PIT during the UPSI period. SEBI further noted that the list of designated persons who had access to UPSI also did not have the name of the interim company secretary. SEBI, considering this, had not levied a penalty⁸.

These cases depict various scenarios (viz. demerger, disputes with clients and demand thereof, downgrade of credit ratings, acquisitions, conversion of securities etc.) a corporate entity might face apart from the regular event of financial results where it is necessary to understand whether that event can be considered as UPSI. It is also observed that whenever the compliance officer fails to demonstrate his efforts in compliance with PIT Regulations with respect to trading window closure, SEBI has held compliance officers liable. However, where the compliance officers could demonstrate their efforts to ensure compliance with trading window closure-related provisions, SEBI has not levied penalties.

Conclusion

It is necessary for compliance officers under PIT Regulations to have processes for identifying UPSI and procedures for what to do when UPSI is identified. Standard Operating Procedures [‘SOP’] would bring certainty and clarity throughout the organisation in the procedure for compliance with PIT Regulations. SOP would also act as a defence while deposing before enforcement authorities to demonstrate that there was no arbitrariness in complying with PIT Regulations.