Ensuring compliance with amended insider trading regulations. By Ashwinee Oturkar

At the turn of the year, the Securities and Exchange Board of India (SEBI) notified amendments to the country’s insider trading regulations, bringing about some pragmatic amendments and much-needed clarifications.

SEBI had constituted the Committee on Fair Market Conduct in August 2017 to review the existing legal framework dealing with market abuse and ensuring fair conduct in the Indian securities market. Fair market conduct can only be ensured by prohibiting, preventing, detecting and punishing market abuse, which is generally understood to include market manipulation and insider trading, and activities that erode investor confidence and impair economic growth.

SEBI regulates market abuse through the SEBI Prohibition of Insider Trading Regulations, 2015 (PIT regulations), and the SEBI Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market Regulations, 2003 (PFUTP regulations).

The committee presented its report to SEBI in August last year. Following public consultation, the final recommendations were codified on 31 December 2018 by amending the PIT regulations and the PFUTP regulations.

The amended regulations came into force on 1 April 2019, leaving listed companies and market intermediaries in a rush to comply with the new rules.

Financial literacy

One of the most important clarifications in the new rules is the meaning of the term “financially literate”. The PIT regulations require companies to appoint a compliance officer who is financially literate, but they did not explain the term.

The amended regulations explain the term to mean a person who has the ability to read and understand basic financial statements, i.e., balance sheet, profit and loss account, and cash flow statement. The explanation was adopted from the SEBI Listing Obligations and Disclosure Requirements Regulations, 2015 (LODR regulations).

Again, in the PIT regulations, it was unclear at what point the regulations became applicable to companies that were about to get listed. The market generally understood it to be the filing of the draft red herring prospectus.

Ashwinee Oturkar

The amended regulations clarify that the regulations apply only to those unlisted companies that have filed “offer documents” with SEBI, the stock exchanges or the Registrar of Companies in connection with their listing, or a scheme of merger or amalgamation (with the intention of getting listed) under the Companies Act, 2013. Offer documents under the SEBI Issue of Capital and Disclosure Requirements Regulations, 2018 (ICDR regulations), means a red herring prospectus, prospectus, or shelf prospectus in case of a public issue, and a letter of offer in the case of a rights issue.

Therefore, all intermediaries will be required to include securities of the company in a grey list, or a restricted list of securities, upon the filing of a red herring prospectus for an equity public offering, a letter of offer for a rights issue, and a prospectus or shelf prospectus for a public debt issue. This clarification excludes draft offer documents. Intermediaries will also have to include securities that will get listed following a merger or amalgamation in the restricted list.

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