Wednesday, July 9, 2014

Guest Post: Disclosure of Shareholding & Insider Trading Regulations

[The following post is contributed by Yogesh Chande, Associate Partner, Economic Laws Practice. Views are personal]

In an order passed by the SEBI Adjudicating Officer against an employee (Noticee) of a listed company, it was held that the “Head of Human Resources” of a particular vertical of the company is also an “officer” within the meaning of the definition of section 2(30) of the Companies Act, 1956 read with the provisions of the SEBI (Prohibition of Insider Trading Regulations), 1992 (Regulations), and therefore was under an obligation to disclose the change in the shareholding  that exceeded the thresholds prescribed under the Regulations.

Regulation 13(2) and regulation 13(4) of the Regulations deal with disclosure of interest or holding in listed companies by director and officer of a listed company.

The Adjudicating Officer rejected the defences pleaded by the Noticee and imposed a penalty of INR 0.5 million on the Noticee.

The somewhat unique facts of this case were as follows:

1.         The listed company has eleven divisions.
2.         The Noticee held the position of head of the “Competency Development and Human Resource” function of the “Trade Marketing and Distribution” vertical of the Indian Tobacco Division of a listed company.
3.         The Indian tobacco division itself is one of the 11 business divisions of the company, which is further divided into “Cigarette Brands and Supply Chain and Trade Marketing & Distribution”, along with all the other divisions and departments, has its own human resource department.
4.         Each of the business divisions of the listed company has a separate human resources department, headed by a 'Head' of Human Resources, in addition to which there is a Corporate Human Resources department, the head of which is a member of the Corporate Management Committee.
5.         There are about 65 personnel in the company who are at the same level as the Noticee, and there are 42 personnel in the company who are above the Noticee in the hierarchy.

Upon perusal of the flowchart of the Human Resources function in the Trade Marketing & Distribution vertical of the listed company, the SEBI Adjudicating Officer found that the Noticee is the Head-Human Resource & Competency Development of the company.

The SEBI Adjudicating Officer also found that, the Divisional Manager - HR Operations, Divisional Manager - Competency Development, District human resources managers (N/S/E/W), the Assistant HR Managers - Operations, Manager - HR Systems and Processes, Manager Skilling & Employability, Asst Manager Training, Asst Manager Training, Asst. HR Managers (N/S/E/W), HR Officer - Frontline Performance are the personnel subordinate to the Noticee, which led to the conclusion that the Noticee is clearly holding a higher position capable of giving directions to her subordinates.

While levying the penalty, the SEBI Adjudicating Officer also relied upon the following judgement of the Hon’ble Securities Appellate Tribunal in Sundaram Finance Limited V. SEBI

A reading of the aforesaid definition makes it clear that it is an inclusive definition. Apart from what the word 'Officer' means, it includes all that is stated therein. In other words, the definition does not exhaust all persons who otherwise come within its ambit or scope. While the definition says that it includes the persons specified therein, it doesn't say who are all the persons who will come within the term. We are of the view that an 'Officer' means a person holding an appointment to an office which carries with it an authority to give directions to other employees. Thus, an 'Officer' as distinct from a mere employee is a person who has the power of directing any other person or persons to do anything whereas an employee is one who only obeys. Any person who occupies a position of responsibility in a company will be an 'Officer' and this has been clarified by the Department of Company Affairs, government of India as per its letter dated October 7, 1963.


This order of the SEBI Adjudicating Officer is likely to have repercussions on those listed companies which are hierarchical.

It is pertinent to note that, although the expression “designated employee” in the model code of conduct [Part A of Schedule I] prescribed under the Regulations, makes a reference to officers comprising the top three tiers of the company management, in the present case, there were not only about 65 personnel in the company who were at the same level as the Noticee, but there were 42 personnel in the company who were above the Noticee in the hierarchy.

Thus, apart from the companies which will have to give a careful reconsideration to the model code of conduct prescribed under the Regulations which they may have adopted in terms of the Regulations, the universe of employees who could potentially fall within the definition of the term “officer” will have to introspect and comply with the disclosure requirements prescribed under the Regulations, is likely to increase.

This will also ensure that, the company does not fall afoul of its obligations under the Regulations including the compliance officer. The onerous nature of responsibilities imposed by SEBI on the compliance officer under the Regulations has been confirmed by SAT on various occasions.

- Yogesh Chande

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