Friday, May 12, 2017

SEBI Informal Guidance: Trading Disclosures – What’s the “Value”?

[The following post is contributed by Yogesh Chande, Partner, Shardul Amarchand Mangaldas & Co. Advocates and Solicitors. Views are personal.]

The SEBI (Prohibition of Insider Trading) Regulations, 2015 (the “PIT Regulations”) prescribe certain disclosure norms relating to acquisitions and disposals of securities by insiders in companies. Specifically, regulation 7(2)(a) states that where acquisitions or disposals of securities by a promoter, director or employee exceed a traded value of INR one million during a calendar quarter, they such person must disclose the transaction to the company within two trading days.

Certain questions came up in relation to the interpretation of the said provision, and the Securities and Exchange Board of India (SEBI), by way of a recent informal guidance, has opined that securities acquired or disposed of beyond the threshold have to be disclosed, irrespective of the mode of acquisition or disposal. According to SEBI, if a person has no role to play in connection with an allotment, e.g. issue of bonus shares or pursuant to an amalgamation/merger, a separate disclosure may not be necessary. Thus, instances such as gifts or off-market transactions warrant a disclosure under the said regulation.

SEBI in the informal guidance has further stated that, the term “value of securities traded” is to be interpreted as the prevailing market value of securities on the day they were acquired or disposed. Thus, the said value should be disclosed for the purposes of calculation of threshold value beyond which disclosure is required in the prescribed form. SEBI’s informal guidance is based on the reasoning that the PIT Regulations are primarily aimed at preventing abuse by trading when in possession of unpublished price sensitive information.

SEBI’s informal guidance is in line with the observation of the High Level Committee to review the SEBI (Prohibition of Insider Trading) Regulations, 1992 under the Chairmanship of N. K. Sodhi, Former Chief Justice, which observed that, regulations ought to be purposively construed and if two views were possible, the view that furthers the legislative objective would need to be adopted over a view that makes a mockery of the legal provisions.
To conclude, while a passive acquisition may not warrant a separate disclosure as explained above, acquisition or disposal by way of gift or off-market trade will warrant a disclosure. Thus, taking cue from SEBI’s informal guidance, conversion of securities into equity shares or those which are exchangeable like a depository receipt into underlying shares and vice versa will warrant a disclosure under the PIT Regulations.

- Yogesh Chande


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