Insider trading regulations 1992
Creation of pledge over shares of a company is certainly neither an act of subscription nor an act of buying of shares. Therefore, the question is whether pledge can be categorized as sale within the term dealing in securities. Here, one may rely on decision rendered in the case of National Bank of Commerce, Dallas v.
The aforementioned reasoning proceeds on the underlying economic reality concerned with the anti-fraud provision of securities law. In the case of McClure v. First National Bank , the same question was analyzed from a commercial perspective.
The Court therein opined that while the objective of securities law unequivocally remained the protection of investors and capital markets, a bank, in its capacity at a pledgee, cannot be regarded as an investor, or, an internal component of the capital markets. A commercial bank, in accepting a pledge of stock as additional consideration for the extension of a commercial loan, does not necessarily affect the securities industry.
This is so, because, a crucial element of any investment is the associated risks inherent to such investment. A bank does not assume any risk insofar as the sanctioned loan is concerned. Thus, economically, because loans granted by commercial banks, on the basis of collateral securities and backed by statutory protection, cannot be termed as risk induced investments, therefore, sale categorization of pledge ought to be beyond the ambit of the objectives of the law.
In light of the above arguments, I argue that sale categorization of pledge under the Regulations is unfounded and should be limited to the Regulations. Notify me of follow-up comments by email. Notify me of new posts by email. The RBI, in its financial stability report, has documented that out of over listed companies in India, promoters of over companies have pledged a substantial portion of their holdings.
In light of such fact, a commercial bank in India sanctioning loans on the basis of listed securities as collateral is an important component of Indian securities markets by virtue of the fact that pledging of shares may result in greater volatility in the markets.
Banks often ask for additional securities if the prices of securities pledged with them as collateral for a loan goes down. Further, banks are often called upon to invoke pledges. In case of pledging of shares by a corporate insider when in possession of unpublished price sensitive information that when published may materially mark down the price of pledged securities, the risk of increased volatility is heightened. A reading of the anti-fraud provision in India, namely Section 12 — A of the SEBI Act, reveals that it is aimed at protecting not only existing investors, but also potential investors.
Enter your email address to subscribe to this blog and receive notifications of new posts by email. Reproduced below is the relevant passage from the order: Further, in paragraph 9 k , the following observations are offered: No insider shall— […], deal in securities of a company listed on any stock exchange when in possession of any unpublished price sensitive information […. Firstly, had the legislature intended to categorize pledge within the term sale, it would have explicitly done so.
Likewise introduction of revised Cl. For the overall ease to Corporates, instead of number of days, SEBI could have specified a particular date from which said regulations would come in force. The new regulations shall put in place a framework for prohibition of insider trading in securities and to strengthen legal framework thereof.
However, it is not clear as to whether such notes has got any binding impact or otherwise, wherever applicable. Further, SEBI has provided 10 categories of connected persons who shall be deemed to be connected persons unless contrary is established. With the new definition of connected persons, it is clear for corporates that a connected person means anyone who has a connection with company that is expected to put him in possession of UPSI.
As a result, the Corporates shall have to have up-to-date list of all such persons presumed to be connected. However, Corporates shall have to gear-up and ensure that such list is prepared and up-dated, in order to avoid unwarranted situations. With this, all immediate relatives need not be included under the definition unless any of the other conditions are satisfied.
While elaborating on " insider" , SEBI brought under net a connected person or a person in possession of or having access to UPSI , regardless of its means. This is quite comprehensive to cover all possibilities of dealings in securities. The Regulations put restrictions on communication and trading by insiders. However, it provides exception where such communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations.
This necessitates all insiders of corporates not to disclose any information to anybody including, even, other insiders which may result into disclosure of UPSI under the new code for insiders. There is a need to imbibe and strict implementation of the need-to-know principle, among all Insiders within the Corporate World.
During such transactions, the onus of establishing, non-possession of UPSI , shall be on such connected persons. New Regulations allow an insider to formulate trading plan i. A clarification through note allows transaction though person is in possession of UPSI as he had pre-decided the transactions even before the UPSI came into being. This adds to confusion for Corporates and defeats the purpose of having trading plan in place in advance.
This may discourage insiders, who might have any strategy of going ahead with the concept of Trading Plan. It is not made clear anywhere whether pre-clearance is necessary or not — for transaction implementation which are incorporated in the trading plan. This puts restriction on corporates to pre-decide Board meeting dates, well-in-advance and disclose the same to all insiders; so as to enable them to have proper trading plan in terms of these restrictions.
In spite of such advance information for insiders, it is practically not possible for anybody to pre-decide the dates of trading and follow the above restriction, as well. Compliance Officer shall review trading plan and assess whether plan would have any potential for violation of these regulations, approve the same, and monitor its implementation.
The Regulations put restriction that approved trading plan need to be implemented mandatorily and shall be irrevocable. Further, no deviation is allowed with execution of any trade in securities outside the scope of trading plan as it would have impact on market pulse, as well.
Approved trading plan, need to be notified to stock exchanges on which company securities are listed. Further, every such person shall make similar disclosures within 7 days of assuming such position. Under continual disclosures , every promoter, employee and director of every company shall disclose to the company the number of such securities acquired or disposed of within 2 trading days of such transaction if the value of the securities traded, whether in one transaction or a series of transactions over any calendar quarter, aggregates to a traded value in excess of Rs.
However, in the initial disclosure provisions no such term has been used. The company, in turn, shall notify the particulars of such trading to the stock exchange on which securities are listed within 2 trading days of receipt of the disclosure or from becoming aware of such information.
The Company needs to make such disclosure of incremental transactions when transactions effected after prior disclosure cross threshold of Rs. Regulations provide freedom to companies to decide on disclosures by other connected persons i.
Prompt public disclosure of UPSI that would impact price discovery no sooner than credible. Designation of a senior officer as a chief investor relations officer to deal with dissemination.