CASE LAWS ON INSIDER TRADING REGULATIONS

SIRC OF ICSI – HALF DAY SEMINARY ON INSIDER TRADING REGULATIONS

6TH APRIL 2019

COVERAGE

• Analysis of Informal Guidance by SEBI;

• Recent instances of investigation and actions taken by SEBI.

INFORMAL GUIDANCE

• Continual Disclosures

• Trading Plan

• Trading Plan & ID

• Power of Compliance Officer

• Investments by Discretionary PortfolioManager

• On Market Contra Trade – does it qualify forexemption u/Reg. 4(1)(i)

CONTINUAL DISCLOSURES

• April 28, 2017 to Kotak Mahindra Bank Ltd.

• Certain transactions eg. Bonus Shares, sharesreceived pursuant to a Scheme ofamalgamation/demerger, gift or off markettransactions – like transfer of shares to a familytrust account - where traded value is NIL – Isdisclosure required? If, yes, at what value?

QUERY RAISED

• Whether disclosure in Form C is required to bemade in case of transactions where tradedvalue is NIL?

• If the answer to the above query is in theaffirmative, then at what value should theaforesaid transaction be disclosed?

MEANING OF TRADING

• Reg. 2(l) – “Trading” means and includessubscribing, buying, selling, dealing oragreeing to subscribe, buy, sell, deal in anysecurities, and “trade” shall be construedaccordingly.

SEBI’s RESPONSE

• REG. 7(2): Every promoter, member of thepromoter group, designated person anddirector of every company shall disclose to thecompany the number of such securitiesacquired or disposed of within two trading daysof such transaction if the value of the securitiestraded, whether in one transaction or a seriesof transactions over any calendar quarter,aggregates to a traded value in excess of tenlakh rupees or such other value as may bespecified;

SEBI’s RESPONSE• No. of securities acquired or disposed beyond the

threshold have to be disclosed, irrespective of mode ofacquisition. Hence, the concerned persons have to makedisclosure relating to change in holding to company, andcompany in turn to the stock exchanges.

• PIT Regulations is to prevent trading when in possessionof UPSI.

• In cases where person getting allotment has no role inthe transaction and the information is already in publicdomain, eg: bonus shares, shares allotted under schemeof amalgamation/demerger – separate disclosure is notrequired.

• Off market transactions, gifts etc – disclosure is a must,at prevailing market value of the securities on the daythey were acquired or disposed of.

TRADING PLAN• November 1, 2016 to Tide Water Oil Co. (India)

Limited

• Can trading plan specify the number of sharesto be purchased during a trading period asproposed in the plan subject to maximum valueper share and not exceeding a certain amount?

COMPANY’S ARGUMENT

• Note under Reg. 5(2)(v) - It is intended thatwhile regulations should not be too prescriptiveand rigid about what a trading plan shouldentail, they should stipulate certain basicparameters that a trading plan should conformto and within which, the plan may beformulated with full flexibility.

SEBI’s RESPONSE• REG: 5(2) - Such trading plan shall:–

(v) - set out either the value of trades to be effected or thenumber of securities to be traded along with the nature of thetrade and the intervals at, or dates on which such trades shall beeffected; and

NOTE: It is intended that while regulations should not be tooprescriptive and rigid about what a trading plan should entail,they should stipulate certain basic parameters that a trading planshould conform to and within which, the plan may be formulatedwith full flexibility. The nature of the trades entailed in the tradingplan i.e. acquisition or disposal should be set out. The tradingplan may set out the value of securities or the number ofsecurities to be invested or divested. Specific dates or specifictime intervals may be set out in the plan.

SEBI’s RESPONSE

• Placing a condition on purchase of sharessubject to certain limit on the price, will lead todeviation from the number of shares specifiedin the Trading Plan;

• Placing the condition of maximum price alsoinduces uncertainty into the Trading Plan andwill not be in compliance with Reg. 5(4) –which requires that trading plan onceformulated cannot be deviated from.

SEBI’s RESPONSE

• Insider can be construed to be providing hint orinducing the investors on future pricing of itssecurities. Disclosure of future pricing wouldentail market abuse, and thus against spirit ofthe regulations.

• Guidance Note para 3 – Any trading opted by aperson under Trading Plan can be done only tothe extent and in the manner disclosed in theplan, save and except for pledging ofsecurities.

INDEPENDENT DIRECTORS

• 19th July 2018 – Hawkins Cookers Ltd.

• Company’s letter seeking informal guidance• One of the company’s independent directors wants to

sell his equity shares of the company;

• The CoC requires trades to be done when the `TradingWindow’ is open and pre-clearance obtained for tradesof Rs. 20 Lakhs and above;

• Para 8 of Schedule B requires undertaking to be givenwhile applying for pre-clearance that he is not inpossession of UPSI;

• “By virtue of participation in board meetings and accessto information that is shared at such meetings, the saiddirector is deemed to be perpetually in possession ofUPSI. The undertaking therefore is not possible.

QUERY RAISED

• Whether the director may submit a TradingPlan as required for a plan to trade sharesabove Rs. 20 lakhs in value and proceed withexecuting the same without giving the saidundertaking.

• Kindly let us know what procedure should befollowed by the company and/or the saiddirector such that the said director may lawfullyexecute the trade.

PARA 8 OF SCHEDULE B

• “Prior to approving any trades, the complianceofficer shall be entitled to seek declarations tothe effect that the applicant for pre-clearance isnot in possession of any unpublished pricesensitive information. He shall also haveregard to whether any such declaration isreasonably capable of being renderedinaccurate.”

SEBI’s RESPONSE

• Trading Plan is an exception to the general rulethat prohibits insiders from trading when inpossession of UPSI;

• Trading Plan shall not be made to entail trading insecurities for market abuse;

• 5(3) empowers Compliance Officer to reviewtrading plan and assess potential violation of PITReg., and entitled to seek such undertakings asmay be necessary;

• In the absence of an approved Trading Plan,designated persons are subject to therequirements of CoC.

POWER OF COMPLIANCE OFFICER

• February 3, 2017, Kirloskar Chillers Private Limited

• KBL – a listed company;

• Promoters of KBL are shareholders of KCPL, andhence KCPL is “Promoter and Promoter Group”;

• Application to the Compliance Officer for pre-clearance is rejected without giving any reasons;

• Writes seeking Grounds, then Compliance Officerwrites back “there is a already pre-clearance in placefor promoters and there is no balance number ofshares available for trade”

QUERIES

• Whether KCPL or any entity that qualifies asPromoter Group entity requires pre-clearance fromKBL merely because it is a promoter, even thoughit has no role in the management of KBL or haveaccess whatsoever to UPSI;

• Factors that CO needs to consider while approvingor rejecting a pre-clearance;

• Is reason given by the CO a valid one; CanCompliance Officer reject pre-clearance requestfor reasons extraneous to CoC and PITRegulations, does he have discretionary powers;

SEBI’s RESPONSE

• Clause 6 of Schedule B - When the tradingwindow is open, trading by designated personsshall be subject to pre-clearance by thecompliance officer, if the value of the proposedtrades is above such thresholds as the boardof directors may stipulate. No designatedperson shall apply for pre-clearance of anyproposed trade if such designated person is inpossession of unpublished price sensitiveinformation even if the trading window is notclosed.

SEBI’s RESPONSE• Pre-clearance is required to be obtained only by

Designated Persons;

• A Promoter if a Designated Person by the BoD, in consultation with the CO, will be required to obtain pre-clearance;

• The CO has power to approve or rejecta pre-clearance request after necessary assessmentas per the PIT Regulationsand the Code of Conduct;

• Questions of acts of CO to be referred to board andaudit committee for examination;

• Actions of the CO, BoD, should be to ensurecompliance in letter and spirit to the PIT Reg., and notany ulterior motive.

TRADING THROUGH PMS

• July 25, 2016 HDFC Bank Ltd.

• Employees may choose to invest throughDPMs.

• DPM invests the funds of its client as per theirown discretion, and the investor has no director indirect control or influence over thedecisions of the DPM.

• Employees only provide funds to the DPM.

SEBI’s RESPONSE

• Reg. 4(1) - No insider shall trade in securities thatare listed or proposed to be listed on a stockexchange when in possession of unpublished pricesensitive information:

• Also, refers to Explanation – who trades when inpossession of UPSI, there is presumption that histrade is motivated by knowledge and awareness ofsuch information in his possession.

• Dealing – directly or indirectly is not relevant. Evenwhen dealing thro’ DPM, it will be insider tradingonly.

ON-MARKET CONTRA TRADE

• April 12, 2018 Star Cement Ltd

• Promoter sold few shares on 14th February2018;

• Proposes to acquire through inter-se transferfrom another promoter, to be executed onstock exchange platform;

QUERIES

• Whether inter-se transfer on stock exchangeplatform being a contra trade violate PIT;

• After inter-se transfer between promoters samepromoter wants to sell shares in open marketwithin 6 months will violate PIT;

• Whether provisions of contra trade apply topromoters individually or to the entire promotergroup as a whole – if one promoter has boughtshares, can another promoter do a sell within 6months?

REG. 4(1)(i)• REG. 4(1) No insider shall trade in securities that are

listed or proposed to be listed on a stock exchangewhen in possession of unpublished price sensitiveinformation:

• Explanation.xxxxxxxx

Provided that the insider may prove his innocence bydemonstrating the circumstances including the following:–

(i) the transaction is an off-market inter-se transferbetween insiders who were in possession of the sameunpublished price sensitive information without being inbreach of regulation 3 and both parties had made aconscious and informed trade decision.

SEBI’s RESPONSE

• Only off-market qualifies for exemption and theproposed on-market sale will not;

• Looked at the then definition in Schedule B ofDesignated Persons and said – restrictions oncontra trade per se does not apply topromoters unless they are designated persons.Also, it is applicable only to personsindividually and not as a group.

CHRONOLOGYDate of the Event Nature of the Event

April 8, 2009 SEBI write to CFO seeking

information about his dealing in the

shares of the Company where he is

a CFO

April 28, 2009 CFO replies

August 30, 2010 SEBI writes, seeking information

about dealing with shares during

June 17, 2008 to July 31, 2008

September 10, 2010 CFO replies

December 1, 2011 CFO examined under oath by SEBI

Investigating Authority

22nd March 2012 SEBI IA issues summons seeking

further information

CHRONOLOGY

Date of the Event Nature of the Event

26th March 2012 Reply by CFO

24th November 2015 Ex-parte interim order, freeze on

bank account till FD is given with lien

marked.

30th November 2015 FD given and freeze removed

January 6, 2016 CFO responds why ex-parte interim

order is not sustainable

March 15, 2017 SEBI seems to have appointed

Adjudicating Officer and CFO

received SCN from the AO

May 9, 2017 CFO replies to allegations in the AO

SCN

CHRONOLOGY

Date of the Event Nature of the Event

August 1, 2017 SEBI informs date of hearing for ex-

parte interim order

September 14, 2017 Hearing by WTM

December 8, 2017 AO issues Supplementary SCN

March 23, 2018 WTM passes order – Investigation

findings found incorrect and no

insider trading

September 12, 2018 AO hears the SCN

December 28, 2018, December 31,

2018 and January 16, 2019

AO passes order

CASE 2 - EVENTSDATE EVENT

27/04/2017 SEBI sends email to the Compliance

Officer seeking information about

contra trades during 13/08/2015 to

31/12/2016 and trading on

20/10/2015 (i.e) before results

announced on October 20, 2015.

31/05/2017 Company writes back stating it is not

aware of the contra trades and

shares the Form C for 31.03.2015

and Annex C for 31.03.2016, and

also informs about his resignation.

12/10/2017 SEBI shares with the company

details of all contra trades done and

seeks comments

CASE 2 - EVENTSDATES EVENTS

09/11/2017 SEBI writes to company asking what

penal action has been taken for the

contra trade

14/01/2019 SEBI writes to Company advising it

to disgorge profits and remit it to

IPEF of SEBI

QUERIES?