Memorandum of Comments on Consultative Papers
on Short Swing Profits & amendments to SEBI (Prohibition of
Insider Trading) Regulations, 1992
I. Amendments to Insider Trading Regulations
SR NO. POINT PARTICULARS
1. 8 Officer, director and substantial shareholder to disclose their holding on
certain events or at certain intervals:
The takeover code provides for disclosure on selling shares under section 7 (1)
3. 13 (A).
4. 14. While coordination between the requirements of insider trading
regulations vis-à-vis takeover regulations is a welcome proposal,
5. 15. we can not loose sight that the 2 regulations are for entirely
different objectives. The threshold levels set under takeover
regulations should not be lowered to make them comparable
with insider trading regulations. It is suggested that substantial
shareholder holding more than 5% shares by itself or with
persons acting in concert should be taken out of the purview of
the insider trading regulations as he is already covered by the
takeover regulations. Multiple disclosures under the two
regulations should be avoided.
This point states that there shall be no real effect on prices of the security on
issuance of bonus /rights shares but this is not true because the news of
bonus / right shares will have a considerable impact on the price of shares of
DESIGNATED OR QUALIFIED BROKERS
This point states that the issuer shall designate a single broker through whom
all the transactions in issuer stock by insiders must be completed or require
insiders to use only brokers who will agree to the procedures set out by the
But this is practically impossible because the employees are scattered at
various location and no single broker has PAN INDIA presence. Also how can
one track the transactions done through online trading and trading done
through F&O segments. It is really not feasible to track it as in F&O and online
trading the Company does not get the details as to who are the people who
have traded in the derivative products of the Company.
This proposal negates the overall scheme of ‘principle based
approach to regulate rather than a rule based approach’. It can be
considered that an Insider is supposed to trade in the shares of
the company, after observing the trading window freeze, only
after pre-clearance of trade and give event based/periodical
disclosures. After these regulatory provisions, a third party
confirmation is not required.
A company as such is not expected to facilitate trading in its
shares by the insiders. Empanelment of designated brokers may
amount to facilitating such trading. It is also a common
knowledge that both the Brokers as well as investors are discreet
in selecting each other and therefore imposing a broker over the
employees may not be a good idea.
The existing provisions are self balancing and an additional
requirement of a confirmation from a broker is not required.
It is difficult to monitor the derivative products as there is daily variation of
premium in F&O transactions.
Unlike Beneficial Position (BENPOS) in the case of trading in shares, there is
no means to cross check the information given by insiders. In the case of
dealing through brokers, information can be taken from them. However a lot
of transactions also take place through on-line trading. SEBI should prescribe
specific formats for disclosure of dealing in derivative products. SEBI should
provide a transparent mechanism to handle this.
It is also important to clarify as to how and to what extent other
provisions like pre-clearance of trade, minimum holding period
of 30 days, event based reporting at every 2% change etc. will be
applicable for trading in derivatives by insider.
At the Company level it is difficult to monitor Tippee Liability.
THE PENAL CLAUSE
Substantial shareholder if not an employee need not be governed
in insider trading.
II. Short Swing Profits
Clause Brief Comments & Suggestions
4 ………the same securities were bought Comments: the definition of ‘securities’
and sold within six months of each include derivatives as per Securities
Contract Regulation Act. In the present
scenario, the derivative contracts have a
maximum tenure of 3 months. Hence this
clause cannot be enforced in the case of
Suggestion: Please consider whether the
regulation can be modified to include a
lesser holding period for derivative
contracts or the same be exempted from the
requirement of minimum holding period.
5 ……..all officers of the company who Comments: companies form various trusts
are beneficial owners, directly or for the benefit of its employees (including
indirectly, of ten percent or more of any
class of securities……
ESOP trust) which hold shares in the said
company. Such trust may hold more than
10% stake in the company. Since all the
employees would be beneficiaries of such
trust, it would amount to covering all the
employees of the company within the
definition of ‘designated persons’.
Suggestion: The word beneficiaries may be
substituted by “Persons” holding more than 10%.
The definition of ‘key management personnel’
should also be given.
6 …….employee benefit plan…… Comments: Please specifically clarify
whether the shares allotted under
Employee Stock Option schemes (ESOP)
can be sold within 6 months of allotment.
A demat account can have both, shares on
conversion of stock option as well as through
purchase of shares. In this situation, if shares under
ESOP are not to be held for 6 months since
allotment, SEBI needs to prescribe a method to
identify shares purchased for holding for 6 months.
We suggest LIFO method.