Insider Trading And Delisting Norms Revisited Nov-2014 TM
Insider Trading Norms Revisited & Delisting Norms Eased SEBI has tightened rules to keep check on insider trading and has eased delisting process. The regulator has tightened the two decade old insider trading rules to align them with international practices. The new regulations strengthen the legal and enforcement framework, align Indian regime with international practices, provide clarity with respect to the definitions and concepts, and facilitate legitimate business transactions. SEBI has also approved and may soon come out with discussion papers for E-IPOs, partly paid shares, imposing restriction on Wilful Defaulters. This Precursor provides first-hand analysis of the broad contours of the changes.
At a Glance Key Moves Delisting regulations revamped Revamp of insider-trading norms Listing agreement to be replaced with listing regulation Investment by FVCIs in NBFC-CIC Key Considerations Reclassification of Promoter as Public Regime change for fundraising through electronic IPOs Issuance of Partly Paid up Shares and Warrants Restriction on wilful defaulters to raise capital
SEBI (Prohibition of Insider Trading) Regulations, 2014 (1 of 3) Particulars 2014 Regulations Pantomath Remarks Who is an Insider? Connected Person Unpublished Price Sensitive Information (UPSI) and Generally Available Information Insider has been made wider by including persons connected on the basis of being in any contractual, fiduciary or employment relationship that allows such person access to unpublished price sensitive information (UPSI). Directors, employees and all other persons in the deeming category covered under 1992 regulations Immediate relatives will be presumed to be connected persons, with a right to rebut the presumption. Under the Regulations, the definition of a Connected Person has been broadened and also the onus of establishing not in possession of UPSI, shall be on such connected persons. UPSI has been defined as information not generally available and which may impact the price. The definition of UPSI has been strengthened by providing a test to identify price sensitive information, aligning it with listing agreement and providing platform of disclosure. Price sensitive information has now been included with respect to securities as well which was earlier with respect to company only Generally Available Information will be the information that is accessible to the public on a non-discriminatory platform which would ordinarily be stock exchange platform. The definition of Insider has been widened and immediate relatives have been brought in the purview of Insiders. The definition of connected person was largely position based in earlier regulation and now it has been broadened. Information which is not disseminated on the Stock Exchange is said to be unpublished information 4
SEBI (Prohibition of Insider Trading) Regulations, 2014 (2 of 3) Particulars 2014 Regulations Pantomath Remarks Communication of information Clear prohibition on communication of unpublished price sensitive information (UPSI) has been provided except legitimate purposes, performance of duties or discharge of legal obligations. Considering every investor's interest in securities market, advance disclosure of UPSI at least 2 days prior to trading has been made mandatory in case of permitted communication of UPSI. Companies by law would be entitled to require third-party connected persons to disclose their trading and holdings in securities of the company. The mere disclosure or communication of UPSI in itself constitutes an offence under the new Regulations whether or not the recipient has utilised the UPSI to gain an undue Advantage Trading can be done after two days of Disclosure of Price Sensitive information Third party connected persons like merchant Bankers, lawyers, Auditors needs to disclose their trading and holding in securities of the Company Prohibition on trading in F&O Valid Defense Directors and KMPs are prohibited from trading in derivatives of Company's securities In given cases, certain circumstances which can be demonstrated by an insider to prove his innocence have been provided. Interestingly, under the newly introduced Companies Act, 2013 ( the Companies Act ), the legislature has already incorporated the prohibition on insider trading of securities under Section 195 and has brought KMPs under the purview of Insider Trading The introduction of the provisions regarding valid defences is a step forward in developing sound insider trading norms in India. The text of the valid defences set out that the charge of insider trading not only has to be clear, precise and reasonable but it also involves the element of mens rea. It must be noted that SAT has, previously, held that in light of the objective of the Insider Trading Regulations, the intention/motive of the insider has to be taken cognizance of. 5
SEBI (Prohibition of Insider Trading) Regulations, 2014 (3 of 3) Particulars 2014 Regulation Pantomath Remarks Trading Plan Insiders who are liable to possess UPSI all round the year would have the option to formulate prescheduled trading plans. Trading plans would, however, to be disclosed on the stock exchanges and have to be strictly adhered to. Trading plans shall be available for bona fide transactions. The United States had introduced the concept of prearranged trading plans in 2000 in the form of Rule 10b5-1 of the Exchange Act, 1934. This facilitate compliant trading towards acquisitions by insiders and to provide them a safe harbour under the new Regulations. However, it is contemplated that once a trading plan has been in put in place; it shall necessarily have to be followed Disclosures of Change in Shareholding Disclosure of any change of 2% for persons holding more than 5% shares or voting rights has been removed Repeated disclosures have been removed so as to ease compliance burden and to align with Takeover Code. 6
Amendment to SEBI (Delisting of Equity Shares) Regulations, 2009 (1 of 2) Particulars Regulation Pantomath Remarks Conditions for Delisting to be Successful A delisting shall be considered successful only when the shareholding of the promoter, together with shares tendered by public shareholders, reaches 90 % of the total share capital. At least 25 % of the public shareholders need to be part of a reverse book-building process. Requires 25% public shareholders to tender shares; could make delisting harder for companies with wider shareholding Determination of Offer Price Prohibition on Promoter & Promoter Group The offer price determined through Reverse Book Building shall be the price at which the shareholding of the promoter, after including the shareholding of the public shareholders who have tendered their shares, reaches the threshold limit of 90%. The promoter/ promoter group shall be prohibited from making delisting offer if any entity belonging to the said group has sold shares of the company during a period of six months prior to the date of the Board meeting which approves the delisting proposal. Will stop investors from tendering their shares at an exorbitant price This regulation restricts the promoter or promoter group from committing manipulation in the process of delisting. Stock Exchange Mechanism Timelines for the Process Use of Stock Exchange platform for offers made under Delisting, Buy Back and Takeover Regulations. Timelines for completing the delisting process has been reduced from 137 calendar days (approx 117 working days) to 76 working days Tax outgo will be reduced if the shares are held for more than one year and transparent mechanism of tendering shares will be there Eases the Process 7
Amendment to SEBI (Delisting of Equity Shares) Regulations, 2009 (2 of 2) Particulars Regulation Pantomath Remarks Responsibility of compliance lies on the Board of Directors Exemption from following Reverse Book Building Process Takeover + Delisting Possible Opportunity to Companies The Board of the company shall approve the proposal for delisting only after satisfying itself that delisting is in the interest of shareholders and that the company is in compliance with applicable securities laws. The Board of the company shall appoint a Merchant Banker on behalf of the company and the promoter for the said purpose and for compliance with the Delisting Regulations. Companies whose paid up capital does not exceed Rs.10 crores and net worth does not exceed Rs.25 crores as on the last day of the previous financial year are exempted from following the Reverse Book Building process. The exemption would be available only if there was no trading in the shares of the company in the last one year from the date of the board resolution authorizing the company to go for delisting and trading of shares of the company has not been suspended for any non-compliance during the same period. Option to the acquirer to delist the shares of the company directly through Delisting Regulations pursuant to triggering Takeover Regulations has been provided. However, if the delisting attempt fails, the acquirer would be required to complete the mandatory open offer process under the Takeover Regulations and pay interest @ 10% p.a. for the delayed open offer. SEBI may, for reasons recorded in writing, relax the strict enforcement of any requirement of the provisions of the Delisting Regulations or exempt from compliance, in line with the provisions existing in ICDR and Takeover Regulations. The onus will be on the Board of Directors of the Company to determine whether the delisting offer is in the interest of the Shareholders Liquid shares of small companies need not comply with Reverse Book Building Process Unlike earlier the option is been given to an acquirer to directly opt for delisting pursuant to Takeover Regulations which makes the process easier and faster for the acquirers objective Here there is a privilege given to the Companies that they may approach SEBI and state their grievances and get an exemptions to certain compliances if SEBI permits. 8
Other Amendments Particulars Regulation Pantomath Remarks Conversion of Listing Agreement into Regulations Applicability to Specified Securities (includes equity and convertibles) - Listed on Main Board and SME Platform, Non-convertible Debt Securities, Non-Convertible Redeemable Preference Shares (NCRPS), Indian Depository Receipts, Securitised Debt Instruments, Units issued by Mutual Fund Schemes The Regulations have been sub-divided into three parts viz.,(a) substantive provisions incorporated in the main body of Regulations; (b) procedural requirements in the form of Schedules to the Regulations; and (c) various formats / forms of disclosures to be specified by SEBI through circular(s) SEBI is aligning the regulations with international practices where instead of separate agreements regulation for governing the Listed Companies is present. Also it has now made it easier to enforce and it will no longer be a contact between an exchange and a company. Amendments in Securities and Exchange Board of India (Foreign Venture Capital Investors) Regulations, 2000 The FVCI Regulations till now did not allow investments in NBFCs except Equipment Leasing and Hire Purchase Companies. To encourage investments in infrastructure, the Board approved amendments in FVCI Regulations to allow FVCIs to invest in NBFC-CIC (Core Investment Companies), as defined by RBI. 9
Other Proposals Particulars Re-classification of Promoters as Public Issuance of partly paid shares and warrants by Indian companies Use of Secondary Market infrastructure for public issuance ( e-ipo ) Imposing restrictions on wilful defaulters - Amendments to Regulations framed under SEBI Act, 1992 Discussion The Board approved the proposal to initiate public consultation process on re-classification of promoters on the basis of the discussion paper placed before it. The Board approved the proposal to initiate public consultation process regarding issuance of partly paid shares and warrants by Indian companies on the basis of the discussion paper placed before it. The Board approved the proposal to frame suitable regulations for using Secondary Market infrastructure for public issuance ( e-ipo ) after going through the public consultation process. The Board approved the proposal to review the policy in respect of restricting an issuer company / its promoter / directors, categorized as wilful defaulter, from raising capital after going through the public consultation process. SEBI shall initiate the discussion on the aforementioned agenda.. 10
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