Guest Post: Disclosure of Shareholding & Insider Trading Regulations

[The
following post is contributed by Yogesh
Chande
, Associate Partner, Economic Laws Practice. Views are personal]
In
an order
passed by the SEBI Adjudicating Officer
against an employee (Noticee)
of a listed company, it was held that the “Head of Human Resources” of a
particular vertical of the company is also an “officer” within the meaning of
the definition of section 2(30) of the Companies Act, 1956 read with the
provisions of the SEBI (Prohibition of Insider Trading Regulations), 1992 (Regulations),
and therefore was under an obligation to disclose the change in the
shareholding  that exceeded the
thresholds prescribed under the Regulations.
Regulation
13(2) and regulation 13(4) of the Regulations deal with disclosure of interest
or holding in listed companies by director and officer of a listed company.
The
Adjudicating Officer rejected the defences pleaded by the Noticee and imposed a
penalty of INR 0.5 million on the Noticee.
The
somewhat unique facts of this case were as follows:

1.         The listed company has eleven
divisions.

2.         The Noticee held the position of head
of the “Competency Development and Human Resource” function of the “Trade
Marketing and Distribution” vertical of the Indian Tobacco Division of a listed
company.

3.         The Indian tobacco division itself is
one of the 11 business divisions of the company, which is further divided into
“Cigarette Brands and Supply Chain and Trade Marketing & Distribution”,
along with all the other divisions and departments, has its own human resource
department.

4.         Each of the business divisions of the
listed company has a separate human resources department, headed by a ‘Head’ of
Human Resources, in addition to which there is a Corporate Human Resources
department, the head of which is a member of the Corporate Management
Committee.

5.         There are about 65 personnel in the
company who are at the same level as the Noticee, and there are 42 personnel in
the company who are above the Noticee in the hierarchy.

Upon
perusal of the flowchart of the Human Resources function in the Trade Marketing
& Distribution vertical of the listed company, the SEBI Adjudicating
Officer found that the Noticee is the Head-Human Resource & Competency
Development of the company.
The
SEBI Adjudicating Officer also found that, the Divisional Manager – HR
Operations, Divisional Manager – Competency Development, District human
resources managers (N/S/E/W), the Assistant HR Managers – Operations, Manager –
HR Systems and Processes, Manager Skilling & Employability, Asst Manager
Training, Asst Manager Training, Asst. HR Managers (N/S/E/W), HR Officer –
Frontline Performance are the personnel subordinate to the Noticee, which led
to the conclusion that the Noticee is clearly holding a higher position capable
of giving directions to her subordinates.
While
levying the penalty, the SEBI Adjudicating Officer also relied upon the
following judgement of the Hon’ble Securities Appellate Tribunal in Sundaram Finance Limited V. SEBI

A
reading of the aforesaid definition makes it clear that it is an inclusive
definition. Apart from what the word ‘Officer’ means, it includes all that is
stated therein. In other words, the definition does not exhaust all persons who
otherwise come within its ambit or scope. While the definition says that it
includes the persons specified therein, it doesn’t say who are all the persons
who will come within the term. We are of the view that an ‘Officer’ means a
person holding an appointment to an office which carries with it an authority
to give directions to other employees. Thus, an ‘Officer’ as distinct from a mere
employee is a person who has the power of directing any other person or persons
to do anything whereas an employee is one who only obeys. Any person who
occupies a position of responsibility in a company will be an ‘Officer’ and
this has been clarified by the Department of Company Affairs, government of
India as per its letter dated October 7, 1963.

Conclusion
This
order of the SEBI Adjudicating Officer is likely to have repercussions on those
listed companies which are hierarchical.
It
is pertinent to note that, although the expression “designated employee” in the
model code of conduct [Part A of Schedule I] prescribed under the Regulations,
makes a reference to officers comprising the top three tiers of the company
management, in the present case, there were not only about 65 personnel in the
company who were at the same level as the Noticee, but there were 42 personnel
in the company who were above the Noticee in the hierarchy.
Thus, apart from the
companies which will have to give a careful reconsideration to the model code
of conduct prescribed under the Regulations which they may have adopted in
terms of the Regulations, the universe of employees who could potentially fall
within the definition of the term “officer” will have to introspect and comply
with the disclosure requirements prescribed under the Regulations, is likely to
increase.
This
will also ensure that, the company does not fall afoul of its obligations under
the Regulations including the compliance officer. The onerous nature of responsibilities
imposed by SEBI on the compliance officer under the Regulations has been
confirmed by SAT on various occasions.

– Yogesh Chande

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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