SEBI’s Guidance Note on Insider Trading Regulations

After the SEBI
(Prohibition of Insider Trading) Regulations, 2015 (the “Regulations”) were
issued that came into effect on May 15, 2015, SEBI received several requests
from companies and their advisors on certain operational issues that came to
the fore in the implementation of the Regulations. In order to address those,
SEBI issued a Guidance
earlier this week.
One of the more
prominent issues clarified in the Guidance Note relates to the treatment of
employee stock options (ESOPs). SEBI has stated that the exercise of ESOPs by
employees shall not be considered “trading” except for the purposes of disclosures.
However, the other provisions of the Regulations shall apply to the sale of
shares so acquired. The principal relaxation relates to the “contra trade”
requirements which impeded the sale of shares by employees within six months of
acquiring shares in the company upon exercise of stock options. Now, an
employee can exercise ESOPs and acquire shares within six months of a previous sale
of shares. Similarly, the employee can also exercise the ESOPs and sell the
shares so acquired within a period of six months. This increases the
flexibility to employees, as it allows them to enjoy liquidity without being
restricted by holding (lock-in) requirements imposed by contra trade norms.
The Guidance Note
also clarifies questions relating to contra trades in derivatives and with
respect to buyback of shares, open offers, rights issues, follow-on public
offerings, etc. by listed companies. It also deals with issues relating to
pledge and other miscellaneous matters.
Employee Ownership: While
on the issue of ESOPs, the current issue of the Economist has an interesting column
highlighting the pros and cons of employees owning shares in their companies.

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.

1 comment

  • Also interesting is the clarification regarding creation of pledges. What measures a pledger/lender can take to prove innocence under the Regulation 4(1)? The documents will build in representations no doubt.

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