SEBI Informal Guidance: Trading Disclosures – What’s the “Value”?

[The following post is contributed by Yogesh Chande, Partner, Shardul
Amarchand Mangaldas & Co. Advocates and Solicitors. Views are personal.]
The SEBI (Prohibition of
Insider Trading) Regulations, 2015 (the “PIT Regulations”) prescribe certain
disclosure norms relating to acquisitions and disposals of securities by
insiders in companies. Specifically, regulation 7(2)(a) states that where
acquisitions or disposals of securities by a promoter, director or employee
exceed a traded value of INR one million during a calendar quarter, they such
person must disclose the transaction to the company within two trading days.
Certain questions came
up in relation to the interpretation of the said provision, and the Securities
and Exchange Board of India (SEBI), by way of a recent informal
guidance
, has opined that securities acquired or disposed of beyond the
threshold have to be disclosed, irrespective of the mode of acquisition or
disposal. According to SEBI, if a person has no role to play in connection with
an allotment, e.g. issue of bonus shares or pursuant to an amalgamation/merger,
a separate disclosure may not be necessary. Thus, instances such as gifts or off-market
transactions warrant a disclosure under the said regulation.
SEBI in the informal
guidance has further stated that, the term “value of securities traded” is to
be interpreted as the prevailing market value of securities on the day they
were acquired or disposed. Thus, the said value should be disclosed for the
purposes of calculation of threshold value beyond which disclosure is required
in the prescribed form. SEBI’s informal guidance is based on the reasoning that
the PIT Regulations are primarily aimed at preventing abuse by trading when in
possession of unpublished price sensitive information.
SEBI’s informal guidance
is in line with the observation of the High Level Committee to review the SEBI
(Prohibition of Insider Trading) Regulations, 1992 under the Chairmanship of N.
K. Sodhi, Former Chief Justice, which observed that, regulations ought to be
purposively construed and if two views were possible, the view that furthers
the legislative objective would need to be adopted over a view that makes a
mockery of the legal provisions.
To conclude, while a
passive acquisition may not warrant a separate disclosure as explained above,
acquisition or disposal by way of gift or off-market trade will warrant a
disclosure. Thus, taking cue from SEBI’s informal guidance, conversion of securities
into equity shares or those which are exchangeable like a depository receipt
into underlying shares and vice versa will warrant a disclosure under the PIT
Regulations.
– 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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