SEBI’s Informal Guidance Affirms Expansive Nature of Insider Trading Code of Conduct

The Securities and Exchange Board of India (SEBI) (Prohibition of Insider Trading) Regulations, 2015 (the “PIT Regulations”) have undergone refinement since their enactment. Earlier this year, SEBI introduced changes by way of the SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2018 that came into effect on 1 April 2019. The amendments to the PIT Regulations clarify that the insider trading code of conduct prescribed in regulation 9 thereof will be applicable to “designated persons” and their immediate relatives. The definition of “designated persons” now includes “all promoters of listed companies and promoters who are individuals or investment companies for intermediaries or fiduciaries”.

In this context, a company, Apollo Tricoat Tubes Limited, approached SEBI with a request for an informal guidance in light of the fact situation that arose in its case. Mr. Saket Agarwal, one of the promoters of the company, ceased to be a director with effect from 12 June 2018 and his shareholding fell from 23.77% in June 2018 to 13.34% in June 2019. Various documents issued by the company clarified that Mr. Agarwal was not acting as a promoter and was uninterested in the management and control of the company. Apollo Tricoat’s concern was that because Mr. Agarwal continued to be classified as a promoter, even though he in fact ceased to act as one, he is bound by the code of conduct under the PIT Regulations, which will impeded his ability to trade in the shares of the company. Matters are somewhat compounded as Mr. Agarwal cannot yet be reclassified from his promoter status because, under regulation 31A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, a person needs to hold less than 10% to be treated as a public shareholder. The company’s request to SEBI for informal guidance was on the ground that Mr. Agarwal ceased to act as a promoter in fact, although he has not been formally reclassified from a promoter to a public shareholder. Given that he is not involved in the day-to-day management of the company, he is not privy to any insider information. Thus, the company argued that the code of conduct, including the norms relating the closure of the trading window, should not be applicable to him.

In providing its informal guidance, SEBI adopted a strict view and stated that Mr. Agarwal continues to be a promoter as he holds more than 10% in the company. Hence, his position as a “designated person” is effectively non-negotiable and the code of conduct, including trading window requirements, will bind him. SEBI, therefore, declined Apollo Tricoat’s invitation to render a broader and more flexible interpretation to the term “designated person” to exclude inactive promoters.

At one level, SEBI’s response is understandable as it simply adopted the textual interpretation of the PIT Regulations. At the same time, this episode demonstrates the rather expansive nature of the said regulations. The recent amendments and SEBI’s approach to the informal guidance are demonstrative of SEBI’s longstanding effort to tighten the substantive regulation relating to insider trading. In the process, it may have the effect of encompassing cases such as these that might prove to be the collateral damage.

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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