Informal Guidance Letters - SEBI’s googlies on Insider Trading

October 16,2017
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Apurv Sardeshmukh (Partner, Legasis Partners)


The Securities and Exchange Board of India (‘SEBI’) has recently issued to informal guidance letters interpreting certain provisions of the SEBI (Prohibition of Insider Trading) Regulations, 2015. The guidance letters were issued to Kirloskar Chillers Private Limited (“KCPL”) and Prabhudas Lilladher Private Limited (“PLP”) Ltd based on the queries raised by these entities and further, related to the applicability of the Prohibition of Insider Trading (“PIT”) Regulations. The views given by SEBI in the informal guidance letters issued to the respective companies has raised a few eyebrows as the two guidance letters appear to be slightly contradictory to one another. Before analyzing the letters and their impacts it is important first to have at some of the important provisions of the PIT Regulations.

Relevant provisions of SEBI (Prohibition of Insider Trading), 2015:

The PIT Regulations are prohibitory in nature and have been enacted to prevent insiders who are in possession of Unpublished Price Sensitive Information (“UPSI”) to take undue advantage of the same while dealing in securities at the expense of other investors and general market participants. PIT Regulations restrict an insider to deal in securities or provide information regarding the same without adhering to the provisions of PIT. Further, PIT defines Insider as a “Connected Person” and a person who is in possession of UPSI.  Connected persons are also defined under the regulations to include a list of persons deemed to be connected persons and include those who have a connection with the company that is expected to put such persons in possession of UPSI.

Regulation 9 of PIT provides for the formulation of a Code of Conduct by the Board of Directors of every listed company. The objective of the Code of Conduct is to regulate, monitor and report trading by the employees of the Company and other connected persons and to ensure compliance with the provisions of PIT.  The Code of Conduct has to be adopted as per the manner provided in Schedule B of the PIT.  The Code of Conduct provides for designating a compliance officer to administer the code of conduct and other requirements of the regulations. Schedule B enumerates that the compliance officer shall report to the Board of Directors and that the Board of Directors shall in consultation with the compliance officer specify certain “Designated Persons.” The Code of Conduct also requires that a pre-clearance shall be taken from the Compliance Officer by such designated persons to deal with the securities.

Analysis of the informal guidance letters:

KCPL had sought guidance from SEBI and  enquired whether it or any other entity that qualifies as a promoter of Kirloskar Brothers Limited (‘KBL’)  require to seek a pre clearance to trade from the compliance officer as mentioned in the Code of Conduct. Further, as KCPL had no role to play in the management of KBL and logically did not have any access to UPSI , KCPL  had enquired whether obtaining  such a pre clearance with respect to trading of shares of KBL was required by them. In the informal guidance letter in relation to the above queries , SEBI quoted clause 6 of Schedule B of the PIT  and stated that as per the above clause, pre-clearance is required to be obtained only by “Designated Persons” if the value of the proposed trade is above such threshold as stipulated by the Board of Directors. SEBI further mentioned that only in situations where a Promoter has been designated as a “designated person” by the Board of Directors in consultation with the compliance officer, will it be required to seek pre-clearance with respect to a trading as per the PIT. Logically, pre clearance rules mentioned in the code of conduct in PIT shall apply to only designated persons.

In the case of PLP, PLP had requested SEBI to clarify whether senior professionals who do not have access to UPSI can request the Compliance officer for exclusion as Designated Persons under the Code of Conduct.  In this case SEBI however stated that that code of conduct applies to all connected persons and not only designated persons.

Effect of the informal guidance:

The two informal guidance letters seem to have caused some confusion. In the KCPL guidance letter SEBI has stated that where a promoter has been designated as a “designated person” by the Board of Directors in consultation with the compliance officer, it will be required to seek pre-clearance with respect to a trading as per the PIT. In the PLP letter SEBI has stated that the code of conduct and the pre clearance mandated under it, applies to Designated Persons as well as connected persons. The definition of ‘Connected Person’ under the PIT is so wide that it appears that there is some conflict in the KCPL guidance letter and the PLP guidance letter.

A look at the regulation reveals  that Clause 3 of Schedule B states that employees and connected persons designated on the basis of their functional role (“designated persons”) in the organization shall be governed by an internal code of conduct governing dealing in securities.  Further it has been provided that the board of directors in consultation with the compliance officer are required to specify the designated persons to be covered by such code on the basis of their role and function in the organization.

It can thus be interpreted that , designated persons can be employees or connected persons subject to the fact that they have been specified as designated persons by the Board of Directors. Further, employees or connected persons are to be specified as designated persons on the basis of their functional role i.e. on the fact that whether their role in the organization is such that they are in possession of UPSI.

It  thus appears , in light of the above discussion and provisions mentioned, the applicability of Code of Conduct as mentioned in Schedule B of the PIT Regulations with respect to pre-clearance and trading is only restricted to Designated Persons. The intention of the legislature behind the same seems to lie in Clause 3 of the Schedule wherein it is specified that only those employees and connected person on the basis of their functional role in relation to UPSI, shall be governed by the PIT. In view of the same it is humbly submitted that SEBI informal guidance letter issued to KCPL is more consistent with the object and language of the PIT Regulations.