The Securities and Exchange Board of India (SEBI) recently issued an informal guidance in response to a request for an interpretive letter from Kotak Mahindra Bank Limited (KMBL) on the continual disclosure requirements under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations).
Regulation 7(2) of the PIT Regulations prescribes a two-step disclosure mechanism wherein:
- Promoters/ employees/ directors of listed companies are required to disclose to the company, within two days of the occurrence of a transaction, the number of securities acquired or disposed, where the value of such securities in the transaction (or a series of transactions in any calendar quarter) amounts to a traded value in excess of Rs. 10 lakh.
- The company in turn is required to disclose such trades to the stock exchanges, on which the traded securities are listed, within two days of receipt of the disclosure or upon becoming aware of such information.
In this regard, KMBL raised two queries for SEBI’s response:
- Whether disclosure in the prescribed format is required even in cases of change in shareholding where the traded value of securities/ consideration amount is nil, as in the case of shares received pursuant to bonus share issuances, schemes of amalgamation/ demerger, gifts, and other off-market transactions like the transfer of shares to a family trust etc?
- What is the basis for determining the value at which such transactions need to be disclosed?
SEBI, in its informal guidance, clarified as follows:
- The number of securities acquired or disposed beyond the prescribed threshold, irrespective of the mode of acquisition or disposal, has to be disclosed.
- The disclosure must be made by the concerned promoter/ employee/ director to the company, and in turn by the company to the stock exchanges.
- Since the intent of the PIT Regulations is to prevent abuse by trading when in possession of unpublished price sensitive information (UPSI), in cases where persons acquiring securities have no role in the transaction and a relevant disclosure for such transaction is already in the public domain (viz. bonus issuance, shares received pursuant to a scheme), separate internal disclosures to the Company may not be necessary.
- In all other instances of off-market transactions or gifts, the disclosures would need to be made by the relevant persons to the Company.
- In the context of the second query, SEBI clarified that even in the case of transactions where the actual traded value of securities/ consideration amount is nil, the value of such securities (as prevailing on the day of acquisition/ disposal) would have to be considered for the purpose of arriving at the threshold value beyond which disclosure may be required.
The principle underlying the informal guidance, of disclosure of any trades exceeding the prescribed thresholds irrespective of the mode and manner of acquisition/ disposal of securities, has previously been upheld by the Securities Appellate Tribunal (SAT) in its decisions under the erstwhile PIT Regulations. However, SEBI’s distinction between the applicability of internal and external disclosures, depending on the nature of the transaction, is an important point of departure from certain prior SAT decisions.
SAT’s decision in Akriti Global Traders Ltd. vs. SEBI,  122 CLA 531 (SAT), involved an appeal against SEBI’s Order penalising the appellant for failure to make timely disclosures under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (SAST Regulations) of an increase in shareholding beyond the prescribed limits, pursuant to the issuance of shares under a scheme of amalgamation.
The SAT held, in relation to the obligations to make disclosures under the provisions of the SAST Regulations as also under the PIT Regulations, 1992, that “… irrespective of whether the shares were purchased from the open market or received on account of amalgamation or by way of bonus shares, if as a result of such acquisition/ receipt, the percentage shareholding of a person exceeds the limits prescribed under the respective regulations, then, it is mandatory to make disclosures under those regulations”. SAT held that the obligation to make the disclosure arose once the prescribed shareholding limits were exceeded, irrespective of the mode and manner of acquisition of the shares. This position in law was reiterated by the SAT in In Re: Pawan Kumar Sharma [MANU/SB/0174/2015].
In light of the above, for the purpose of disclosures under the prevailing PIT Regulations and without prejudice to continuing disclosure requirements under the extant SAST Regulations, limited reliance can be placed on the instant informal guidance on the following points:
- SEBI’s informal guidance, distinguishes between the nature of the transactions, for the purpose of making internal and external disclosures. In instances where there is an active acquisition or disposal of securities by insiders, such as in the case of gifts, transfer of shares to a trust – both internal disclosures (to the company) and external disclosures (by the company to the exchanges) would continue to be required. However, other transactions involving passive acquisition of securities through bonus share issuances, schemes of amalgamation etc., may require only external reporting under the PIT Regulations, since mandated reporting by the Company to the stock exchanges would subsume information that is likely to form the content of the internal reporting.
- Disclosure requirements necessarily extend to all off-market transactions or gifts where the actual traded value of the securities acquired or disposed may be nil, and the prevailing market value as on the date of acquisition or disposal of the securities should be taken into account to determine the threshold beyond which disclosures are required.
While the informal guidance does provide clarity on the nature of disclosures for merger transactions involving listed companies, it may not apply to other more nuanced circumstances such as merger of two promoter entities which hold shares in a listed entity consequent to which the shareholding percentage of the merged entity in the listed entity increases. In such circumstances the making of an internal disclosure to the Company, as required under Regulation 7.2(a) of the PIT Regulations, is advisable.
* The author was assisted by Aditi Nayak, Associate