Sebi board clears big ticket market reforms

The board of Securities and Exchange Board of India (Sebi) on Wednesday cleared big-bang market reforms, including a move to replace the two-decade-old insider-trading rules with the new prohibition of insider trading (PIT) regulations, and amending the existing delisting regulations.

Additionally, Sebi approved new reforms in consent mechanism under which it will give entities found violating securities laws the option of settling the matter before the issue of showcause notices and start of enforcement proceedings. This will be done by way of basic notices stating the probable action. The regulator, however, clarified this arrangement would be only for minor violations.

According to a press statement from the market regulator, the rules around insider trading have been strengthened by clearing new definitions of unpublished price-sensitive information (USPI), insider and connected persons.

An insider would now mean a person who is in possession of or has access to price-sensitive information.

The PIT regulations of 1992 defined a connected person on the basis of the position held by him; in the new regulations, the definition would include immediate relatives.

Sebi’s new PIT regulations are based on the recommendations of the N K Sodhi committee, which gave its report to the regulator in December last year.

The regulator said any price-sensitive information could not be communicated to anyone without legitimate purposes. However, there could be cetain defence, such as if a communication was in the ordinary course of business, or an acquisition was under the Takeover Code.

“Sebi would do well if these defences were reworded to provide clarity on coverage. Also, the regulator could consider whether to include additional defences based on the Sodhi committee’s recommendations,” said Vaneesa Abhishek, a Bombay High Court lawyer.

And, companies in possession of insider information around the year are required to declare their trade plans, made well in advance, to stock exchanges.

“The perpetual insiders like promoters and directors would be required to frame their future plans well in advance, disclose those to stock exchange and then strictly abide by such plans. This might lead to speculation in share prices, since the public would have an advance knowledge of their trading plans,” said Tejesh Chitlangi, Partner, IC Legal.

The idea of allowing settlement under consent mechanism for minor violations through issue of basic notices at an early stage is in line with the US practice of issuing ‘Wells’ notices.

“The Wells notice or the basic notice would only be sent in cases of minor violations. So, if an entity is willing to take the consent route, it might proceed much early; that would expedite the outcome. Sebi will be spared of preparing and sending detailed showcause notices in such cases which will save it time and resources,” said Chitlangi.

Legal experts also believe that Sebi should ensure companies make right disclosures to the public. “It will be interesting to see how notices for settlement are implemented and whether they lead to companies actually settling cases before formal showcause notices being issued. It is also possible under this mechanism that Sebi drops the case on the basis of submissions from noticees. A study in the US has indicated that the Secuties and Exchange Commission there dropped 20 per cent of the cases after issuing initial notices,” said Abhishek. Besides, the delisting timeline for companies has been reduced from 137 days to 76 days.

A delisting shall be considered successful only when the shareholding of the promoter, together with shares tendered by public shareholders, reaches 90 per cent of the total share capital. At least 25 per cent of the public shareholders need to be part of a reverse book-building process.

The Sebi board also converted the exiting listing agreement into listing regulations. “Regulation would consolidate and streamline the provisions of existing listing agreements, thereby ensuring better enforceability,” said the Sebi press release.

According to the press release, the market regulator is also reviewing the policy with respect to restricting a company categorised as a wilful defaulter, and its promoters and directors, from raising capital. A discussion paper in the regard would be issued. The promoter-to-public reclassification was also cleared by Sebi during the meeting. Sebi would issue a discussion paper on this for public consultation.