SEBI makes delisting easier, tightens insider trading norms

Revamping its nearly two-decade old regulations on insider trading, Sebi today approved stricter norms, including new definition for connected people, to prevent the menace.

Apart from clarity on concepts and definitions, the new regulations strengthen legal and enforcement framework while also ensuring that legitimate business transactions are not impacted.

The new Prohibition of Insider Trading Regulations were approved by the board of Securities and Exchange Board of India (Sebi) here today.

"The new regulations strengthen the legal and enforcement framework, align Indian regime with international practices, provide clarity with respect to the definitions and concepts, and facilitate legitimate business transactions," Sebi said in a statement after the board meeting.

Sebi has expanded the definition of 'Insider' to include persons connected on the basis of being in any contractual, fiduciary or employment relationship that allows such people access to unpublished price sensitive information (UPSI).

Under the new framework, Sebi has defined a connected person in the context of insider trading activities.

A connected person would be someone who is or has during the past six months prior to the concerned act has been associated with a company, directly or indirectly.

Besides, immediate relatives of connected persons would also come under the same category unless they prove that they were not privy to unpublished price sensitive information.

The onus of establishing that they were not in possession of UPSI would be with the connected persons.

The regulator has decided to remove the requirement for repeated disclosures and ease compliance burden.

"Disclosure of any change of two per cent for persons holding more than five per cent shares or voting rights has been removed as they are prescribed under Takeover Code," the statement added.

To protect the interest of investors, companies would be now mandatorily be required to disclose UPSI at least two days prior to trading in case of permitted communication of such information.

Besides, communication of such information is prohibited except in instances of legitimate purposes or discharge of legal obligations.

Insider trading refers to dealing in securities after having access to unpublished price sensitive information and such practices provide unfair advantage to the entity who has privy to such details.

Sebi has come across various instances of insider trading activities not just at small companies but also at larger ones.

The definition of UPSI has been strengthened by "providing a test to identify price sensitive information, aligning it with listing agreement and providing platform of disclosure".

Earlier, the definition of price sensitive information had reference to company only, now it has reference to both a company and securities.

Companies by law would be entitled to require third-party connected persons to disclose their trading and holdings in securities of the company.

In line with the new Companies Act, prohibition on derivative trading by directors and key managerial personnel on securities of the company has been provided.

Disclosure of UPSI in public domain has been made mandatory before trading, so as to rule out asymmetry of information in the market.

"A provision of Trading Plans on the lines of US has been introduced for insiders with necessary safeguards. Such a plan has to be for bona fide transactions and has to be disclosed on stock exchange platform in advance," the release said.

To provide clarity, generally available information has been defined as information that is accessible to public on a non-discriminatory platform such as stock exchange.

Meanwhile, insiders who are liable to possess UPSI all round the year would have the option to formulate pre-scheduled trading plans.

Among others, principle-based Code of Fair Disclosure and Code of Conduct has been prescribed.

The latest norms have been prepared after taking into consideration recommendations of Sodhi panel and suggestions from various other quarters.

After extensive deliberations, a panel headed by former Justice N K Sodhi had submitted its report on insider trading norms in December 2013. Sodhi was former Chief Justice of Karnataka and Kerala High Courts.

Sebi today approved norms that will allow entities to settle enforcement proceedings for minor violations, even before the issuance of formal show cause notice by the market regulator.

The move would help in saving cost and time.

The Securities and Exchange Board of India (Sebi), will send intimation to the entity under scrutiny in case of minor violations, before issuing a formal enforcement Show Cause notice.

The initial notice will enable the entity to settle the proceedings through the consent mechanism.

Presently, settlement of civil proceedings commences after the issue of show cause notice as parties only become aware of probable action after the issue of the show cause notice.

According to Sebi, the practise of providing the first opportunity to settle administrative and civil proceedings only post show cause notice stage results in delay in conclusion of proceedings and resultant wastage of resources.

"Sebi, has, therefore decided that in minor violations intimations will be sent about impending enforcement action to the concerned parties upon arrival of the said actions by the competent authority and before a show cause notice is issued," the regulator said in a statement after the board meeting.

"This would enable parties to seek settlement of proceedings or make voluntary submissions even prior to receipt of a detailed show cause notice.

"If any party avails such an opportunity to respond to such notice, the proposed proceedings may be settled or discontinued on the basis of submission of the noticee," it added.

Sebi, in October, issued draft norms for settlement of administrative and civil proceedings against suspected market defaulters, except in cases of serious violations like illicit pooling of funds from investors, insider trading and fraudulent and unfair trades.

The list of violations that cannot be settled has been expanded widely under the new norms, which also provide for the involved entity to file settlement plea within 60 days of the Show Cause Notice served by the Sebi.

As per the draft norms, a plea to settle pending cases, upon payment of settlement charges and related costs, will not be considered if the applicant has already been party to two earlier settlements.

Besides, cases already pending before a court or tribunal can not be settled under the new norms.

An entity can not seek settlement of any proceedings if the alleged default has been committed within two years of an earlier settlement involving them.

Also, settlements can't be sought for cases involving non -compliance to Sebi orders, violations to the open offer requirements, listing disclosure norms, front running, sharing of unpublished price sensitive information, manipulative practices of mutual funds and failure to redress investor grievances, among other serious offences.

Making delisting of companies less cumbersome, capital market regulator Sebi today approved revamped norms that reduce the time taken for completing the process by about half from minimum 137 days at present.

The changes, aimed at making the existing regulatory framework on delisting more effective, have been cleared by the board of Securities and Exchange Board of India (Sebi) during their meeting here.

"Timelines for completing the delisting process has been reduced from 137 calendar days (approximately 117 working days) to 76 working days," the regulator said in a release.

Apart from reducing the timeline, the watchdog has decided to retain the reverse book building process for discovering the price of shares for the purpose of delisting.

Delisting would be considered successful only if at least 25 per cent of the public shareholders participated in the reverse book building process.

Besides, shareholding of the acquirer, together with the shares tendered by public shareholders, should reach 90 per cent of the company's total share capital.

To ensure that a delisting plan has been decided in a fair manner, the board should approve the same only after due diligence process, for which it can appoint a merchant banker on behalf of the company and the promoter.

Further, the board should certify that the company is in compliance with applicable securities law and that it would be in the interest of shareholders.

Sebi said that an acquirer would have the option to delist the shares of the company directly through delisting regulations pursuant to triggering takeover norms.

"However, if the delisting attempt fails, the acquirer would be required to complete the mandatory open offer process under the Takeover Regulations and pay interest at the rate of 10 per cent per annum for the delayed open offer," the release said.

Companies having paid up capital of not more than Rs 10 crore and networth that does not exceed Rs 25 crore as on the last day of the previous financial year would be exempted from following the Reverse Book Building process.

"The exemption would be available only if there was no trading in the shares of the company in the last one year from the date of the board resolution authorising the company to go for delisting, and trading of shares of the company has not been suspended for any non-compliance during the same period," the release said.

According to Sebi, the stock exchange platform should be sued for offers made under Delisting, Buy Back and Takeover Regulations.

Depending on reasons put in writing, Sebi would consider relaxing the strict enforcement of delisting regulations.

Sebi came up with a discussion paper on delisting process in May and comments were received on aspects such as price discovery and shortening of the process.

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