INSUBCONTINENT EXCLUSIVE:
A seemingly innocuous clause in the new, tighter insider trading regulations that took effect on April 1 is giving Indian companies a hard
time in the ongoing earnings season
The Securities and Exchange Board of India (Sebi) has extended the period during which management and promoters aren’t allowed to trade in
their company’s shares before earnings announcements
What had gone unnoticed was that the regulator also included share pledging by promoters in this window.
Company promoters looking to raise
money by pledging shares have been caught off guard in the current earnings season, said experts.
Earlier, listed companies were required to
close the trading window for four days – 48 hours before the board meets for results and 48 hours after their declaration
According to the new rules, trading restrictions for company insiders start from the end of every quarter and are lifted 48 hours after the
That could mean an extended period for companies that report late in the season.
“It closes about 200 days for trading and possible fund
raising through pledge of shares (leaving aside other corporate action days) every year,” said Ankur Jain, group CEO of Satellite
Developers, a real estate firm.
All listed companies are required to specify the period in which the trading window is closed for promoters,
directors and employees when they are in possession of unpublished price-sensitive information
The trading window is also applicable to auditors, accountancy firms, law firms, analysts and consultants who are assisting or advising the
It stays closed during announcements such as financial results, dividends, mergers, takeovers, buybacks, public and rights issues and major
Previously, only buying and selling of shares by these individuals or entities constituted insider trading, not pledging.
Most companies
announce results within 15-20 days of the end of every quarter and about 45 days of the full year.
“That also restricts about four months
for trading and fund raising,” Jain said
“This will have farreaching impact for company promoters and its employees.”
Promoters and companies pledge shares to raise funds, a
matter that came to the fore in the wake of the ILFS default.
Some lawyers said the regulator may not have taken into account the full
impact of including share pledging in the restricted period.
“This has resulted in an unintended consequence of the shareholders not being
able to pledge shares of the listed company during the intervening trading window closure period,” said Ajai Achuthan, partner, Bharucha
Partners.
Sebi had tightened insider trading rules based on the recommendations of a committee headed by former law secretary TK Viswanathan
on fair market conduct.
“With the new rules, compliance has gone up,” said a member of the committee
“There is lot of suspicion that lot of trading takes place during results
Results are fairly critical information
People who are involved in result preparation are privy to unpublished price-sensitive information.”
The tighter rules follow quarterly
results of several blue-chip companies being leaked last year on social media platforms such as WhatsApp before official announcements to
the stock exchange.
Lawyers said the regulator could ease norms for share pledging.
“Sebi could consider relaxing the trading window
closure period norms by permitting pledge of shares with a scheduled commercial bank or systemically important NBFC (nonbanking finance
company) or housing finance company or a public financial institution,” said Achuthan.
