The Securities Exchange Board of India (SEBI) announced new regulations on Insider Trading & De-listing and claims that it will 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. Here is a primer of the changes introduced by SEBI on 19th November 2014.

SEBI has introduced a detailed listing regulations by bringing in comprehensive norms for various listed securities, the first time in almost two decades that it has taken such measures. The capital markets watchdog has approved these norms in order to bring in stricter regulations and simpler compliance requirements to streamline related mechanisms, and boost investor confidence in Indian markets by way of strengthening safeguards to the same.

The new rules have been instituted after lengthy deliberations [a discussion paper in this regard was circulated earlier this year], taking into consideration the need for a framework to consolidate listing obligations and disclosure requirements for listed entities across all securities in one place; prior to the Board’s pronouncement, there were separate listing agreements for different segments of the capital market [which process shall continue till such time as the new framework is put into practice]. SEBI has specified that entities will have to execute a shortened version of listing agreement within six months of notifying these regulations. Such a mechanism has been put in place to ensure since listing agreement is a contractual pact between the stock exchange and listed entity.

The new norms shall be applicable to equity, non-convertible debt securities, non-convertible redeemable preference shares, Indian Depository Receipts, securitized debt instruments and units issued by mutual fund schemes, among others. Under the revamped framework, listed entities will be required to co-operate with intermediaries such as debenture trustees and credit rating agencies that are registered with SEBI.


Significant Amendments

1. The definition of insider had been made wider by including persons connected on the basis of being in any contractual, fiduciary or employment relationship. Immediate relatives will now be considered insiders, as will any person who has access unpublished price-sensitive information [UPSI]. Directors and employees of a company remain insiders.

2.  Listing regulations have been divided into three parts - substantive provisions incorporated in the main body of regulations, procedural requirements in the form of schedules and various formats/forms of disclosures to be specified by Sebi through circulars.

3. Delisting regulations have been amended - delisting will now be considered successful if the shareholding of the acquirer together with the shares tendered by public shareholders hits 90% of the total share capital and if at least 25% of the number of public shareholders tender in the reverse book-building process (RBB).

4. The SEBI board has approved a proposal to review the policy that restricts persons or entities categorized as wilful defaulters from raising capital after going through the public consultation process. To encourage investments in infrastructure, Sebi approved amendments to the FVCI Regulations to allow foreign venture capital investors (FVCIs) to invest in NBFC-CIC (core investment companies), as defined by Reserve Bank of India (RBI).

5. With the intent to prevent misbehavior on the part of promoters, SEBI has mandated that the promoter or the promoter group will be barred from making a delisting offer if any entity of the group has sold shares of the company six months prior to the date on which the board approves the delisting proposal. Timelines for completing the delisting process have been reduced from 137 calendar days to 76 working days.


Observations
 

• According commentators, the new insider trading norms are likely to result in fewer rejection of SEBI cases by the Securities Appellate Tribunal [SAT].
• Some stakeholders have stated doubts about the wisdom of asking a minimum of 25% public shareholders holding DMAT shares to participate, since this could potentially make de-listings more difficult because of the inherent lack of participation by small shareholders. However, others believe this will foil market operators who aim to corner shares and tender them once the delisting is announced.
• Insiders, especially those likely to have access to UPSI all the year round, can now have trading plans on the lines of those prevalent in the US. The alignment of Indian practices with those adopted overseas will serve to provide flexibility to insiders, and is a positive step that will help further streamline relevant processes.
• In the words of the SEBI itself, “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.