The Securities and Exchange Board of India (Sebi), the capital markets regulator, made a series of far-reaching changes to its regulations in a meeting last week. Some of the major changes pertain to insider trading regulations. There are also big changes in listing and delisting norms and some changes to the consent order regime. Taken together, these should lead to better corporate governance and help align Indiancapital market standards more closely to international practices.
The regulator adopted most of the suggestions of the judge Sodhi committee, which had examined the Sebi (Prohibition of Insider Trading) Regulations (1992). The new Prohibition of Insider Trading Regulations (2014) updates and broadens the 1992 regulations. The new definition of an "insider" is broader, including within its ambit any "connected person" with access to "unpublished price sensitive information" (UPSI). This includes relatives of directors, employees and of other persons covered under the earlier definition of an insider. If such connected persons trade, the onus will be on them to prove that they were not in possession of theUPSI at the time of trade. The UPSI and the norms under which the UPSI can be communicated have also been defined more clearly. Third-party connected persons may be asked to declare any holdings in the company in question. Connected persons and insiders who wish to trade a stock may do so only by disclosing trading plans in advance to the stock exchange. For instance, such a pre-declared plan would enable employees with vested stock options to book profits. The UPSI would have to be communicated at least two days in advance of a trade.
Until case law develops, it would be difficult to see how the new regulations work in practice. But on the face of it, the new regulations should reduce rampant insider trading. In particular, it would be difficult for a connected person as defined under the new regulations to prove that he or she did not possess the UPSI. Of course, that disincentive could help curb insider trading, but it could also prove to be a barrier against legitimate trading.
Sebi's decision to transform the erstwhile Listing Agreement into new Listing Regulations, along with some changes, is designed to impart the force of law to what used to be a bipartite private agreement between a stock exchange and a company. Listing obligations and disclosures will now have to be adhered to closely since mandatory disclosures, compliance, etc, become strictly enforceable. The time period for compliance in delisting processes has been reduced to 76 working days from the earlier 137 calendar days. All delisting, takeover and buyback offers must come through stock exchanges. The changes in the delisting regulations do contain at least one provision that will be difficult to comply with. At least 25 per cent of the public shareholders as of the date of the board meeting that approves the delisting proposal must tender in the reverse book building process. This last requirement may be hard to comply with, especially for companies with widely dispersed shareholding patterns.
Apart from these key changes, Sebi has also aligned its regulations in line with the Reserve Bank of India's "wilful defaulter" norms, by blocking defaulters from raising money via the capital markets. It has relaxed its norms for consent regulations allowing "minor offences" to be settled this way. Small mutual funds will be allowed to run two schemes even before hitting the stipulated Rs 50 crore in net worth. Procedurally speaking, electronic initial public offerings should also ease the burden of paperwork and accelerate processes. Theoretically at least, the new provisions do seem to strengthen the legal and enforcement framework as Sebi claims.
The regulator adopted most of the suggestions of the judge Sodhi committee, which had examined the Sebi (Prohibition of Insider Trading) Regulations (1992). The new Prohibition of Insider Trading Regulations (2014) updates and broadens the 1992 regulations. The new definition of an "insider" is broader, including within its ambit any "connected person" with access to "unpublished price sensitive information" (UPSI). This includes relatives of directors, employees and of other persons covered under the earlier definition of an insider. If such connected persons trade, the onus will be on them to prove that they were not in possession of theUPSI at the time of trade. The UPSI and the norms under which the UPSI can be communicated have also been defined more clearly. Third-party connected persons may be asked to declare any holdings in the company in question. Connected persons and insiders who wish to trade a stock may do so only by disclosing trading plans in advance to the stock exchange. For instance, such a pre-declared plan would enable employees with vested stock options to book profits. The UPSI would have to be communicated at least two days in advance of a trade.
Until case law develops, it would be difficult to see how the new regulations work in practice. But on the face of it, the new regulations should reduce rampant insider trading. In particular, it would be difficult for a connected person as defined under the new regulations to prove that he or she did not possess the UPSI. Of course, that disincentive could help curb insider trading, but it could also prove to be a barrier against legitimate trading.
Sebi's decision to transform the erstwhile Listing Agreement into new Listing Regulations, along with some changes, is designed to impart the force of law to what used to be a bipartite private agreement between a stock exchange and a company. Listing obligations and disclosures will now have to be adhered to closely since mandatory disclosures, compliance, etc, become strictly enforceable. The time period for compliance in delisting processes has been reduced to 76 working days from the earlier 137 calendar days. All delisting, takeover and buyback offers must come through stock exchanges. The changes in the delisting regulations do contain at least one provision that will be difficult to comply with. At least 25 per cent of the public shareholders as of the date of the board meeting that approves the delisting proposal must tender in the reverse book building process. This last requirement may be hard to comply with, especially for companies with widely dispersed shareholding patterns.
Apart from these key changes, Sebi has also aligned its regulations in line with the Reserve Bank of India's "wilful defaulter" norms, by blocking defaulters from raising money via the capital markets. It has relaxed its norms for consent regulations allowing "minor offences" to be settled this way. Small mutual funds will be allowed to run two schemes even before hitting the stipulated Rs 50 crore in net worth. Procedurally speaking, electronic initial public offerings should also ease the burden of paperwork and accelerate processes. Theoretically at least, the new provisions do seem to strengthen the legal and enforcement framework as Sebi claims.
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