The Securities and Exchange Board of India (“SEBI”) has recently amended the existing SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”) by way the SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2018, (“Amendment Regulations”), which came into effect from April 1, 2019. Another amendment to the PIT Regulations with respect to the disclosure requirements by the members of the promoter group was brought in through the SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2019, which came into effect from January 21, 2019. These amendments were the outcome of the TK Vishwanathan Committee (“Expert Committee”) report on Fair Market Conduct, which was constituted to review the efficiency of the existing legal framework dealing with the market abuse and promotion of fair market conduct in the securities market.
The erstwhile SEBI (Prohibition of Insider Trading) Regulations, 1992, as originally enacted, did not define the term ‘proposed to be listed’. Pursuant to the recommendations from the Justice Sodhi Committee report, the term ‘proposed to be listed’ was introduced in the PIT Regulations. However, the PIT Regulations did not define as to what ‘proposed to be listed’ entailed. Further, in the absence of clarity, the phrase ‘proposed to be listed’ was subject to different interpretations as to when in time a company is deemed to be “proposed to be listed”, resulting in debates and confusion.
The definition of unpublished price sensitive information (“UPSI”) under the PIT Regulations refers to information which on becoming generally available, would affect the market price of the relevant securities. Therefore, the Expert Committee deliberated over the point in time when such information relating to a company proposing to achieve listing would be regarded as UPSI. Pursuant to the same, the Amendment Regulations have defined the term “proposed to be listed” to include securities of an unlisted company: (a) if such unlisted company has filed offer documents or other documents, as the case may be, with SEBI, stock exchange(s) or registrar of companies in connection with the listing; or (b) if such unlisted company is getting listed pursuant to any merger or amalgamation and has filed a copy of such scheme of merger or amalgamation under the Companies Act, 2013. Further, in terms of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, an ‘offer document’ in relation to a public issue, includes a red herring prospectus, a prospectus or a shelf prospectus.
In view of the above, it would appear that the PIT Regulations would become applicable in the context of the securities of a company undertaking an initial public offering process only at the stage when the company registers its red herring prospectus with the registrar of companies, as opposed to when the company files its draft red herring prospectus with SEBI. Ostensibly, this is because at the time of filing the draft red herring prospectus with SEBI, it is still difficult to determine with certainty as to whether the company would be successful in completing the listing of its securities.
SEBI has also set out minimum standards for code of conduct for regulating and monitoring intermediaries and professional firms such as auditors, accountancy firms, law firms, analysts, consultants, bankers, etc. (“Fiduciaries”), while handling UPSI. As per the prescribed minimum standards, the intermediaries and Fiduciaries are required to formulate policy as to how and when an individual is to be brought ‘inside’ a sensitive transaction. It also imposes an obligation on the intermediaries and Fiduciaries to sensitize such individuals about their duties, responsibilities and liabilities, while handling UPSI. The intention of SEBI with respect to these amendments is to bring intermediaries and Fiduciaries under the ambit of PIT Regulations to prevent further leakages of UPSI.