Manoj Kumar Tiwari
HDFC Securities Limited (Applicant Company) had on 7th August, 2018 requested SEBI to issue informal guidance for getting clarity/better understanding as to whether the lending and borrowing of securities through the Securities Lending and Borrowing Scheme (SLBS) falls within the definition of ‘trading/trade’ as defined in SEBI (Prohibition of Insider Trading) Regulations, 2015 (hereinafter referred to as the PIT Regulations).
The below note gives a summary with regards to the informal guidance issued by SEBI dated 5th October, 2018 which gives clarity/better understanding with respect to the SLBS.
Requirement under PIT Regulations
As per Regulation 2(l)
“trading means and includes subscribing, buying, selling, dealing, or agreeing to subscribe, buy, sell, deal in any securities, and “trade” shall be construed accordingly;
Note: Under the parliamentary mandate, since the Section 12A (e) and Section 15G of the Act employs the term ‘dealing in securities’, it is intended to widely define the term “trading” to include dealing. Such a construction is intended to curb the activities based on unpublished price sensitive information which are strictly not buying, selling or subscribing, such as pledging etc. when in possession of unpublished price sensitive information.”
As per Regulation 4 (1)
”No insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information:”
Interpretation of HDFC Securities Limited:
The Applicant Company requested SEBI to issue an informal guidance with respect to their query as follows:
- While marketing the SLB products to select senior employees (referred to as designated employees) for lending of shares allotted to them under Employee Stock Option Plan (ESOP), queries were raised on applicability of PIT Regulations for such SLB transactions. These designated employees by virtue of their employment could be considered to be in possession of Unpublished Price Sensitive Information (UPSI) of the employer company whose shares they intend to lend in SLBS.
- As per sub-section (xv) of Section 47 transfer under SLBS is not regarded as transfer under Section 45 of the Income Tax Act, 1961.
- Quotes of securities which are available on SLB platform have no correlation to market price of the underlying securities and the lending/borrowing fee is not determined by price movement of the underlying securities.
SEBI’s Informal Guidance:
It is noted that in SLB, the title of the securities lent vests with the borrower during the lending period. Further, the underlying securities are amenable for price discovery on exchange platform.
Considering the contents of Regulation 2(l) and the nature of SLBS, the transaction of borrowing/lending done under SLB mechanism constitute trade for the purpose of PIT Regulations. Accordingly borrowing or lending of securities by an insider while in possession of UPSI shall result in insider trading in terms of Regulation 4(1) of the PIT Regulations.
What is Securities Lending and Borrowing?
Securities Lending and Borrowing (SLB) is a scheme formed by SEBI which came into force on 6th February, 1997. It is a scheme for lending of securities through an approved intermediary to a borrower, under an agreement, for a specified period with the condition that the borrower will return the securities at the end of the specified period along with the corporate benefits accruing on the securities borrowed. Such lending and borrowing of securities happen through intermediaries approved by SEBI. The scheme has been implemented to facilitate short selling under F&O segment.
The SLB is a mechanism for lending and borrowing of securities (i.e. equity shares in this case) in the form of contracts which are traded on an automated screen based order-matching platform. The said scheme involves borrowing/lending of securities. The nature of transaction in SLB mechanism brings it into the ambit of the definition of “trade” under PIT Regulations.
Since the said SLB transactions are construed as trade, the designated employees entering into such transaction would be required to give disclosures as mandated in the PIT regulations.