SLB transactions to be construed as ‘trade’ under PIT

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 Such a construction is intended to curb the activities based on unpublished price sensitive information which are strictly not buying, selling or subscribing, such as pledging etc. when in possession of unpublished price sensitive information.”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insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information:”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:[1]

The Applicant Company requested SEBI to issue an informal guidance with respect to their query as follows:

  1. 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 These designated employees by virtue of their employment could be considered to be in possession of Unpublished Price Sensitive Information (UPSI) of the employer company whose shares they intend to lend in SLBS.
  2. 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.
  3. 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:[2]

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?[3]

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.





SAST amendments brought by SEBI

-imposes a complete prohibition on a fugitive economic offender

By Munmi Phukon (

SEBI on 11th September, 2018 has notified the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) (Second Amendment) Regulations, 2018[1]. The key changes are highlighted below:

Chapter I- Preliminary

[Reg. 2(1)]- Definitions

Clause (j)- Frequently traded shares

As per existing definition, the traded turnover of the shares (to be treated as frequently traded shares) was required to be determined during the period of 12 calendar months preceding the month in which public announcement is made.

Now, the period of 12 months will be calculated from the month preceding the month in which the public announcement was actually required to be made.  Therefore, even in case of failure to make an open offer, the 12 months shall be counted from the month in which the offer was required to be made.

Insertion of new clause (ja)- Definition of fugitive economic offender”

To mean an individual who is declared a fugitive economic offender under section 12 of the Fugitive Economic Offenders Act, 2018 (17 of 2018).

The insertion of the definition is in relation to the new Reg. 6B which is covered below.

Chapter II- Substantial Acquisition of Shares, Voting Rights or Control


Reg. 5A- Delisting offer

The existing proviso to the Regulation provides that an upfront declaration of the intention to delist the shares of the target company is required to be made at the time of publication of the detailed public statement. In order to bring more clarity, the said proviso has been amended to specifically provide that any subsequent declaration of delisting shall not suffice.

Insertion of new Reg. 6B- Prohibition applicable to fugitive economic offender

The new Reg. is different from Reg. 6A inserted vide SAST (Second Amendment) Regulations, 2016 which is applicable to a wilful defaulter. Reg. 6A prohibits a wilful defaulter to acquire shares or enter into any transaction that would attract the obligation to make a public announcement of an open offer for acquiring shares under these regulations. Evidently, the restriction is to acquire so much of shares or to enter into any transaction which in turn shall require making of a public offer. Further, a wilful defaulter has been made eligible to make a competing offer in accordance with the regulations.

On the other hand, fugitive economic offender has been completely prohibited from making a public announcement of an open offer or making a competing offer for acquiring shares or entering into any transaction, either directly or indirectly, for acquiring any shares or voting rights or control of a target company. Therefore, the prohibition is not only on making an open offer or competing offer but on any acquisition.

Reg. 7(2)- Offer size for voluntary offer

The existing Reg. provided the minimum offer size to be additional 10% of total shares of the target company. The same has now been linked to voting rights and accordingly, minimum offer size for voluntary offer shall be for additional 10% of the voting rights.

Reg. 10- General exemptions from making an open offer

Clause (a) of Reg. 10(1) provides exemption to inter se transfer between certain categories of persons including transfer among group companies being holding- subsidiary, fellow subsidiary etc. An explanation to the said clause has been inserted to bring clarity that the company as referred to in the clause shall include a body corporate.

CHAPTER – III- Open Offer Process


Reg. 17(3)- Form of escrow account

An explanation has been inserted under the Reg. explicitly mentioning that the cash component of the escrow account may be maintained in an interest bearing account, subject to the merchant banker ensuring that the funds are available at the time of making payment to the shareholders.

Reg. 18(2)- Mode of sending of letter of offer

An explanation has been inserted to provide electronic mode as the eligible mode of sending letter of offer to the shareholders. However, on receipt of a request, a physical copy shall have to be issued from any shareholder to receive a copy of the letter of offer in physical format, the same shall be provided. The letter if offer shall specifically mention the same.



SEBI ICDR Regulations, 2018– Snapshot on changes in rights, bonus, QIP and preferential issue

SEBI amends LODR in relation to listing of Security Receipts

By CS Vinita Nair (

Aligns with recent amendment made in SEBI regulations for listing of Securitised Debt Instruments

SEBI has notified amendments to LODR Regulations vide SEBI (Listing obligations and Disclosure Requirements) (Fifth Amendment) Regulations, 2018[1] (‘Present Amendment’) dated September 6, 2018 and has aligned the said regulations with the amendments made in SEBI (Public Offer and Listing of Securitised Debt Instruments) (Amendment) Regulations, 2018 dated June 26, 2018[2]. Read more