By Smriti Wadehra (firstname.lastname@example.org)
SEBI vide its circular dated December 01, 2015 had introduced system driven disclosure in securities market. Under this initiative, a system was developed involving the Stock Exchanges, Depositories and Registrars and Share Transfer Agents (RTAs) for generating system based disclosures under Takeover Regulations and Insider Trading Regulations based on acquisition /disposal of shares by promoters / promoter group and pledge of equity shares by them. The basic intention behind this circular was to create a centralised database system to ascertain details holding and trading of promoter and promoter group.
Though, SEBI initiated the system of dissemination of detailed information of promoter’s shareholding on the website of stock exchange, however, in the absence of advanced systems and technologies in place for executing such proposal, the said initiative was decided to be executed in a phased manner.
First Phase – Covering Promoters / Promoter Group
In the initial phase as implemented from 1st January, 2016, the disclosure was pertaining to changes in shareholding of promoter/promoter group of the listed entities under the SAST Regulations and PIT Regulations. The same also included pledge of equity shares by promoters/promoter group under the SAST Regulations. By virtue of the implementation of the said system, listed companies through its RTA were required to provide to the depositories the information about promoters and promoter groups of the companies. The said phase worked in the following manner:
In furtherance to aforesaid circular, SEBI vide its circular dated 21st December, 2016 removed the RTAs from the information disclosure/ sharing procedure and provided that depositories shall directly provide information to the stock exchange for dissemination and also provide transaction data of promoter/promoter groups to the stock exchanges on daily basis. This substitution in the process was effective from 2nd January, 2017.
Second Phase- Covering Non-Promoters and Specified Employees
As provided in the aforesaid SEBI circular of 2016, SEBI based on the experience gained in the first phase, came out with another circular dated 28th May, 2018 wherein it has introduced and prepared the second phase of system –driven disclosure for being implemented from August 01, 2018. The second phase broadly covers the following:
A. Disclosures under Regulation 29(1) and 29(2) of SAST Regulations by non-promoters
Provision of law
As per Regulation 29(1) and 29(2) of SAST Regulation, 2011, every acquirer has to provide information about acquisition of shares or voting rights in the target company if such acquisition amounts to 5% or more of the shares of such target company. Further, subsequent disclosure is also required if there is any change in shareholding or voting rights amounting to 2% or more of the shares of the company post the initial disclosure and every time the change hits the threshold. In this regard, the regulation provides that shares taken by way of encumbrance shall be treated as an acquisition and shares given upon release of encumbrance shall be treated as a disposal of shares. This information as per the regulation has to be submitted to stock exchange within a stipulated time and the same is disseminated on the website of the stock exchange.
Currently, under the second phase SEBI has directed that the companies have to opt for system driven disclosure however, this would run parallel with the existing system i.e. the promoters/promoter group/ non-promoter shall be required to continue to comply with the disclosure obligations as applicable to them under the respective regulations. The intention behind letting the two disclosures run parallelly is to enable cross-checking of the disclosures made and ensuring more transparency at the end of the stock exchange as the same provides trading data on daily basis. As a result of the dual disclosure, stock exchanges will now be able to verify the truthfulness of the disclosure provided by various companies.
Further, the system also ensures that the disclosures made by the promoter/non-promoter entities as per the current regulatory requirements matches with the disclosure generated by the systems, and if there is any discrepancies the same has to be intimated to the stock exchange. The process of disclosure shall be two-fold:
Depositories shall share data about individual non-promoter shareholders of the Company who are holding more than 2% in the Company, each day between themselves.
2. Depository to stock exchange
Depositories shall provide information about non-promoters whose combined shareholding is more than 5% in the company to the stock exchanges on a daily basis.
With respect to the word ‘combined shareholding’, one may interpret that as Regulation 29 of the Takeover Regulations uses the word ‘persons acting in concert’, accordingly, the said phrase may be said to be used to refer to PACs. However, stock exchange has clarified that the combined shareholding shall mean shareholding of non-promoters in totality taking into consideration the shareholding of the respective non-promoters with all depositories. Hence, the same is not drawing reference to PACs.
3. Stock Exchange
Stock Exchange after receiving such information from the depositories shall disseminate the same on their website.
Exemption from system-driven disclosures
As the provisions of regulation 29 of the Takeover Regulations exempts scheduled commercial banks and public financial institutions from the ambit of disclosure under regulation 29(1) and (2), accordingly, the same is also exempted for the purpose of this circular.
Compliance to be ensured by Companies
Companies have to provide information to the depositories as may be required by the depository, and shall observe if there are any discrepancies in the disclosure provided by them and disclosure provided by the depositories, which has to be intimated to the stock exchange.
A. Disclosures under Regulation 7(2) of PIT Regulations pertaining to directors and employees of the Company
Provision of law
As per Regulation 7(2) of PIT Regulations, 2015, every promoter, director and employee has to disclose to the company if any trading transaction or series of transaction entered by them during a calendar quarter exceeds Rs 10 lakh rupees over any calendar quarter. Subsequently, the Company has to inform such information to the stock exchange within 2 working days receipt of the disclosure or from becoming aware of such information.
System Driven Disclosure
In the new system driven disclosure mechanism of SEBI, disclosure under Regulation 7(2) by promoters, directors and some identified employees to the system for dissemination of such information to the stock exchange. For this the depositories have been directed to build a database of the existing holdings at ISIN level of all the directors and employees of each listed company.
The scope of applicability of this circular w.r.t disclosure under PIT Regulations, 2015 runs to include:
- Directors; and
- Identified employees i.e CEO and two levels below CEO of a company.
Even though the circular provides that employees covered under the system-driven disclosure shall consist of CEO and two levels below the CEO, the anomaly stands as to whether the same is will include two levels as per the organisational hierarchy or two levels as per reporting under the company. However, one may interpret that the aforesaid levels shall determined on the basis of organisational hierarchy.
Intervals of Disclosure
The disclosure shall be required to be made by the company/depository on following events:
- The companies shall be required to disclose the information to the depositories within 15 days from the date of the circular i.e. 12th June 2018 and shall be subsequently disseminated on the website of the stock exchange;
- As and when the applicable participants hit the threshold limits;
- Any subsequent changes in the details directors/employees of the listed company. In this regard, the company shall be required to provide the information of such changes to the depositories on an immediate basis and not later than 2 working days.
Compliance on the part of the Company
The onus of compliance on the listed company is limited to providing information about the directors and employees to all the depositories which shall be in the format* prescribed by depositories however, should include the PAN details of the concerned individuals, also in case of PAN exempt entities, the account numbers shall be provided.
Further, the information so provided by the listed company to the depositories must be authenticated within 15 days from the date of SEBI circular before forwarding the same to the stock exchange. Here, note the circular does not clearly provide as to who shall authenticate the data provided by the Company, however, the erstwhile circular provides that the RTA shall authenticate the information. Accordingly, as we understand the intent of SEBI is moving towards automated system based disclosure process by eliminating the role of RTA we may interpret that the same has to be authenticated by the depositories.
Also, the company shall observe if there are any discrepancies in the disclosure provided by them and disclosure provided by the depositories, which has to be intimated to the stock exchange.
[*Kindly note the format has not yet been issued by the depositories, however, the same may soon be available on their respective websites]
Process of complying with the system driven disclosure
As the compliance of this system driven disclosure is mandatory for all listed companies there should be a road path for complying with the same. Therefore, in this article we have aimed to jot down the process based on the information provided in the circular:
Step 1: Listed Entity has to select one of the depositories as a designated depository for the dissemination of data and for this it has to provide a consent letter appointing one depository as their designated depository. The format of consent letter attached as Annexure A.
Step 2: Depository along with other depositories of the Company shall build a database of existing holders at ISIN level of all director and employees of the Company;
Step 3: As per the prescribed format the listed company shall be required to provide all the information as and when required by the depositories, in this case the Company’s RTAs shall also be required to provide information which may not be available with the Company. The information should specifically include the PAN details of the concerned persons, however, in case PAN is not available the account numbers should be provided;
Step 4: The information provided the Company should reach the depositories by 10th June, 2018 and should be authenticated by the RTA and the Company.
Step 5: In case of any subsequent changes in the directors/employees of the listed company, the company shall provide the information of the changes to the depositories on an immediate basis and not later than 2 working days.
Step 6: The data shall be processed by the Designated Depository and the identified data requiring disclosure in terms of PIT Regulations shall be sent to the respective stock exchanges on a daily basis for dissemination on their website.
To conclude we may say that the intention of SEBI behind this circular may be to plan a automated process for receiving disclosures from the depositories instead of requiring the promoter/ promoter groups/employees/ directors to give disclosures under the aforementioned regulations. However, presently the system would run parallel with the existing system i.e. the promoters/promoter group shall be required to continue to comply with the disclosure obligations as applicable to them by the respective regulations.