Link to Informal Guidance by SEBI – https://www.sebi.gov.in/sebi_data/commondocs/sep-2020/SEBI%20let%20Raghav%20IG_p.pdf
Physical disclosures to continue till March 31, 2021
Updated as on September 23, 2020
– CS Harshil Matalia, Assistant Manager, Vinod Kothari and Company (email@example.com)
SEBI in its Board meeting dated June 25, 2020, had discussed about necessary amendments to be made in SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’). While the other amendments were implemented, the amendment relating to automating continual disclosures requirement under Regulation 7(2) of the PIT Regulations was pending to be implemented. SEBI vide gazette notification dated July 17, 2020 notified amendments in PIT Regulations through SEBI PIT (Amendment) Regulations, 2020. As per these amendment regulations, Regulation 7(2)(c) was inserted granting enabling power to SEBI for prescribing manner of submitting System Driven Disclosures (SDD).
SEBI vide circular dated September 09, 2020 (‘present Circular’) has issued the manner of providing SDD under Regulation 7(2). This article covers brief summary of the present Circular.
Earlier, in December 2015 SEBI had notified SDD in the first phase shall pertaining to acquisition/disposal of equity shares by promoters/promoter group based on specified thresholds under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘SAST Regulations’) and PIT Regulations and pledge of equity shares by promoters/promoter group under the SAST Regulations. Thereafter in May 2018 next phase of SDD was implemented for disclosure under Reg 29 (1) and 29 (2) of SAST Regulations by non-promoters and continual disclosures under Reg. 7 (2) of PIT Regulations for directors and employees. Refer Figure 1: Flow of events in relation to SDD
With introduction of present Circular the aforesaid circulars dated December 01, 2015, December 21, 2016 and May 28, 2018 stands superseded with respect to implementation of SDDs under PIT Regulations. It continues to remain in force in relation to disclosures under SAST Regulations.
Figure 1: Flow of events in relation to SDD
Applicability of present Circular
SDD under PIT Regulations is applicable for continual disclosures relating to trading in equity shares and equity derivative instruments i.e. Futures and Options of the listed company (wherever applicable) by the entities by members of promoter group and designated persons in addition to the promoters and directors of the company (collectively referred as ‘Entities’). Therefore, at this stage, continual disclosure w.r.t. trading in listed debt instruments or listed preference shares are not system driven and requires disclosure in the manner provided in Reg. 7 (2) as discussed below.
System Driven Disclosure
As per Regulation 7(2) of PIT Regulations, every promoter, member of the promoter group, designated person and director of every company are required to disclose to the company, within two trading days, about the transaction related to the acquisition or disposal of securities if the value of such transaction, either individually or combined value of series of transactions exceed ten lakh rupees over any calendar quarter. Also, there is an onus on the company to intimate information about such transaction to the stock exchange on whose platform the securities of such company are listed, within two trading days of receipt of the disclosure or on becoming aware of such information.
Entities are required to comply with existing system for providing disclosure to the company under PIT Regulations as applicable to them till March 31, 2021. However, depositories and stock exchanges are required to adopt suitable arrangement for generating SDDs under PIT Regulations and such disclosures shall be disseminated on the website of respective stock exchanges w.e.f. October 01, 2020.
Process of Implementation
Pursuant to SEBI circular dated May 28, 2018, the listed entity was required to select one of the depositories as a ‘Designated Depository’ (DD)for the purpose of disclosure of data for that particular company.
Pursuant to the present Circular, the listed entity shall provide the information including PAN number of Entities to the DD in manner and format prescribed by the depositories within 10 days of this circular, i.e. upto September 19, 2020. SEBI has received certain representations from listed companies for extending the due date for sharing information to DD. In this regard, SEBI has informed the stock exchange about the extension of due date till September 30, 2020.
However, in case of PAN exempted entities, the listed company shall provide demat account number of entities. The DD shall share such information with other depository.
In case of subsequent changes in the details of the Entities, the listed company shall update the DD, on the same day and the DD shall share such updated information to other depository on the same day on which information received from the listed company.
Based on information of PAN or demat account number, as the case may be, the depositories shall tag such demat accounts in their system at ISIN level. This would facilitate depositories to track trading activities of Entities and to monitor ceiling prescribed under Regulation 7(2) of PIT Regulations for the purpose of disclosure requirements.
The depositories shall provide the following data regarding tagged demat account to the stock exchanges on daily basis.
- Details of transactions for pledge/revocation/invocation of shares and other encumbrances such as NDU etc. of the entities.
- Details of off market transactions of the entities.
- Details of transmission of shares of the entities.
- Details of corporate actions such as ESOPs, Bonus, Rights, etc. of
- the entities
- Additionally, details of market transfers in case of PAN Exempt entities.
Based on the above data, stock exchange will identify transactions carried out in their trading system and such trading information shall be shared by stock exchange with other stock exchanges where the securities of the company are being listed. Every stock exchange shall consolidate such information of various trading activities and if the consolidated transaction value exceeds the ceiling prescribed under PIT Regulations then the Stock exchange shall disseminate information about these transactions on its websites.
Refer Figure 2: Flow of events for process implementation.
Figure 2: Flow of events for process implementation
Whether PAN/Demat Account number of immediate relatives shall also to be provided?
The primary intention of PIT Regulations is to prevent abuse by trading in securities of the company when in possession of unpublished price sensitive information (UPSI). Therefore, it is intended that disclosure requirement would be applicable not only to those persons who have executed any trade in securities while in possession of UPSI but also applies to immediate relative of person concerned or any other person for whom the person concerned takes any trading decisions.
As per para 14 of Schedule B of PIT Regulations, designated persons are required to disclose names and PAN details of immediate relatives along with persons to whom designated person shares material financial relationship. The said paragraph was inserted by SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2018, with effect from April 01, 2019.
Therefore, considering the intent of the law as a whole, the PAN details of immediate relatives of person concerned shall also to be provided to the designated depository even though it has not been specifically provided in the circular.
Procedure for submitting information to DD
In terms of SEBI circular dated May 18, 2018, the company may have already provided the information including PAN of the directors and employees (CEO and upto two levels below CEO) through NSDL’s issuer services portal under below mentioned categories/level.
CEO with Directorship
CEO without Directorship
Employees upto two levels below CEO
For providing information including PAN of promoters, members of promoter group, and designated persons, additional categories/levels have been added:
Other Designated Person
For providing the information as per aforesaid SEBI circular dated September 9, 2020, the company shall follow the below mentioned process:
For Listed companies who have designated NSDL and registered on NSDL issuer portal following steps may be followed:
- Log-in to NSDL issuer services portal https://issuer.nsdl.com by using existing log-in credentials received from NSDL.
- There are two options by which the company can provide information about Promoters, members of the promoter group, designated persons to NSDL on the issuer services portal:
Option 1 – Issuer can provide the aforesaid information by directly capturing data on the screen available under menu ‘Add Promoter / Designated Person Details’ under the tab ‘System Driven Disclosure’.
Option 2 – Alternatively, Issuers can upload the details through file upload facility available under the menu ‘Upload Promoter / Designated Person Details’ under the tab ‘System Driven Disclosure’. The format for upload is available in Annexure I and how to create/fill up the upload file is given in Annexure III. Also refer to Annexure II as a reference file i.e. example of data will look post creating in upload file.
- Once the details of Promoters, members of the promoter group, designated persons and directors are provided on NSDL issuer services portal, the same can be viewed under the menu ‘ View/Delete Promoter / Designated Person Details’.
- NSDL will identify demat accounts in NSDL Depository System based on the PAN details of Promoters, members of the promoter group, designated persons and directors provided by Companies. The same can be viewed under the menu ‘View Demat Account Details’.
In case users have forgotten their password, they can reset their password by clicking on the ‘Forgot password’ link on the login page of Issuer portal. The user will need to follow to below mentioned steps:
- Enter the User ID in the ‘Username’ field and click ‘Forgot password’ link;
- User will be need to click on radio button for OTP;
- User will be prompted to enter the mobile number registered with NSDL and click on ‘Send Code’;
- On receipt of the OTP on the registered mobile number, user will need to enter the same in the said field and submit;
- Once the OTP validation is done User will have the option to enter their new password and submit.
Whether PAN of the entire promoter group to be given to DD?
In order to enable the system to capture the trading activities of entire promoter group, the listed entity shall provide PAN/Demat account number, as the case may be, of all the members belonging to the promoter group irrespective of the fact that person belonging to promoter group is holding any shares or not.
Whether PAN details shall be provided separately for SAST disclosures?
Pursuant to SEBI circular dated December 01, 2015, listed companies were required to provide information about promoters and promoter groups of companies to the depositories through the RTA for the purpose of disclosures under SEBI (SAST) Regulations, 2011. The intent was to build an accurate database of the existing holdings at ISIN level of all the promoters / promoter group. However, SEBI vide circular dated September 23, 2020, informed that the same procedure is to be used for capturing PAN/Demat account details as mentioned in circular dated September 9, 2020 for SAST disclosures too. Therefore, erstwhile, where details of promoter or promoter group were required to be provided through the RTA, now the listed entity shall provide the same to the DD for all members of promoter group irrespective of their holdings. The idea behind the same is to align the practices of SDD for both PIT Regulations and SEBI (SAST) Regulations, 2011.
The automated process of generating disclosures under PIT Regulation will do away the instances of late filing of disclosures by the Entities or the listed company and will enable transparency in trading activities of Entities. SEBI may achieve its intention to create centralized database system by implementing such SDD process.
Our other writeups on the captioned subject:
- SEBI prescribes norms for structured digital database, system driven disclosures & CoC violations – Click here
- Presentation on recent amendments in PIT Regulations – Click here
- YouTube video: Click here
- Compliance by companies for system driven disclosures – Click here
- System-driven Disclosures in Securities Market- Now extended to Non-Promoters – Click here
Youtube Video – https://www.youtube.com/watch?v=5DNOJDB9o0k
– Time given till last day of FY 2020-2021
Pammy Jaiswal | Partner | Vinod Kothari and Company
Physical transfers of specified securities were prohibited w.e.f. 1st April, 2019 by virtue of amendment made in Reg. 40 vide SEBI LODR (Fourth Amendment) Regulations, 2018.Listed entitieswere not allowed to process the transfer request for equity shares where shareholders held the same in physical form with effect from 1st April, 2019.
In order to address the issue of transfer requests filed prior to April 1, 2019 but rejected due to deficiency in documents etc, SEBI issued a press release on 27th March, 2019 permitting the shareholders, who had already lodged their transfer request before 1st April, 2019 and where the request was returned/ rejected due to deficiency in paperwork, to re-lodge their transfer request with the listed companies.
However, there was no specific deadline provided for re-lodgement of such requests. SEBI vide its Circular dated 7th September, 2020 has provided a cut-off date of 31st March, 2021 for re-lodging the transfer request rejected/ returned earlier.
Is the Circular applicable to all shareholders?
This Circular is only applicable in such cases where the transfer request for physical shares had been lodged prior to 1st April, 2019 and were rejected/ returned on grounds of deficiency in documents.
While the language of the Circular states – “Further, the shares that are re-lodged for transfer(including those request that are pending with the listed company / RTA, as on date), this cannot be interpreted to mean the inclusion of fresh transfer request post 1st April, 2019 since the same was prohibited by law itself.
Transfer to be effected in demat mode
Another important clarification that the Circular provides is that on effecting the transfer of such physical shares the transferee will be issued shares in demat mode only. This means that the transferee will have to have a demat account in order to give effect to the transfer, failing which the transfer will not be processed by the listed company.
Standard procedure for transfer of physical securities
For the purpose of processing the transfer request pursuant to the re-lodgement by the shareholders, the RTAs will be guided by the SEBI circular dated 6th November, 2018 to follow the procedure provided therein. The said circular provides for the standard procedures including the document requirement for processing the transfer request of physical securities.
Enhanced due diligence for dematerialization of physical shares
For augmenting the integrity of the system in processing of dematerialization request in respect of physical shares, SEBI issued a circular on 5th November, 2019. This requires the listed companies to share the static database (name of shareholders, folio numbers, certificate numbers, distinctive numbers and PAN etc.) of those shareholders who are holding physical shares.
The intent is to cross check the systems for validating dematerialization request of such shareholders.
By setting the deadline to re-lodge the transfer request, SEBI has put an end to allow the pending transfer request to be alive for an indefinite time period. In cases where the shareholder fails to re-lodge the transfer request on or before 31st March, 2021, such transfers will be deemed cancelled and will not be allowed to be transferred unless shares are dematerialised.
Other reading materials on the similar topic:
- ‘No Physical, only Demat!’ can be viewed here
- ‘SEBI amends LODR mandating dematerialization’ can be viewed here
- ‘FAQs on Dematerialization of Shares’ can be viewed here
- Our other articles on various topics can be read at: http://vinodkothari.com/
Email id for further queries: firstname.lastname@example.org
Our website: www.vinodkothari.com
Our Youtube Channel: https://www.youtube.com/channel/UCgzB-ZviIMcuA_1uv6jATbg
SEBI during FY 2018-19 conducted an investigation into the trading activities in illiquid stock options at BSE for a period of 1st April, 2014 to 30th September, 2015. As a result of the investigation, SEBI observed that there were large scale reversal trades executed in stock options by various entities.
Reversal trades refers to trading i.e. buying and selling of stocks from and to the same counterparty during a day which creates artificial trade units of stocks in the question. In such trades one party suffer losses and buy stock at higher rate and within seconds execute reversal trade and sell these stocks to the same counter party at a relatively lower rate thereby resulting to gains for other party. Supreme Court in the appeal no. 1969 dated 8th February, 2018 quoted:
“Trading is always with the aim to make profits. But if one party consistently makes loss and that too in pre-planned and rapid reverse trades, it is not genuine, it is an unfair trade practice.”
Such kind of transactions executed by entities were considered non-genuine by SEBI as they were not executed with the basic trading rationale. These transactions were prohibited pursuant to the provisions of section 4(2) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (‘PFUTP Regulations’) which provides:
“(2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely: —
(a) indulging in an act which creates false or misleading appearance of trading in the securities market;”
Pursuant to such restriction under the PFUTP Regulations, SEBI issued show cause notices to various entities (approximately 14000 entities) demanding justification for executing reversal trades at a loss. Entities who were involved in executing such trades were liable for penalty under section 15J of the SEBI Act. Generally, SEBI has levied a fine of approximately Rs. 5 lakhs on entities i.e. the minimum under section 15J of SEBI Act, however, the parameter of determination of fine was subjective and hence even higher fine has been levied to some entities.
Rationale behind the scheme
SEBI was penalising entities for non-genuinely trading in illiquid stock options through price manipulation under the PFUTP Regulations and SEBI Act. However, tax evasion with respect to such trading activities were to be separately investigated and penalised by IT Authorities. Hence, most entities were contesting the SEBI order with higher authorities to avoid notice/regulatory action from the IT Authorities.
The Hon’ble SAT vide its order dated 14th October, 2019 in the matter of R S Ispat Ltd vs SEBI directed:
“We are adjourning this matter today, so that SEBI may consider holding a Lok Adalat or adopting other alternative dispute resolution process with regard to the illiquid stock options”
Hence, to settle the proceedings initiated for such entities, SEBI introduced a scheme to settle the matter.
Regulation 26 of SEBI (Settlement Proceedings) Regulations, 2018, empowers SEBI to specify settlement schemes as and when desirable for defaults conducted by entities. SEBI for the purpose of reducing the administrative burden of pending proceedings relating to trading in illiquid stock options, issued a public notice on 27th July, 2020 for introduction of Settlement Scheme, 2020.
Pursuant to the scheme a one-time settlement opportunity is being provided to entities involved in dealing of illiquid stock options during the period from 1st April, 2014 to 30th September, 2015. The validity of the scheme is for a period ranging from 1st August, 2020 to 31st October, 2020.
The scheme provides an indicative criteria for determining the settlement amount on the basis of:
- Artificial volume created
- Number of non-genuine trades
- Numbers of contracts resulting in creation of artificial trades
Further, uniform consolidated settlement factor of 0.55 shall be applied to calculate the net settlement amount payable by entities. For the purpose of determination, SEBI has introduced a separate web page where settlement amount for the purpose of such orders can be calculated. This can be accessed at Link
|Process of determination of settlement amount|
|1.||Company has to provide two information:
a) Category of payment i.e. for order or settlement
b) PAN details of the entity
|2.||The following details gets auto filed by providing PAN details:|
|i) Name of the entity|
|ii) Entity type|
|iii) Number of contracts reversed|
|iv) Number of non-genuine trades|
|v) Artificial volume of trades|
|3.||The settlement amount gets automatically calculated. The payment amount is segregated as follows:|
|a) Settlement amount (as calculated using the 0.55 factor)||b) Registration fees
For bodies corporate: Rs. 25,000
For individuals: Rs. 15,000
1. Income tax returns for last 3 years
2. Copy of PAN card of the entity/individual
3. Undertaking and waivers as required under the SEBI (Settlement Proceedings) Regulations, 2018
For the purpose of making payment under the settlement scheme, the entity has to withdraw any pending proceeding in the said matter. After withdrawal, entities can use this web page for payment of settlement amount.
The settlement amount is directly proportionate to the artificial volume of trades executed by the entities. We have obtained data of 15 entities on sample basis for analysis of settlement amount. The same is represented below:
|Sl.No.||No. of contracts reversed||No. of non-genuine trades executed
|Artificial volume of trades||Settlement amount|
Hence, basis the aforesaid table, we understand that higher the artificial trades executed, the higher will be the settlement amount. However, the point of focus here is where SEBI has levied fine of approximately Rs. 5 lakhs on entities, why will entities pay a higher settlement amount then the actual fine. Further, the whole intent of settling a proceeding is to settle it at a lower cost than actual fine. Here, the fine ranges around Rs. 5 lakhs, however, the settlement amount ranges from Rs. 20 lakhs and may go upto Rs, 83 lakhs or even higher.
Process of availing the settlement scheme
Whether settlement proceedings shall avoid scrutiny of IT department?
As regards penal provisions under IT provisions are concerned, the details of trading in illiquid stock options is linked to the PAN details of the entity. Further, the portal also requires to attach the ITR of last three years of the entity.
In this regard, whether the intent of the settlement proceeding is also to channelize information and link the proceedings with IT department, is still unknown. Further, the fate of intention of entities to delay/waive the IT proceedings by either challenging the SEBI order in higher court or settling the proceedings shall be seen only when IT departments start sending letters to such entities.
Generally, settlement refers to neither admitting nor denying any non-compliance. Therefore, entities opting for settlement scheme may have a better chance before the IT department. However, whether this can also safeguard entities them from being penalised by the IT authorities is uncertain.
The entities who opt for settlement scheme has to pay the settlement amount through the portal after withdrawing any pending proceedings. As regards, entities which do not opt for such schemes, the proceedings, as is, shall continue.
Our presentation can be viewed here: https://www.youtube.com/watch?v=CK6QOm4k8Rw