SEBI prescribes norms for structured digital database, system driven disclosures & CoC violations

CS Vinita Nair, Senior Partner | Vinod Kothari & Company

July 23, 2020

Link to gazette notification: http://egazette.nic.in/WriteReadData/2020/220574.pdf

Effective date: July 17, 2020

Background

SEBI in the Board meeting held on June 25, 2020 (‘SEBI BM’) discussed amendments in PIT Regulations on Structured Digital Database, continual disclosures and amendments in the Code of Conduct (CoC).

This article discusses the position prior to amendment, relevant discussion at SEBI BM and actionable post amendment.

Structured Digital Database (SDD-1)

Prior to the amendment

Reg 3(5) of the regulations provided maintenance of SDD-1 with names of persons with whom UPSI was shared and PAN/ any other identifier of the person (where PAN was not available). SDD was required to be maintained with adequate internal controls and checks such as time stamping and audit trails to ensure non-tampering of the database.

The regulation indicated that just the listed entity is required to maintain the same. However, SEBI clarified in the guidance note, pursuant to an insertion made on July 5, 2019, that the requirement to maintain SDD-1 was applicable to listed companies, and intermediaries and fiduciaries who handle UPSI of a listed company in the course of business operations.

Discussion in SEBI BM

As per the agenda of the SEBI BM It was proposed to specify following in relation to SDD:

• Nature of UPSI;
• Details of persons or entities who have shared;
• Period of preservation of SDD-1;
• Prohibiting entities from outsourcing the same.

Post amendment

• SDD-1 is required to be maintained by the Board of directors or heads of organization of every person required to handle UPSI;
• SDD-1 shall additionally contain the name of the person sharing the UPSI.
  • So the names of person sharing and the one with whom the same is shared will be recorded along with PAN/ any other identifier of the person (where PAN was not available).
• SDD-1 shall be maintained internally and not be outsourced.
• SDD-1 to be preserved for a period of 8 years after completion of relevant transactions or even longer in case of pending proceedings.

System Driven Disclosures (SDD-2)

Prior to the amendment

Continual disclosures under Reg 7 (2) (b) was required to be made by the promoters, member of promoter group and designated persons to the stock exchanges within two trading days of receipt of the disclosure or becoming aware of such information. System driven disclosure was implemented vide SEBI Circular dated May 28, 2018 only for The CEO and upto two levels below CEO of a company and all directors. The database was submitted to the depositories along with PAN of the individuals.

Discussion in SEBI BM

Investigation of delay or non-compliance due to manual submissions takes up considerable time and effort and clogs the system. In order to eliminate it was proposed to automate the process of filing such disclosures by way of SDD-2 thereby enabling timely and fair disclosure without intervention of entities involved. SEBI will be issued detailed circular on the same to the market participants.

Post amendment

Reg 7 (2) (c) inserted to provide enabling power for issue of format and manner of submitting SDD-2.

Exemption from trading window restrictions

Prior to the amendment

Trading window restriction was not applicable on transactions specified in proviso to Reg 4 (1), in respect of pledge for a bonafide purpose and transactions undertaken in accordance with respective SEBI Regulations such as acquisition by conversion of warrants or debentures, subscribing to rights issue, further public issue, preferential allotment or tendering of shares in a buy-back offer, open offer, delisting offer.

Discussion in SEBI BM

Offer for sale was not included in the said list despite SEBI having laid detailed procedure for the same.

Post amendment

Enabling clause inserted to include the transactions which are undertaken through such other mechanism as may be specified by the Board from time to time. SEBI vide Circular dated July 23, 2020 provided that trading window restriction shall not apply in case of rights entitlement and Offer for Sale.

Crediting the amount for CoC non-compliance to IPEF

Prior to the amendment

Only profits from contra trade were disgorged and credited to Investor Protection and Education Fund (IPEF) administered by SEBI. The listed entity had the option to take disciplinary action including by way of recovery, clawback.

Discussion in SEBI BM

The listed entity could take action against person violating the CoC by way of disciplinary actions viz. wage cut, collecting of certain amount etc. There was no uniform approach w.r.t. utilization of amounts levied by the listed entities/ intermediaries/ fiduciaries for other violations of CoC viz. trades during window closure, trade without pre-clearance etc.

Also, a clawback is generally a contractual agreement between the employee and the employer in which the employee agrees to return previously paid or vested remuneration to the employer under certain circumstances. However, every employment agreement may not have a “clawback” clause or provision. Whereas, disgorgement as an equitable remedy, aimed at depriving the wrongdoer of his ill-gotten gains. It was suggested to substitute ‘clawback’ with ‘disgorgement’.

Post amendment

Any amount collected for violation of CoC shall also be remitted to SEBI for credit to the IPEF. The word ‘clawback’ has been deleted in Schedule B and Schedule C. SEBI vide Circular dated July 23, 2020 has provided that such amounts shall be credited to the IPEF through the online mode or by way of a demand draft (DD) in favour of the Board (i.e. SEBI – IPEF) payable at Mumbai. The bank account details of SEBI – IPEF for online transfer is given below:

Informing violation of PIT Regulations to Stock Exchange

Prior to the amendment

Violation of PIT Regulations was required to be informed to SEBI. SEBI vide Circular dated July 19, 2019 prescribed format for standardized reporting of violations under CoC.

Discussion in SEBI BM

The intimations received from listed companies/ intermediaries/fiduciaries were maintained in non IT based environment. To ensure that such intimations were captured electronically in an IT based environment to create a data repository, which could be used for conducting examination of cases or for any other data analysis, in future, it was recommended to file intimations with the stock exchanges.

Post amendment

The violations will be required to be reported to the stock exchanges in the form and manner as may be prescribed by SEBI. SEBI vide Circular dated July 23, 2020 prescribed the format in supersession of July, 2019 circular.

Whether the intimations filed with the stock exchanges will be publicly available, is not clear.

Comparison of formats

The format is broadly similar to that prescribed in July, 2019, however, has following modifications:

Actionables for the listed entities/ intermediaries/fiduciaries

SDD-1

Maintenance of SDD-1 to be ensured with details of persons sharing the UPSI.  SDD to be preserved for minimum 8 years from completion of relevant transactions. Internal control manual/ SOP, if any, will be required to be updated to capture the amendment.

SDD-1 may be maintained by Compliance Officer or may be maintained by various functional heads who are in possession of UPSI and share the same for legitimate purpose. The Compliance Officer should have access to the same as that is required for deciding of pre-clearance for the trades by DPs.

SDD-2

Reporting continual disclosure in SDD-2 after the format is prescribed by SEBI. In case SEBI decides to implement SDD-2 in the manner it implemented in 2018, the listed entity will be required to furnish name and PAN details of promoter, member of promoter group and all designated persons to the depository.

CoC

The CoC will be required to be amended to capture the amendments by removing reference of clawback provision and specifying to deposit amounts collected for violation to IPEF.

Violation of the regulations and of CoC to be reported to the stock exchange instead of SEBI by listed entity/ intermediary/ fiduciary in the format provided by SEBI vide circulated dated July 23, 2020.