Maintenance of Structured Digital Database (“SDD”) has been mandatory since April 1, 2019 in view of the relevant provisions under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’) reproduced below. The provisions inter-alia stipulates the responsibility, the details to be captured in the SDD, manner of maintenance and the preservation period. The entities have been maintaining for the last 3 years, however, since quarter ending June 30, 2022 the entities are additionally required to submit a compliance certificate, based on the email received from the stock exchanges where its securities are listed, duly certified by the Compliance Officer. We have been given to understand that this submission will be mandated on a quarterly basis and the same will henceforth required to be submitted duly certified by a practising company secretary. As on date, no SEBI circular or Exchange circular has been issued in this regard.
The last date for submission for the immediately preceding quarter was August 9, 2022. Based on the client queries received in this regard, format of the compliance certificate provided by the stock exchange and the views from the representatives of SEBI and stock exchanges as expressed in seminars from time to time, we intend to highlight certain points of concerns for your kind consideration.
Relevant provisions of Law:
Reg. 3 (5) and (6) of PIT Regulations:-
(5) The board of directors or head(s) of the organisation of every person required to handle unpublished price sensitive information shall ensure that a structured digital database is maintained containing the nature of unpublished price sensitive information and the names of such persons who have shared the information and also the names of such persons with whom information is shared under this regulation along with the Permanent Account Number or any other identifier authorized by law where Permanent Account Number is not available. Such database shall not be outsourced and shall be maintained internally with adequate internal controls and checks such as time stamping and audit trails to ensure non-tampering of the database.
(6) The board of directors or head(s) of the organisation of every person required to handle unpublished price sensitive information shall ensure that the structured digital database is preserved for a period of not less than eight years after completion of the relevant transactions and in the event of receipt of any information from the Board regarding any investigation or enforcement proceedings, the relevant information in the structured digital database shall be preserved till the completion of such proceedings.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Team Corplawhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngTeam Corplaw2022-08-22 19:21:462022-09-23 11:55:40Structured Digital Database: some emerging concerns
SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’) inter-alia prohibits trading by a Designated Person (‘DP’) when the trading window is closed. Despite the express prohibition, there are instances of deliberate or inadvertent trades by the DPs that results in violation of the Code of Conduct to regulate, monitor and report trading by its DPs and immediate relatives of DPs followed by disciplinary action by the listed entity, reporting of violation to the Stock Exchange (‘SE’) and followed with SEBI proceeding against the DP for the violation. This causes reputational loss for the listed entity as well as the DP and loss of investor confidence on the internal controls and systems prevalent in the listed entity. There is also a practice followed by certain financial sector entities where the demat account of DPs are opened with the SEBI registered depository participants in the group and trading in the said security of the listed entity is locked/ freezed during the trading window closure period. In case of financial results the closure period commences the 1st day immediately following the end of quarter (for e.g. Oct 1, Jan 1, April 1 and July 1) and ends after 48 hours post disclosure of financial results.
SEBI vide Circular dated August 05, 2022 (‘original circular’), had proposed a framework for restricting trading by DPs by freezing PAN at security level during the Trading Window Closure (‘TWC’) period making it applicable on listed companies that are a part of Nifty 50 or Sensex 30 commencing from declaration of financial results for quarter ending September 30, 2022
On similar lines, on June 28, 2023, BSE and NSE issued a circular extending the requirement phase wise in case of financial results to rationalize the compliance requirement and to prevent inadvertent non-compliances of provisions of PIT Regulations. While the phase was indicated in the circular and was to apply to all listed entities effective April 1, 2023, the details of companies covered under the obligation for quarters ending September 30, 2023 and December 31, 2023 was to be indicated by way of a separate circular.
Present Circular
On July 19, 2023, SEBI issued a circular (‘present circular’) on similar lines of BSE and NSE specifying the companies covered for freezing their PAN which has been discussed in this article. In order to provide further clarity on the practical implications, BSE and NSE issued the FAQs on the subject on March 28, 2024 (‘SE FAQs’).
Applicability of the present circular
This Circular will be applicable for on-market transactions, off-market transfers and creation of pledge in equity shares and equity derivatives contracts (i.e. Futures and Options) of listed entities in a phased manner as explained in figure 1 below.
Figure 1: Applicability of provision relating to freezing of PAN
# Illustration: For a company getting listed during October 01 to December 31, 2023, PAN of DPs should be frozen at security level as per prescribed framework latest from April 01, 2024.
For trading in derivatives, the SE FAQs states that the listed company will be required to educate the DPs about freezing of PAN at ISIN level. Consequently, all open positions in the derivative segment should be squared off before the commencement of TWC.
Process for implementing through Designated Depository (‘DD’)
In terms of SEBI Circular dated May 28, 2018, listed companies were required to select one of the depositories as a Designated Depository (‘DD’) for disclosing the details of the company for the purpose of implementing system driven disclosures in the capital market. Further in terms of SEBI Circular dated September 09, 2020, for further automating the system driven disclosures, listed companies were required to submit PAN of promoters/ promoter group, DPs and directors (hereinafter collectively referred to as entities) to the DD and for PAN exempt investors, the demat account number(s) were required to be provided. Further, In case of any subsequent changes in the directors/ employees of the listed company, the companies were required to provide the information of the changes to the depositories on an immediate basis and not later than 2 working days.
The original circular prescribed the following procedure for prohibiting trading during TWC as explained in figure 2 below.
Figure 2: Procedure of prohibiting trading during TWC
Quarterly reporting by Depositories
The present circular requires quarterly reporting by the depositories giving details of number of listed entities on which the requirement is applicable and that appointed the depository as a DD, number of PAN of DPs provided for the freeze, total number of accounts in which PAN-ISIN level freeze was levied for the quarter and total number of exemptions given to DPs.
Accordingly, the DDs are expected to keep a track of all the quantitative data to be able to report at the end of quarter.
Disclosure of TWC to stock exchange
The PIT Regulations are silent on the requirement to disclose TWC period to the stock exchange.The relevance of TWC is for DPs and not the general public at large. The circular of BSE dated February 03, 2014 as well as that of NSE dated December 18, 2013 also provided for disclosure of the TWC period at the time of disclosing the price sensitive information. The original circular provides that after the listed company enters the TWC period, the DD shall disclose the TWC period and other details received from the listed company to the SE and other depository atleast 1 trading day prior to the commencement of TWC.
Presently, the scope of the original circular and the present circular is limited to TWC for financial results. However, going forward, if this mechanism is adopted for various trading window closures for all DPs or few of them, SEBI will have to reconsider the requirement of informing about TWC to SE or anywhere in public domain as it signals the world at large about the existence of UPSI within the company.
The stock exchanges also rolled out XBRL format for public comments w.r.t informing about TWC to the stock exchange. In our view, the requirement of intimation of TW closure period is unwarranted and should be done away with in entirety in order to avoid creation of a false market for reasons discussed below:
Right from the germination of UPSI till its disclosure to the stock exchange, its confidentiality is required to be maintained, and hence, the TW is closed for the DPs who are having access to such UPSI. There is no requirement of ‘intimation’ of TW closure to the stock exchange at the time of generation of UPSI as TW closure is for DPs (insiders) and not outsiders. When the information is in a shape concrete enough to be disclosed, the listed entity will do a disclosure under Regulation 30. Before the information is made public, the TW is closed. In that case, how can the listed entity go public on TW closure before the information is itself public, this is in contradiction with the requirement of law. 3.
If the listed entity discloses that its TW has been closed stating the purpose of the TW closure (as indicated in the proposed format) this itself is sufficient to convey a message to the market that a UPSI has, in fact, originated in the organization, leading to speculations, market rumour, attempt to procure the information and fluctuations in the price of the listed security, thereby, defeating the very purpose of TW closure.
Applicability of the restriction to off-market trades
PIT Regulations permit off-market inter-se transfer between insiders who were in possession of the same unpublished price sensitive information without being in breach of regulation 3 and both parties had made a conscious and informed trade decision.
The system provides for the flexibility to the listed company to exempt the transaction by de-freezing the PAN of such DP in the system. In such cases, the restriction shall be removed within 2 trading days from the date of receipt of request from the listed company.
For example, if the listed company provides exemption to any DP on April 3, 2024, then the change i.e. de-freeze shall be effected on or before April 5, 2024. The restrictions shall be re-introduced automatically post lapse of the exemption period or completion of the transaction by the DP.
Determination of TWC period and alteration to the same
The original circular mandates listed companies to specify the TWC period atleast 2 trading days before the TWC start date. While the period within which the financial results are to be approved are provided in the Listing Regulations, it is likely that the company may not be certain about the Board meeting date for approval of the financial results and therefore, not in a position to specify the end date for TWC. In such cases, the SE FAQs have clarified that the end date is modifiable. The listed entity can put a notional end date initially and once the board meeting date is decided it can be modified on the basis of T-2 days.
Compliance in case of companies having stricter TWC period
Some companies follow the practice of a stricter TWC period where the TW is closed much prior to the end of quarter. For e.g. for the financial results of the quarter ended March 2024, the TWC would be closed from 15th March, 2024. Presently, the portal freezes the PAN from the 1st day of the month following the end of quarter. In such cases, theSE FAQs provide that the listed companies will be required to close the TW internally by sending intimations to the DPs.
Applicability of the restriction to creation of pledge on equity shares
Para 4 (3) of Schedule B to PIT Regulations expressly permit pledge of shares for bonafide purposes such as raising of funds subject to pre-clearance by the compliance officer during the trading window closure period. However, the original circular restricts the same.. Further, with regard to invocation of pledge, the SE FAQs provides that pledge invocation is not allowed in the tenure of PAN freeze, unless pledge is created before the TWC period.
The meaning of DPs under PIT Regulations includes promoters and it will be quite challenging for business if the ability to pledge the shares is prohibited during the result declaration period. Hence, in order to allow pledge of shares, the listed company will have to specifically exempt such DP by updating in the system, on a case to case basis.
Further, the Supreme Court ruling in the matter of PTC India Financial Services Limited v. Venkateshwar Kari and Another[1] highlighted the modus operandi in case of pledge and also reiterated the need of aligning laws like SEBI’s Takeover Regulations – see para 11.8 of the said ruling. We have also discussed the relevance of PIT Regulations in the context of pledge in another article[2]. This needs to be revisited by SEBI.
Conclusion
The SE FAQs provide further clarity for the entire regime. This will certainly help in minimising the instance of violations on account of trading during TWC period. The mechanism will work well in case of TWC for financial results, however, may require a re-look in case extended to all TWC for all UPSI.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Vinita Nair Dedhiahttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngVinita Nair Dedhia2022-08-10 14:51:542024-03-30 19:02:21Trading window restrictions get hardwired as trading freeze at PAN level for DPs
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Team Corplawhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngTeam Corplaw2022-08-06 13:12:082022-11-21 11:35:19FAQs on Structured Digital Database
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Team Corplawhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngTeam Corplaw2022-07-30 09:54:492022-09-23 11:59:29Comments on Consultation Paper on inclusion of Mutual Fund Units in PIT Regulations
Growth of investor interest in fixed income investment options is a sign of maturity of a market. Indian investors have traditionally been looking at securities markets for equity-type returns and use mutual funds, bank deposits etc. for fixed returns. However, in recent years, the avenues for fixed income investing in corporate bonds, P2P lending platforms, various types of collective investment schemes such as property shares[1], etc. have flourished. Hence, as investors become active and aware, they no longer limit themselves to mutual funds. Investors are now moving to debt trading platforms, which is the subject matter of SEBI’s Consultation Paper on Online Bond Trading Platforms[2] (‘Paper’). Due to stringent requirements for debt listing, the number of issuances, the number of listed debt issuances to the public is relatively low. Considering the growing investor interest, the lack of volumes of public issuances and limitations of trading of bonds through electronic bond platforms, several platforms started offering listed and unlisted debt securities to investors. This is what we are referring to as “debt trading platforms” here.
In a recent Circular[1], SEBI has come up with the Guidelines for Large Value Funds for Accredited Investors (LVFs) and requirement for appointment of compliance officer for managers to Alternative Investment Funds[2] (AIFs). SEBI had introduced the concept of LVFs alongwith the concept of Accredited Investors (AIs) in August, 2021. A brief timeline showing the evolution of the framework of AIs in India is as follows:
AI also known as qualified investor/professional investor/ experienced investor are a class of investors who have in-depth market knowledge and high risk bearing capacity to take an informed investment decision. Since, these AIs are well informed investors, therefore, the intermediaries providing services to these investors are given regulation-light regime i.e. less regulatory oversight & relaxed compliance requirement by SEBI.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Vinod Kothari Consultantshttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngVinod Kothari Consultants2022-07-16 18:38:412023-12-22 11:16:57SEBI amends framework for Large Value Funds
Additionally invites comments on the applicability in case of units of pooled investment vehicle
Vinita Nair | Senior Partner, M/s Vinod Kothari & Company
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2022-07-09 13:46:572022-07-22 18:15:28SEBI: Insider trading norms should apply to fund managers
Hon’ble Supreme Court, in the matter of PTC India Financial Services Limited v. Venkateshwar Kari and Another (‘PTC India ruling’), brought out a very important distinction between the meaning of ‘beneficial owner’ under the Depository law, and the right of the pledgee/ pawnee/ security interest holder) to cause the sale of goods pledged by pledgor/ pawnor in terms of the rights arising under the pledge[1]. The PTC India ruling inter-alia holds that “beneficial ownership” in the context of the Depositories Act should not be confused with beneficial ownership in law. Getting registered as a “beneficial owner” in terms of Section 10 of Depositories Act, 1996 read with Regulation 58 (8) of the SEBI (Depositories and the Participants) Regulations, 1996[2] (‘Depository law’) does not amount to any transfer of title to the pawnee – it is merely a procedural precondition to sale by the pawnee. It further stipulates that there is no concept of ‘sale to self’ by the pledgee and that the pledgee is bound by the two options provided under Section 176 of the Indian Contract Act, 1872 (‘ICA, 1872’), viz., right to bring a suit against the pawnor and retain the goods pledged as collateral security, or sell the thing pledged on giving reasonable notice to the pawnor and sue for the balance, if any. This ruling triggers the need to review current practice followed by companies and also validity of orders pronounced by Securities Appellate Tribunal (‘SAT’) and SEBI from time to time w.r.t. pledge.
The Apex Court referred to the decision of Securities Appellate Tribunal (‘SAT’) in the matter of Liquid Holdings Private Limited v. The Securities Exchange Board of India[3] where SAT held that the banks being recorded as beneficial owners of the shares pursuant to invocation of pledge became the members of the target company and subsequent transfer of the said shares by the banks back to the appellants resulted in purchase by the appellants attracting the open offer obligations under SEBI (Substantial Acquisition and Takeovers) Regulations, 1997 [Repealed by SEBI (Substantial Acquisition and Takeovers) Regulations, 2011] (‘Takeover Code’). The Apex Court observed that SEBI should examine the provisions of Depository law and the Takeover Code to avoid discord or ambiguity resulting in instability or confusion especially on applicability of Takeover Code when the pawnee exercises his right to be recorded as a ‘beneficial owner’, while reserving his right to sell the pledge. Additionally, in the author’s view, there is an equal need to examine the applicability of SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’) in the context of pledges[4], for reasons discussed in the latter part of this article.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Vinod Kothari Consultantshttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngVinod Kothari Consultants2022-06-28 16:07:502022-08-29 19:02:41Pledge as transfer: Several SEBI Regulations may require review post SC Ruling
By Vinod Kothari, Managing Partner, Sikha Bansal, Partner and Shraddha Shivani, Executive | corplaw@vinodkothari.com
The Supreme Court ruling in PTC India Financial Services Limited v. Venkateshwar Kari and Another is significant in many ways – not that it categorically rewrites the law of pledges which is settled with 150 years of the statute[1] and even longer history of rulings, but it surely refreshes one of the predicaments of a pledge. Importantly, since most of the pledges of securities currently are in the dematerialised format, it brings out a very important distinction between the meaning of ‘beneficial owner’ under the Depository law, and the right of the pledgee (a.k.a. pawnee or security interest holder) to cause the sale in terms of the rights arising under the pledge. Also, very importantly, the SC dwells upon the essential principle of equity of redemption in pledges and renders void any provision in the pledge agreement which allows the pledgee to make a sale of the pledged article without notice to the pledgor, or to forfeit the pledged article and convert the same as pledgee’s own property. There are also observations in the ruling that seem to give an indefinite time to the pledgee for the sale of the pledged property – this is a point that this article discusses at some length.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Vinod Kotharihttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngVinod Kothari2022-06-24 19:39:572025-03-03 12:58:50Broken Pledge? Apex Court reviews the law on pledges
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Kaushal Shahhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngKaushal Shah2022-04-26 14:56:182023-06-19 20:43:36Guidance note on Disclosure of Related Party Transactions under Reg. 23 (9) of LODR
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