SEBI’s Plethora of Proposals
– Sourish Kundu, Executive | corplaw@vinodkothari.com
Read More:
Subsidiaries to refer LODR definition of “related party” – going too far with relationships?
SEBI approves cartload of amendments
– Team Corplaw | corplaw@vinodkothari.com
SEBI in its Board meeting dated December 18, 2024, has approved amendments pertaining to BRSR, HVDLEs, DTs, SMEs, Intermediaries, etc. This article gives a brief overview of the approved amendments.
Ease of Doing Business for BRSR
- Scope of BRSR Core for Value Chain Partners shrunk
- Value chain partners now consist of individuals comprising 2% or more of the listed entity’s purchases and sales (by value) instead of 75% of listed entity’s purchases/sales (by value).
- Further, the listed entity may limit disclosure of value chain to cover 75% of its purchases and sales (by value), respectively.
- Deferred applicability of ESG disclosures for the value chain partners & its limited assurance by one financial year
- Applicability of ESG disclosures for the value chain deferred from FY 24-25 to FY 25-26.
- Applicability of limited assurance deferred from FY 25-26 to FY 26-27.
- Voluntary disclosure of ESG disclosures for the value chain partners & its limited assurance instead of comply-or-explain
- Top 250 listed entities by market cap can now comply with the ESG disclosures for the value chain partners & its limited assurance on a voluntary basis in place of comply-or-explain.
- Term ‘Assurance’ replaced with ‘assessment or assurance’ to prevent unwarranted association with a particular profession (specifically audit profession).
- Assessment defined as third-party assessment undertaken as per standards to be developed by the Industry Standards Forum (ISF) in consultation with SEBI.
- Reporting of previous year numbers voluntary in case of first year of reporting of ESG disclosures for value chain.
- Addition of disclosure pertaining to green credits as a leadership indicator under Principle 6 – Businesses should respect and make efforts to protect and restore the environment of BRSR
Immediate actionables for Listed entities:
- Entity to re-assess its value chain partners as per the revised definition.
- Entity forming part of top 250 listed entities by market cap to undertake third party assessment of its BRSR Core disclosure for FY 24-25 as per the standards to be developed by ISF.
- To disclose about the green credits procured/generated by the entity during FY 24-25.
Debenture Trustee (‘DT’) Regulations:
- Introduction of provisions relating to ‘Rights of DTs exercisable to aid in the performance of their duties, obligations, roles and responsibilities’, which broadly indicates (as proposed in the CP):
- Calling information/ documents from issuer w.r.t. the issuance;
- Calling documents from various intermediaries;
- Calling of and utilization of Recovery Expense Fund, with consent of holders.
- Corresponding obligations on the issuers to submit necessary information/documents to DTs.
VKCo comments: In addition to the corresponding obligations on the issuer, CP also proposed to mandate Depositories and Stock exchanges to provide requisite information to DTs, which is yet to be approved. The right to call information from issuers and market participants including corresponding obligations on them will enable DTs to perform their functions efficiently.
- Introduction of standardized format of the Debenture Trust Deed (‘DTD’)
- To be issued by Industry Standards Forum with SEBI consultation;
- In case of deviation from the format of DTD, disclosure is to be made for investor review. (CP proposed to disclose deviation as insertion of a key summary sheet of deviation in GID/KID)
VKCo comments: While the introduction of model DTD is appreciated, the draft model DTD proposed in the CP was not aligned with the general market practices followed by the DTs as well as the applicable laws such as SEBI Listing Regulations, NCS Regulations, Indian Trust Act, etc.
- Activity-based Regulation for DTs:
- DTs are to undertake only such activities regulated by other financial sector regulators/ authorities (as SEBI specifies);
- Hive off non-regulated activities to a separate entity – within 2 years;
- Sharing of resources between DT and hived-off entity is allowed, subject to segregation of legal liabilities;
- Hived-off entity can use DT’s brand/logo – only for a period of 2 years (CP suggested 1 year); Both DT and hived-off entity to abide by SEBI’s code of conduct during such period.
- Refer to our discussion on CP in SEBI unveils new reforms for Debenture Trustees
Applicability of CG norms on HVDLEs
Under this segment of changes discussed by SEBI, most of the proposals are in alignment with the Consultation Paper dated 31st October, 2024, except for few changes in relation with PSUs coming together with public enterprises under Public Private Partnership.
- Threshold for being identified as HVDLE increased from 500 Crores to 1,000 Crores to align with the criteria of Large Corporates
VKCo Comments: The proposal to enhance the extant threshold is encouraging in terms of governing the maximum value of outstanding debt while at the same time achieving the same without bearing the burden of compliance by an increased number of purely debt listed entities. Subsequently, effective implementation of such a proposal aligns it with the identification criteria of Large Corporates.
- Introduction of a separate chapter for entities having only debt listed, and sunset clause for applicability of CG norms
VKCO Comments: While this proposal is noteworthy, however, instead of rolling out a new chapter, there could have been certain modifications in the existing regulations by way of a proviso to align with the needs of an HVDLE. Further, one also needs to wait to see the fine print -of the provisions once the same is issued.
VKCo Comments: The proposal is welcome since it clearly sets the HVDLEs free from the barrier of once an HVDLE so always an HVDLE. This proposal sets a clear nexus between the compliance and the size of the debt outstanding, for the protection of which in the very first place, the compliance triggered.
- Optional constitution of RMC, NRC, and SRC and delegation of their functions to the AC and Board respectively.
VKCo Comments: Given the close construct of debt listed entities, it is often observed that the constitution of such committees becomes more of a hardship than in smoothing compliance and discussing specific matters. Accordingly, it looks appropriate to redirect the functions of NRC and RMC to the Audit Committee and that of the SRC to the Board.
- HVDLEs to be included in the counting of maximum no. of directorships, memberships and chairmanships of committees. However, this shall exclude directorships arising out of ex-officio position by virtue of statute or applicable contractual framework in case of PSUs and entities set up under the Public Private Partnership (PPP) mode respectively, in the count. The said exclusion was not in the CP.
VKCo Comments: The rationale completely aligns with the proposal made and seems to be justified. Further, as far as the exclusion is concerned, this seems more from excluding those members who are part of the board not on the basis of their appointment but their current tenure being served in a particular position in the company.
- RPT Approval by way of NOC from DT (who obtains it from holders), before going for shareholders’ approval [w.e.f. 1st April, 2025]
VKCo Comments – While the CP suggested two ways of seeking approval for material RPTs of an HVDLE. The Board has only considered the alternative mode of first seeking NOC of DT and thereafter approaching the shareholders. Further, as discussed in our related write up on the CP, there does not seem to be any incentive to first approach the DT and thereafter the DT to approach the NCD holders. Instead the approval of the NCD holders can be taken up directly by the HVDLE.
- Submission of BRSR on a voluntary basis
VKCo Comments: The inclusion of a voluntary provision in the legislation with respect to a comprehensive report like BRSR is not likely to be submitted given the huge details under the BRSR. However, an opportunity to submit BRSR can be a game changer for an HVDLE from the perspective of being able to raise funds based on its reporting standards in this regard.
One of the changes discussed by the Board is relaxation to HVDLEs set up under the PPP mode from composition requirements of directors. While this was not a part of the CP, however, even if we have to understand that change proposed, this looks like relaxing the composition requirement of the Board of Directors.
CHANGES NOT APPROVED:
- Compulsory filing of CG compliance report in XBRL format
VKCo Comments: This proposal was with an objective to align and standardize the filing of quarterly CG compliance report for bringing parity as in the case of equity listed entities
- Exemption to entities not being a Company
VKCo Comments: While SEBI refers to the introduction of similar exclusion for equity listed entities, however, it has also mentioned the subsequent amendment wherein the same was omitted. The proposal not being notified is in alignment with the position of equity listed entities, however, the same would have been a welcome change since it would have helped such entities to give preference to their principal statutes and not an ancillary one like LODR.
Our detailed write up on the CP can be accessed here.
Amendments in the definition of UPSI – making the law more prescriptive
- Inclusion of 17 items in definition of UPSI: The illustrative list of USPI in reg. 2 (1) (n) of the PIT Regulations has been expanded to include 17 items from the list of material events laid out in Part A of Schedule III of the Listing Regulations [Originally proposed in the CP – 13 items]
- Threshold limits under reg. 30 made applicable: materiality thresholds specified in reg. 30 (4) (i) (c) of the Listing Regulations have been made applicable for identification of events as UPSI
- As per the current practice, any event that is likely to materially affect the price of the securities can be identified as UPSI
- Extended timelines for making entries in SDD: for an event of UPSI that emanates outside the company, entries can be made in the SDD within 2 days of occurrence. Further closure of the trading window will not be mandatory in such cases.
- This has been introduced as a part of EODB
- As per the current practice entries in the SDD have to be made promptly
Refer to our discussion on CP in: Laundry List: SEBI’s proposal to elongate list of deemed UPSIs
Compliance-o-meter: From abstraction to structured granular assessment
– Vinod Kothari and Payal Agarwal | corplaw@vinodkothari.com
In risk assessment, effectiveness testing, compliance management, or other areas where qualitative assessment is required, one may be making abstract statements like: we have very effective controls; we have strong risk management practices; we have the best of the practices in compliance management, etc. However, very often, these may be pure abstractions. How do we use a structured approach which may allow us to give a more granular, methodical approach to benchmark ourselves?
Unlike quantitative parameters, there are no set methods or approaches to qualitative assessment. However, every qualitative assessment is also backed by identifying the elements that need to be studied, the ingredients or the check points in each of these elements, the weights of the respective elements in the overall assessment framework, assignment of scores based on the weights and observations for each of the checkpoints, eventually coming to an aggregate score. That is, a purely qualitative assessment may be converted into a score sheet.
One may create one’s own methodology; here is a suggested one. Before proceeding with the methodology, one may submit that the same methodology that may be used for effectiveness assessment may also be used for risk assessment. A good score in effectiveness is a positive indicator; a high score in risk assessment is a threat.
The suggested assessment methodology involves:
- Identification of elements: Every assessment can be decomposed into the elements underlie it. Take a very easy example of, say, quality of board minutes prepared in a large company. The quality is purely an abstraction, which can be granularly split into, at the least, the timeliness of minuting, the comprehensiveness, ease of understanding, compliance with the law and standards, etc. Similarly, if one refers to the effectiveness of controls on insider trading, one may decompose the overall control into several elements such as identification of UPSI, sharing of UPSI, management of Designated Persons, codes and policies etc. Note that the more granular the elements are, the better is it for the final result.
- Weights of the elements: The next point to understand is whether each of the elements are equally weighted, or do they have differential relevance or importance in the overall matter being assessed. For example, if the subject matter of assessment is “quality of minuting”, compliance with law and standards may be perceived as having a higher weight than, say, comprehensiveness or ease of understanding. The task of assigning weights may, once again, become qualitative – therefore, it is necessary to have a methodical approach towards the weights as well. The weights may be determined based on, in descending order, whether the element may result in penal consequence or reputational loss, whether it may undermine controls or the correctness or reliability of the subject matter, whether it is good to have but not must to have, etc.
- Ingredients or check points for each element: The check-points for each element need to be an even more granular list of activities, processes, policies, etc that make up the respective element. For instance, in the context of PIT controls, the check points under DP management may include the manner of categorizing DPs, periodicity of updating the list of DPs, maintenance of DP database etc.
- Scores: Once the base work w.r.t. creation of the assessment list is done, actual scores are required to be assigned based on the level of performance of the company on the given check-point. Depending on whether the assessment is a risk assessment, compliance assessment or process review, a scoring parameter may be created, for instance:
| Scoring Parameter | |
| Not compliant/ no practice exists for the same | 0 |
| Meeting minimum compliance/ practice | 1 |
| Good Practices (indicates industry practice) | 2 |
| Gold Practices (indicates leadership practices) | 3 |
- Weighted score: The scores allotted to each check-point has to be multiplied with the weights assigned to each check point, to arrive at the weighted score of the respective checkpoint. For instance, assume there are five checkpoints in an element, the weighted score can be derived as below:
| Check-points | Weights | Scores | Weighted Score |
| A1 | 3 (maximum) | 1 | 3 |
| A2 | 2 | 0 (minimum) | 0 |
| A3 | 3 | 3 (maximum) | 9 |
| A4 | 3 | 2 | 6 |
| A5 | 1 (minimum) | 2 | 2 |
| Total | 12 | 20 |
- Maximum score and actual score: The weighted score obtained against each checkpoint of an assessment element sums up to form the actual score of such element. The same is to be compared against the maximum score for such an element, and expressed as a percentage. For instance, in the aforesaid table, the actual score of the element, let’s say ‘A’, that is made up of ‘A1’ to ‘A5’ sums up to 20. The maximum score that can be obtained for the said element ‘A’ is maximum score for a check-point (3) multiplied by the maximum weight (3), i.e., 9 multiplied by the total number of checkpoints (5), i.e. 45. Based on the aforesaid, the percentage score of the element can be calculated as = (Actual score/ Maximum score)*100.
- Radar chart: Once the scores are assigned, and the percentage score for each element has been calculated, the same can be expressed in the form of a radar chart. Below is an example of a compliance radar:
In the picture above, (0-25) is the area of non-compliance, depicting lapses in meeting the minimum legal requirements. (26-50) is the area of meeting the minimum compliance with law, (51-75) indicates that the company is moving towards the general industry practices, and a score beyond 75 shows that the company is adopting leadership practices in the respective compliance area.
A risk assessment chart may be similarly formed, wherein, a higher score indicates a higher level of risk. Also see an article on Compliance Risk Assessment.
Other Related Resources –
DPs to furnish periodic & continual disclosures for units of its own mutual fund to AMC
Shaivi Bhamaria, Associate & Sakshi Patil, Executive | corplaw@vinodkothari.com
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Insider Trading Framework for Mutual Funds and other Pooled Investment Vehicles
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SEBI widens the definition of ‘Connected Persons’ for facilitating enhanced enforcement against insider trading
Last updated on December 10, 2024
Team Corplaw | corplaw@vinodkothari.com
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Also, refer our resource on PIT here
Will Insiders Tread Trading Plan 2.0?
Insider Trading Regulations amended in line with Consultation Paper
Heta Mehta | Executive | corplaw@vinodkothari.com
The concept of Trading Plan (‘TP’) that existed since May 2015 continued to remain unpopular due to the stringent conditions laid down in the Insider Trading Regulations. The framework was set to be reviewed based on empirical evidence and feedback post introduction and determine if SEBI needs to dilute or increase the regulatory requirement. In order to make it more realistic and captivating, SEBI’s Working Group suggested reforms vide Consultation Paper dated 24th November, 2023[1] that was approved by SEBI in its board meeting held on March 15, 2024. SEBI (Prohibition of Insider Trading) (Second Amendment) Regulations, 2024 notified on June 25, 2024 will be effective from September 24, 2024. As a concept, it is not unique to India, globally, both the US and UK have similar TP concepts with some or the other variations when compared to our legislation. This article discusses the amendments, including the rationale provided in the CP, relevant points discussed in the SEBI Board meeting and our analysis on the same.
Read more →SEBI Consultation Paper (CP) to ease trading plans by company insiders
Sanya Agrawal | corplaw@vinodkothari.com
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Our detailed article on the topic can be read here
Link to our PIT resource centre: https://vinodkothari.com/prohibition-of-insider-trading-resource-centre/
Contra trade restrictions – traversing out of PAN to common control
Anushka Vohra | Senior Manager
corplaw@vinodkothari.com
Introduction
The SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’) impose certain restrictions and obligations on the DPs, one of which is contra trade restriction.
The DPs and their immediate relatives are restricted from entering into contra trade which refers to opposite trades executed viz. buy / sale within a shorter period of time usually within a period of 6 months with an intent to book short term profits. Where contra – trade is executed in violation of the restriction, the profit earned is to be disgorged for remittance to the IPEF.
In case of an individual DP (promoters / directors / etc. as recognized by the listed company), the immediate relatives also have certain obligations under the Regulations as their trades may be said to be influenced by the DPs. Similarly, in case of non-individual DPs (promoters), there may be other promoters and persons belonging to the promoter group who may act in concert with a particular non-individual promoter.
Having said that, it is important to understand the intent of contra trade, whether the same would apply individually on DPs based on trades executed against their PAN or the same would apply jointly on DPs and their immediate relatives or the entire promoter group inter-se. The same has been a matter of discussion in various Informal Guidance (‘IG’) of SEBI. We discuss the same briefly along with other illustrations.
Informal Guidance
Generally, the concept of Persons Acting in Concert (‘PACs’) is used in the Takeover Code and under the PIT Regulations, the perspective so far has been PAN based. In the recent IG in the matter of Deccan Gold Mines Ltd[1], SEBI in its interpretative letter has given the view that contra trade restrictions would apply on the promoter group jointly, given the case in hand. The facts of the case have been represented diagrammatically below.
We see that the listed company is being held by two corporate promoters, which in turn are held by common shareholders. Here, RMML intended to sell its shareholding in open-market within 6 months of the allotment made to AIRL.
Since there is common control in both the promoter entities, it was stated that contra-trade restriction would apply jointly on both.
Intent of contra-trade
The intent of contra trade, as also mentioned above is to ensure that the persons who are privy to UPSI do not make short term profits in the securities of the listed company. For instance, if a DP has bought a security of the listed company in anticipation of a rise in prices that might be caused by the UPSI, such DP cannot sell such security within 6 months of the purchase. While trades can be executed by different DPs having different PAN, however where a single person is the “driving force” (as cited by the SAT in Shubhkam Ventures (I) Private Limited v. SEBI[2], it cannot be said that the persons acted in their individual capacity.
There have been instances in the past where SEBI has given the view that contra trade restrictions apply individually on DPs. The view seems to be supported by the interpretation of clause 10 of Schedule B of the Regulations, which states that:
The code of conduct shall specify the period, which in any event shall not be less than six months, within which a designated person who is permitted to trade shall not execute a contra trade. XXX
Previously, in 2020, in the matter of Raghav Commercial Ltd[3], SEBI in its interpretative letter took the view that the contra trade restrictions apply to trades made by promoters individually and not the entire promoter group.
Taking the case of individual DPs, in the matter of Star Cement Limited[4], while answering the question on applicability of contra trade restrictions – whether individually or to the entire promoter group, SEBI cited the above clause 10 stating that the same applies individually.
Reference of the above case was taken in 2019 in the matter of Arvind Limited[5], where contra trade restrictions were said to apply individually on DP through PAN, disregarding who took the trading decision. Our detailed article on the same can be read here.
The current case makes it quite clear that the facts of the case have to be considered to analyze whether there is a single person taking trading decision.
Let us take several other examples to understand the intent of contra trade.
1.
Whether Leg 2 will be contra to Leg1? Here we see that significant stake i.e. 50% is being held by Partner A (promoter of X Ltd) in the LLP. The trades of LLP can be said to be influenced by the decision of Partner A. This can be a case of common control and therefore Leg 2 becomes contra to Leg 1.
2.
In this case, we will have to see who is behind A Ltd and B Ltd. If both A Ltd and B Ltd are held by the same set of shareholders, Leg 2 would become contra to Leg 1.
Further, there are certain exemptions w.r.t. contra-trade restrictions that have been prescribed in the PIT Regulations and also in SEBI FAQs.
As per PIT Regulations, contra trade shall not apply for trades pursuant to exercise of stock options. SEBI Faqs further elaborate on the same stating that, in respect of ESOPs, subscribing, exercising and subsequent sale of shares, so acquired by exercising ESOPs (hereinafter “ESOP shares”), shall not attract contra trade restrictions.
Further trades pursuant to any non- market transaction is exempted (SEBI Faqs).
The rationale behind exemption is that for stock options and non-market transactions, the exercise price / purchase price is predetermined. The selling transaction pursuant to exercise of stock options or pursuant to acquisition of shares in non-open market is not influenced by purchases made basis some UPSI. The exercise price / acquisition price is already decided by the company.
Let us understand another example.
3.
In the above case, it is evident that A is the decision maker for A Pvt Ltd. Here, Leg 2 is not contra to Leg 1.Leg 4 is contra to Leg 3 as there is no exemption provided.
Often, it is also interpreted that contra-trade is applicable share wise. To take an example, suppose; first – stock options are acquired by a DP, second – open market purchase is done, third – stock options are sold (all three within a period of 6 months). Here, it is interpreted that third would not be contra to first and second. This is a wrong interpretation, as the moment the DP makes any open market purchase or already has the company’s shares in portfolio, the immunity w.r.t. selling shares acquired pursuant to exercise of stock options is lost. One cannot differentiate between the shares as what is important to establish for contra-trade is the intention to make short term profits. Such intention, also, is evident when trading decisions are made by a single person, irrespective of the different individuals executing trades.
Global scenario
Contra-trade is understood by different names in other jurisdictions. It is referred to as short swing in the US and reversal trade in some jurisdictions.
- United States – Securities Exchange Commission Act, 1934[6]
Section 16(b) deals with prohibition on short-swing trades by beneficial owner, director, or officer of the companies. The section reads as under:
“For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner[7], director, or officer by reason of his relationship to the issuer, any profit realized by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer (other than an exempted security) or a security-based swap agreement involving any such equity security within any period of less than six months, unless such security or security-based swap agreement was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such beneficial owner, director, or officer in entering into such transaction of holding the security or security based swap agreement purchased or of not repurchasing the security or security-based swap agreement sold for a period exceeding six months.XXX”
- China – Securities Law of the People’s Republic of China[8]
Article 41 and 42 deals with contra trade restrictions. It reads as under:
Article 41 A shareholder that holds five percent of the shares issued by a company limited by shares shall, within three days from the date on which the number of shares held by him reaches this percentage, report the same to the company, which shall, within three days from the date on which it receives the report, report the same to the securities regulatory authority under the State Council. If the company is a listed company, it shall report the matter to the stock exchange at the same time.
Article 42 If the shareholder described in the preceding article sells, within six months of purchase, the shares he holds of the said company or repurchases the shares within six months after selling the same, the earnings so obtained by the shareholder shall belong to the company and be recovered by the board of directors of the company. However, a securities company that has a shareholding of not less than five percent due to purchase of the remaining shares in the capacity of a company that underwrites as the sole agent shall not be subject to the restriction of six months when selling the said shares.
If the company’s board of directors fails to comply with the provisions of the preceding paragraph, the other shareholders shall have the right to require the board of directors to comply.
If the company’s board of directors fails to comply with the provisions of the first paragraph and thereby causes losses to the company, the directors responsible therefore shall bear joint and several liabilities for the losses.
Concluding remarks
We had earlier in our article (supra) given the view that contra-trade should be seen jointly and not individually, considering the intent. To establish violation of PIT Regulations, one has to go beyond tracking trades based on PAN. It is important to know the decision maker behind the trades, in order to establish a clear nexus. It would be important to see whether such a view was taken by SEBI because of the case in hand or is it reflective of a new trend i.e. position of common control.
Link to our PIT Resource centre: Click here
[1] https://www.sebi.gov.in/enforcement/informal-guidance/oct-2023/in-the-matter-of-rama-mines-mauritius-ltd-under-sebi-prohibition-of-insider-trading-regulations-2015_78308.html
[2] https://www.sebi.gov.in/satorders/subhkamventures.pdf
[3] https://www.sebi.gov.in/sebi_data/commondocs/sep-2020/SEBI%20let%20Raghav%20IG_p.pdf
[4] https://www.sebi.gov.in/sebi_data/commondocs/jul-2018/StarCementGuidanceletter_p.pdf
[5] https://www.sebi.gov.in/sebi_data/commondocs/nov-2019/Inf%20Gui%20letter%20by%20SEBI%20Arvind_p.pdf
[6] https://www.govinfo.gov/content/pkg/COMPS-1885/pdf/COMPS-1885.pdf
[7] Every person who is directly or indirectly the beneficial owner of more than 10% of any class of any equity security (other than exempted security) [Ref. 16(a)(1)]
[8] http://www.npc.gov.cn/zgrdw/englishnpc/Law/2007-12/11/content_1383569.htm#:~:text=Article%201%20This%20Law%20is,of%20the%20socialist%20market%20economy.