Posts

Recent regulatory developments for listed entities – critical changes under LODR and PIT Regulations

Loader Loading…
EAD Logo Taking too long?

Reload Reload document
| Open Open in new tab

Download as PDF [1.02 MB]

Introduction to SEBI (Prohibition of Insider Trading) Regulations

– Vinita Nair & Aisha Begum Ansari | corplaw@vinodkothari.com

Loader Loading…
EAD Logo Taking too long?

Reload Reload document
| Open Open in new tab

Download as PDF [1.03 MB]

Workshop on Insider Trading Framework for Mutual Funds

Click here to register for the workshophttps://forms.gle/hFtagsmfBMpcgkP28
Loader Loading…
EAD Logo Taking too long?

Reload Reload document
| Open Open in new tab

Download as PDF [487.81 KB]

Read our article on “Mutual Fund units now under the net of insider trading regulations

Read our FAQs on “Insider Trading Framework for Mutual Funds

Our PIT Resource Centre can be accessed here

FAQs on Insider Trading Framework for Mutual Funds

– Team Corplaw | corplaw@vinodkothari.com

Loader Loading…
EAD Logo Taking too long?

Reload Reload document
| Open Open in new tab

Download as PDF [434.10 KB]

Also read our article on “Mutual Fund units now under the net of insider trading regulations

Our PIT Resource Centre can be accessed here

Mutual Fund units now under the net of insider trading regulations

Numerous actionable for Asset Management Companies

– Vinita Nair, Senior Partner | corplaw@vinodkothari.com

Background

Investment in MFs are very common these days. As on March 31, 2022 there were about 1120 open ended schemes and 354 close ended schemes[1]. Presently, in terms of Reg. 32 of SEBI (Mutual Funds) Regulations, 1996 every close ended scheme, other than equity linked savings scheme, are required to be listed on stock exchanges. 

Until, the present amendment, SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’) were applicable in case of dealing in securities that are listed or proposed to be listed while in possession of Unpublished Price Sensitive Information (‘UPSI’). Units of mutual funds were excluded from the definition of securities under PIT Regulations and therefore, remained outside the purview of the said regulations.

The erstwhile PIT Regulations of 1992 was amended in 2002 to mandate Asset management Companies (AMCs) and Mutual Fund (‘MF’) Trustees to frame internal procedures and conduct for prevention of insider trading, pursuant to which any security which was purchased or sold or was considered for purchase or sale by the organization on behalf of its clients/ schemes of MFs was required to be put on the restricted/ grey list. Thereafter, at the time of finalization of PIT Regulations, the committee led by Mr. N. K. Sodhi felt that there is no longer a special need for a special or separate circular for a specific class of market intermediaries and therefore, the said circulars be withdrawn to ensure consistency. The definition of securities in the proposed draft of PIT Regulations forming part of the said report provided for the meaning assigned to it under the Securities Contract (Regulation) Act, 1956 (‘SCRA’) without any exclusion. It was also explained that an MF set up as a trust, that can issue units of close-ended schemes which are traded in the market would also be a ‘company’ for purposes of the proposed regulations. However, the PIT Regulations as approved by SEBI in its meeting held on November 19, 2014 excluded MF units from the definition of securities. The thought process, as indicated in a news piece, was that even if a person has inside information regarding one company, he cannot possibly take advantage on that information by investing in a scheme, which is a diversified pool of securities of various companies and that there existed strict and transparent norms of NAV (net asset value) calculations and offence of front-running was already covered under SEBI (Fraudulent and Unfair Trade Practices) Regulations, 2003.

Read more

Workshop on Structured Digital Database for Insider Trading: Preparing for the Compliance Certificate

In view of the overwhelming response received for this session, we are announcing a repeat session on 15th November, 2022.

Click here for details.

Click here to register for the workshop – https://forms.gle/JgWXqp2JJUBX4wPm8
Loader Loading…
EAD Logo Taking too long?

Reload Reload document
| Open Open in new tab

Download as PDF [253.70 KB]

The essence of mens rea in insider trading

Supreme Court contradicts its previous ruling while considering the ‘intent’ in insider trading

– CS Aisha Begum Ansari | aisha@vinodkothari.com

Insider trading means dealing in the securities of the listed company on the basis of unpublished price sensitive information (‘UPSI’), thereby gaining an unfair advantage over the market. A person guilty of insider trading is punishable with a monetary penalty[1] under section 15G of the SEBI Act, 1992 (the ‘Act’). Further, under section 24 of the Act, SEBI can punish a person with imprisonment of upto Rs. 10 years or with a fine of upto Rs. 35 crores or both for violation of the Act and its regulations.

Read more

SEBI: Insider trading norms should apply to fund managers

Additionally invites comments on the applicability in case of units of pooled investment vehicle

Vinita Nair | Senior Partner, M/s Vinod Kothari & Company

Insiders, Connected Persons, and Designated Persons: Demystifying the Quandary of ‘Insider’ Trading Terms

– Sikha Bansal, Partner, Vinod Kothari & Company (sikha@vinodkothari.com)

Securities law in India, as in most other countries in the world, prohibits ‘insider trading’ and seeks to impose
stiff penalties including custodial sentence to ‘insiders’ who violate insider trading norms – relevant provisions
are contained in section 12A and section 15G of the Securities and Exchange Board of India Act, 1992. The
SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘Regulations’), which succeeded the erstwhile 1992
regulations, have been framed by SEBI to provide for a detailed framework for the same. It may be noted that,
while the Regulations broadly put a restriction on insider trading, the focus is on certain specific insiders –
specified to be ‘designated persons’ – whose trading in securities of the listed company is sought to be
“regulated, monitored and reported” in a certain manner and the ‘connected persons’.

The article has been published in August, 2021 edition of ICSI Chartered Secretary journal and can be read here, from Page 70 onwards.

Understanding Silent Period for listed entities

By CS Aisha Begum Ansari (aisha@vinodkothari.com)

Introduction

When you go silent, you may be doing a soul searching, as for example, in meditational techniques. However, in case of listed entities, silent period is a period just before declaration of financial results, to ensure that there is no accidental leakage of confidential information. Silent period is different from “trading window closure” that most corporate professionals in India are familiar with. However, this article discusses the relevance of silent period, as a subset of the trading window closure, and its relevance to listed entities in India. While exploring the topic, the author also makes a study of the global laws around silent period.

Why silent period?

Insider trading is a ‘white collar’ crime that seeks to exploit the unpublished, non-democratic information (that is, what is not available in public domain) to the advantage of a select few, and to the disadvantage of the market in general. Since, it is a fraud upon the market in general, it has always been a significant topic for the securities market regulators around the globe. In India, Securities and Exchange Board of India (‘SEBI’) has framed the regulatory framework to curb the insider trading called as SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’).

The material inside information is generally accessed by the top executives and employees of the company. To avoid the exploitation of such information, the company prohibits them from trading in its securities while having access to such information.  The preventive framework of insider trading does not just end by prohibiting the employees from trading; it also needs to ensure that such material inside information is not leaked outside the organization. There are many ways used by the insiders to leak such information such as sharing the same on social media, sharing of information during analyst or institutional investor meets, etc.

Silent period is different from trading window closure. Silent period is when the company’s top executives, say that CEO, CFO etc. will refrain from doing public communications altogether. The intent is to ensure that there is no interaction with investors or public at large, so as to avoid unintended slippage of information. Currently, SEBI regulations do not require companies to mandatorily observe a silent period; therefore, companies may choose to adopt this practice by way of their Code of Fair Disclosure.

What is silent period?

A silent period (also known as quiet period) is a stipulated time during which a company’s senior management and investor relation officers do not interact with the institutional investors, analysts and the media. The purpose of the silent period is to preserve the objectivity and avoid the appearance of the company providing insider information to select investors. During the silent period, the company does not make any announcements that can cause a normal investor to change their position on the company’s securities.

Is it different from trading window closure?

Trading window closure period (also known as blackout period or closed period) refers to the period during which the employees of the company who have access to material inside information are prohibited from trading in the securities of the company. In some of the developed countries, the securities market regulators give a freehand to the companies to decide the period during which the trading window shall be closed. In India, the PIT Regulations provide that the companies shall close the trading window from the end of the closure of the financial period for which results are to be announced till 48 hours after the disclosure of financial results to the stock exchanges. For any other material inside information, SEBI has given the responsibility to the compliance officers of the companies to close the trading window when the employees can reasonably be expected to have possession of inside information.

Silent period differs from the trading window closure in such a way that trading window closure prohibits the employees to trade in the securities of the company while having access to material inside information and silent period prohibits or restricts the company’s spokespersons to interact with the institutional investors or analysts. The purpose of trading window closure is to prohibit trading on the basis of inside information and the purpose of silent period is to prohibit communication of inside information illegitimately.

Duration of silent period

The PIT Regulations or any other regulatory framework in India do not provide for the requirements of silent period. So, the duration of silent period differs from company to company. Some companies specify the silent period as 20-30 days before the declaration of financial results till the date of disclosure and some companies align the silent period with the trading window closure period. The following table gives the synopsis of the practice followed by the Indian listed entities regarding silent period:

Name of the Company Practice followed
Mahindra & Mahindra Limited Silent period commences from 20 days before the declaration of financial results till the date of disclosure of results
Tata Consultancy Services Limited Quiet period starts 20 days before the declaration of financial results till the date of disclosure of results
HCL Technologies Limited Silent period is same as trading window closure period
Asian Paints Limited Silent period is observed between the end of the period and the publishing of the stock exchange release for that period
Wipro Limited Quiet period commences from 16th day of the last month of the quarter and ends with 48 hours after earnings release.
Infosys Limited Silent period is observed between the 16th day prior to the last day of the financial period for which results are required to be announced till the earnings release day.

Thus, it can be concluded that the silent period is smaller than the trading window closure period.

Analysts/ investors meets during silent period

Analysts/ investors meets can be a medium of leak of material inside information, therefore, the companies avoid interaction with them during trading window closure period. So, does it mean that companies completely abstain from interacting with the analysts and investors? While the answer may differ from company to company and the policies adopted by them for communication with analysts and investors. Some companies completely refrain from the analysts/ investors meets while some companies interact with them and discuss the past and historical information which is already available in public domain and general future prospects of the company, dodging the specific questions relating to the material inside information.

Guidelines for Investor Relations for Listed Central Public Sector Enterprises[1]

While the regulations framed by SEBI are silent about the silent period, the Guidelines for Investor Relations for Listed Central Public Sector Enterprises issued by the Department of Disinvestment, Ministry of Finance, Government of India, provides for the duration of silent period and obligations of the public sector enterprises in this regard. The Guidelines advise that the silent period should commence 15 days prior to the date of Board meeting in which financial results are considered and end 24 hours after the financial results are made public. The Guidelines requires the companies to abstain from meeting the analysts and investors and not communicate with them unless such communication would relate to the factual clarifications of previously disclosed information.

International practice with respect to silent period

Country Trading window closure period Silent period Analyst meet during silent period
United States of America (USA)[2] USA laws do not provide any specific timeline for trading window closure period. Thus, the companies are free to determine it There are two types of silent period prevalent in USA:

1.    When the company makes an Initial Public Offering (‘IPO’) – the Securities Exchange Commission (‘SEC’) mandates such companies to maintain a silent period from the date of registration with SEC which lasts till 40 days after the securities begin to trade on the stock exchanges. Such silent period is heavily regulated by the SEC.

2.    During finalization of quarterly results – the silent period is not clearly defined by SEC.

During the silent period, the interaction with the analysts and investors is reduced. The companies either go completely silent or they speak about only past and historical information.
United Kingdom (UK)[3] Unlike USA, the UK laws prescribe the trading window closure period. Article 19.11 of Market Abuse Regulations specifies the period of trading window closure starting from 30 calendar days before the announcement of an interim financial report or a year-end report till the second trading day after announcement of financial report. UK laws do not comment anything about the silent period. Thus, the companies determine the silent period as per their own discretion.

 

Since UK laws do not provide for silent period, the companies, as per their discretion, avoid interactions with the analysts and investors during such period.

 

Canada[4] Para 6.10 of National Policy on Disclosure Standards (‘Policy’) discusses about blackout period. It states that the company’s insider trading policy should specify the period which may mirror the quiet period. Para 6.9 of the Policy talks about quiet period. While the Policy does not prescribe the duration of quiet period, it states that the period should run between the end of the quarter and the release of a quarterly earnings announcement. The Policy states that the company need not completely stop communicating with the analysts and investors during the quiet period, but the communication should be limited to responding to inquiries concerning publicly available or non-material information.

Conclusion

After discussing the practices followed by the Indian listed companies and the regulatory framework of other developed countries, it can be concluded that the concept of silent period is not something new, though unregulated. Some companies align the silent period with the trading window closure period while some provide for lesser duration for silent period. Some companies completely abstain from interacting with the analysts and the institutional investors during the silent period whereas some prefer discussing the generally available information only.

[1]https://www.dipam.gov.in/dipam/downloadFile?fileUrl=resources/pdf/capital-market-regulation/IR_Guidelines_website.doc

[2] https://www.irmagazine.com/reporting/six-commonly-asked-questions-and-answers-about-quiet-periods

[3] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014R0596&from=EN

[4] http://ccmr-ocrmc.ca/wp-content/uploads/51-201_np_en.pdf

Other relevant materials of interest can be read here –

http://vinodkothari.com/2021/07/step-by-step-guide-for-disclosure-for-analysts-investors-meet/

http://vinodkothari.com/2021/05/sebi_defines_investors_meet/

http://vinodkothari.com/2020/11/sebi-proposes-enhanced-disclosures-for-meetings-with-analyst-investors-etc/