IN A memorandum to the regulatory body, on the proposed amendments to the SEBI regulations, 1992 (prohibition of insider trading), FICCI, welcoming the proposal that the regulations should not freeze legitimate trading by the specified persons, feels that the management of a company should be authorised to decide and create a window freeze and should also decide on the class of persons to whom such window freeze would be applicable, so that, only the real insiders are restricted from trading.

 

Paragraph 13 of the SEBI’s proposal states that the companies should either designate a single broker, through whom all the transactions- in stocks- by the insiders should be completed, or require insiders to use only one designated broker, who will agree to the procedures set out by the company.

 

The FICCI feels that these steps may not help in better reporting or monitoring. In the case of big companies, with large number of employees spread across various geographical locations, it is not feasible to appoint designated brokers. Also, there would be employees, who are registered to carry out on-line trading. As an alternative, it has been proposed, in the draft paper, that the employee should obtain a certification from the broker. This proposal, in the light of the problems faced especially by the large companies, appears to be more feasible.

 

The SEBI has also proposed to widen the scope of the term ‘shares’ to ‘securities’, thereby including equity derivatives for the purpose of disclosures. This is a well-justified step, since after the introduction of derivatives in 2000, the inclusion of the derivatives under the regulations was very important so as to bring all the dealings in securities within the ambit of the regulations.

 

The paragraph 15 proposes to penalise a “tippee” (a recipient of insider information for trading). There is no real need for this, since the tippee is already prohibited from dealing in securities, while in possession of unpublished price-sensitive information. However, in this context, the FICCI seeks to highlight a very important and neglected area of the insider trading regulations. After the 2002 amendments, no due diligence is capable of being conducted without the ambiguity of whether any due diligence would constitute a violation. When one listed company invests in another, it is incumbent on its board to ensure proper diligence.

 

The paragraph 16 says that criminal penalties attached to corporate governance measures may be deleted, while the other powers of monetary penalties and directions are continued. The FICCI feels that it is a good step to ensure compliance with the provisions of the regulations, in letter and spirit.

 

Drawing attention towards SEBI’s consultative paper on the introduction of ’short swing profit’ regulations in India, the FICCI pointed out that the term, ‘designated insider’, proposes to cover all the key management personnel- by whatever name called, all the directors of the company, all the officers of the company, who are the beneficial owners- directly or indirectly- of 10 per cent or more of any class of the equity securities (10 per cent owner). Alternatively, all the officers of the company, as well as all the beneficial owners of the company, in excess of 10 per cent holding- singly or in concert.