SEBI: Submission highlighting issues relating to trading window closure

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SEBI: Submission highlighting issues relating to trading window closure

Tejasvi

@tejasvi

October 11, 2022

Public Policy

154

Dear All,

As you may be aware, Regulation 4(1) of Schedule B of SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations) provides that designated persons and their immediate relatives will not trade in securities when the trading window is closed. In this regard, SEBI recently issued Circular No. SEBI/HO/ISD/ISD-SEC-4/P/CIR/2022/107 dated August 5, 2022 (Circular) which prescribes the framework for restricting trading by Designated Persons (DPs) by freezing PAN at security level during trading window closure period. The Circular also provides that these restrictions will apply for on-market transactions as well as off-market transfers.

Based on feedback from the Industry, we have made a submission to SEBI requesting for clarity on the following aspects.

Non-applicability of trading window restrictions in certain cases:

Allotment of shares under stock option plans - Allotment of shares under stock option plans directly by the company or transfer from employee trust is an off-market transfer. This was clarified by SEBI in August 2015 vide issue of a guidance note wherein it was stated that exercise of ESOPs is not considered as “trading”. Further, Clause 4(3)(a) of Schedule B also specifies that trading window restrictions shall not apply on exercise of stock options. Pursuant to issue of the Circular, since the PAN of designated parties would be freezed, there may be issues in allotment of shares under stock option plans during trading window closure.
Corporate actions such as acquisition by subscription to rights issue, buy-back, open offer, etc. - Clause 4(3)(b) of Schedule B of PIT regulations provide that trading window restrictions shall not apply to corporate actions such as acquisition by conversion of warrants or debentures, subscribing to rights issue, further public issue, etc. However, pursuant to issue of the Circular, there is ambiguity as to whether transfer of shares in above cases will be allowed since the PAN of the designated persons would be freezed, thereby impacting debit/credit of shares in such cases.

Suggestion - SEBI should specifically clarify that the restriction of trade by Designated Party will not apply in following cases:

Allotment of shares under stock option plans. Depositories will be permitted to credit shares pursuant to exercise of stock options during trading window closure, either through allotment of shares directly by the company to its employees or transfer of shares from employee trust through off-market transfer method.
Acquisition of shares by conversion of warrants or debentures, subscribing to rights issue, further public issue, or other corporate actions carried out by the Company.

Clarity on commencement of trading window closure:

As per clause 4(2) of Schedule B of PIT Regulations, trading restriction period shall be made applicable from end of every quarter till 48 hours after declaration of financial results. With respect to financial results, the listed company is required to specify the 1st day immediately after the end of every quarter for which results are to be announced as ‘Trading Window Closure commencement date. For example, for quarter ending September 30, companies are required to specify October 1 as commencement date of trading window closure. However, as a good governance measure, some companies commence their trading window closure well in advance (say 15th September), instead of commencing it from 1st day after the end of the quarter. This may lead to inconsistency between the trading window closure commencement date adopted by the Company which is also disclosed to stock exchanges (i.e, September 15) and dates mentioned in designated depository portal (i.e., October 1)

Suggestion - SEBI should allow companies to determine the trading window closure commencement date as per the company policy.

These will provide certainty and clarity to the Industry.

We hope you will find the update useful. We will keep you posted on further developments in this regard.

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Tejasvi