Sebi restricts borrowing, lending shares while keeping insider information

Borrowing or lending of securities by an insider while in possession of price sensitive information about such stocks will attract the provisions of insider trading regulation, according to the markets regulator Sebi.

The clarification has been given as part of an informal guidance sought by brokerage firm HDFC Securities with respect to whether transactions of lending and borrowing of securities done under the SLB mechanism attract the provisions of the PIT (prohibition of insider trading) regulations.

Securities lending and borrowing (SLB) allows short sellers to borrow securities for making deliveries.

As per the regulator, it is a mechanism for lending and borrowing of equity shares in the form of contracts, which are traded on the automated screen based order-matching platform. The price of such contracts is lending fee, which may derive its value from the underlying securities.

"Borrowing or lending of securities by an insider while in possession of UPSI (unpublished price sensitive information) with respect to underlying securities shall result in insider trading in terms of ... the PIT regulations provided that the insider may prove his innocence by demonstrating the facts," Sebi said in the three-page interpretive letter.

The letter, issued on October 5, was made public today by the watchdog.

Noting that this position is based on the information furnished, Sebi said, "different facts or conditions might lead to a different result". "This letter does not express a decision of the board on the question referred," the regulator added.