Street Food: Inside the insider trading forms

The Securities and Exchange Board of India (Sebi) has been active in the enforcement of disclosure requirements under various regulations, including those on insider trading.

The new norms, recently come into force, rely heavily on periodic disclosure by promoters and other insiders. A circular from Sebi on May 11 prescribed four forms to be used. Forms A and B were for disclosures related to shareholding and exposure to derivatives (futures, options, etc) of directors, key managerial personnel (KMP) and so on. The former relates to the declaration to be done on the date the new regulation comes into force and the latter is the format for such declarations whenever a new director or KMP is appointed or when a person becomes a promoter.

That brings us to Forms C and D. These are to be filed by the insiders and connected persons whenever there is a transaction. Form C is a 17-column  format prescribed for disclosure of ‘Details of change in holding of securities of promoter, employee or director of a listed company and other such persons as mentioned in Regulation 6(2).’ Form D, also of 17 columns, is for reporting “Transactions by other connected persons as identified by the company”.

Thus, C and D are important formats that are going to be used by thousands of companies over the next several years for disclosure of important and price-sensitive information. These are designed to get not only the details of shareholding but the exact number of options, futures and such derivative contracts the insider and connected persons have traded on.

However, there is a problem in these forms, which if not addressed soon could result in defeat of the purpose of the regulations. In Forms C and D, there are columns (3 & 4) to disclose type and number of securities held before the transaction and columns (5 & 6) for the type and number of securities transacted. Then, in the next two columns (7 & 8), the ‘per cent of shareholding’ pre and post transaction is given. The subsequent columns relate to date of the transaction, mode of transaction, derivatives and exchange of execution, etc.

However, curiously, the number of shares held after the transaction is not required to be disclosed under the format in both forms C & D. This is going to create a situation where investors and public shareholders might not clearly understand what is the basic character of the transaction being reported — Buy or Sell.

For example, an insider, X, holds 5.5 per cent in a company, which translates to 5.5 million shares. If he bought 10,000 shares the next week and reports it through the format prescribed by Sebi, the disclosure would look as follows:

Securities held before acquisition disposal: a) Type : equity shares; b) Number: 5.5 million;

Securities acquired/disposed: a) Type: equity shares; b) number: 10,000.

Then comes the interesting detail:

Per cent of shareholding: a) Pre-transaction: 5.5 per cent; b) Post-transaction: 5.5 per cent.

Thus, when the size of the transaction is below a tenth of a percentage point, the change in holding is not reflected. Thus, the format fails to disclose the basic nature of the transaction itself.

Thus, if companies blindly follow this format, they could inadvertently end up not disclosing whether X bought or sold at all, as described above. One can’t even contemplate the repercussions if people start using this as a loophole.