Entities privy to UPSI cannot trade indirectly: Sebi

Stock trades by entities privy to unpublished price sensitive information will be in violation of insider trading norms even if they are done indirectly under discretionary portfolio management scheme, according to Sebi.
The market regulator has given this opinion in response to queries by the country's second largest private sector lender HDFC Bank with respect to trading that can be done by its employees.
HDFC Bank had sought an informal guidance on whether its employees -- who are in possession of Unpublished Price Sensitive Information (UPSI) related to it or other listed companies dealing with the bank -- can carry out trades on the stocks concerned under discretionary portfolio management scheme.

Under the scheme, day to day investment decisions are taken by portfolio manager without involvement of investor.
Giving its views, Sebi said dealing in securities, whether it is direct or indirect, is not relevant, "but that any insider when in possession of UPSI should not deal in securities of the company to which the UPSI pertains".
"Even while dealing in such securities through a discretionary portfolio management scheme, the trades of insider shall be assumed to be motivated by the knowledge and awareness of UPSI," Sebi said in a recent communication to HDFC Bank.

This opinion is with regard to whether the bank's employee or his relative -- who have no control over investment decision under discretionary portfolio management scheme but are in possession of UPSI -- can do trades on the stocks concerned.

According to the regulator, the lender had also sought an interpretative letter on the issue as well as on another matter in terms of compliance with Sebi (Prohibition of Insider Trading) Regulations.
The second issue on which the bank sought view was whether trade can be done under the scheme when the trading window of the bank or the companies concerned are closed.
PIT Regulations mandate operation of a notional trading window as an instrument of monitoring trading by the designated person, the regulator said.
"The trading window shall be closed when the compliance officer determines that a designated person or class of designated persons can reasonably be expected to have possession of UPSI.

"... Dealings by the bank or the company with which the bank deals in securities through a discretionary portfolio management scheme, when the trading window is closed, shall be assumed to be motivated by the knowledge and awareness of UPSI," Sebi said.
The watchdog also emphasised that its position is based on information furnished.
"Different facts or conditions might lead to a different result," it added.