The new insider trading regulations notified last month will not only be applicable to listed companies, but also to those ‘proposed to be listed’. “The 1992 regulations were restricted in their application to listed companies alone. However, the new regulations apply to both listed companies and those ‘proposed to be listed’. It is unclear how the term ‘proposed to be listed’ will be interpreted. We consider this is intended to include companies that have filed draft red herring prospectus with the Securities and Exchange Board of India (Sebi) for an initial public offering (IPO) or offer for sale,” law firm Khaitan & Co said in a note, ‘New Insider Trading Regime – Compliance Issues And Challenges’, dated February 19.
Sandeep Parekh, founder of Finsec Law Advisors, former executive director of Sebi and the author of a book on insider trading, said it was likely the provision was applicable to companies that were looking to list their shares on stock exchanges. “The provision will apply to anyone who has insider information that is not present in the prospectus. Broadly, it will cover companies that are proposed to be listed, too,” he said. He added perhaps, this clause sought to address price-sensitive information made available to insiders after the drafting of the prospectus but before the listing date. During this window, there could be a window for mischief, which the prohibition sough to prevent, he added.
|EXPANDED SCOPE OF INSIDER TRADING REGULATIONS|
“These provisions might particularly be attracted in the case of an offer for sale, as part of the IPO, where an insider could take advantage of his access to unpublished price-sensitive information and trade with investors in the IPO without making such price-sensitive information generally available in the prospectus of the company,” said Yogesh Chande, associate partner, Economic Laws Practice.
Lawyers say the roots of the expanded scope lie in the Companies Act of 2013. Section 195 of the Act prohibits insider trading by directors or key managerial persons, while 458 empowers Sebi to prosecute insider trading in securities of listed companies and companies that intend to get their securities listed.
This is also mentioned in the new insider trading regulations. “No insider shall communicate, provide, or allow access to any unpublished price-sensitive information relating to a company or securities listed or proposed to be listed,” said the Sebi (Prohibition of Insider Trading) Regulations, 2015, notified on January 15.
Earlier, there was confusion on whether this meant Sebi had jurisdiction other unlisted firms, too. If so, this would have expanded Sebi’s jurisdiction beyond the 5,600-odd listed companies to 62,991 public limited companies and another 936,912 private companies. But lawyers say this isn’t the case, as long as these companies don’t apply for listing.
“Applying the insider-trading prohibition to an unlisted company will not make any sense, as there is no public interest. Without the involvement of the public, any unfairness between a shareholder and another should be dealt with by the law of contract and the law protecting shareholders. I am not aware of an international precedent covering ‘proposed to be listed’ securities. But extending the prohibition to the proposed category cannot be termed excessive,” said Parekh.