Introduction
In a recent informal guidance issued to Kotak Mahindra Bank Limited, SEBI has clarified its position on the continuous disclosure norms required under Regulation 7(2) of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”). Regulation 7(2)(a) provides that a promoter, employee and director of a company is required to inform the company, within 2 days, regarding the acquisition of or disposal of securities if the traded value is beyond Rs. 10 lakhs (INR 1 million) in a calendar quarter. The company, in turn, is required to notify the stock exchange regarding the same under Regulation 7(2)(b).
Kotak Mahindra’s queries
Kotak Mahindra had sought clarification from SEBI on the following issues: (i) whether transactions such as bonus shares issued pursuant to a scheme of arrangement, or transfer of shares by way of gifts, etc. which does not involve any consideration, needs to be disclosed under Regulation 7(2)(a); and (ii) how should the value of the aforesaid transaction be determined for the purpose of Regulation 7(2).
SEBI’s response
In response to the first issue, SEBI opined that all transactions that lead to a change in holding of the securities beyond the prescribed threshold needs to be disclosed. SEBI observed that transactions such as issue of bonus shares and receipt of shares pursuant to a scheme of arrangement, etc. will not require a separate disclosure as ‘the person getting allotment of shares has no role’ in it and the information related to it is already in public domain. However, personal transfers, such as, transfer by way of gift, off-market acquisitions, etc., needs to be disclosed under Regulation 7(2).
With respect to the second query, SEBI was of the view that, in respect of those transactions which are required to be disclosed, the transactions should be valued at the market value as on the day the securities were acquired / disposed of, irrespective of the price at which that particular transaction is carried out between the parties. If the cumulative market value of the securities exceeds the prescribed limits then such persons will be required to make the requisite disclosures under Regulation 7(2).
Analysis
In order to determine whether a transaction ought to be disclosed under Regulation 7(2), SEBI has preferred a purposive approach in its interpretation of the PIT Regulations. SEBI was of the view that the PIT Regulations are primarily aimed at preventing abuse by trading when in possession of unpublished price sensitive information. It was of the view that the disclosure provisions of the PIT Regulations was aimed at asking those persons who are likely to be in possession of unpublished price sensitive information to disclose their dealings in securities beyond a threshold. It was on this basis that SEBI felt that acquisition of shares through bonus issue, scheme of amalgamation / demerger, etc. need not be disclosed as the allottee / acquirer was a passive recipient of the shares and the information pertaining to these transactions would be in public domain. However, when it comes to transfers through gifts or off-market transfers, not only will the allottee / acquirer have an active role to play, information about these transactions would not always be in the public domain.
In respect of the second query, SEBI has rightly opined that the threshold for disclosure should be the market value of the securities traded, not the transaction value. Had SEBI preferred the transaction value as opposed to the market value, there is a risk that the provisions of Regulation 7(2) would be defeated by deliberately undervaluing the transactions to avoid disclosures. Therefore, market value of the securities is the correct threshold in such circumstances.
