New Insider Trading regulations and its impact on promoter pledging

The new, 'tighter' insider trading regulations that took effect on April 1 are giving Indian companies a tough time in the ongoing earnings season.

What has changed?

SEBI has extended the period during which management and promoters aren’t allowed to trade in their company’s shares before earnings announcements. Earlier, till March 31st, all insiders including directors, promoters, advisors, auditors etc couldn't buy/sell the stock 2 days before the announcement of results and 2 days after the results; meaning a freeze of ~4 trading days for insiders where they are not allowed to trade in that stock. These rules have now been modified in order to bring about more transparency and ensure better corporate governance. According to the new rules, trading restrictions for company insiders start from the end of every quarter and are lifted 48 hours after the declaration of results. For instance, if the results are declared on 25th April, the freeze will be valid for a period of 27 days. The new rules could mean an extended period for companies that report late in the season.

The tighter rules follow in the wake of quarterly results of several blue-chip companies being leaked last year on social media platforms such as WhatsApp before official announcements to the stock exchange. Also, in a deal between Sabero Organics and Coromandel International, SEBI found that certain top people were in possession of unpublished price-sensitive information (UPSI) without purpose.

New rules include pledging..

The new norms have been tweaked in a manner that the definition of trading also includes 'dealing'. This covers not only activities such as buying and selling, but also pledging of securities when in possession of UPSI. This means that insiders including promoters can neither pledge their shares nor revoke their pledges during the freeze period, as explained above.

Impact on promoter pledging

The move seems to be an effort to prevent promoters from compromising interests of minority shareholders by pledging majority of their shares. Another reason can be to prevent what can be called as quasi promoter funding. It has been found that in the past few years, many mutual funds have invested in private companies floated by promoters through NCDs secured by promoters' holdings. Promoters and companies also pledge shares to raise funds, a matter that came to the fore in the wake of the IL&FS default.

While the new rules attempt to curb some issues, they could create some problems for promoters looking to pledge their shares for funding requirements. Considering that most companies announce results within 15-20 days of the end of every quarter and about 45 days of the full year, it places restriction of about four months for trading and fund raising. It would further affect planning and execution of transactions such as preferential allotment, rights issue, takeovers, ESOPs, warrant conversion and other similar transactions, which need not particularly be in the nature of insider-trading. Unless there is further clarification or exemption explicitly provided or legal precedent, the rule may lead to confusion and ambiguity in the markets.



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