In the informal guidance issued to Raghav Commercial Limited (Applicant), published on September 02, 2020, SEBI clarified the applicability of contra trade and trading window closure restrictions on inter-se transfer of shares between promoters and promoter group.
Certain promoter group entities of HEG Limited (the Company) propose to undertake inter-se transfer of certain shares (between individual and non-individual promoters) of the Company by way of a block deal on the stock exchange (Proposed Transaction). However, certain other entities of the promoter group had sold shares of the Company on the open market in the recent past.
In light of this, the Applicant requested an informal guidance on whether the contra trade restriction would be applicable on those individual members of the promoter group who had traded, or on the entire promoter group. SEBI clarified that in terms of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations), the contra trade restrictions would apply to trades made by promoters individually, and not to the entire promoter group.
Further, the Applicant requested a clarification on whether trading window restrictions, if it exists during the period of the Proposed Transaction, would be applicable on the Proposed Transaction. Clause 4(3)(a) of Schedule B to the PIT Regulations exempts transactions specified in clauses (i) to (iv) and (vi) of the proviso to Regulation 4(1) from the purview of trading window restrictions. The proviso to Regulation 4(1) provides for certain circumstances which can be used by an insider to demonstrate his innocence while trading in securities when in possession of unpublished price sensitive information (UPSI). Clause (ii) of the proviso specifies transactions that are carried out through block deal mechanism between persons who were in possession of the UPSI without being in breach of regulation 3, and where both parties had made a conscious and informed trade decision. Clause (v) of the proviso, for which exemption is not provided under clause 4(3)(a) of Schedule B, specifically provides for circumstances to prove innocence where the parties involved are non-individual insiders. Since the Proposed Transaction involves both individual and non-individual members of the promoter group, being designated persons as per the Company’s code of conduct policy, the Applicant requested a clarification on the availability of an exemption under clause 4(3)(a) of Schedule B.
SEBI was of the view that since the Proposed Transaction is happening through a block deal mechanism between parties who are in possession of UPSI and who have made a conscious and informed trade decision, it would fall within the scope of transactions specified in clause (ii) of the proviso to Regulation 4(1). Therefore, the exemption from the applicability of trading window restrictions provided in clause 4(3)(a) of Schedule B is available to the Proposed Transaction.
By this informal guidance, SEBI has rightly clarified that the transactions specified in clause (ii) of the proviso to Regulation 4(1) can even be between non-individual members of the promoter group. Given the recent substantial amendments to the PIT Regulations, this is a much-needed clarification.
Further, as per Regulation 9(4)(iii) of the PIT Regulations, only promoters are mandatorily required to be included in the list of designated persons by a listed company. While the present informal guidance has been issued in light of the fact that the Company’s code of conduct policy includes both promoters and promoter group as ‘designated persons’, it should be kept in mind that where the promoter group is not included in the list of designated persons of a listed company, the trading window restrictions are not applicable on such promoter group.