Context: The Securities and Exchange Board of India (SEBI) has relaxed the preferential allotment pricing norms for companies along with tightening insider trading rules.
Steps taken by SEBI
- Tightening the insider trading regulations :It has amended the SEBI (Prohibition of Insider Trading) Regulations. It is now mandatory for companies to maintain a digital database of unpublished price -sensitive information (UPSI).
- An additional, temporary option to price shares in a preferential allotment: Those companies who frequently trade shares can price the preferential allotment above the average of the weekly high and low over the past 1 weeks or 2 weeks.
- Earlier SEBI provided the relaxation to companies with stressed assets.
- The existing price mechanism will continue.The relaxed price mechanism will be available for preferential allotments done between July 1 and December 31, 2020.
- Using consent route: The amended rules allow using consent route for settling the regulatory proceedings by paying a penalty. Also the calculation method for penalty has been changed.
What are preferential allotments?
An existing company has three methods available to it for expanding its share capital.
- First is through a fresh issue of shares to existing shareholders in proportion to shares held by them (rights or bonus issues).
- Second is by making an open offer, inviting the public in general to subscribe to shares, which is generally known as initial public offer (IPO).
- Preferential allotment: The third method is by making a bulk allotment to individuals, companies, venture capitalists or any other person through a fresh issue of
- The entire allotment is made to pre-identified people, who may or may not be existing shareholders of the company, at a pre-determined price. Three-fourths of the shareholders should agree to the issue of shares on a preferential basis.
- Rationale: The rationale is to provide a route by which the company can secure the equity participation of those who it feels can be of value as shareholders, but for whom it may be costly to buy large chunks of shares from the market.
- A minimum pricing formula: Under this, an average of the highs and lows of the 26 weeks preceding the date on which the board resolves to make the preferential allotment is arrived at and this is the minimum price at which the allotments can be made.
- SEBI’s plans to tackle misuse: A high price in preferential allotment results in a benchmark for the market price, facilitating a false market in the shares. Sebi is now looking at putting a cap on the maximum price at which such allotments could be made and prescribing the entities to whom they could be made.
Benefits of the steps:
- Liberalising capital regulations: Due to serious challenges faced by the corporate sector in the wake of developments related to COVID-19, Industry leaders have requested SEBI to temporarily liberalise regulations relating to raising of capital from the securities market.
- Insider trading: The database will minimise instances of unpublished, price-sensitive information getting leaked.
- UPSI related concerns: There have been instances where UPSI was being shared by the company officials with outsiders using Whatsapp.
- Faster disposal of legal cases: Using the consent route in Takeover regulations will save time.
- The Securities and Exchange Board of India was established on April 12, 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992.
- The Preamble of the Securities and Exchange Board of India describes the basic functions of the Securities and Exchange Board of India as "...to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto"
- It is the buying and selling of a public limited company’s stocks by people who have confidential information about that stock.
- This confidential information can be material nonpublic information which can impact an investor's decision to trade that share/stocks.
- This practice is an illegal and punishable offence.
- Laws for prevention of insider trading (PIT) have evolved, putting increased onus on companies to protect price sensitive information.
Regulations in India:
- The first major law was PIT regulation of 1992 which required companies to have a model code of conduct to prevent leakage of price sensitive information.
- Justice NK Sodhi committee’s recommendation: The law underwent a major overhaul in 2015 making the model code of conduct principle based rather than rule based.
- Allowing insider trading within rules: It also introduced a concept of trading plans which gave room to insiders to trade in the stock. Under this, insiders could announce a plan of buying or selling in advance, under the obligation to execute those trades.
- The TK Vishwanathan panel report: Starting April 2019, organisations needed to have in place a policy and procedure for conducting inquiry into incidents of a leakage of material information.
- It was prohibited to communicate and have access and procure unpublished price sensitive information (UPSI).
- However, communication done for ‘legitimate purpose’ is permitted such as due-diligence and certain third party vendors.
- An informant mechanism: Under this, Sebi will reward an informant ₹1 crore if the tip-off provided by him or her leads to headway in investigating an alleged case of insider trading.
- It gives the regulator a platform to widen the net and increase the quality of evidence and investigative processes.
How SEBI investigates insider trading?
- Identifying insider: Sebi first seeks to establish who is an insider, which typically is key managerial personnel of a listed company, company board, auditors, personnel handling financial information or sensitive information, promoters and persons connected to promoters.
- Even close relatives of these officials are considered persons connected to insiders and thus can have access to information.
- Identifying price sensitive information: This could be anything ranging from a company acquiring a major contract to good financial information.
- Lack of investigative tools: Sebi has not been empowered with some basic investigative powers and tools is a major reason behind the low prosecution. As per Sebi’s annual reports in 2017 and 2018, the regulator took up 85 cases for investigations and only 25 have been completed so far.
- Sebi was granted powers to call for phone data records only in 2014.
- Even today, Sebi does not have the power to tap phone records, a recommendation of the Vishwanathan panel.
Image Source: Times of India