(a) The Model Code itself has been amended. There are two major changes.
(b) Clause 4.2 of the Model Code has been amended. As per this amended clause, directors/officers/designated employees, who buy or sell shares, cannot now carry out a reverse transaction for six months. Thus, if such person buys even 1 share, he cannot sell any shares for six months and if he sells even one share, he cannot buy any shares for six months. Further, such persons cannot deal, at all, in derivatives of the Company. This bar is over and above the general prohibition on insider dealing.
(i) The devil in me tells me that the ban is only on such directors, etc. and the dependents of such persons are not affected by such ban ! Of course, such dependents may have to answer to the charge of Insider Dealing generally.
(ii) This bar also does not apply to Promoters ! ! ! This is absurd. Of course those Promoters who are directors, officers or designated employees would face the bar. So also, the prohibition on Insider Trading generally would continue to apply.
(iii) The bar also does not apply to other Insiders.
(c) This bar on such transactions is total. There are no circumstances’ – whether of urgent need or otherwise – under which the bar can be lifted. There is also no provision under which even SEBI could grant exemption.
(d) An interesting question arises. Does the bar apply also to shares acquired through exercise of employees’ stock options or under a Share Purchase Scheme? This can be seen in two ways. If such a person has sold shares, can he acquire shares under an ESOPs scheme in the next six months? Alternatively, if he has acquired shares under an ESOPs scheme, can he sell shares in the next six months?
(i) The crucial word to examine is ‘buy’. I think there is a good case to argue that the word ‘buy’ would include shares acquired under an ESOP scheme. However, I still think that shares acquired under ESOP schemes are not intended to be covered. Consider a related bar on shares acquired through an IPO. The existing clause, continued without any change, requires shares acquired by such persons through IPO should be held for at least 30 days. Obviously, if the intention was to cover shares bought in any manner, then such a separate bar was not required at all. I know the provisions are not happily worded. I also know it could be argued that the 30-day lock-in for IPO acquired shares is meant to be a special case. However, taking all things into account, perhaps the intention is not to cover shares acquired under ESOP schemes.
6. No penal consequences for violating the new trading restrictions on Insiders?
(a) As discussed earlier, directors, etc. are barred from carrying out opposite transactions for six months and holding positions in derivatives (let us call such transactions as ‘Specified Transactions’).
(b) The question is what are the consequences of violation of these two restrictions?
(c) The SEBI Act provides for severe punishment for Insider Trading. U/s.15G, the specified acts by an Insider attract a penalty of Rs. 25 crores or 3 times the profits made from Insider Trading, whichever is higher. U/ s.24, violation of the Regulations could result in imprisonment up to 10 years or a fine of up to RS. 25 crores or both. There can be other consequences also.
(d) Would any of such consequences be attracted for violating the bar on carrying out such Specified Transactions – i.e., such opposite transactions or derivatives? The answer seems to be No.
(e) Violations of the Code are to be punished by the company internally and the Model Code suggests that they ‘may be penalised and appropriate action may be taken by the company’. The violators shall also be ‘subject to disciplinary action by the company, which may include wage freeze, suspension, ineligible for future participation in employee stock option plans, etc.’.
(f) Beyond this, it appears that SEBI cannot levy the said penalties of RS.25 crores, etc. or prosecute and get such person imprisoned, etc. The reason is the peculiar placement of the amendments. The bar on Specified Transactions is contained in the Model Code. Regulation 12 merely requires listed companies and other entities to ‘frame’ and ‘enforce’ a Code on the lines of the Model Code. There is no requirement in the Act or the Regulations that the Code so made should be followed. While an obligation and enforcement relation has been created between the company, etc. and such persons, no such obligation or enforcement relation has been created between SEBI and such persons.
(g) If, e.g., the company does not frame the Code of Conduct as prescribed, SEBI can levy penalties, and take other penal and other action. Further, if a company does not enforce the Code, then also such penal consequences would follow. But the Regulations do not go further and require that the Code so framed should also be complied with by the directors, etc.
(h) Is this intentional or is it an unintentional drafting lapse? On first impression, one could be tempted to consider that this is intentional. The Consultative Paper on proposed amendments to Insider Trading of March 2008 did consider the requirements of the Model Code to be akin to corporate governance requirements. In fact, it discussed that disclosure of non-compliance was perhaps a better way to punish a company economically through the markets. It also recommended dilution of the punitive requirements. Effectively, it appeared to suggest a change in approach. However, even considering these original thoughts, it still appears to me that it is not intended by SEBI that such violations should not attract penal conse-quences.
(i) I think it is not only an unintentional lapse and this also arises on account of an improper appreciation of the structure of the Regulations. SEBI has all along assumed that violations of the Code as framed by the Company are not only punishable with monetary penalties and directions, but also subject to prosecution. In the aforesaid Consultative Paper of March 2008, SEBI recommended that the violations of the Code should not result in imprisonment. It further said that “other powers of monetary penalties and directions should be continued”. Thus, SEBI assumed that the violations already attracted all these penal consequences.
(j) On this erroneous presumption, perhaps, SEBI placed the bar on the Specified Transactions in the Model Code.
(k) But where is the provision, in the Act or the Regulations, saying that violations of the Code will attract such penal consequences? No-where, I think.
(l) Thus, by possibly an unintentional drafting lapse, the bar on the Specified Transactions will not attract the penalties, prosecution, etc. Taking this further, even violation of the 30-day lock-in for shares acquired in IPO or, for that matter, violation of any other provision of the Code, would not attract such punishment.
(m) Of course, this does not mean that such persons can merrily carry out Insider Trading as defined – i.e., trade in shares on the basis of unpublished price-sensitive information or communicate such information, etc. Also, persons violating the bars on ‘specified transactions’ would also face, as discussed above, action by the company for violation of the Code.
(7) There are a few other amendments and issues, but considering space constraints, only certain important amendments have been discussed.
(8) A common thread amongst these amendments appears to be that SEBI seems to have preferred a total ban and also creating a ‘deemed category’ of insiders without leaving any scope for subjective exemptions. While the merits of such an approach could be debated, it is likely that at least in the short run, many persons may unwittingly carry out ‘Insider Trading’ as so now widely defined – in terms of persons as well as transactions. This is the sad consequence of the poorly publicised and arbitrary amendments.
