QUESTION
MCL is a public limited company, which has its equity shares listed on both BSELimited and National Stock Exchange of India Limited. CPPL is a part of the promoter group of MCL since it is closely held by certain promoters of MCL. However, currently, CPPL neither holds any equity shares in MCL nor has any role in the management of MCL. The 'Promoter and Promoter Group’ of MCL collectively hold 65.44% of the total paid-up capital of MCL, as on date.
Being a public listed company, MCL has issued a 'Code of practice and procedures for fair disclosure of unpublished price-sensitive information ("UPSI") and code of conduct to regulate, monitor and report trading by insiders of MCL ("CoC") in accordance with the SEBI(Prohibition of Insider Trading Regulations), 2015 ("PIT Regulations"). CPPL now intends to acquire 50,000 equity shares, constituting 0.06% of the paid-up capital of MCL ("ProposedAcquisition"), which is beyond the thresholds stipulated by the board of directors of MCL for trading by designated persons.
In view of the above facts, answer the following questions
- What category of persons are required to obtain a pre-clearance from the compliance officer of a listed entity prior to trading?
- Will CCPL be required to obtain a pre-clearance from the compliance officer of MCL for the Proposed Acquisition?
- Does the compliance officer have discretionary powers under the PIT Regulations to reject a pre-clearance request on any reason it deems fit.
- Is the compliance officer required to consider certain factors while approving or rejecting an application seeking pre-clearance for a proposed transaction?
- Is there any provision in the PIT Regulations that provides for the examination of acts of a compliance officer?
ANSWERS
The following are the findings of the case as given above:
a) Clause 6 of Schedule B of the PIT Regulations states that pre-clearance is required to be obtained only by 'designated persons’ (i.e., employees and connected persons designated as such on the basis of their functional role in the organization) if the value of the proposed trades is above such thresholds as stipulated by the board of directors of the listed company.
Clause 6 of Schedule B of PIT Regulations; When the trading window is open, trading by designated persons shall be subject to pre-clearance by the compliance officer, if the value of the proposed trades is above such thresholds as the board of directors may stipulate.
Designated Persons: Designated Person(s) includes the promoters; directors; key managerial personnel; auditors; all employees and support staff of the Accounts, Finance, Legal, Internal audit, Information technology and Secretarial Department; Key Managerial Personnel of the material subsidiary of the Company and other persons as may be prescribed.
b) CCPL will be required to obtain a pre-clearance from the compliance officer of MCL for the Proposed Acquisition only if it is designated as a 'designated person’ by the board of directors of MCL, in consultation with the compliance officer.
c) The compliance officer, under the provisions of the PIT Regulations, is entrusted with ensuring adherence to the PIT Regulations and in rejecting a pre-clearance request, the compliance officer is required to ensure compliance in letter and spirit to the PIT Regulations i.e., to ensure that no undue advantage accrues to certain categories of investors on account of their access to UPSI and not for any ulterior motive.
d) The compliance officer is required to approve or reject a request for pre-clearance afternecessary assessment as per the PIT Regulations and the Code of Conduct of the company.Clause 7 of Schedule B of the PIT Regulations requires the compliance officer to maintain a list of such securities as a 'restricted list’ which is to be used as a basis for approving or rejecting applications for pre-clearance of trades and Clause 8 requires a compliance officer to haveregard to whether a declaration (from the applicant seeking pre-clearance to the effect that he is not in possession of UPSI) is reasonably capable of being rendered inaccurate.
Clause 7 of SEBI (PIT) regulations, 2015 ;Omitted by Securities and Exchange Board of India (Prohibition of Insider Trading) (Amendment) Regulations, 2018 (w.e.f. April 01,2019) which earlier read as below:
"The compliance officer shall confidentially maintain a list of such securities as a "restricted list" which shall be used as the basis for approving or rejecting applications for preclearance of trades."
Clause 8 of SEBI (PIT) regulations, 2015
Prior to approving any trades, the compliance officer shall be entitled to seek declarations to the effect that the applicant for pre-clearance is not in possession of any unpublished price-sensitive information. He shall also have regard to whether any such declaration is reasonably capable of being rendered inaccurate.
e) Regulation 2(1)(c) of the PIT Regulations lays down that the compliance officer acts under the overall supervision of the board of directors of the listed company or the head of the organization (as the case may be). Additionally, Clause 1 of Schedule B of the PIT Regulations requires the compliance officer to report to the board of directors and provide reports to the Chairman of the audit committee/ board of directors. Hence, any act of the compliance officer may be referred to the board of directors and the audit committee for examination with the extant laws and relevant facts of the case.
Regulation 2(1)(c) of PIT Regulations
(c) "compliance officer" means any senior officer, designated so and reporting to the board of directors or head of the organization in case board is not there , who is financially literate and is capable of appreciating requirements for legal and regulatory compliance under these regulations and who shall be responsible for compliance of policies, procedures, maintenance of records, monitoring adherence to the rules for the preservation of unpublished price sensitive information, monitoring of trades and the implementation of the codes specified in these regulations under the overall supervision of the board of directors of the listed company or the head of an organization, as the case may be.
Explanation -For the purpose of this regulation, "financially literate" shall mean a person who has the ability to read and understand basic financial statements i.e., balance sheet, profit and loss account, and statement of cash flows.
Clause 1 of Schedule B of SEBI(PIT) Regulations, 2015
The compliance officer shall report to the board of directors and in particular, shall provide reports to the Chairman of the Audit Committee, if any, or to the Chairman of the board of directors at such frequency as may be stipulated by the board of directors [but not less than once in a year.
DISCLAIMER: The case study presented here is only for sharing knowledge with the readers. The views are personal, shall not be taken as professional advice. In case of necessity do consult with professionals for more understanding and clarity on the subject matter.
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