Recent Amendments to SEBI Takeover Regulations and Insider Trading Regulations

Disclosure of Encumbrances

The Securities and Exchange Board of India (‘SEBI’) had, by way of a notification dated July 29, 2019, approved amendments to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘Takeover Regulations’) with respect to disclosure requirements for encumbrances. Prior to the amendment, an “encumbrance” was defined in Regulation 28(3) of the Takeover Regulations to include “a pledge, lien or any such transaction, by whatever name called”. Pursuant to the amendment, the scope of the term “encumbrance” under Regulation 28(3) has been significantly broadened to now also include:

i.       any restriction on the free and marketable title to shares, by whatever name called, whether executed directly or indirectly;

ii.      pledge, lien, negative lien, non-disposal undertaking; or

iii.    any covenant, transaction or condition or arrangement in the nature of encumbrance by whatever name called, whether executed directly or indirectly.

Additionally, a new Regulation 31(4) has been added to the Takeover Regulations which requires promoters of listed companies to declare, on a yearly basis, that they, along with persons acting in concert, have not made any encumbrance other than the encumbrances already disclosed during the financial year.

On August 7, 2019, SEBI has issued a circular which prescribes additional disclosure requirements under the Takeover Regulations, as follows (‘Disclosure Circular’):

i.      Promoters of listed companies are required to specifically disclose detailed reasons for encumbrance, whenever the combined encumbrance by the promoters along with persons acting in concert equals or exceeds 50% of their shareholding in the company or 20% of the total share capital of the company. Such disclosures are required to be made on every occasion, when the extant encumbrance (having already breached the above thresholds) increases further from the prevailing level; and

ii.     In case of existing encumbrances as on September 30, 2019 which are above the thresholds set out in sub-point (i), a first disclosure, as above, must be made by the promoter by October 4, 2019. These details are required to be maintained by the stock exchanges on their respective websites.

The disclosures set out above are in addition to the disclosures to be made by promoters under Regulation 31(1) of the Takeover Regulations. The Disclosure Circular sets out the format for such disclosures, which includes providing details such as the type of encumbrance, the entity in whose favour the encumbrance is created and end-use of the money borrowed. The Disclosure Circular will come into effect on October 1, 2019.

Informant Mechanism

SEBI had, in its Discussion Paper released on June 10, 2019, considered adopting an informant mechanism to detect cases of insider trading, given that direct evidence is not readily available in such matters making prosecution extremely difficult. At its board meeting on August 21, 2019, SEBI has approved amendments to the SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’) establishing an informant mechanism. Some of the key features of this mechanism are as follows:

i.       An informant means a person voluntarily submitting a form detailing credible, complete and original information relating to an act of insider trading;

ii.      SEBI has clarified that confidentiality of the identity of the informant and the information provided will be maintained (except where the evidence of the informant is required during proceedings initiated by SEBI) and that since information provided for the purpose of law enforcement is exempted from disclosure under Sections 8(1)(g) and 8(1)(h) of the Right to Information Act, 2005, information provided by the informant will be exempted from disclosure;

iii.     An independent office separate from the investigation and inspection wings or any of the operational departments will be established by SEBI to devise the policy relating to receipt and registration of voluntary information disclosure forms;

iv.      A reward would be given to the informant if the information provided by them leads to disgorgement of at least Rs. 1 crore, of an amount upto 10% of the money disgorged (capped at Rs. 1 crore) (approximately USD 140,000);

v.      All organisations required to implement codes of conduct under the PIT Regulations are required to amend their codes of conduct to provide protections from victimization of informants;

vi.     The original information may be shared with an appropriate agency or law enforcement authority within or outside India or a self-regulatory organisation, subject to confidentiality of the informant being maintained; and

vii.     If SEBI finds that the information submitted by an informant is frivolous or vexatious, SEBI may initiate appropriate action against the informant under the securities laws or any other applicable law.

The formal text of the amendments is awaited.

Structured Digital Database

In April 2019, SEBI amended the PIT Regulations and introduced a requirement for the ‘Board of Directors’ to maintain a structured digital database containing details of persons with whom information is shared under the PIT Regulations. By way of an amendment to the Guidance Note dated August 24, 2015 issued by SEBI on the PIT Regulations, SEBI has clarified that the requirement to maintain a structured digital database applies not only to listed companies, but also to intermediaries and fiduciaries who handle unpublished price sensitive information for listed companies in the course of business operations.

Date: August 29, 2019