May 15, 2023

Comparative Analysis of recent FAQs on Insider Law Regulations

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With the objective to provide greater clarity on several concepts related to the SEBI (PIT) Regulations, 2015, as also to shed more light on the nuances of various requirements of the regulations, SEBI issued comprehensive Frequently Asked Questions (FAQs) on April 29, 2021, which consolidated all the FAQs and guidance notes issued earlier (“Earlier FAQs”).

In light of the queries and suggestions received, and consultations with market participants, some of the FAQs have now been revised & updated, more particularly, with regard to the maintenance of a structured digital database, contra-trade related provisions, transfer of Securities from one Demat to another. Some new FAQs have also been issued.

Key highlights of the changes in earlier FAQs

1. FAQ NO.7 – If the “Structured Digital Database” is maintained on Amazon, Google, or cloud server hosted outside India, will it be considered as outsourced or internal?

Earlier FAQs	New FAQs
Databases/servers provided by third-party vendors whether within India or outside India will be considered as outsourced.	The SDD has to be maintained in compliance of Regulation 3(5) and 3(6) of PIT regulations. The Board is solely accountable for all aspects related to the maintenance of data on cloud or any other method. The Board and the Compliance Officer has to ensure the confidentiality, integrity and security of its data and logs, and ensure compliance with the laws, regulations, circulars, FAQ’s etc. issued by SEBI/ Exchanges from time to time. The Board / Compliance Officer shall be responsible and accountable for any violation of the same.
Rationale behind the Change
Earlier FAQs strictly prohibited the maintenance of SDD on cloud servers provided by third-party vendors and the same was also treated as outsourced. Later, the FAQs released by Stock Exchanges dated October 28, 2022, clarified that for maintaining the Structured Digital Database, external software could be used but it should be maintained internally. However, the majority of listed entities maintain & keep their backup data of all business information on private cloud servers and ensure appropriate security measures are in place to protect the confidentiality, and integrity of the data and don’t have any physical server in their business premises. Accordingly, the amended FAQs have given some room to the listed entities to maintain the data of SDD on the cloud or any other method, but at the same time, the Board of Directors & Compliance Officer shall be responsible and accountable for any violation in the maintenance of Structured Digital Database.

2. FAQ NO. 11 – Nomination Directors of a Bank or Financial Institution sharing information to their bank or financial information for legitimate purpose, will it be covered as communication of UPSI?

Earlier FAQs	New FAQs
If the directors fall under the list of designated persons or as an insider, then sharing of UPSI by them for legitimate purposes with the Bank/FIs, would be considered as communication of UPSI. Accordingly, the same would be recorded in the SDD of the company.	The nominee directors on an entity, falling under the list of designated persons or as an insider, sharing UPSI with the Bank/FIs, for the legitimate purpose of the entity, would be considered as communication of UPSI. Accordingly, the same would need to be recorded in the SDD of the company.
Rationale behind the Change
This FAQ specifically addresses the information shared by the Nominee Directors for the legitimate purpose of the entity. Therefore, the word Directors has been substituted by the words Nominee Directors. Accordingly, if the Nominee Director shares any UPSI, he/ she has to record the same in the Structured Digital Database maintained by the listed entity.

3. FAQ NO. 17 – Whether companies are required to provide the details of immediate relatives also along with the details of Designated Persons in terms of SEBI Circular SEBI/HO/ISD/ISD/CIR/P/2020/168 dated September 09, 2020 (System Driven Disclosures)?

Earlier FAQs	New FAQs
As per SEBI Circular dated September 09, 2020, SEBI has mandated system driven disclosure for members of promoter group and designated persons only in addition to promoters and directors of the company under Regulation 7(2) of SEBI (PIT) Regulations, 2015. Only details of designated persons are required to be given this time.	As per SEBI Circular dated September 09, 2020, SEBI has mandated system-driven disclosure for members of promoter group and designated persons only in addition to promoters and directors of the company under Regulation 7(2) of SEBI (PIT) Regulations, 2015.
Rationale behind the Change
In the above FAQ, the last line shown in bold has been removed, as the same is not relevant now. Going forward, System Driven Disclosures pursuant to Regulation 7(2) of PIT Regulations are applicable for the Promoter, member of the Promoter Group, Directors, and Designated Persons of the company.

4. FAQ NO. 24 – Whether transfer of shares from one Demat account to another Demat account of the same person will trigger the disclosure requirements?

Earlier FAQs	New FAQs
Since beneficiary ownership remains the same, the transfer of Securities will not qualify as trading. Hence, disclosure requirements for the same will not be required.	Since beneficiary ownership remains the same, the transfer of shares will not qualify as trading. Hence, disclosure requirements for the same will not be required. However, the disclosure requirements shall be applicable in cases where one of the Demat accounts has more than single ownership.
Rationale behind the Change
If any individual transfers his holding from one Demat account to another and has a single holding in both the Demat accounts then the disclosure is not required. However, if any of the Demat accounts has multiple ownership (more than one) then the Disclosure requirement becomes applicable to the Designated Person of the Company for transferring Securities to another Demat account.

5. FAQ NO. 36 – Does the Contra trade restriction (for a period not less than six months) under clause 10 of Schedule B of the Regulations also apply to the exercise of ESOPs and the sale of shares so acquired?

Earlier FAQs

New FAQs

Exercise of ESOPs shall not be considered to be “trading” except for the purposes of Chapter III of the Regulations. However, other provisions of the Regulations shall apply to the sale of shares so acquired.

For Example:

If a designated person has sold/ purchased shares, he can subscribe and exercise ESOPs at any time after such sale/purchase, without attracting contra-trade restrictions.
Where a designated person acquires shares under an ESOP and subsequently sells/pledges those shares, such sale shall not be considered as contra trade, with respect to exercise of ESOPs.
Where a designated person purchases some shares (say on August 01, 2015), acquires shares later under an ESOP (say on September 01, 2015) and subsequently sells/pledges (say on October 01, 2015) shares so acquired under ESOP, the sale will not be a contra trade but will be subject to other provisions of the Regulations, however, he will not be able to sell the shares purchased on August 01, 2015 during the period of six months from August 01, 2015.
Where a designated person sells shares (say on August 01, 2015), acquires shares later under an ESOP (say on September 01, 2015) the acquisition under ESOP shall not be a contra trade. Further, he can sell/pledge shares so acquired at any time thereafter without attracting contra trade restrictions. He however, will not be able to purchase further shares during the period of six months from August 01, 2015 when he had sold shares.

Any buy/sell trade, undertaken by a Designated Person (DP) and their immediate relatives, within 6 months of an earlier sell/buy trade, respectively, where both the trades have been done in open market, will tantamount to contra trade.

In respect of ESOPs, subscribing, exercising, and subsequent sale of shares, so acquired by exercising ESOPs (hereinafter “ESOP shares”), shall not attract contra trade restrictions. Further, if the ESOP shares are sold in multiple transactions, it will not attract contra trade restrictions.

Further, it is to be noted that other provisions of the Regulations shall apply to the sale of shares so acquired through exercising ESOPs.

Table below provides for different scenarios involving buy/sale of ESOP shares, elucidating the principles provided above:

Transaction Date – Jan 01, 2021 (A)	Transaction Date – Feb 01, 2021 (B)	Transaction Date – March 01, 2021 (C)	Transaction Date – August 01, 2021 (D)	Transaction Date – September 01, 2021 (E)	Contra (F)
–	ESOPs – Acquire#	ESOPs – Dispose$	–	–	No
–	ESOPs – Acquire#	ESOPs – Dispose$	ESOPs – Dispose$	–	No
–	ESOPs – Acquire#	Market – Acquire@	ESOPs – Dispose$	–	Yes, Transaction ‘D’ is contra to ‘C’
–	ESOPs – Acquire#	ESOPs – Dispose$	Market – Acquire@		Yes, Transaction ‘D’ is contra to ‘C’
Market – Dispose@	ESOPs – Acquire#	ESOPs – Dispose$	–	–	No
Market – Acquire@	ESOPs – Acquire#	ESOPs – Dispose$	–	–	Yes, Transaction ‘C’ is contra to ‘A’
Market – Acquire@	ESOPs – Acquire#	ESOPs – Dispose$	Market – Acquire@	ESOPs – Dispose$	Yes, Transaction ‘C’ is contra to ‘A’, ‘D’ is contra to ‘C’ and ‘E’ is contra to ‘D’
Non – open Market – Acquire%	ESOPs – Acquire#	ESOPs – Dispose$	–	–	No

# – ESOPs – Acquire: Securities acquired through exercising ESOPs
$ – ESOPs – Dispose: Securities disposed, which were acquired through exercising ESOPs.
@ – Open Market – Acquire/Dispose: Securities acquired or disposed in open market
% – Non – Open Market – Acquire – Securities acquired through corporate actions like Rights Issue, FPO, OFS, Bonus, Split, etc.]

Rationale behind the Change

Exercising the ESOP shares will not fall under the ambit of Contra trade provisions. However, the sale of shares acquired through exercising ESOP will be considered Open market trade in terms of SEBI (PIT) Regulations. Therefore, now the Designated Persons can only sell their ESOP securities if they have not earlier acquired the Company securities prior to six months of such selling (except via exercising the ESOP shares), and once the ESOP securities were disposed of, they cannot acquire the Company securities from the Open Market for a period of next six months.

The table mentioned in the new FAQs has also specified different permutations/ combinations of scenarios that shall fall under the contra trade provisions.

Further, SEBI has also clarified what Open Market trade & Non-Open Market trade means i.e. “Any acquisition/disposal of Securities undertaken through any corporate action i.e. Rights Issue, FPO, OFS, Bonus, Split, Exit offers, Buyback offer, Open offer, Merger/Amalgamation, Demerger, etc. shall be considered as Non-open market trade, rest all kinds of transactions will be considered as Open Market trade”.

6. FAQ NO. 39 – Whether the restriction on the execution of contra trade in securities is applicable in case of buyback offers, open offers, right issues, FPOs, OFS, share split, bonus, exit offers, merger/amalgamation, demerger, etc. by/ of listed companies?

Earlier FAQs	New FAQs
Buyback offers, open offers, rights issues, FPOs, bonus, exit offers etc. of a listed company are available to designated persons also, and restriction of ‘contra- trade’ shall not apply in respect of such matters. Provided the initial transaction of buy/sell have been completed in accordance with PIT Regulations.	Any acquisition of securities by way of Rights issue, Follow-on Public Offer (FPO), Offer for Sale (OFS), Bonus issue, Share Split, Merger/Amalgamation, Demerger, would not attract restriction of ‘contra-trade’, provided the initial transaction of disposal was completed in accordance with PIT Regulations. Similarly, any disposal of securities by way of Buy-back, Open offer, Exit offer, Merger/Amalgamation, etc. would not attract restriction of ‘contra-trade’, provided the initial transaction of the acquisition was completed in accordance with PIT Regulations.
Rationale behind the Change
In the said FAQ, SEBI has further bifurcated in detail that trading in securities i.e. acquisition of securities [via Rights issue, Follow-on Public Offer (FPO), Offer for Sale (OFS), Bonus issue, Share Split, Merger/Amalgamation, Demerger] and/ or disposal of securities (via Buy-back, Open offer, exit offer, Merger/Amalgamation, etc.), are exempted from the Contra trade provisions, if the initial/prior transactions were executed as per SEBI (PIT) Regulations.

7. FAQ NO. 40 – In case securities are acquired/ disposed of pursuant to right issue, FPO, buyback offers, open offers, bonus, OFS, share split, merger/ amalgamation, demerger, etc. whether the contra trade restrictions would apply if such securities are disposed/acquired through Open Market trade, before completion of six months from the initial date of acquisition/ disposal?

Earlier FAQs	New FAQs
If the first trade is an acquisition by way of rights issue/FPO, then the subsequent sale of shares before 6 months from the date of acquisition would be considered as a contra trade.	If the initial transaction is an acquisition by way of Rights issue, Follow-on Public Offer (FPO), Offer for Sale (OFS), Bonus issue, Share Split, Merger/Amalgamation, Demerger, then subsequent disposal of securities within 6 months from the date of initial transaction would be considered as a contra trade. Similarly, if the securities are disposed through Buy-back or Open offer, then subsequent acquisition of securities within 6 months from the date of initial transaction would be considered as a contra trade. However, for the transactions involving merger/amalgamation, demerger, bonus and split, the period of 6 months shall be calculated as under: Merger/amalgamation – For securities received subsequent to a merger/amalgamation, period of 6 months is to be calculated from the date of acquisition of securities of the entity(ies), which were merged/amalgamated. However, if an unlisted entity gets merged/amalgamated with the listed entity, the employees of the unlisted entity who are now the Designated Persons of the listed entity as a result of merger/ amalgamation, the period of six (6) months for such Designated persons shall be counted from the first transaction in the entity, post-merger/ amalgamation. Demerger – For securities received subsequent to a demerger, period of 6 months is to be calculated from the date of acquisition of the securities of the entity, which was demerged. Bonus and share split – For securities received subsequent to bonus or share split, 6 months to be calculated from the date of acquisition of original securities, on which bonus/split Securities were received.
Rationale behind the Change
This FAQ is in continuation to the previous FAQ. If the initial trade of the Designated Person, is in the form of the acquisition of shares through right issues, FPO, OFS, etc., or similarly tendering of securities voluntarily in buyback offers, open/ exit offers, etc. by Designated Person is the first transaction, which is available to all the shareholders of the Company at par is treated as a trade but are exempted from the Contra trade provisions under SEBI (PIT) Regulations. However, voluntarily taking the opposite position subsequently, after the initial/ first transaction is not exempted from the definition of trade and the same will be treated as Open Market trade and if the said transaction happened within a time span of six months then it shall also fall under the ambit of contra trade provisions. Further, where Designated Person received the securities directly without applying, the period of six months in those cases will be calculated as follows: In case of merger/ amalgamation of two listed entities will be counted from the date of acquisition of securities before merger/ amalgamation. Furthermore, for the employees of an unlisted entity who are now the Designated Persons of the listed entity as a result of merger/ amalgamation, they have to follow the period of six (6) months from the first transaction in the entity post-merger/ amalgamation. In case of demerger the period of six (6) months is to be calculated from the date of dealing in securities of the entity which was demerged. In the case of bonus & split the period of six (6) months is to be calculated from the date of acquisition of original securities on which bonus/ split Securities were received.

Key highlights of the new FAQs added

8. FAQ NO. 42A – If Designated Person (DP), is holding shares under his PAN in different capacities viz. in his personal capacity, in the capacity of trustees, or in the capacity of an executor of will, etc., will the restrictions of contra trade be applicable to all the shares held in all the capacities collectively or individually?

New FAQ
The restriction to engage in contra trade as provided under the provisions of the PIT Regulations would be applicable to all the shares held under the PAN of the Designated Person, irrespective of the capacities in which such Designated Person holds such shares in the Company.
Rationale behind the Change
After going through the above FAQ, we can conclude that irrespective of the capacity in which the Designated Person holding the securities of the Company once the Securities get linked with the PAN number of the Designated Person the restrictions of contra trade (i.e. to take opposite transaction w.r.t to the initial transaction) will apply on all Securities held by such Designated Person so that he shall not influence his decision on the basis of securities held in different capacities.

9. FAQ NO.44A – Whether the Designated Person can trade in the Right Entitlement if he/ she has earlier acquired the shares of the Company within a six (6) months period?

New FAQ
Trading in Rights Entitlements tantamount to open market trade in the Company securities and contra trade provisions are applicable to them. Thus, if the Designated Person has earlier acquired the shares of the Company and if they sell the Right Entitlement within a time span of six (6) months, it will attract contra trade provisions.
Rationale behind the Change
Subscribing to Right issues is deemed as trade in terms of SEBI (PIT) Regulations, but exempted from the provisions of the Contra trade because it is available to all the shareholders at par. However, trading in the Rights Entitlement is also treated as trading in securities of the Company. So, if any Designated Person voluntarily wants to sell the Right Entitlement of the Company then it shall be treated as contra trade also if he/ she has earlier acquired any securities of the Company (i.e. prior to six months from the date of selling of Right Entitlement).

10. FAQ NO. 59 – Whether entities who have participated as prospective bidder in the bidding process of a listed company, under the Corporate Insolvency Resolution Process (CIRP), can buy/ sell the listed securities of the said company, either on Exchange/ on a Preferential basis/ through any bidding process?

New FAQ

Regulation 4(1) of the PIT Regulations requires that no insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information. Thus, an entity, if had access to the UPSI during the bidding process of the company under CIRP, then the requirements under the PIT Regulations need to be abided with.

Rationale behind the Change

The basic intent of the PIT Regulations is that no insider shall directly or indirectly deal in the securities of the Company on the basis of any UPSI of such entity. Accordingly, if a prospective bidder has access to any UPSI of the Company in which they are party to the bidding process so they should restrict themselves to deal in the securities of such entity during such information becomes generally available to the public.

May 15, 2023

Comparative Analysis of recent FAQs on Insider Law Regulations

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