The COVID-19 pandemic has reduced highway traffic to a bare minimum. People obsessively washing their hands every hour and not to forget the remarkable stock market crashes. The pandemic has brought catastrophic consequences both physically and financially.
Next in line are the promoters and insiders of companies. The Securities and Exchange Board of India (SEBI) reportedly prohibited promoters and insiders from buying company shares from April 1, 2020, to June 30, 2020. This prohibition may have been a direct effect of the additional time given to companies to report their financial results.
On March 19, the SEBI released a circular providing relaxation from compliance to certain provisions of the SEBI's (Listing Obligations and Disclosure Requirements) Regulations, 2015.
This included an extension of quarterly and annual financial results reporting by one month, from May 30 to June 30, 2020. The beneficiaries of such relaxation are listed entities, stock exchanges and depositories.
Customarily, the trading window is subject to closure for a certain period after the financials of a company are published. The period for restriction on trading can be made applicable for 48 hours from the end of every quarter.
This would mean a closure of the trading window for insiders and promoters for 48 hours from May 30, 2020. However, in light of the ongoing lockdown, SEBI has reportedly prohibited promoters and insiders from trading between April 1, 2020 and June 30, 2020.
The rationale behind the decision is clear. Numerous companies may have reached a stage where financial results may be suggestive of the ultimate outcome, although not entirely accurate.
Such information is considered Price Sensitive Information (PSI). Relaxation of filing deadlines suggests a higher possibility of misuse by insiders, promoters and management if the trading window is left open from April 1 to June 30, 2020.
What appeared to be just another WhatsApp forward disclosed the financial results of top companies in 2019. People remember this and so does the regulator. In light of past and current circumstances, SEBI rejected requests for exemption from this trading restriction.
Knowledge of PSI and acting upon such information amounts to insider trading and may subject a person to penalties under Section 15H of the Securities and Exchange Board of India Act, 1992. A person found guilty of insider trading will be liable to the following penalty: -
1. Rs 10 lakh or more, subject to a maximum of Rs 25 crore, or
2. Three times the amount of profits made from insider trading, whichever is higher.
Further, all connected persons and insiders will fall under the purview of this restriction. Connected persons include directors, deemed directors, employees, professionals having access to unpublished PSI and also include connected persons six months prior to the act of insider trading.
Promoters and insiders of companies are regularly exposed to PSI, thereby favourably positioning them to cushion a bear run especially in turbulent times where capital markets have hit rock bottom.
This is a welcome move by the regulator in its attempt to disarm holders of price-sensitive information from further wreaking havoc in the markets and penalising them if found to be in violation of this trading restriction.
(The author is Managing Partner, KS Legal & Associates)