SEBI’s Informal Guidance – Century Plyboards Ltd[1] (Gift as Contra Trade and identification of promoter group as designated person) - MMJC

Introduction:

• This newsletter summarizes key points from a recent informal guidance letter issued by the Securities and Exchange Board of India (SEBI) regarding the interpretation of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations.
• The guidance was provided in response to a request from Century Plyboards (India) Limited, a company whose equity shares are listed on stock exchanges.

Background of the Query:

• Century Plyboards sought clarification on the applicability of PIT Regulations to certain transactions involving the gifting of shares among promoters
• Specifically, the company asked whether gifting shares would be considered a “contra trade” under the regulations and how this would affect related transactions.

Definition of Trading

SEBI clarified that the inter se off market gift of shares is considered “dealing in shares” and therefore falls under the definition of “trading” according to the PIT Regulations[1].  

• Contra Trade Implications:
  • The guidance emphasizes that gifting shares can indeed attract contra trade restrictions.
  • This means that the person gifting the shares (donor) may face restrictions on buying or selling the company’s shares for six months.
  • SEBI also clarified that these restrictions apply not only to the designated person but also to their immediate relatives. SEBI further highlighted that FAQ no. 42 of SEBI PIT FAQs clearly states that contra trade restrictions are applicable to designated persons and their immediate relatives collectively[1].
  • SEBI further stated that entering into reverse trades within six months of receipt of gift by the designated persons, would attract provisions of contra trade.

• Relaxation by Compliance Officer:
  • However, SEBI pointed out that the PIT Regulations allow for relaxation from these contra trade restrictions.
  • A company’s compliance officer, if authorized by the Board of Directors, can grant exemption from the strict application of contra trade
  • This relaxation is subject to the condition that it does not violate any other provisions of the PIT Regulations

Designated Persons and Promoter Group:

SEBI reiterated provided as to who would be qualified to be a “designated person” under the PIT Regulations[1]. SEBI stated that all promoters of a listed company are automatically considered designated persons

Other members of the promoter group are included if they have access to Unpublished Price Sensitive Information (UPSI).  

Conclusion:

Contra trade applicability and the delineation of designated persons constitute particularly challenging areas within the PIT Regulations, often requiring recourse to SEBI for formal clarification. This informal guidance should significantly enhance industry comprehension and promote a more standardized approach to these critical considerations

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[1] Reg 9(4)(iii) of PIT Regulations read with FAQ no. 51 of SEBI PIT

[2] FAQ no. 45 of comprehensive FAQ on PIT

[3] Clause 3 read with clause 10 of PIT Regulations read with FAQ no. 42.

[4] Clause 10 schdule B of PIT Regulations

[5] Reg 9(4)(iii) of PIT Regulations read with FAQ no. 51 of SEBI PIT

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