SEBI decides to cut some slack over stringent insider trading rules amid COVID-19 condition to make it easier for companies to raise capital from the market. However, the regulator has also instructed the companies to maintain a structured record regarding all unpublished price information and details of people who have access to it.
The decision came after the board of directors met on June 25 via a video conference. The SEBI board agreed to amend the current Prohibition of Insider Trading Regulations and add some relaxations amid ongoing economic lockdown situation.
Insider trading is one of the most controversial areas in the capital market. It is considered illegal since it allows special privileges to particular inside investors who have access to undisclosed price information, allowing them to avert losses in many cases. In 2015, SEBI enacted the Prohibition of Insider Trading Regulations and since then has penalised several organisations on various counts of violation.
SEBI’s changes to insider trading prohibition rules proposed a special pricing methodology for preferential issuance of stocks. It suggests that share allotment will be based on a volume weighted average price (VWAP), considering weekly highs and lows for twelve weeks or two weeks, whichever is lower. Also, receivers of these securities will have to hold those for three years.
The existing pricing formula for insider trading will remain in place, and current investors can choose to stick to it or shift to the new policy, which will become effective from July 1 and stay valid still December 31.
Apart from pricing methodologies, insider trading prohibition rules amendments by SEBI also laid down a code of conduct for the organisations to follow, which include,
1. Maintaining a structured record of each person privy of undisclosed price information
2. Automating the process of filing disclosure with exchanges
3. These deals will take place outside the trading window prescribed by SEBI
4. Entities required to file for non-compliance of Code of Conduct with stock exchanges and disclose any amount collected for non-compliance
5. Any amount collected for non-compliance will be credited to Investor Protection Education Fund under SEBI
Market reaction to the new amendment proposal by SEBI
Under the new change, promoters are given relaxation if they subscribe to shares under preferential allotment mechanism. This will increase the number of promoter shareholding in companies. SEBI has also allowed the acquisition of bulk or block deals through stock exchange settlement process.
The news received a positive response from the market, which hailed it as much-awaited change. In reacting to the news Bhavin Shah, Partner and Leader Financial Services Tax, PwC India said, “Much awaited change in pricing guidelines will cheer promoters as well as investors. Many deals were stuck on pricing misalignment between regulatory minimum and current market conditions.”
Experts believe this leniency from SEBI will promote more transactions and improve liquidity in the capital market.