IMPACT OF COVID-19 ON INSIDERS
The pandemic Coronavirus (“COVID-19”) has caused global economic disruptions predominantly for the months to come, perhaps years. While the economies are dwindling into recession, the COVID-19 has further caused multitudinous compliance challenges for the professionals across the globe.
From mid-March 2020, the Indian masses were promptly working from home. In late March 2020, the Securities and Exchange Board of India (“SEBI”) and the Ministry of Corporate Affairs (“MCA”) issued circulars granting abundant relaxations and exemptions for the ease of doing business and ensuring convenience of compliances by the Indian Entities.
While SEBI has been generous to grant an extension to file financials results inter-alia other compliance reports, MCA has sanctioned conducting virtual Board Meetings as well as General Meeting until June 30, 2020.
In light of the relaxations were being granted, SEBI had received numerous requests seeking relaxation with respect to the trading restriction period applicable pursuant to Clause 4 of Schedule B of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”). According to the applicable provisions, the trading restriction period is applicable from the end of every quarter until 48 hours after the declaration of financial results.
However, BSE Limited (“the Exchange”) vide it's circular dated March 31, 2020, stated that SEBI has informed the Exchange that the requests seeking relaxation on the applicability of trading restriction period with regard to financial results for the quarter and financial year ending March 31, 2020, have not been acceded to.[1]
The disaccord was widely debated by industry experts. The following could be the possible reasons for not granting any relaxation under the PIT Regulations:
1. Access to Unpublished Price Sensitive Information (“UPSI”)
The Directors, Promoters, Key Managerial Personnel and Senior Management of a Company are ‘Designated Persons’ under the PIT Regulations. They are presumed to have access to UPSI. Accordingly, they are presumed to have knowledge about the key performance metrics, such as financial projections, business disruptions, material contracts, governance responses, etc., and the impact of the outbreak of COVID-19 in the upcoming months. Access to such UPSI allows the Insider to foresee underperformances and plan their trading decisions efficiently.
On the other hand, the general investors are only informed of the shut down of business operations due to the national lockdown. The Insiders have fathomable access to UPSI as compared to the general investors.
Further, the situation on all sides of COVID-19 is still quite volatile. The Central and State Governments are in talks to extend the national lockdown. If the lockdown continues, it will not only cause additional compliance challenges but will also raise questions with respect to the going concern of the business.
During this period of uncertainty, the undue advantage of asymmetry of information cannot be permitted to the Insiders.
2. Increase in controlling stake
As the situation around the COVID-19 is dynamic and incalculable, it has distorted the trust of the investors in the financial markets. Such distortion is continuing to lead to a steep fall in the share prices across the market.
With such low prices, insider (primarily Promoters), can use this opportunity to increase their shareholding in the Company. Bloomberg Quint reported significant increases in the promoter stake of various top-notch Companies in March 2020. [2]
If insiders are permitted to increase their stockpile, it will not only allow potential misuse of their control for a long period of time but also a ludicrous exit. However, as the shut period is now implemented, such intemperate purchases by the Insiders are averted.
3. Preventive regulation
At the end of the day, PIT Regulations is essentially preventive in nature. PIT Regulations were introduced in the year 1992. However, in the wake of the scams in the early 2000s, SEBI had revamped the major pieces of the Regulations in 2015.
Our age-old saying of ‘prevention is better than cure’ holds true when it comes to compliances with respect to insider trading. While there may be genuine and obedient insiders in the market, the regulatory cannot trivialize the risk of potential scams and harm to the financial investors.
Insider trading is a strict liability offence. When a person who has traded in securities while in possession of UPSI, the trades would be presumed to have been motivated by the knowledge and awareness of such UPSI. The accused must then prove this innocence to SEBI why the trade should not be seen under the shadow of insider trading. In recent times, SEBI has also stepped up enforcement and investigations under the PIT Regulations. No stone is left unturned. From phone tapping to surveillance of personal social media accounts, SEBI examines all mediums of communication by a person.
In view of the foregoing, the trading restrictions have more blessings to count than drawbacks. The Companies who wish to step out of the trading restrictions can publish their financial results before June 30, 2020, and open their trading window after 48 hours of the declaration of results.
[1] BSE Limited circular LIST/COMP/71/2019–20 on Clarification Related to Trading Window Closure dated March 31, 2020 (https://www.bseindia.com/corporates/Displaydata.aspx?Id=e149deab-edf0-4c95-9336-2d3eb35f2ac3&Page=cir)
[2] Bloomberg Quint’s article on Promoters Go Shopping for Shares as Markets Tumble dated March 27, 2020
(https://www.bloombergquint.com/markets/promoters-go-shopping-for-shares-as-markets-tumble)
