SEBI INFORMAL GUIDANCE – COMPLIANCE OFFICER TO MONITOR TRADING OF DESIGNATED PERSONS IN ALL KINDS OF SECURITIES – Eshwars
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SEBI INFORMAL GUIDANCE – COMPLIANCE OFFICER TO MONITOR TRADING OF DESIGNATED PERSONS IN ALL KINDS OF SECURITIES

Authored by Aishwarya Lakshmi VM

Applicant: KP Capital Advisors Pvt. Ltd. Date of the guidance: 19.08.2020

Factual Background

 (i) The Applicant is a Category I Merchant Banker and thus an ‘Intermediary’ within S.12 of the SEBI Act, 1992.

(ii) Under the Applicant’s Code of Conduct pursuant to the SEBI (Prohibition of Insider Trading) Regulations, 2015, the compliance officer maintains a ‘Restricted List’ containing companies who are their clients.

(iii) The employees and designated persons of Applicant can trade in the ‘Restricted List’ companies, only as per its Code of Conduct and the PIT Regulations.

Guidance sought

1. Can trades in scrips other than in the `Restricted List’ be outside the purview of PIT Regulations?

2. Can Compliance Officer share the ‘Restricted List’ with Designated persons, so that they can know the scrips that they can trade?

Provisions Involved

 Regulations 9(1) of SEBI (Prohibition of Insider Trading) Regulations, 2015[1] (“PIT 2015’) read with Clause 5 of Schedule C[2] of PIT 2015.

Informal Guidance by SEBI

1. Interpreting the provisions involved, SEBI in its informal guidance stated that the Compliance Officer is bound to monitor trading of Designated Persons in all kinds of securities. Such trading is subject to the pre-clearance by the Compliance Officer(s) above a certain value threshold as decided by the board / head of the organization of the intermediary.

2. With respect to sharing of the list, SEBI on a reading of clause 5 of Schedule C, stated that sharing the restricted list with the designated persons would undermine the requirement of maintaining confidentiality of restricted list as stipulated in PIT Regulations, as it is to be maintained by the Compliance Officer on a confidential basis for approving / rejecting applications made for pre-clearance of trade.

The letter of SEBI can be read at: https://www.sebi.gov.in/sebi_data/commondocs/aug-2020/IG%20Let%20by%20SEBI%20KP_p.PDF

As per the Informal Guidance [Scheme] 2003 of SEBI, the guidance provided is applicable only to the Applicant, and is should not be construed as a conclusive decision or determination of any question of law or fact by SEBI, and is also not an Order u/S 15T of SEBI Act, 1992.

[1] Reg. 9(1), SEBI (PIT) Regulations, 2015: The  board  of  directors  of  every  listed  company  and the  board  of  directors  or head(s) of the organisation of every intermediary shall ensure that the chief executive officer or managing director shall formulate a code of conduct with their approval to regulate, monitor and  report  trading  by  its designated  persons  and  immediate  relatives  of  designated  persons towards achieving compliance with these regulations, adopting the minimum standards set out in Schedule B (in case of a listed company) and Schedule C (in case of an intermediary) to these regulations, without diluting the provisions of these regulations in any manner.

Explanation – For  the avoidance  of  doubt  it  is  clarified  that  intermediaries,  which  are  listed, would be required to formulate a code of conduct to regulate, monitor and report trading by their  designated  persons,  by  adopting  the  minimum  standards  set  out  in  Schedule  B  with  respect  to trading in their own securities and in Schedule C with respect to trading in other securities.

[2] Clause 5, Schedule C, SEBI (PIT) Regulations, 2015: The compliance officer shall confidentially maintain a list of such securities as a “restricted list” which shall be used as the basis for approving or rejecting applications for pre-clearance of trades.

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