Sebi has proposed to make ?insiders? surrender to companies their short-swing profits. It has defined short-swing profits as the ones made from trading in securities within a six-month period, using ?insider? knowledge. The move is aimed at creating a level-playing field for a company?s ordinary shareholders who would not have access to such inside information.
The proposed Sebi move is based on similar regulations prevalent in the US, which defines insiders as owners, directors and officers of a company with at least 10% stake.
They need to give up any profit realised (short-swing profit) from any such insider trading conducted in a six-month timeframe.
However, a senior Sebi source clarified that institutional investors, including mutual funds and foreign institutional investors, would not be considered beneficial owners of a company and would be out of the purview of the designated insider.
Insider trading has long been a bugbear of the domestic equity market and Sebi?s draft regulation will be a major step towards cleansing the system, bringing it on a par with global best practices.
The regulator has put the draft proposal on its website, inviting public comments until January 21. The proposal will then go to its board for a final decision. Once the board approves the proposal, regulations on short-swing profits will become a part of Sebi (insider trading) regulations.
Sebi said, insiders would automatically attract the short-swing rule as soon as two things are established.
First, the fact that one is an insider or a ?designated insider?. Second, the same securities have been bought and sold within six months. In such a scenario, the intent of a person shall be immaterial. Merely the fact that trading has taken place will be sufficient to make an insider return the profits. In case of any delay, an interest has to be paid.
The concept of a ?designated insider? may be considered for the purpose of surrendering of short-swing profits. This concept is intended to be narrower than the existing ones involving what constitutes a deemed insider. At the same time, it will expand the definition of an insider.
The Sebi proposal says, ?Such a regulation will check insiders, who have greater access to price sensitive company information, from taking advantage of information for the purpose of making short-term profits (short swing profits).?
Sebi says that insiders should have long-term investments in a company and are not expected to make rapid buy-sell transactions. The move is also intended to align the long-term objectives of company insiders with ordinary shareholders.