In a sharp criticism of regulator Sebi’s new insider trading norms, industry leader and Biocon chief Kiran Mazumdar Shaw today said these rules have “draconian intent” and will kill the ESOPs.
The new norms have replaced nearly two-decade old regulations and provide for strict penal action for illicit transactions in shares of listed firms by promoters, key management personnel, their relatives and all connected persons with prior access to the ‘insider information’.
“Sebi’s proposed Insider Trading policy will kill ESOPs. Hope practicality can replace draconian intent,” Shaw tweeted.
While Shaw called it a “proposed” policy, the new insider trading norms are already in force. Sebi notified these regulations in January this year and they came into effect on May 15.
While notifying the norms, Sebi said measures have been taken to ensure that genuine trades are not impacted, while greater clarity has been provided on concepts and definitions, along with a stronger legal and enforcement framework.
“The new rules on Insider Trading prohibiting an employee from buying and selling a share within a period of six months is draconian in intent,” Shaw told PTI.
Similar concerns have been raised in other quarters as well, although the 21-page regulations do not explicitly mention any such ban on share sales, including those allotted under Employee Stock Option Plans (ESOPs) which have been a key aspect of employee compensation at the companies.
However, there have been various cases where Sebi has found ESOP-related manipulation in the markets on the basis of insider information.
Expressing her concern in this regard, Shaw said, “Why should the ESOPs be prohibited from buying and selling shares within a period of six months? Imagine, the financial losses the employee may face if he or she is compelled to sell his holdings when the company’s scrip has tanked?”
The proposed rules under the policy has the touch of typical bureaucratic functioning, Shaw said. “These proposed rules have been framed by a babu sitting somewhere who do not understand the nuances of share market,” she added.
Under the new rules, no insider can trade in securities when in possession of unpublished price sensitive information, except for in a few cases.
These exceptions include the insider proving his innocence by demonstrating the circumstances that the transaction was an off-market inter-se transfer between promoters who were in possession of the same insider information, or when the trades have been executed as per a pre-determined trading plan.
The new norms allow that an insider can formulate a trading plan and present it to the compliance officer at the company for approval and public disclosure, pursuant to which trades may be carried out on his behalf in accordance with such plan.
However, such a plan can not entail commencement of trading on behalf of the insider earlier than six months from the public disclosure of the plan, among other restrictions.
Insider trading refers to sale or purchase of securities on the basis of access to unpublished price sensitive information and such practices provide unfair advantage to the entity who is privy to such details.
The issue has been attracting regulatory attention worldwide and rules are being revised globally as there have been loopholes that were being misused by the offenders to escape action.