Skip to main content

Govt may amend law to let Sebi act against unlisted units

Govt may amend law to let Sebi act against unlisted units
Specific sections of the Companies Act may be tweaked to allow Sebi to enforce corporate governance norms on unlisted subsidiaries to protect investors’ interestThe government may soon vest the Securities and Exchange Board of India (Sebi) with powers to act against insider trading and forward dealing activities in unlisted units of a publicly traded entity.
Specific sections of the Companies Act may be amended to allow Sebi to enforce corporate governance norms on unlisted subsidiaries so that investors’ interest is protected, said Injeti Srinivas, secretary of ministry of corporate affairs (MCA).
“We have a meeting with Sebi in the next few days and we will work on this issue. Even if it involves unlisted companies, MCA is open to vacate the required areas in the Act for Sebi as long as it serves the common goal of improving corporate governance standards,” Srinivas said on the sidelines of a corporate governance summit organized by Confederation of Indian industry (CII) in Mumbai on Saturday.
The Companies Act empowers MCA to regulate or take penal action against any unlisted company or its board members for a breach of insider trading or forward dealing norms.Sebi can take action only if the company is traded publicly and its powers specified under section 458 and section 28 of the companies Act.
Addressing the summit, Uday Kotak, who chaired the 25-member corporate governance panel of Sebi, said many listed companies have several unlisted subsidiaries. “In many cases, the businesses of the subsidiaries account for 70-90% of the consolidated business of the related listed company. The listed company comes under the domain of Sebi and the unlisted ones come under MCA,” said Kotak.
“The money of the investor in the listed company moves across the entire consolidated group. The investor does not know what is happening with the money in the unlisted space below the listed company.”
Existing Sebi regulations, which came into force on 15 May 2015, allow the market regulator to take action against a connected person or a subsidiary of a listed entity for breaching insider trading norms. But Sebi rules are silent on unlisted subsidiaries. Therefore, if such a subsidiary is an unlisted entity or the connected person belongs to an unlisted entity, the case automatically falls under the Companies Act also, which results in ambiguities with regards to penal actions.
“Sebi’s existing norms on insider trading fairly covers all connected entities, irrespective of listed or unlisted subsidiaries. Hence, it makes sense to amend section 458 accordingly and delete the sections of the companies act that specifies regulations on insider trading,” said Sandeep Parekh, founder Finsec Law Advisors and a former executive director of Sebi. “For regulating insider trading activities and taking enforcement actions in any listed or unlisted entity, only Sebi’s norms should be followed as they are far more detailed.”
Under the Companies Act, insider trading is defined as an act of buying, selling or dealing in any securities of a company by its directors, key managerial persons or any other person or their agents on the basis of possessing a non-public price sensitive information about the company for illicit gains.
Any act of counselling about procuring or communicating any non-public price-sensitive information to any person is also termed as insider trading.For classifying an act as insider trading, Sebi regulation defines the term ‘insider’ differently and includes dealings by connected persons and immediate relatives of promoters, directors or key managerial persons who have access to unpublished price-sensitive information.
Also, under Sebi’s norms breaches in insider trading rules is only punishable with a monetary penalty.The Companies Act on the other hand allows MCA to impose a jail term of up to five years as well, if any person violates insider trading norms.
The Companies Act says dealings involving a communication required in the ordinary course of business will not amount to insider trading.Sebi norms exempt legitimate dealings as well as off-market transactions between promoters who were in possession of the same unpublished price-sensitive information (UPSI) if both the parties had made a conscious trade decision.
Sebi also exempts trades between any other individuals (even while possessing UPSI) from insider trading if such individuals are not the ones who took trading decisions. In such cases, decision-making individuals should not be in possession of UPSI when they took the decision to trade.
The lack of correlation between the Companies Act and Sebi norms in this area makes it difficult to enforce action on defaulters either by Sebi or by MCA. For instance, an entity may be found as guilty under the companies Act but innocent under Sebi’s norms. Also, Sebi merely has the power to enforce penal actions as per the Companies Act and not regulate them. Once section 458 is amended, only Sebi’s insider trading norms and punitive actions will be applicable on insiders in unlisted entities if they are subsidiaries of any listed firm.
Similarly, section 458 of the Act currently empowers MCA to regulate and take action for dealings in forward contracts in any Indian company. In this area too, Sebi’s powers are restricted to the listed space.
The Companies Act prohibits any director or key managerial personnel (KMP) of a company from entering into any put or call option in the securities of the company or its associates.
This is because such individuals may have access to privileged price-sensitive information about the company, which can be misused while dealing with forward contracts in order to reap undue gains at a future date.The Act, however, does not prohibit the relatives or associated entities of directors and KMPs from dealing in forward contracts.
Except for hedging investment risks in cases of takeovers, mergers and acquisitions in the listed space, the Securities Contracts Regulations of Sebi prohibit companies, promoters and directors from entering into any type of put or call options.
The Mint, New Delhi, 13th November 2017

Comments

Popular posts from this blog

Budget: Startup sector gets new Fund of Funds, FM to allocate Rs 10K cr

  The Indian startup sector received a boost with Finance Minister Nirmala Sitharaman announcing the establishment of a new fund of funds (FoF) in the Budget 2025. The minister unveiled a fresh FoF with an expanded scope, allocating Rs 10,000 crore. The initial fund of funds announced by the government with an investment of Rs 10,000 crore successfully catalysed commitments worth Rs 91,000 crore, the minister said.   “The renewal of the Rs 10,000 crore commitment to the Fund of Funds for alternative investment funds (AIFs) is a significant step forward for the Indian startup and investment ecosystem. The initial Rs 10,000 crore commitment catalysed Rs 91,000 crore in investments, and I fully expect this fresh infusion to attract an additional Rs 1 lakh to Rs 1.5 lakh crore in capital,” said Anirudh Damani, managing partner, Artha Venture Funds.   Damani further added that this initiative will provide much-needed growth capital to early-stage startups, further strengthenin...

After RBI rate cut, check latest home loan interest rates of top banks for loans above Rs 75 lakh

  The Reserve Bank of India (RBI) has reduced the repo rate by 25 basis points from 6.50% to 6.25% in its monetary policy review as announced on February 7, 2025. After the RBI repo rate cut, banks such as SBI, Canara Bank, PNB, and Union Bank among others have cut their repo linked lending rates. Most other banks are also expected to cut their lending rates in line with the RBI rate cut. After banks cut their lending rates, their home loan borrowers will have to pay less interest. Normally, when a lender cuts the lending rate, borrowers get two options: Either to go for a reduction in EMIs or reduce the tenure of the loan. The second option will help the borrowers clear their home loan outstanding faster. In case, the borrower goes for reduction in EMI then the lower lending rate of the lender would mean lower Equated Monthly Installment (EMI) for borrowers.   EMI is the amount you will pay on a specific date each month till the loan is repaid in full.A repo rate-linked home ...

GST collections rise 9.9% to exceed Rs 1.96 trillion in March 2025

  Gross GST collection in March grew 9.9 per cent to over Rs 1.96 lakh crore, government data showed on Tuesday. GST revenue from domestic transactions rose 8.8 per cent to Rs 1.49 lakh crore, while revenue from imported goods was higher 13.56 per cent to Rs 46,919 crore. Total refunds during March rose 41 per cent to Rs 19,615 crore. After adjusting refunds, net GST revenue stood at over Rs 1.76 lakh crore in March 2025, a 7.3 per cent growth over the year-ago period.       - Business Standard 02 th March, 2025