Is SEBI helping markets enjoy freedom responsibly?
Business, more than any other human activity, gives free rein to creative and ‘animal’ spirits. Often, it may lead to exuberant, even irresponsible behavior. In the past, great fortunes could only be built by buccaneers and pirates. The idea that one could make money without looting has come in only recently. The joint stock company created the possibility of small shareholders becoming wealthy. However, promoters and market operators with inside information were able to make significant gains at the expense of small shareholders as the first Harshad Mehta scam showed, and subsequent similar activities continued in small or big measure.
To temper the ‘animal’ spirits of market participants, SEBI is rigorously implementing the Prohibition of Insider Trading (PIT) Regulations, 2015, and its requirement to create a Structured Digital Database (SDD). SEBI is the world’s first regulator to ask for such a mechanism. While SEBI issued the PIT regulations in 2018, and the SDD was made mandatory on April 1, 2019, the regulator started checking seriously on compliance, only 8 months back. Only now, therefore, is business beginning to feel the conflict between freedom and responsibility.
Promoters, who approach the market for funds to realise their business dreams, can be un-mindful or simply unaware of the responsibility for both information disclosure, and non-disclosure, as a part of their fund-raising freedom. PIT Regulations are to do with non-disclosure and non-trading when promoters and senior company officers possess UPSI (Unpublished Price Sensitive Information). Each listed entity must create an SDD, host UPSI details in it to track its movement, till it is disclosed to the market or closed because it is not being realized, while preventing trading by Designated and Connected Persons (DPs and CPs) who possess UPSI during that period.
Three examples of what can be considered UPSI. One, a big order that could increase the company’s revenues by more than say 15% for the next 2-3 years. Before the deal is closed, this sensitive information could positively influence the company’s share price and is called UPSI. Two, a lawsuit lost in a lucrative export market could threaten sales generation there and, if known to the stock market, could depress the share price. Three, a patent that has received provisional approval, or for which the earlier provided provisional approval is withdrawn.
Though SEBI has mandated listed entities to create an SDD, many companies still haven’t done it. The company’s Designated Persons (DPs) neither enter the UPSI they possess nor stop trading in the company’s shares while in possession of UPSI. This non-compliant conduct is largely the outcome of a perception conflict between personal freedom and required responsibility.
Freedom concerns raising and investing money (including trading in the company’s shares), as insiders please, while responsibility concerns their duties to their investors. The regulation seeks to curtail the freedom of trading, when in possession of UPSI, of promoters and other insiders, to implement the adage, “Responsibility is the price of freedom”.
From August 4, 2022, SEBI began asking listed entities to certify compliance with the SDD requirement, with a promise that whichever exchange the company’s paper is listed on, could come for inspection to confirm compliance, with a day’s notice. By now, over 1,000 companies have been inspected by NSE/BSE, with a significant number found non-compliant.
Axar Digital Services’ InsiderLens is the solution to ensure compliance with SDD, UPSI, and trading curtailment. As SEBI experiments with regulations to make business more ‘responsible’, or at least considerate of responsibilities to outside shareholders, InsiderLens guarantees the history of records for eight years, with date, time, and audit trails, as SEBI requires. Compliance becomes the foundation of good governance – taking responsibility to continue enjoying freedom.