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Tuesday, January 01, 2008

Insider Trading - SEBI proposes consultative paper


In order to curtail incidents of insider trading, capital market regulator SEBI on Tuesday floated a consultative paper, whereby insiders would not be able to buy and sell the company's securities within a period of six months. Insiders would have to surrender any profit made by buying and selling company securities in six months, according to SEBI's proposed regulations on Short Swing Profit.

The proposed regulation is based on a similar rule in the US, which requires 10% owners, directors and officers of a company to give up any profit realised from any purchase and sale, or any sale and purchase, of any equity security of the company within a six-month period.

According to SEBI, the regulation would help prevent company insiders, who have greater access to price sensitive company information, from taking advantage of information for the purpose of making short-term profits, called as short swing profit. Additionally, it would align the long term objectives of company insiders with the company shareholders.

SEBI has proposed the “Last In First Out” (LIFO) method for determining the six month period between buy and sell trades by company insiders.

The short swing rule would automatically get invoked once two things are established. First is the fact of being an insider or a designated insider. And second, the fact that the same securities were bought and sold within six months of each other.

The intent of the person would be immaterial. Merely the fact of the trade will be sufficient to take action. Where there is a delay, interest may be payable by such insider to the company.

SEBI has proposed certain exemptions, such as transactions approved by a regulatory authority, employee benefit plans, bona fide gifts and inheritances, mergers and acquisitions etc. Certain securities may also be considered as exempt altogether.

The regulator invited comments from the public on the consultative paper particularly with regard to coverage of persons in the definition of designated insider, method of calculating the dates of purchase and sale and classes of exemptions.