Securities Lending and Borrowing transactions by insiders to attract insider trading norms

Securities and Exchange Board of India (SEBI) has issued informal guidance to HDFC Securities Limited with respect to whether transactions of lending and borrowing done under Securities Lending and Borrowing Scheme (SLBS) fall within the definition of trading/trade under SEBI (Prohibition of Insider Trading) (PIT) Regulations, 2015.

       Facts of the case are as follows:

·      HDFC Securities Limited (HSL) is registered stock broker with SEBI and trading member  with BSE and NSE

·    It is also registered with AMFI as distributor of Mutual Funds and Corporate agent of Insurance registered with IRDA

·      Selected senior employees (designated persons) of few companies are allotted shares under   ESOP

·   These senior employees may be considered as insider and may  possess unpublished price sensitive information (UPSI) of their company whose shares they intend to lend in SLB

·    As per Section 47(xv) of the Income Tax Act, transactions done under SLB  shall not be regarded as transfer under Section 45 as ownership of the securities remains with the lender and does not get transferred to borrower

Query: Whether SEBI (PIT) Regulations 2015 are applicable to SLB transactions where senior employees of the companies lend shares who are in possession of unpublished price sensitive information (UPSI)? ?

Reply by SEBI:

•  SLB mechanism is temporary  lending and borrowing of securities in the form of contracts which  are traded on an automated screen based order matching platform
•  The title of the securities vests with the lender during the lending period
• Borrower is entitled to deal with or dispose of the securities as per the SLB Contract  and is also required to return the securities at the end of the contract

•      Regulation 4(1) of SEBI (PIT) Regulations, 2015:

No insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information:

Provided that the insider may prove his innocence by demonstrating the circumstances

•  Regulation 2(L) of SEBI (PIT) Regulations, 2015:

"trading" means and includes subscribing, buying, selling, dealing, or agreeing to subscribe,  buy,sell, deal in any securities, and "trade" shall be construed accordingly

NOTE: Under the parliamentary mandate, since the Section 12A (e) and Section 15G of the Act employs the term 'dealing in securities', it is intended to widely define the term “trading” to include dealing. Such a construction is intended to curb the activities based on unpublished price sensitive information which are strictly not buying, selling or subscribing, such as pledging etc. when in possession of unpublished price sensitive information

• Hence, transaction of borrowing and lending done under SLB constitute trade such transaction by employees of companies who are in possession of UPSI would hence attract PIT regulations.