Mumbai: The Securities and Exchange Board of India (Sebi) on Wednesday toughened the rules against insider trading, made it easier for companies to delist from stock exchanges and said it would review the regulations to deal with so-called wilful defaulters after public consultations. The capital market regulator also converted listing agreement guidelines into regulations to enhance enforcement of the rules. Following a board meeting, Sebi said insider trading norms were being overhauled after a 20-year gap, following recommendations made by a committee led by N.K. Sodhi, former chief justice of the Karnataka and Kerala high courts and former presiding officer of the Securities Appellate Tribunal. In an effort to make the rules tighter, Sebi widened the definition of an insider. “The definition will now include persons connected on the basis of being in any contractual, fiduciary or employment relationship that allows such person access to unpublished price sensitive information (UPSI),” said Sebi. Directors, employees and all others that fall under the existing definition would continue to be covered as well. The definition of UPSI has also been strengthened, said Sebi, adding that such information can pertain to the company as well as its securities. An insider can be a person who is in possession or has access to UPSI; his or her immediate relatives will be presumed to be “connected persons”, said Sebi. Under previous regulations, the definition of a connected person was largely based on his or her position in a company. Sebi added the onus of establishing that a connected person was not in possession of UPSI would lie with the person. “Decision of widening the scope of definition for an insider is a masterstroke. For instance, the onus will now be on accused to prove his or her innocence which increases the level of scrutiny by the regulator,” said Ramesh Vaidyanathan, founder and managing partner at Advaya Legal, a Mumbai-based law firm. “On the other hand, it may lead to unnecessary harassment of people known to the insider who may not be aware or involved in the insider trading transactions,” he added. Conspicuous by its absence in the new rules was a recommendation by the Sodhi committee to include public servants in the category of connected persons. The committee had recommended that connected persons should explicitly include public servants who handle UPSI relating to listed firms. Sebi’s statement made no mention of this. To ensure that investors’ interest is protected, Sebi has now asked companies to disclose UPSI at least two days prior to trading if such an information is ultimately permitted for communication to the public. This can potentially impact large equity transactions, including private equity (PE) deals. But two PE executives, who spoke on condition of anonymity because they are yet to read the fineprint of the new regulations, said this would not prove to be a large hindrance and was in line with global practices. For legitimate business deals, UPSI can be communicated with safeguards, Sebi said. Every insider with access to price-sensitive information through the year will now have the option of formulating pre-scheduled trading plans. Such trading plans, however, have to be disclosed on the stock exchanges and have to be strictly adhered to, said the market regulator. Separately, Sebi approved a proposal to review policies for restricting an issuer company and its promoters/directors, declared as wilful defaulters, from raising capital. A decision on this move will be taken after a public consultation process. Wilful defaulters are those who don’t pay back bank loans although they have the ability to do so. A company declared as a wilful defaulter is denied access to bank funds, but can still raise money from the markets. Delisting norms The market regulator approved a revamp of its delisting guidelines following a discussion paper that was released on 9 May. The new guidelines are intended to make it quicker and easier for companies to delist from the exchanges. Delisting means the permanent removal of securities of a listed company from a stock exchange. In its discussion paper, Sebi had questioned whether the current book-building process was leading to genuine price discovery at the time of delisting. Revising its norms, Sebi said that a firm wanting to delist has to ensure that its promoter shareholding reaches at least 90% after acquiring shares from the public, or if at least 25% of the number of public shareholders tender in the reverse book-building process. Book building is a process used by companies for raising capital through public offerings—both initial public offerings or follow-on public offers to aid price and demand discovery. It is a mechanism where, during the period for which the book for the offer is open, the bids are collected from investors at various prices, which are within the price band specified by the issuer. The issue price is determined after the bid closure based on the demand generated in the process. For voluntary delisting by a promoter or acquirer, the process of reverse book building is used by the company. In this, shareholders willing to tender their shares place their offers on the online electronic system with the bidding form. The final offer price is determined as the price at which the maximum number of shares has been offered.? Under current norms, a majority of public shareholder have to approve the delisting and at least 50% of public shareholders must tender their shares in the reverse book-building process. The offer price to the public in the reverse book-building process will be the price at which the shareholding of the promoter (after including the public shareholders who have tendered their shares), reaches the threshold limit of 90%, said Sebi. At present, the exit price for voluntary delisting is set via the book-building process. The offer price has a floor price, which is the average of 26 weeks’ traded price quoted on the stock exchange where the shares of the firm are most frequently traded. The promoter/promoter group shall be prohibited from making a delisting offer if any entity belonging to the group has sold shares of the firm during six months prior to the date of the board meeting that approves the delisting proposal, said Sebi. In order to ensure that the stocks of the firm willing to delist are safeguarded from manipulation, the market regulator reduced the delisting timeline from 117 working days to 76 working days. “Reducing the time will reduce the uncertainty both for the company and its investors as dragging the de-listing process for long can be counter-productive,” said Harish H.V., a partner at Grant Thornton’s Indian unit. In its discussion paper, Sebi had said that in case of successful delisting offers, a few market participants were concerned that the success of the offer may have been due to a tacit understanding between promoter(s) and a set of investors. Similarly, when any delisting offer failed, some participants raised concerns that the discovered price through the reverse book-building process had been unduly influenced by a set of investors who were mainly speculators. “In 1990s and early 2000s, the delisting procedure was in favour of the companies, but later it swung more in favour of the shareholders. With the decision to relax norms around the tendering process for delisting, Sebi has struck a fine balance between the needs of the company and those of shareholders,” said Avinash Gupta, managing director at Alpen Capital, an investment bank. Gupta said that with the relaxation in the tendering process, a lot more firms that think they are undervalued on the exchanges will considering delisting now. Over the past few years, increasing misuse of the delisting process, either for unfair gains by certain entities or to facilitate an easy exit for promoters, has occupied Sebi’s attention. Sebi’s paper said market participants had raised the concern that the acquirers are finding ways to side-step regulatory norms. However, Sebi exempted companies with paid-up capital of up to Rs.10 crore and net worth of less than Rs.25 crore from following the reverse book-building process to delist their shares if there was no trading in the shares during a one-year period prior to the date of the board approving a delisting. This move will ensure that smaller listed firms whose shares are thinly traded or have low liquidity get to exit stock exchanges with minimal cost and effort. The regulator said if the promoter holding goes beyond 90% in a listed firm due to an open offer after a takeover, the delisting process will be automatically triggered. If the delisting attempt fails, the acquirer would be required to complete the mandatory open offer process and pay an annualized interest of 10% for the delayed open offer. In another key move, Sebi converted the listing agreements into regulations, naming them Sebi (Listing Obligations and Disclosure Requirements) Regulations, 2014. Such a move will enhance Sebi’s scope for enforcing the norms on listed firms and also curb violations. Under the new listing regulations, company filings on stock exchanges through the electronic platform will be compulsory. It will be mandatory to appoint the company secretary as the compliance officer for adhering to listing norms. Separately, Sebi approved a proposal to allow asset management companies (AMCs) with a net worth of less than Rs.50 crore to launch only up to two schemes a year till such time as the AMCs meet net-worth requirements. Sebi will allow an AMC to do so only if it proves it made efforts to meet the net worth requirements within the permissible timelines. Earlier this year, Sebi gave AMCs three years to comply with the Rs.50 crore net-worth requirement.