In a recent interpretative letter issued to Kirloskar Chillers Private Limited under the informal guidance scheme, SEBI clarified the extent of the powers granted to a compliance officer appointed under the Insider Trading Regulations, 2015.
The Insider Trading Regulations mandates that every listed company and market intermediary must formulate a code of conduct (to regulate, monitor and report trading by its employees and other connected persons) and must appoint a compliance officer who will be tasked with administering the code of conduct and other requirements under the Insider Trading Regulations. Under the code of conduct, one of the functions of a compliance officer is to grant pre-clearance for any trades by designated persons which are above a set monetary threshold as decided by the company in question.
In the facts of the Kirloskar case, while considering an application made by a promoter seeking pre-clearance, the compliance officer rejected the application on the grounds that “there was already approved pre-clearance in place for promoters and there is no balance number of shares available for trade”. It is pertinent to note that neither the Insider Trading Regulations nor the code of conduct prescribe a limit on the number of shares available for trade or on the number of transactions for which pre-clearance may be granted. Hence, an interpretative letter was sought from SEBI as the grounds for refusal were extraneous to the provisions of Insider Trading Regulations.
SEBI, in its interpretative letter, stated that a compliance officer may approve or reject a pre-clearance request after necessary assessment as per the Insider Trading Regulations and the code of conduct. It was further clarified that any actions of a compliance officer must be to ensure compliance with the letter and spirit of the Insider Trading Regulations and not for any ulterior motives. Therefore, an application seeking pre-clearance may be rejected where the compliance officer believes that the trade would be in violation of the Insider Trading Regulations, say when it is possible for the applicant to have had access to unpublished price sensitive information. Although the interpretative letter merely clarifies what is already stated in the Insider Trading Regulations, such clarification was clearly necessary to ensure that compliance officers do not overstep their bounds.
Disclosure: Finsec Law Advisors is representing Kirloskar Chillers Private Limited.