SEBI has recently issued its opinion to SBICAPS (Querist), a registered merchant bank, under the SEBI (Informal Guidance) Scheme, 2003, on a query related to the applicability of restrictions under Clause 10 of the Code of Conduct of the SEBI (Prohibition of Insider Trading) Regulations, 2015, to the employees of the Querist. Clause 10 provides that no designated person (employees and connected persons to whom certain trading res t r i c t ions under the Regulations apply, including that of a registered intermediary) who is permitted to trade shall execute a contra trade (both buy and sell trades) within a period of six months. The Querist sought a clarification as to whether Clause 10 applied even in respect of trades undertaken in shares of companies with which the Querist is not connected in any manner or has no access to unpublished price sensitive information (UPSI) pertaining to such company.

SEBI noted that as per the Regulations the Querist maintained a restricted list, which included companies for whom the Querist was handling any assignments or was privy to any UPSI, and in respect of those companies neither the Querist nor its employees were allowed to trade.  Further, SEBI noted that in respect of those companies for which it had noassignments or UPSI, neither the Querist nor its employees would be considered as “insiders” or “connected persons” under the Regulations. SEBI clarified that the restriction against contra trade applied only with respect to those securities in which the designated persons are reasonably expected to have access to UPSI and such restriction is construed to be in respect of securities to which the UPSI pertains. Further, SEBI clarified that only if the Querist or its employees was a ‘connected person’ of a listed company under the Regulations, or was in possession of or had access to UPSI, the restriction under Clause 10 would be applicable.

The opinion issued by SEBI is correct as it is only logical that there ought to be no restrictions on a person or an entity, including a registered market intermediary, to trade in shares of a company with which it has had no connection or has no access to UPSI. That such a query was even raised by an intermediary does not speak well about the Regulations which was introduced in 2015 with the objective of simplifying the rules related to insider trading. It is apparent that the rules under the Regulations are anything but simple and clear.