Alerts & Updates

SEBI Update | System Driven Disclosures

Corporate & Commercial | May 31, 2018

A. Background

1. What is a system driven disclosure?: SEBI vide a circular dated December 1, 2015 (“Original SEBI Circular”) (available here) proposed system driven disclosures relating to acquisition, sale and pledge of securities and voting rights under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Code”) and the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“Insider Trading Regulations”).

As per the aforesaid regulations, certain disclosures were being made by the acquirer to the listed company and the stock exchanges. SEBI had made such a proposal that Stock Exchanges, Depositories and Registrar and Share Transfer Agents could make such disclosures, on the basis of systemic data maintained by them.

This proposal had been made by SEBI to take advantage of the advanced data systems and technologies adopted by the Stock Exchanges, Depositories and Registrar and Share Transfer Agents and to ensure further transparency with respect to the aforementioned disclosures.

2. Previous steps: In the Original SEBI Circular, SEBI proposed to introduce the system driven disclosures in phases. Further, SEBI decided to streamline the procedures for the system driven disclosures vide SEBI circular dated December 21, 2016 (available here).

3. Recent Circular: In furtherance of this objective, SEBI vide circular dated May 28, 2018 (“May Circular”) (available here), has proposed to implement the next phase of the system-driven disclosures, as mentioned in the Original SEBI Circular. The system driven disclosures would continue to run in parallel with the existing system of disclosure obligations by the acquirers under the Takeover Code and Insider Trading Regulations.

B. System-driven Disclosures under Takeover Code

1. Disclosures in this phase: SEBI, through the May Circular proposes to implement the following disclosures by non-promoters under the Takeover Code:

a. Disclosure with respect to any acquisition of shares or voting rights, if such acquisition by the acquirer, along with people acting in concert, exceeds an aggregate of 5% of the shares of the target company (Refer to Regulation 29(1) of the Takeover Code); and

b. Subsequent to any person’s shareholding or voting rights, along with people acting in concert, exceeding 5% of the shares or voting rights of the target company, disclosure of any change in the shareholding or voting rights, if such change exceeds 2% of the shares or voting rights (Refer to Regulation 29(2) of the Takeover Code).

2. Certain pledges exempted: Regulation 29(4) of the Takeover Code states that a pledge of shares shall be treated as an acquisition under the Regulation 29 of the Takeover Code. However, pledges created in favour of commercial banks or public financial institutions are exempted from these system driven disclosures, irrespective of whether the pledge is created for securing indebtedness in the ordinary course or otherwise.

3. Procedure: The procedure for implementation of the aforementioned Takeover Code disclosures, are as follows:

a. The formats for sharing data shall be standardized by the depositories and the exchanges.
b. The depositories shall tag scheduled commercial banks and public financial institutions in their systems for excluding pledges in their favour from the disclosure requirements.
c. The depositories shall share data with each other everyday, pertaining to non-promoter shareholders holding more than 2% in a listed company.
d. Depositories to provide details of non-promoters having a combined shareholding of more than 5% in the company, daily.
e. Stock exchanges shall identify and disseminate on their website the data required to be disclosed as per the Takeover Code.
f. Entities shall communicate any discrepancy with respect to disclosures to the respective stock exchange and resolve the same in coordination with them.
Note: The reference to “Entities” here appears to be to the listed companies whose data is being disclosed.

C. Disclosures under Insider Trading Regulations

1. Disclosures in this phase: SEBI, through the May Circular, proposes to implement system driven disclosures regarding acquisition or disposal of securities by directors and employees (including CEO and two levels below the CEO), if such transaction or series of transactions over a quarter of a year exceeds the prescribed threshold (Refer to Regulation 7(2) of Insider Trading Regulations). The acquirer/ seller is required to make such disclosures to the target company within 2 trading days, and the target is required to make an onward disclosure to the stock exchanges within 2 trading days of receipt of such disclosure or of becoming aware of such transaction.

Note: Please note that while Regulation 7(2) mandates disclosure requirements for every employee of a listed company, the system driven disclosures in this phase would only cover the CEO and employees two levels below the CEO.

2. Procedure: The procedures for implementation of the Insider Trading disclosures, are as follows:

a. The formats for sharing data shall be standardized by the depositories and the exchanges.
b. First, a database of the existing holdings at ISIN level of all the directors and specified employees of each listed company.
c. The listed company will provide to the depositories, authenticated information about the directors and employees, along with the PAN of the entity, within 15 days from the date of the May Circular entity. The account numbers shall be provided in case of PAN-exempt entities.
d. The depositories will tag demat accounts at ISIN level based on PAN/account numbers.
e. Information regarding change in directors/ employees of the listed company shall be submitted not later than 2 working days from such change.
f. The listed company shall select a depository, as its designated depository for these disclosures. The designated depository shall, with respect to identified directors/ employees of a listed entity, aggregate its data with data received from the other depository for the same entity.
g. The relevant data as required by the Insider Trading Regulations shall be identified by the designated depository and sent to the respective stock exchange, daily.
h. Entities shall communicate any discrepancy with respect to the disclosures to the respective stock exchanges and resolve the same in coordination with them.
Note: The reference to “Entities” here appears to be to the listed companies whose data is being disclosed.

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