Mumbai, November 13, 2017

Specific sections of the Companies Act may be tweaked to allow Sebi to enforce corporate governance norms on unlisted subsidiaries to protect investors’ interest

The government may soon vest the Securities and Exchange Board of India (Sebi) with powers to act against insider trading and forward dealing activities in unlisted units of a publicly traded entity.

Specific sections of the Companies Act may be amended to allow Sebi to enforce corporate governance norms on unlisted subsidiaries so that investors’ interest is protected, said Injeti Srinivas, secretary of ministry of corporate affairs (MCA).

“We have a meeting with Sebi in the next few days and we will work on this issue. Even if it involves unlisted companies, MCA is open to vacate the required areas in the Act for Sebi as long as it serves the common goal of improving corporate governance standards,” Srinivas said on the sidelines of a corporate governance summit organized by Confederation of Indian industry (CII) in Mumbai on Saturday.

The Companies Act empowers MCA to regulate or take penal action against any unlisted company or its board members for a breach of insider trading or forward dealing norms.

Sebi can take action only if the company is traded publicly and its powers specified under section 458 and section 28 of the companies Act.

Addressing the summit, Uday Kotak, who chaired the 25-member corporate governance panel of Sebi, said many listed companies have several unlisted subsidiaries. “In many cases, the businesses of the subsidiaries account for 70-90% of the consolidated business of the related listed company. The listed company comes under the domain of Sebi and the unlisted ones come under MCA,” said Kotak.

“The money of the investor in the listed company moves across the entire consolidated group. The investor does not know what is happening with the money in the unlisted space below the listed company.”

Existing Sebi regulations, which came into force on 15 May 2015, allow the market regulator to take action against a connected person or a subsidiary of a listed entity for breaching insider trading norms. But Sebi rules are silent on unlisted subsidiaries. Therefore, if such a subsidiary is an unlisted entity or the connected person belongs to an unlisted entity, the case automatically falls under the Companies Act also, which results in ambiguities with regards to penal actions.

“Sebi’s existing norms on insider trading fairly covers all connected entities, irrespective of listed or unlisted subsidiaries. Hence, it makes sense to amend section 458 accordingly and delete the sections of the companies act that specifies regulations on insider trading,” said Sandeep Parekh, founder Finsec Law Advisors and a former executive director of Sebi. “For regulating insider trading activities and taking enforcement actions in any listed or unlisted entity, only Sebi’s norms should be followed as they are far more detailed.”

Under the Companies Act, insider trading is defined as an act of buying, selling or dealing in any securities of a company by its directors, key managerial persons or any other person or their agents on the basis of possessing a non-public price sensitive information about the company for illicit gains.

Any act of counselling about procuring or communicating any non-public price-sensitive information to any person is also termed as insider trading.

For classifying an act as insider trading, Sebi regulation defines the term ‘insider’ differently and includes dealings by connected persons and immediate relatives of promoters, directors or key managerial persons who have access to unpublished price-sensitive information.

Also, under Sebi’s norms breaches in insider trading rules is only punishable with a monetary penalty.