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November 28, 2011 Trading Window Closure: Contingencies Clarified! Introduction The Securities Appellate Tribunal (“SAT”) in its decision dated October 19, 2011 in the matter of Hindustan Dorr Oliver Limited & Ors. (“Appellant”) v/s. Securities and Exchange Board of India (“Respondent” or “SEBI”) ruling in favour of the Appellants held that the execution of new projects for a third party in the ordinary and regular course of business does not trigger compliance under the provisions of Clauses 1.2, 3.2.1 and 3.2.3 (d) of the Model Code of Conduct (“Code”) provided under Regulation 12(1) of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 (“Regulations”), which mandates closure of the trading window. Facts The Appellant is a public limited company listed on the Bombay Stock Exchange and the National Stock Exchange of India Limited (collectively referred to as the “Stock Exchanges”) and is primarily engaged in the business of contracting and executing engineering contracts. The instant appeal arose out of an order of SEBI following an investigation into the affairs of the Appellant during the period February 2, 2009 to March 25, 2009 when the Appellant was awarded two projects namely, an order for Uranium Ore Processing Plant from Uranium Corporation of India Limited worth INR 441 crores and another order from HPCL – Mittal Energy Limited worth INR 24 crores. Though the Appellant intimated the Stock Exchanges of this development, on February 25, 2009 and March 25, 2009 respectively, it was alleged that the Appellant did not close its trading window as required under the applicable provisions of the Regulations and the provisions of the Code. To briefly recapitulate the regulations in issue, Regulation 12 (1) of the Regulations requires all listed companies associated with the securities market to frame a code of conduct of internal procedures and conduct as near as possible to the Model Code specified in Schedule I of the Regulations, without diluting it in any manner and ensure compliance with the same. Clause 3.2.1 of the Code requires that the trading window of a company should inter alia remain closed during the period when the price sensitive information1 pertaining to the company remains unpublished. While responding to a show cause notice issued by SEBI, the Appellant submitted that being in the business of executing engineering contracts, the Appellant is primarily engaged in setting up projects for several third parties and the projects in question were also undertaken by the Appellant in the ordinary course of business. Although the Code mandates closure of the trading window at the time of any expansion plans or execution of new projects under Clause 3.2.3 (d)2 the Appellant emphasized that there was no violation thereof as the expansion or execution of new project in question was not for itself, but for one of its clients. Denying the justification offered by the Appellant, the adjudicating officer after taking into account the volume jump in the price post intimation to the Stock Exchanges, concluded that the procurement of the project by the Appellant (whether for itself or for the clients) constitutes Price Sensitive Information within the meaning of the Regulations and hence warranted a closure of the trading window. In view of this non-compliance, the adjudicating officer slapped a penalty of INR 250,000 on the Appellant. This order of the adjudicating officer was appealed against before the SAT. Issue Whether a listed company is required pursuant to the provisions of the Regulations to close the trading window for its directors and key employees when in possession of all types of price sensitive information? Contention on behalf of the Appellant Though the Parties to the appeal were in consonance in terms of the fact that the award of projects to the Appellant constitutes ‘Price Sensitive Information’, the Appellants continued to contend that the information regarding the aforesaid projects did not fall within the ambit of sub-clauses (a) to (g) of Clause 3.2.3. read with para 9 of the Code Further, it was also contended that all price sensitive information did not warrant closure of the trading window by the Company in terms of the Regulations as the Code was limited this to certain limited events. Contention on behalf of SEBI SEBI argued that the trading window is required to be closed during the time when any unpublished Price Sensitive Information is in possession of the company. It appears that the contention of SEBI were based on the premise that the list of Price Sensitive Information as provided under Clause 3.2.3 is inclusive in nature and that there is scope for additional items to be inserted/ interpreted in light of the existing inclusions. Judgment In view of the arguments advanced and issues raised by the Parties, the SAT allowed the appeal and clarified that the sub-clause (a) to (g) of Clause 3.2.3 of the Code should be interpreted in the context of the meaning assigned to the other sub-clauses. Where all the other sub-clauses pertain to activities directly related to the company, it is implicitly lucid that the execution of projects also has to be understood in relation to the company. SAT concluded that the ambit of ‘price sensitive information’ is much wider than the contingencies referred to in the Code that mandates a closure of the trading window by the Company. SAT further elucidated that the Code mandates closing of trading window only during the occurrence of any of the seven contingencies mentioned in sub-clauses (a) to (g) of Clause 3.2.3 of the Code. Analysis Given that Clause 3.2.3 of the Code begins with “the trading window shall be, inter alia, closed at the time…” brings about uncertainty as to whether the contingencies set out therein are exhaustive or inclusive in nature. The decision of the SAT is welcomed in the sense that it puts to rest this ambiguity and discounts the necessity for a company to exercise discretion on whether or not a particular ‘Price Sensitive Information’ other than those specifically referred to in impugned Clause mandates closure of its trading window.
__________________________________ 1 Section 2(ha) of the Insider Trading Regulations defines the term ‘Price Sensitive Information’ to mean any information which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of the company. The following shall be deemed to be price sensitive information: (i) periodical financial results of the company, (ii) intended declaration of dividends, (iii) issue of securities or buy-back of securities, (iv) any major expansion plans or execution of new projects, (v) amalgamation, mergers or takeovers, (vi) disposal of the whole or substantial part of the undertaking, (vii) significant changes in policies, plans or operations of the company. 2 Regulation 3.2.3 of the of the Regulations state that the trading window shall be inter alia, closed at the time: (a) declaration of financial results (quarterly, half-yearly and annually), (b) declaration of dividends (interim and final), (c) issue of securities by way of public/ rights/ bonus etc., (d) any major expansion plans or execution of new projects, (e) amalgamation, mergers, takeovers and buy-back, (f) disposal of whole or substantially whole of undertaking, (g) any change in policies, plans or operations of the company.
- Harshita Srivastava, Simone Reis & Siddharth Shah You can direct your queries or comments to the authors
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