Lawyers uneasy with Sebi's informal guidance scheme

Experts say it is adding to the confusion rather than simplifying the process of interpreting laws

The Securities and Exchange Board of India’s (Sebi’s) informal guidance scheme, which was expected to smoothen legal processes for companies, seems to be confusing things further. The Securities Appellate Tribunal (SAT) has also raised its concerns due to the inconsistency in guidance.
 
In the recent case of Arbutus Consultancy LLP, when the company cited an informal guidance given to Weizmann Forex in 2012 in its defence, SAT said the guidance wasn’t in line with Sebi’s norms. The issue was whether inter-se transfers by promoters made prior to completion of three years of listing of the target company were eligible for general exemption from an open offer.

 
SAT also said an incorrect interpretation of the statutes by Sebi cannot undermine the law itself and provisions of the takeover code were clear in the context. “The Sebi official should have been more careful and diligent in issuing interpretations of Regulations,” SAT said in the verdict.
 

An informal guidance is an arrangement where an entity can seek advice from Sebi to understand the position of the law. And although Sebi is not legally bound by such interpretations, legal experts say misinterpretations or ambiguous replies could undermine the faith of companies on the scheme. “While the informal guidance in the form of interpretive letter issued by the relevant departments of Sebi is helpful to understand their views, the expectation is that the views expressed are consistent based on similar facts. In view of the recent judgment of SAT, Sebi should consider clarifying that it will not respond to queries where the statute is clear. Basically, the mechanism of obtaining informal guidance should not be seen as a tool to reduce the importance of the law,” suggests Yogesh Chande, partner, Shardul Amarchand Mangaldas.

 
Sebi did not respond to an email questionnaire.
 
This is not the first instance where the regulator’s informal guidance scheme has attracted criticism. Sebi has been receiving a lot of requests for informal guidance with regard to prevention of insider trading (PIT) regulations. These regulations are relatively new and punishment for violation is also strict. However, Sebi’s informal guidance on the subject has often either ducked the questions by putting the onus on the chief compliance officer of the company or have created more ambiguity.
 
For instance, in an informal guidance given to the brokerage Prabhudas Lilladher, Sebi took the view that the code of conduct for PIT applies not only to the ‘designated persons’ but to all ‘connected persons’. This is in stark contrast with the PIT regulations, which state that the rules will be applicable only to those ‘connected persons’ who are designated by the company’s board, on the basis of their functional role.

 
Similarly, in an informal guidance on a query raised by Indo Thai Securities, the regulator gave another interesting interpretation on formulation of trading plans. The guidance said that trading plans are not mandatory for the people in possession of unpublished price sensitive information (UPSI). However, it is an option to prove their innocence if situations go wrong. Experts say, this interpretation is against the very spirit of PIT regulations, which aim at bringing a systematic procedure for all the people in a company, who are in possession of UPSI.
 
“There have been serious issues with the insider-trading regulations since its inception. Sebi needs to conduct a comprehensive review of the norms to plug the problem areas. Meanwhile, it should not issue informal guidance in cases where they are not able to clarify the legal position constructively. Interpretation of a poorly-worded regulation will increase rather than decrease confusion,” said Sandeep Parekh, founder, Finsec Law Advisors.

 
The interpretation of law is provided by Sebi’s respective department and doesn’t need any approval from the board. Hence, the opinion expressed in such informal guidance is not essentially the opinion of the board.