Economic disruptions caused by the coronavirus pandemic may have warranted several compliance and financial reporting relaxations, but experts and officials cautioned on Sunday that relaxing the mandatory closure of trading window for 'insiders' might go against the interest of investors.
There has been demand from promoters and others classified as insiders with regard to stock market trading that this restriction should also be relaxed as capital markets regulator has eased the timelines for filing of financial results for listed companies.
Under the Sebi's Prohibition of Insider Trading Regulations, "Trading restriction period shall be made applicable from the end of every quarter till 48 hours after the declaration of financial results. The gap between clearance of accounts by audit committee and board meeting should be as narrow as possible and preferably on the same day to avoid leakage of material information.
Accordingly, the trading window closure for insiders is already in place since April 1, though the timeline for filing of results for the quarter and year ended March 31 has been relaxed till June 30.
These are among the relaxations given by Sebi for listed companies and various market participants in light of the COVID-19 crisis and the ongoing nationwide lockdown.
While promoters and other insiders are demanding that the trading window should be opened for them as results would be announced later, officials and experts flagged such a relaxation would be detrimental to the interest of general investors as promoters and the top management, alongwith their associated entities, would already be in know of broader financial performance for the last quarter even if the actual results would get filed later.
Confirming that there have been requests seeking relaxation from the trading restriction period, a government official said the challenge for regulator Sebi was striking a balance between granting relaxations and ensuring market integrity.
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Exchanges have already issued circulars regarding the trading window closure as Sebi did not accede to requests for any relaxation. Globally also, no such relaxation has been given by regulators in major markets. Information relating to financial results, unless made public, is deemed as unpublished price sensitive information (UPSI) and insiders who may have access to such UPSI are not allowed to trade.
It would be incorrect to infer from the above developments that promoters and insiders cannot trade till June 30, 2020 as there is no mandate from Sebi to delay the financial results, instead a listed entity is free to stick to its timelines and open the trading window as per extant provisions of law," the official said.
Companies are free to publish their results before June 30 and get out of the trading window relaxation, he added.
"A blanket extension to all would not have been in the interest of investors as there may be companies whose financial results may otherwise be in advanced stage or also may be indicative enough so as to qualify them as UPSI but likely to be kept in abeyance by certain entities in case trading window relaxation is granted.
"Also, the date of financial results having reached such a stage would vary for each company and there would be no mechanism to verify the same and prevent likely misuse by insiders," the official added.
"Filing of financial results within specified timeline is obligatory and hence justifiable for consideration of relaxation in wake of recent developments while dealing in securities is not an obligation but just an option," said a securities market lawyer.
Significant volatility has been seen in securities market globally due to developments relating to COVID-19. In such a situation, insiders may have tremendous incentive and opportunity to trade on UPSI and therefore it needs to be checked," said another market observer who did not wish to be identified.
"The decision of Sebi is keeping in mind its mandate of protecting the interest of investors. Maintaining confidence in the fairness and integrity of our markets assumes even greater significance in present dynamic and unique circumstances, in wake of COVD-19," another official said.
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