SEBI TARGETS COMPANY INSIDERS MAKING FAST BUCK

Securities and Exchange Board of India (SEBI) chairman M Damodaran has decided to set a more attacking field for company insiders making ‘short-swing profits’. In a bid to curb the abuse of privileged corporate information, SEBI has proposed that company insiders will have to return any profits made from the purchase and sale of company shares to the company, if both transactions occur within a six-month period. A company insider as defined by SEBI is any officer, director or holder of more than 10% of the company’s shares. By virtue of their positions, they have greater access to price-sensitive company information. If market circles are to be believed, there are cases, where insiders have taken advantage of confidential information to make short-term profits, also known as short-swing profits.In a consultative paper on short-swing regulations, the capital market regulator mooted the concept of a “designated insider” for the purpose of surrendering short-swing profits. This definition is intended to be narrower than the existing concept of what constitutes a deemed insider, and broader than what is known as an insider under the current regulations.“The ‘designated insider’ should capture within its ambit all key management personnel (by whatever name called), all directors of the company, all officers of the company who are the beneficial owners, directly or indirectly, of 10% or more of any class of equity securities,” SEBI said. SEBI seems to have taken a leaf out of the Securities and Exchange Commission rule book (the US stock market regulator) that requires 10% owners, directors and officers of a company to give up “any profit realised ... from any purchase and sale, or any sale and purchase, of any equity security” of the company within a six-month period.The regulator has also clarified that this liability will be imposed without any necessity for guilt or wrongfulness. Conversely, a direction to surrender profits made in a short-swing transaction should not necessarily imply any form of guilt. As per the proposals, the short-swing rule will be automatically attracted as soon as two things are established. “First is the fact of being an insider or a “designated insider”. And the second that the same securities were bought and sold within six months of each other,” the SEBI note said. It goes on to add that in such a regulation, the intent of a person should be immaterial.“Merely the fact of the trade will be sufficient to take action i.e. direction to hand over such profits to the company,” the note added.SEBI has proposed that there should be an exemption of certain transactions — and certain securities — from amounting to transactions resulting in short-swing profits such as transactions approved by a regulatory authority, employee benefit plans, bona fide gifts and inheritances, mergers and acquisitions (M&As) and so on.SEBI has now invited comments from the public on the consultative paper, particularly with regard to the coverage of persons in the definition of ‘designated insider’, method of calculating the dates of purchase and sale, and classes of exemptions, by January 21, 2008 – www.economictimes.com