INSIDER TRADING

Insider trading is nothing but a ‘white collar’ crime, which also results in conflict of interests. Concerns with insider trading arises as there is a likely damage to public confidence since there is clear intention to defraud the public when those with inside knowledge use that knowledge to make profit in their dealings of securities. This is nothing but unfair use of the insider information for making private gains.

Once the instances of insider trading felt, it was then that the erstwhile regulations i.e., SEBI (Prohibition of Insider Trading) Regulations, 1992 (1992 Regulations) were recommended after taking into consideration the provisions as contained in the US and UK laws. Who will be an insider and what information should be regarded as price sensitive amongst other provisions was laid down by way of the said regulations.

The 1992 Regulations had been replaced by SEBI (Prohibition of Insider Trading) Regulations, 2015 (the “Regulations”). The Regulations contained several new features, the scope of the Regulations was widened and the net of the provisions was casted too wider to get within its ambit almost every person who can be deemed to be an insider so as to curb this unfair trade practice

Regulator

SEBI regulates insider trading. Section 11 (2) (g) of SEBI Act, 1992 specifies prohibiting insider trading in securities as a function of SEBI. Further, SEBI has been empowered under Section 12A read with Section 30 of SEBI Act, 1992 to make regulations for prohibition of insider trading. By virtue of the aforesaid power, SEBI issued the Regulations repealing the 1992 Regulations

Trading Plan

Insiders who are perpetually in possession of UPSI such persons cannot be rendered incapable of trading in securities throughout the year. In such a situation, an Insider will be permitted to formulate in advance to effect trade at a subsequent date. By that time such insider would be in possession of new UPSI and the one they possessed at the time of formulating the plan would then be generally available.

A trading plan is to accommodate firm plans to acquire/ dispose off securities typically by strategic shareholders. For example, a holding company may have plan to do disposal of its subsidiary at a pre-specific time. Also, promoters of the company may have a firm plan to do a creeping acquisition of securities in their controlled company. These plans are pre announced, and are firm plans irrespective of the prevailing price. Hence, they are insensitive to prices, and hence, are presumably immune from allegations of insider trading.

Trading plan are required to be framed by such insiders who are at all times in possession of UPSI and the plan is required to be reviewed and approve and monitor implementation of the trading plan.

 

Steps which companies are required to ensure under Regulation

• Identify and designate a compliance officer to administer the Code of Conduct and another requirements under these Regulations;
• Formulate and publish on its official website, a Code of Practices and Procedures for Fair Disclosure (Code of Fair Disclosure) of UPSI that the Board will follow to ensure uniform dissemination of UPSI;
• Having a policy for determination of legitimate purpose, which should be an approach driven policy and shall be a part of the Code of Fair Disclosure.
• Formulate a Code of Conduct to regulate, monitor and report trading by the Designated Persons and their immediate relatives as prescribed in Schedule B and or Schedule C, as the case may be.
• Maintaining a Structural Digital Database of persons with whom UPSI is shared;
• Putting in place adequate and effective system of internal controls to ensure compliance of the provisions of the Regulations in order to avoid insider trading:
• Review of the system of internal control by the Audit Committee atleast once a year, verifying whether the systems for internal control are adequate and are operating effectively
• Policy / mechanism to prevent any leak of UPSI and to set up the procedure for inquiry in case of leak of UPSI or suspected leak of UPSI.
• Ensuring compliance with initial and continuous disclosure requirements from the promoters, KMPs, directors, designated persons respectively and intimate the same to the stock exchange(s);

Disclosures Obligation

 Initial Disclosures (one time Disclosure)

Continual Disclosure (Event based Disclosure)

Discretion based Disclosure (Disclosers by other connected Person)

 

Regulations	Disclosures Requirement	Particulars	Time period	Format
Reg 7(1)(b) {One Time Disclosure}	Upon appointment as :- v  Promoter v  Members of the promoter Group v  KMP v  Director	Holding of Securities of the company as on the date of appointment or becoming a promoter	Within 7 days of appointment or becoming a promoter	Form B
Reg 7(2)(a) {Continual Disclosure}	v  Promoter v  Member of the promoter group v  Designated person v  Director	Number of securities acquired or disposed off in case the transaction or a series of transactions over any calendar quarter traded value exceed 10 lakh Rupees.	Within two trading days of such transaction	Form -C
Reg 7(2)(b) {Continual Disclosure}	Company required to notify to stock Exchange	In case the securities traded by promoter, members of promoters group, designated person or directors during the calendar quarter , traded value is in excess of 10 lakh Rupees	Within 2 trading days of receipts of such disclosure of becoming aware of such transaction.
Reg 4(1) proviso of clause “i” {Continual Disclosure}	Insiders	The transaction in off market inter se transfer between insiders who were in possession of material information without breach of regulation 3	Within 2 working days of such transaction	Not Specified
Reg 4(1) Second proviso of clause “i” {Continual Disclosure}	Company required to notify the stock exchange	Particulars of such trades to the stock exchange	Within 2 days of receipt of disclosure becoming aware of such information	Not specified
Reg 7(3) {Discretion based Disclosure}	v  Other connected Person v  Class of connected person	Holding /trading in securities	As determined by company	Form D

 

This Article has been Compiled by Swati Garg (Senior Associate)

You can direct your queries or comments to the author at swati@factumlegal.com

 

Disclaimer-

The contents of this article should not be construed as a legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.

 

THE MODEL TENANCY LAW - ROAD TO REGULATED AND BENEFICIAL TENANCIES IN INDIA

 

INTRODUCTION

An announcement was made in Union Budget 2019-2020 by the Finance Minister, Ms. Nirmala Sitharaman proposed few changes to be bought under the housing sector the laws governing the transactions between landlords and tenants for renting of property in India. Almost two years after announcing it, the union cabinet approved the Model Tenancy Act, 2020’[1] (“MTA”) that aims to boost rental housing in the country and reduce litigation, which was first released in the year 2019 by the Ministry of Housing and Urban Affairs ("Ministry") for seeking public comments. The MTA will provide the legal framework for the rental housing including commercial premises across the country. It is expected to give a boost to private sector participation in the rental housing sector thereby creating a lucrative market and addressing the huge housing shortage especially faced by the urban population. States can adopt the Act as either in the form of fresh legislation, since it is a state subject or they can amend their existing rent acts in line up with the MTA.

 At the outset, the precise objective behind the enactment of MTA extracted from the recital reads as “to establish Rent Authority to regulate renting of premises and to protect the interests of landlords and tenants and to provide speedy adjudication mechanism for resolution of disputes and matters connected therewith or incidental thereto”

 EXISTING LAWS ARE LONG DRAWN

The existing state rental laws such as Maharashtra Rent Control Act, 1999 and Delhi Rent Act, 1995 have lengthy legal frameworks tilted heavily in favour of tenants which results in unsettled litigation. Ceiling the rent further deteriorated the quality and quantity of rental house stock resulting in lower rental yields. On the other hand, affording a house is a challenge especially for a low-income household and it becomes difficult to promote rental housing to such households. In addition to the rental housing, the draft law also emphasis on growth of investment in the sector and give a boost to entrepreneurial opportunities and innovative mechanisms of sharing of space. It will be applicable prospectively without affecting the existing tenancies, meaning that owners who have not been able to evict tenants due to the provisions of the previous laws will get no relief unless the state in which they own a property specifically provisions for it. 

[1] http://mohua.gov.in/cms/modeltenancyact.php

 LEGAL PRACTICE ENVISAGED UNDER THE MTA

1. Tenancy Agreement[1]

       - All the new tenancies of the premises are bound to execute a rent agreement in writing. As per the requirement under section 4 of the MTA, the details of the executed rent agreement shall be duly submitted to the concerned Rent Authority in the prescribed form as specified under the MTA, jointly by the landlord and the tenant within 2 months from the execution date of the Agreement.  

     - In the event if both the landlord and the tenant, fails to jointly submit the details with the Rent Authority within 2 months from the execution date of the Agreement, then they can separately inform to the Rent Authority within a period of one month from the date of expiry of the 2 months period specified above.

    - A digital platform will be put in place which may be in the local vernacular language or the   language of the State/Union Territory for submitting tenancy agreement and other documents.   Rent Authority will keep a charge/control/tab on these agreements.

     - The Rent Authority will provide a UIN (Unique Identification Number) to the parties and within   seven working days of the receipt of the information from the parties, the Rent Authority will   upload the tenancy details on the above-said digital platform. 

      - The term ‘premises’ includes residential and commercial premises but excludes industrial premises.[2]

2.    Security Deposit

A cap on the number of the months security deposit (“SD”) has been put in place by the provisions of the MTA. The SD to be paid by the tenant shall not exceed two months rent in case of the residential properties and in the case of non-residential properties the SD shall not exceed more than the six (6) months' rent.[3]

 3.    Restricting the sub-letting rights

The sub-letting or assigning or transferring of premises held by a tenant is allowed subject to entering into a supplementary agreement and informing jointly to the Rent Authority within two months in the prescribed form, from the date of execution of such supplementary agreement.[4]

 4.  Eviction and Recovery of possession of premises by the landlord

During the continuance of tenancy the tenant shall not be evicted from the premises for the defaults unless otherwise agreed to something in writing by both the parties and if nothing agreed in a tenancy the agreement, then the landlord shall approach the Rent Authority for obtaining an order of eviction and recovery by relying on the grounds such as tenant failed to pay agreed rent or arrears for consecutive two months, sub-let without obtaining written consent, misuse the land after receiving cease and desist order from a landlord, failed to vacate let out premises after receiving vacate notice, necessary to carry out changes or repair of let out premises on the direction of competent authority.[5.

However, in case of the death of landlord, the legal heirs shall move the application to Rent Authority, showing a bonafide requirement for seeking the eviction and recovery of possession of premises let out. [6]

5.    Rent Authority, their powers, and appeals [7]

The MTA has introduced the mechanism of addressing the disputes and grievances through a specific Rent Authority (“RA”) to providing an expeditious conclusion of such disputes. The district collector or district magistrate is vested with the power to appoint jurisdictional RA an officer not below the rank of deputy collector in consultation with respective state governments. The MTA has provided more teeth to the RA by vesting the powers of Rent Court relating to revision of rent, determination of revised rent in case of dispute, the deposit of a rent with rent authority, repair and maintenance of the property, duties of a property manager and consequences of violation of duties and withholding essential service or supply.

 6.    Dispute Resolution Mechanism- Rent Courts and Rent Tribunals[8]

The MTA paved the way for establishing the jurisdictional Rent Courts (“RC”) and Rent Tribunals (“RT”) for achieving the speedy redressal of disputes and have powers to regulate their own procedure. The RC / RT shall decide the dispute within a period of sixty (60) days. The jurisdiction of the RC & RT is limited to the tenancy agreement and does not extend to disputes on title and ownership of the premises in dispute.

The district collector or district magistrate shall, with the previous approval of the State Government/Union territory administration, appoint an additional collector or additional district magistrate or an officer of equivalent rank, to be the rent court for the purposes of the MTA, within his jurisdiction. The State Government/Union territory administration in consultation with the jurisdictional High Court, may by notification, appoint a district Judge or additional district Judge as rent tribunal in each district.

Conclusion

Upon successful implementation of the MTA by the respective state governments across the nation, it will lead to a massive relief to the real estate sector and eventually stabilise the rental and housing market in India. The restriction by the existing rental laws on the growth of rental housing and discourage owners from renting out their vacant houses due to fear of repossession, will come to an end now and transparency and accountability in the existing system of renting of premises will come into effect. Furthermore, as the land is the State’s subject, therefore the State would be free to adopt the law, also, States and Union territories can adopt the MTA by enacting fresh legislation or they can amend their existing rental laws suitably. Besides this, huge investment would be required to constitute three-tier grievance redressal system as provided under the MTA.

Download the complete Model Tenancy Act, 2020 at: [1] http://mohua.gov.in/cms/modeltenancyact.php

This Article has been Compiled by Himanshu Mohinani (Associate) and edited by Deepika Sharma (Senior Associate) You can direct your queries or comments to the author at himanshu@factumlegal.com or deepika@facumlegal.com

Disclaimer:

The contents of this article should not be construed as a legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.

[1] Section 4 of The Model Tenancy Act, 2020

[2] Section 2(d) of The Model Tenancy Act, 2020

[3] Section 11 of The Model Tenancy Act, 2020

[4] Section 7 of The Model Tenancy Act, 2020

[5] Section 21 of The Model Tenancy Act, 2020

[6] Section 22 of The Model Tenancy Act, 2020

[7] Chapter VI of The Model Tenancy Act, 2020

[8] Chapter VII of The Model Tenancy Act, 2020

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Key Takeaways on Buyback of Shares by Companies

INTRODUCTION 

    
The Buyback refers to the process by which Company purchases its own shares or securities from its shareholders at a price usually higher than the market price (where shares refer to both Equity and Preference shares and specified securities refer to ESOP and other securities specified by CG from time to time). It is also known as financial restructuring which involves re-arrangement of the financial structure of the Company to make the company’s finance more balanced, buyback is a process of making, and the overcapitalized company a balanced capitalized company.
Though it amounts to a reduction of capital but the provisions of reduction of capital are not applicable on buyback as Section 66(6) of Companies Act 2013 clearly states that nothing in this section shall apply to buyback of its own securities by a company under section 68.

 

      However, one should bear in mind that the Company cannot buy back its debentures as it is not covered under the definition of shares or other specified securities

    Also, Buy-back is not regarded as transfer of shares as the shares bought back by the Company is eventually destroyed and the rights attached to such shares are extinguished. Therefore, there is no stamp duty payable in case of buyback as the stamp duty is payable only in case of transfers.

 

Given below are the various needs of Buy Back:-

To increase the promoter’s shareholding

To increase the Earning per share as the shares outstanding in the market reduces.

To Counter hostile takeover

To return the surplus cash not required by a company to its shareholders

Restructuring of debt-equity ratio

This serves as an exit opportunity to the shareholders of the Company

 

Legal Framework for Buyback

·    Buyback of unlisted company-Section 68 to 70 and Rule 17 of Companies (share capital and debenture rules) 2014;

·   Buyback of listed Company -Provision of Companies Act and various SEBI regulation such as SEBI (Prohibition of Insider trading) Regulation 20015, SEBI (Listing obligation and disclosure requirements) Regulation, 2015 and SEBI(Buyback of securities) regulation 2018

 

In Re SMR universal Softech limited it was seen that the company not being eligible for buyback as there was no authority in AOA of the Company to buy back its shares and the shares proposed to be brought back were not fully paid up issued a public announcement for Buy and was withdrawn simultaneously which resulted in fraud on shareholders, The ruling of SAT are hereunder

 I can therefore be inferred that the motive behind the above advertisement was to deceive the investors by way of disseminating false information. The process of announcing buy-back of shares and its subsequent withdrawal must have resulted in a pecuniary loss to the investors who were influenced to purchase shares on the basis of the advertisement. Hence SMR had committed fraud on shareholders by first issuing misleading advertisement when they were not eligible/ required to make a commitment of buy-back as also their failure to take any conclusive action thereon.

Therefore, taking into consideration all the material facts and circumstances of the case. I hereby restrain the Company and its directors from buying, selling and dealing, or accessing the securities market in any manner for a period of two years.

 

Buy- Back of listed Company

 

Different methods of Buyback

Particulars	Tender offer	Stock exchange	Book Building
Reservation for small shareholder	Yes	No	No
Letter of offer	Yes	No	No
Amount to be deposited in Escrow Account	For 1st 100CR 25%  Beyond 100CR 10%	25% of total Consideration	For 1st 100CR 25% Beyond 100CR 10%
Margin money	1% of total consideration	2.5% of the total consideration	1% of the total consideration
Promoter participation	Yes	No	No
Tendering period	Mas 10 days	Max 6 months	Minimum 15 days Maximum 30 days
Buyback through order matching mechanism. *	N. A	Yes

 

 

 

In case of buyback through the stock, exchange method shares must be buyback through order matching mechanism except for ‘all or none” order matching system where order matching the mechanism is simply the electronic system that matches the buy and sell orders and ‘all or none” order matching system impose a condition that only full order should be matched if the full order is not matched it will stay in books till matched or canceled. 

 

Can a promoter be allowed to decrease its holding in Company?

In a case Re, Punjab Communication, petitioner submitted that the promoter shall not be allowed to participate in the buyback offer as the sole motive of the promoter is to decrease its holding in the Company However SAT held that the promoter can decrease its shareholding in the Company provided that the aggregate shareholding of the public do not fall below the mandatory limit of 25% Of the paid-up capital and the promoter complies with the disclosure requirements.

The ruling of SAT is as hereunder: -

What is relevant here is the question: Whether the promoters can also participate in the company's buy-back offer. The disclosure requirements in this regard are found to have been complied with. The Letter of Offer clearly states that the "promoters intend to surrender equity shares under the buyback offer". There is also a declaration that "The promoters have not traded in the equity shares of the company during a period of 12 months preceding the date of the Board resolution for approving the Buy-Back and during the period of 6 months prior to the Public Announcement for Buy-back". It has also stated that the aggregate shareholding of the promoter on the date of the Public Announcement of the Buyback offer was. 70.22% of the paid-up capital of the company. The Letter of Offer also contains an averment that the non-promoter shareholding will be maintained at 26.48% of the paid-up capital of the company. It is seen from the particulars made available by the PunCom that post-buy back, non-promoter shareholding in the PunCom would be 28.74%. So long as the promoters' participation in the PunCom's buy-back offer is in accordance with the extant law and regulations there is no justifiable reason to disallow the same at this stage.

 

However, presently there are still some ambiguities prevailing in the market in respect of buyback, such as unclear timeline in case of opening of Escrow Account, Regulation 11 and Regulation 21 of Buy Back Regulation which talks about extinguishment of shares contradicts each other which in turn leads to confusion in respect of reporting of extinguishment of shares as a result of which different companies are following different timeline, but one should ensure that they comply with good corporate governance and all the disclosures shall be made as soon as possible.

 

This Article has been compiled by Deepika Sharma (Senior Associate). You can direct your queries or comments to the author at deepika@factumlegal.com)

 

      Disclaimer:

The contents of this article should not be construed as a legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.