How to Deal with Trading Window Closure for Companies with Listed Debt Securities
SEBI (Prohibition of Insider Trading) (PIT) Regulations, 2015 (Regulations) are applicable in relation to securities listed and proposed to be listed. Companies having their debentures listed are also required to comply with the provisions of the Regulations.
The intent of the Regulations is to prohibit trading—essentially the wrongful trading in listed securities while in possession of the unpublished price sensitive information (UPSI). UPSI has been defined to mean such information that is not generally available and which can materially affect the price of the securities on becoming generally available and includes information in relation to financial results, dividends, change in capital structure, restructuring and changes in key managerial personnel.
However, a few pertinent questions that arise are:
1. Should the trading window of a debt-listed entity be closed from the end of every quarter till the declaration of financial results by the company which will happen only after the completion of a half year?
2. Should the debt-listed company close the trading window every quarter while submitting results to the holding company for consolidation purpose?
UPSI in Case of Debt Listed Entities
Sensitivity of any bit of information largely depends on the kind of security it is associated with; information that may be regarded as UPSI for an equity-listed entity may not necessarily affect prices of the debt-listed. For example, declaration of dividend is price sensitive information for an equity-listed entity but may not have any impact on the debt-listed one. The reason is that debentures receive a fixed rate of interest and are not at the discretion of the management. However, default/ expected default in the payment of interest on a loan is price sensitive information as it may result in non-service of obligations in relation to the debt-listed one too.
Generally speaking, the information with respect to the financial position of the company, revision in ratings, instance of default made by the company in repayment of any debt or any such information which affects the payment of principal and /or interest of the debentures are probable price sensitive information for listed debt securities.
Given the uniform applicability of the Regulation for all listed companies, there are certain implementation issues with respect to the closure of trading window in case of debt-listed company which has been discussed in this article.
Closure of Trading Window in Case of Financial Results
Trading window denotes a notional window used as an instrument of monitoring the trades of designated persons. A designated person is permitted to trade only when the trading window is not closed.
As per para 4 of schedule B to the Regulations, it is mandatory for all listed companies to close its trading window from the end of 'every quarter' till 48 hours after the declaration of financial results.
“Trading restriction period can be made applicable from the end of every quarter till 48 hours after the declaration of financial results”
An equity-listed entity is required to submit financial results on a quarterly basis. In case of debt-listed entity, listed entities are required to submit un-audited or audited financial results on a half-yearly basis. If the debt-listed entity is a subsidiary of an equity-listed entity, in that case it is required to submit financial results on a quarterly basis for consolidation purpose.
The quarterly results so submitted may not be published on the website of the debt-listed entity; however, the information becomes generally available by forming part of the consolidated financial results.
It is to be noted that, with the amended provisions in place, the tenure of closure of the trading window got elongated and covers almost 180 days or six months of the year. Now, if the provisions of PIT, for a debt listed company, are interpreted in a way that the window should be closed from the end of each quarter and opened once the financial results are declared after the half year, one can easily imagine that the window is closed for almost the eight to nine months of the year! Does that mean that the designated person of such companies will be allowed barely three months for trading? Taking such a view will be squarely impractical.
A debt listed company, which is not a subsidiary of an equity listed holding company, cannot be mandated to close the trading window every quarter merely to comply with Schedule B requirements. This will result in an absolutely impractical situation.
Where the debt listed company is required to share quarterly financials for consolidation purpose, standalone financial results of the debt listed company are not published separately. Accordingly, the UPSI becomes published and publicly available, to the extent of consolidated figures, on the declaration of results by the holding company and therefore, keeping up with the intent of closing of the trading window (to prevent trading by the designated person while in possession of UPSI) it will be appropriate to interpret that the trading window of such debt listed companies should be closed quarterly and opened after 48 hours of declaration of consolidated financial results by the holding company to public.
Compliances for Sharing of Financial Results with the Parent Company
So far as sharing of the quarterly results of the debt listed company with the holding company is concerned, the same being for a legitimate purpose, certain compliances have to be ensured by the debt listed company in line with its code of conduct, viz,:
Promoters are regarded as designated persons under the Regulations. Therefore, signing of non-disclosure / confidentiality agreement with the holding company may not be required;
Designated person shall not trade in the listed securities of the debt listed company until the information becomes generally available either pursuant to publishing of financial results by the debt listed entity or publishing of consolidated figures by holding company, as applicable.
Entry to be made in the structured digital database in relation to sharing of information with the employees of the holding company.
(CS Nitu Poddar is Senior Associate in the Corporate Law & Resolution Division at Vinod Kothari & Company)