SEBI REFORMS | NEW INSIDER TRADING REGULATIONS

Securities and Exchange Board of India (``SEBI``) last week approved SEBI (Prohibition of Insider Trading) Regulations, 2014 (``New Regulations``). This update will briefly examine the revisions proposed by SEBI in its New Regulations.

Background: SEBI constituted a committee under the chairmanship of Justice N K Sodhi (``Committee``) to strength the regulatory framework in dealing with the insider trading regulations in India. The Committee in December 2013 submitted a comprehensive report and recommend a new set of insider trading regulations. SEBI last week in its board meeting broadly approved the recommendation of the Committee and substituted old regulations with New Regulations. While the text of the New Regulations is still to be published and notified, following are the key changes approved by the SEBI Board.

Key Changes in the New Regulations

• Definition of Insider: The definition of `Insider` has been widened to include person connected on the basis of being in any a) contractual; b) fiduciary or c) employment relationship that allows such a person to access unpublished price sensitive information (UPSI). Further, Insider will also include a person who is in possession or has access to UPSI

• Immediate Relatives: Immediate relatives will be presumed to be connected persons, with a provision of right to challenge this presumption. SEBI in past has faced several difficulties in showing evidence for passing of UPSI to an immediate relative. With this proposed amendment, the burden of proof will now shift on the immediate relative to prove that he or she did not hold UPSI before trading the securities.

• UPSI Strengthened: UPSI under the old regulations was been defined as information not generally available and which may impact the price. The New Regulations strengthens the definition of UPSI by providing a test to identify price sensitive information, aligning it with listing agreement and providing platform of disclosure. Earlier, the definition of price sensitive information had reference to company only; now it has reference to both a company and securities. Further, generally available information means information that is accessible to the public on a non-discriminatory platform which would ordinarily be stock exchange platform.

• Legitimate Business Transaction:: Aligning insider trading norms with international practices and facilitate legitimate business transaction, SEBI now intends to permit access of UPSI though due-diligence with appropriate safe guards. This provision will make it easier for private equity and strategic investors for accessing UPSI during their due diligence. However to maintain the information cemetery, UPSI must be disclosed at least 2 days before the trading.

• Management holding UPSI: Insiders who are liable to possess UPSI all round the year i.e. CEO, CFO and senior management of the company, would now have the option to formulate pre-scheduled trading plans. Trading plans would, however, will be required to be disclosed on the stock exchanges and have to be strictly adhered to.

• Ease of Compliance Burden: Repeated disclosures have been removed so as to ease compliance burden and to align with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (``Takeover Code``). Disclosure of any change of 2% for persons holding more than 5% shares or voting rights has been removed as they are prescribed under Takeover Code.

MHCO COMMENT

Broadly, the changes proposed by SEBI are significant. It primarily endeavours to provide a good legal system and broadening the definition of insider to curtailing any person from wrong trading in securities who has advantage of having asymmetrical access to unpublished information. However, we will have wait for wordings of the New Regulations for its true interpretation. 

(The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or contact@mhcolaw.com for any assistance.)

GOVERNMENT RELAXES FDI NORMS FOR CONSTRUCTION DEVELOPMENT SECTOR | BOOST TO AFFORDABLE HOUSING

The Union Cabinet chaired by Prime Minister of India on 29 October 2014 consented to amend the Foreign Direct Investment (FDI) policy in construction sector i.e. Townships, Housing, Built-up infrastructure.

The key amendments are as follows:

• Minimum area to be developed: (a) The minimum built up area has been reduced from 50,000 square meters to 20,000 square meters for construction development projects (b) The term ``service housing plot`` has been replaced by ``service plots`` allowing companies to have commercial plots. Further the minimum built up area for plot has been reduced from 10 hector to nil;

• Minimum capitalization: The minimum capital requirement (which is to be brought within 6 months of the commencement of the project) has been reduced from USD 10 million to USD 5 million for a wholly owned subsidiary;

• Exit: Investors can now exit the project immediately after the completion of the project or after 3 years from the date of final investment subject to the development of trunk infrastructure;

• Transfer: Transfer from one non resident investor to another non resident before completion of the project has been permitted subject to the Foreign Investment Promotion Board approval;

• Affordable housing: The cabinet has proposed [is this proposed or has been approved] that any project which has a 30% allocation of total project cost for low-cost affordable housing would be exempted from compliance of the conditions pertaining to minimum capitalisation and minimum developed area norms;

• Completed Projects: For completed projects, 100% FDI under the automatic route is allowed for operation and management of townships, malls/shopping complexes and business centres;

• Investor Responsibility Eased: (a) Responsibility of Investor for obtaining all regulatory permission by the investor has been dropped; (b) The condition regarding development of 50% of project within 5 years from the date of commencement and making it the responsibility of the investor has now also been waived.

The aforesaid amendments will come into effect upon the Department of Industrial Policy & Promotion issues a press note notifying the changes.

MHCO COMMENT

The relaxations in the conditions for foreign investment in real estate and construction sector are a great boost to the foreign investors to invest in residential and commercial projects. Real estate developers see the most incentive in reduction in area and capital requirements, as they will provide the much needed liquidity in the sector. Most importantly, these are the major steps for fulfilment of the Cabinet`s dream of creating smart cities across the country at affordable pricing.

(The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or contact@mhcolaw.com for any assistance.)