This article is authored by Shubham Gupta
Introduction:
In the recent informal guidance dated 6th
Jan. 2020 in Gujarat State Petronet Ltd., the
SEBI, in response to the interpretative letter, has clarified that even
non-monetary transactions are within the scope of material financial
relationships. Clause 14 of Schedule B of SEBI (PIT) (Amendment) Regulations,
2018 stipulates that all designated persons in a company are required to
disclose the details of those persons with whom they share a “material
financial relationship”. Bringing non-monetary transactions within the
ambit of material financial relationship - may have far-reaching unintended
consequences and senior executives may be stretched into the blanket of violation
easily. This article seeks to analyze the informal guidance issued by SEBI, and
emphasizing the needs of the industry.
What Constitute Material Financial Relationship?
Material Financial Relationship has been explained as "a
relationship in which one person is a recipient of any kind of payment such as loan
or gift during immediately preceding twelve months, equivalent to at
least 25% of such payer's annual income but shall exclude relationships in
which the payment is based on arm's length transactions." Any payment
including s gift that includes payment - kinds in nature must also be
under the orbit of the aforesaid relationship. This interpretation has been
unleased in the backdrop of pseudo transactions funded by the corporate
executives on their behalf. The various investigation by SEBI such as Sun Pharma, KBL
promoter, etc. have shown that close relatives of executives have carried out
transactions based on unpublished price sensitive information on behalf of the executive.
Therefore, to curb such undesirable and prohibited
transactions, SEBI has swayed the corporate compliance for corporate bigwigs. Extending
the scope of material financial relationships cautioned all listed company
executives to ready to disclose immediate personal transactions also. Essentially,
this interpretation has again unfurled serious privacy concerns, and corporates
executives scrambling to shield themselves from unintended consequences. Not
only this, the safeguarding of this information and ensuring that it is available
within the organization on a need-to-know basis only, will be critical
from the implementation point of view.
The reaction of the industry is unwelcome, and the corporate
executive is wary to share the details owing to private transactions. Once
compliance officer, on anonymity in ET said “We often make advance payments
to our personal staff such as domestic help and chauffeur. As per the new
rules, we have to give the details of those persons as well.[1]
Under the regulations, the disclosure pertains to their name, PAN number,
cell number, annual income. Executive spook to the disclosure of the annual
income, as they may be seeking to remain confidential. Apart from this,
designated persons are required to submit details of their educational
institutions as well as the names and details of the designated person’s past
employers. It has been seen that many transactions are personal and private in
nature which doesn’t need to disclose owing to privacy concerns and may be made
in lieu of family wealth like a daughter’s marriage expenses.
For example, a designated person who is depositing
fees directly to the university bank’s account for her granddaughter studying in the foreign university shall be required to disclose in the details, of
granddaughter, and if grand-daughter is minor, then the details of her parents
provided it constitute 25% of the payer’s annual income. Also, if a designated person has gifted a land constituting more than 25% of the payer’s annual
income, such would fall under a brick of disclosure. The corporate executive
said that such gifts will build wealth for their children, and which are not
material financial transactions and such payment made even before becoming the
designated person. In response, SEBI has termed transaction as ‘material
financial relationship’.
Not only this but even persons who are deemed to be
connected person; in addition, falling under the purview of material financial
relationship would need to make separate disclosure under this rule
irrespective of standing disclosure under the regulations. This step has been
brought into to engulf who all those people like a spouse, and son-in-law, etc.
who are likely to be traded on behalf of it.
Extending the scope of persons under disclosure, like in the matter
of Deep Industries Ltd,[2]
where Facebook like was said to induce the existence of relationship as a connected person, SEBI has increased the breadth of categories of persons
falling under SEBI (PIT) Regulations.
Another array which has frowned upon is that the
threshold of 25% of the annual income is quite low, and thus must be increased
in light of over-compliance and overt data records. The Committee of Fair Market
Conduct[3]
has also envisioned that 25% may be increased by SEBI as may be notified from time
to time. SEBI may have the leverage to increase this threshold of income to be
reckoned on, and thus, postulating a limit which does not enshrine overburden
on executives.
Conclusion :
In an event of non-accurate information in the hand of
designated persons, this disclosure catches the liability of designated
persons. However, the viable scenario may be that a designated person must not
be held accountable for the inaccurate information provided by others, since
disclosure is not solely based on information in the hands of designated
persons. Besides, to ensure that designated persons are allowed to maintain
privacy regarding their personal expenses – certain carveouts should be arched
for – to bring ease in following the regulatory norms. Onto pre-incidental
gathering of information may streamline the detect the information leakage, and
evidence but such shall be wisely construed as not bring the company into the
domain of liability of insider trading on leakage of minute non-material information.
[1] Disclosure Rules to Curb Insider
Trading Spook Top Executives, Economic Times (Jan. 09, 2020) https://prime.economictimes.indiatimes.com/news/73164900/news
[2] In the matter of Insider Trading
in the scrips of Deep Industries Ltd, https://www.sebi.gov.in/enforcement/orders/apr-2018/order-in-the-matter-of-insider-trading-in-the-scrip-of-deep-industries-limited_38713.html
[3] REPORT OF COMMITTEE ON FAIR MARKET
CONDUCT, SEBI (Aug 08, 2018).
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