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Evolving legal position of contra-trades in India

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informal guidance

SEBI recently, issued an informal guidance on the question of whether conversion of share warrants into equity by a Designated Person would form part of a corporate action? And whether conversion of such warrants into equity within six months of the date of allotment would constitute as a contra-trade?

SEBI held that conversion of warrants into equity is not caused by the action of the company but by the voluntary act of the warrant holder, thus cannot be termed as a corporate action. Further, the price for conversion of the warrant is fixed but the exercise of the same is at the discretion of the warrant holder. Hence the exercise would in fact be akin to an acquisition and would not attract the contra trade restrictions.

However, SEBI clarified that any sale or disposal of the allotted equity (pursuant to the conversion) within six months of such conversion would attract contra trade restrictions.

Recently, SEBI in October 2023 in the context of contra trades had issued another informal guidance on whether contra trade restrictions apply to a single entity in a promoter group or the promoter group collectively. SEBI held that since in the present case the two promoters are corporates which in turn have common promoter shareholders and are controlled by the same corporates, the provisions of contra trades will apply jointly to them i.e. if one promoter acquired shares of its listed subsidiary, the other could not sell shares of its listed subsidiary before six months. Interestingly, SEBI in 2018 had issued an informal guidance holding that contra trade restrictions do not apply to the promoter group but to individual persons including promoters.

The term “contra trade” finds its roots in SEBI‘s (Prohibition of Insider Trading) Regulations, 2015. These regulations prohibit Designated Persons and their immediate relatives from engaging in contra trades i.e. executing opposite trades (buying or selling) within a short period, typically six months. Profits earned from contra trades in violation of these restrictions are required to be disgorged for remittance to the Investor Protection and Education Fund (IPEF). This too however has been a bone of contention since there are various rulings of the Securities Appellate Tribunal which have held that if profits from a contra trade have been disgorged to the IPEF, it is not open to SEBI to initiate adjudication proceedings to impose penalty under its residuary power of Section 15HB.

Readers are welcome to send their views to Regstreet Law Advisors at info@regstreetlaw.com

A copy of the SEBI Informal Guidance is enclosed below and also available on the SEBI website.

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