SEBI Engulfs Non-Monetary Transactions – Extending tThe Scope of Material Financial Relationships

Shubham Gupta, a 4th year law student at the Institute of Law, Nirma University, Ahmedabad

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 have shown that close relatives of executives have carried out transactions based on unpublished price sensitive information on behalf of the executive.Therefore, to curb such undesirable and prohibited transactions, SEBI has swayed the corporate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. [1] Disclosure Rules to Curb Insider Trading Spook Top Executives, Economic Times (Jan. 09, 2020) https://prime.economictimes.indiatimes.com/news/73164900/news
  2. [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. [3] REPORT OF COMMITTEE ON FAIR MARKET CONDUCT, SEBI (Aug 08, 2018).

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