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Applicability of grey listing provisions of SEBI (Prohibition of Insider Trading), Regulations, 1992

Jul 16, 2007
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Informal Guidance

DEPUTY GENERAL MANAGER

INVESTIGATION DEPARTMENT

 

IVD/IG/BM/98729/2007

July 16, 2007

 

Shri Arun K Saha

Deputy Managing Director

Infrastructure Leasing and Financial Services Limited,

The IL & FS Financial Center,

BKC, Bandra (E),

Mumbai-51

 

Dear Sir,

 

Re: Applicability of grey listing provisions of SEBI (Prohibition of Insider Trading), Regulations, 1992.

 

 

  1. Please refer to the correspondence resting with your letter dated June 29, 2007  seeking guidance under the SEBI (Informal Guidance) Scheme, 2003.

     
  2. It has inter-alia been informed by you  that- 


    • IL&FS Ltd is registered with SEBI as portfolio manager and provides investment advisory services to UOB Global Capital PTE Ltd. (UOB), a registered Foreign Institutional Investor (FII) in India.
    • IL&FS also manages its own proprietary portfolio in equities which is duly recognized by Investment Advisory Agreement (IAA) and Memorandum of Agreement (MOA) entered by IL & FS and UOB.
    • UOB funds are being marketed and sold primarily on the basis of performance of IL & FS proprietary portfolio. The UOB has specifically insisted that IL & FS create a mirror portfolio to the extent possible for each of the products they launch. Accordingly, IL&FS has instituted a transparent trading mechanism for its portfolio and regularly intimates the UOB about the performance of mirror portfolios.
    • The UOB has also required that IL&FS portfolio and UOB funds be managed in an identical manner, to the extent possible, within the limitations of FII restrictions and variations in Fund corpus.
    • As agreed between both the parties, IL&FS has created mirror portfolios in its proprietary book. One portfolio each to UOB Indian Equity Fund and UOB IL&FS India Opportunity Fund. Both the parties shall ensure that any market action would be in a similar proposition in both the portfolios. Thus, orders are placed simultaneously for purchase / sale of any stock for both the portfolios.
    • IAA and MOA contain a full set of rules for avoidance of conflict of interest and situation like front running.
    • IAA and MOA provide for detailed reporting procedures under which UOB is advised of transactions and performance of the mirror portfolios on a monthly basis, specific cooling off period following UOB fund’s transactions as well as right to audit of IL&FS by UOB so as to maintain total transparency.
    • UOB Global is allowed to audit the proprietary book as and when they insist.
    • IL&FS has established Code of Conduct for Prevention of Insider Trading on the lines of Model Code of Conduct notified by SEBI under SEBI (Prohibition of Insider Trading) Regulations, 1992 (the Regulations). IL&FS has also established a Compliance Committee consisting of the members of its Board. A senior level employee is appointed as compliance officer for administrating the matters relating to implementation of Code of Conduct. Dealings by employees in securities on the grey list are restricted in terms of the provisions of the Code.
    • Moreover all the operations of the company are subject to institutionalized internal audit conducted by independent professional firm.
    • According to your analysis, the provisions of Clause 4.3 of code of conduct specified under the Regulations will act as an unreasonable restriction upon you since you have got enough checks and balances and systems in place to take care of any situation like front running or insider trading. 
  3. In the light of aforesaid submissions, you have expressed that the dealing restrictions under Clause 4.3 of code of conduct specified under the Regulations in respect of securities to be placed in the grey list should not be applied to the proprietary portfolio of IL&FS in the given context.

  4. Our views on the issue raised by you are as under-

 

i.                     Your request appears to seek informal guidance in the nature of ‘No-Action Letter’ in respect of the transactions described in your letters under reference.  

ii.                   We have examined the submissions made by you and based on the above representations made by you while not necessarily accepting/ agreeing to your interpretation of the legal provisions of Clause 4.3 of Schedule I, Part B of the SEBI (Prohibition of Insider Trading) Regulations 1992 the Investigation and Enforcement Departments would not recommend any action for violation of the said clause on the specific factual assertions made by you.

iii.                  This no action letter is being given under the SEBI (Informal Guidance) Scheme, 2003 and may not be used if any of the presumptions contained in your letters and as summarized above are not in place. Further, any actual front running (ahead of your clients) by you would not allow you any protection from provisions of the law as may apply in the facts of the case. This no action letter may not be used as an interpretive letter and no legal interpretation of any question of law is being given by the letter.

 

    5.     This ‘No-Action Letter’  is based on the representations made in your aforesaid letters. Different facts or conditions might require a different result. This letter does not express decision of the Board on the questions referred.

 

   6.     You may please note that the above views are expressed only with reference to the ‘No-Action Letter’ sought on SEBI (Prohibition of Insider Trading) Regulation, 1992 and do not affect the applicability of any other law or requirement.

 

 

Yours faithfully,  

 

Barnali Mukherjee