As per Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992, a merchant banker means any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities or acting as manager, consultant, adviser or rendering corporate advisory service in relation to such issue management. As entities dealing in securities transactions, merchant bankers have access to confidential information of listed companies including information related to finance, capital structure and corporate governance that can impact the share price. Merchant bankers provide managerial and advisory services to listed companies. These services are rendered and information is received by merchant bankers in a fiduciary capacity.
As an entity accessing unpublished price sensitive information belonging to listed entities, merchant bankers have a legal and fiduciary duty to aid the listed entities in prevention of insider trading. SEBI (Prohibition of Insider Trading) Regulations, 2015 mandates many compliances which are also applicable to merchant bankers.
As per Comprehensive FAQs on SEBI (PIT) Regulations, 2015 published on April 29, 2021, a listed entity sharing UPSI with a merchant banker, should capture the nature of UPSI shared, along with their PAN or other unique identifier (in case PAN is not available) in their structured digital database as per Regulation 9A (2)(d) and as required under Schedule C of SEBI (Prohibition of Insider Trading) Regulations, 2015. The Merchant Banker shall also sign a confidentiality agreement with the listed company.
Further, Merchant banks shall implement a Code of Conduct to Regulate, Monitor and Report Trading by Designated Persons. The Code of conduct shall identify designated persons in the merchant bank who have access to UPSI of clients.
All UPSI obtained from listed entities in a fiduciary capacity shall be handled within the organization on a need-to-know basis and no unpublished price sensitive information shall be communicated to any person except in furtherance of legitimate purposes, performance of contractual and legal obligations.
Further, merchant bankers shall implement a policy governing how and when people are brought ‘inside’ on sensitive transactions. Individuals should be made aware of the duties and responsibilities attached to the receipt of Inside Information, and the liability that attaches to misuse or unwarranted use of such information.
The FAQ further clarifies that the Merchant Banker shall also maintain a structured digital database internally, which captures the nature of UPSI received/shared and details of the listed entity/client it belongs to and designated persons in the merchant bank with access to such UPSI along with their PAN or other unique identifier (in case PAN is not available).
This shall help the listed entities, stock exchanges and SEBI to prevent, investigate, detect and penalize insider trading. Prevention of insider trading is also beneficial to the interests and credibility of merchant bankers as well.
Alby Stephan. K, Legal Executive at Legality Simplified.