SEBI Guidance on Pledge Revocation and Sale of ESOP Shares

 The Securities and Exchange Board of India (‘SEBI’), in a recent informal guidance, clarified that revocation of pledge and subsequent sale of ESOP shares (viz. shares acquired under Employee Stock Option Plan (‘ESOP’)) by a Designated Person constitute ‘trading’ under the SEBI Prohibition of Insider Trading (PIT) Regulations. However, such transaction does not attract ‘contra’ trade restrictions if they are bona fide and pre-cleared by the Compliance Officer.

Background:
The company’s MD and CEO (considered as Designated Person under the SEBI PIT Regulations) was allotted Shares under ESOP. He availed the loan from a Non-Banking Financial Company (NBFC) to acquire the same and, pledged them as collateral. It was proposed that the pledge on the shares will be released (revoked) and subsequently, the shares will be sold in the open market, the proceeds of which will be utilized to repay the loan. The proposed transaction is intended to be carried out during the period when the notional trading window is open, and no unpublished price sensitive information (UPSI) is held by the Designated Person.

Issue under consideration under SEBI PIT Regulations: Whether creation and revocation of pledge would be considered ‘trading’ and accordingly, would be considered as ‘contra’ transactions? Als, whether a subsequent sale of these shares would attract ‘contra’ trade restrictions against the revocation of pledge.

SEBI’s Confirmation under Informal Guidance:

• Trading: SEBI confirmed that creating, revoking, or invoking a pledge over shares, although not strictly buying or selling, is considered ‘trading’ and, the provisions of SEBI PIT Regulations to be applied accordingly.
• Contra Trade: Generally, opposite trades (‘contra’) within 6 months is restricted. However, revocation of pledge within 6 months of creation does not attract such ‘contra’ restrictions (since the beneficial ownership does not change unless the pledge invoked), provided the transaction is bona fide and pre-cleared by the Compliance Officer.
• Sale of Shares: Also, selling shares after revoking a pledge is not considered a contra trade provided the transaction is bona fide and pre-cleared by the Compliance Officer.
• Pre-clearance: All such transactions must be approved by the Compliance Officer and such transaction to be undertaken only during the period when the notional trading window is open (i.e., no UPSI is held by the Designated Person).

Key Takeway:
This SEBI informal guidance highlights the importance of ensuring that transactions involving the creation or revocation of a pledge are bona fide, pre-cleared by the Compliance Officer, and executed only when the notional trading window is open and the Designated Person is not in possession of UPSI. It also emphasizes the need to assess whether any proposed transaction by a Designated Person attracts ‘contra trade’ restrictions.