SAT seeks review on practice of share sales to select investors

Aims to nip unfair edge that buyers get The Securities Appellate Tribunal (SAT) has asked the capital markets regulator to look into the manner in which merchant bankers and brokers market sales of shares, especially by listed companies, to select investors before an issue opens. The tribunal said it could lead to sharing of inside information giving such investors an unfair advantage over others and hence the Securities and Exchange Board of India (SEBI) must examine whether there is a need to bar such investors from trading before the issue opens. This assumes significance as popular fund-raising routes such as offer for sale (OFS) and qualified institutional placement (QIP) used by listed firms are often pitched to select potential investors before the issue opens. “We would like to bring it to the notice of SEBI that the question as to whether investors participating in the market-gauging exercise should be allowed to trade in all segments of the market prior to the [opening of the] issue needs to be looked into,” said the SAT. The tribunal’s direction came while hearing a matter related to Factorial Master Fund, which, as per SEBI, indulged in “unusual and aggressive trading” in the shares of Land T Finance Holdings ahead of its OFS. According to SEBI, the fund allegedly traded in derivatives contracts of Land T Finance Holdings before the OFS on the basis of unpublished price sensitive information that it received during a market-gauging exercise done by Credit Suisse Securities, which was the merchant banker for the OFS. While SEBI found the fund guilty of unfair practices and ordered it to disgorge more than Rs. 200000000 of alleged unlawful gains, SAT quashed the order saying that the entity needs to be given the ‘benefit of doubt.’ Conflict of interest? Legal consultants said SAT has nudged SEBI to look at potential conflict between market-gauging exercises by merchant bankers and communication of inside information, which is prohibited. “While SAT seems to have considered the business need of merchant bankers [for] market gauging, it questions if investors [to whom an issue is pitched to get an idea about valuation] be allowed to trade in derivatives prior to the opening of the issue,” said Sumit Agrawal, a regulatory lawyer and a former law officer at SEBI. “In most jurisdictions, such activities by investment bankers are considered legitimate, not constituting insider trading or improper disclosure of inside information since it is a business need,” he added.