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Master of Business AdministrationMBA Semester 4MF0017Merchant Banking and Financial ServicesAssignment-Set- 1Q.1 what do you understand by insider trading. What are the SEBIrules and regulations to prevent insider trading?Ans:-"
Insider trading
is a term subject to many definitions andconnotations and item compasses both legal and prohibited activity.Insider trading takes place legally every day ,when corporate insidersofficers, directors or employees
buy or sell stock in their own companieswithin the confines of +company policy and the regulations governing thistrading. It is the trading that takes place when those privileged withconfidential information about important events use the special advantageof that knowledge to reap profits or avoid losses on the stock market, tothe detriment of the source of the information and to the typicalinvestors who buy or sell their stock without the advantage of "inside"information. Almost eight years ago, India's capital markets watchdog
 the Securities and Exchange Board of India organised an internationalseminar on capital market regulations. Among others issues, it had invitedsenior officials of the Securities and Exchange Commission to tell us howit tackled the menace of insider trading.
SEBI rules and regulations to prevent insider trading.
SEBI had amended the Insider Trading Regulations 1992 vide aNotification dated November 19, 2008 which I had discussed I there andhere .SEBI has now released a set of "Clarifications" on 24th July 2009 oncertain issues arising out of the amendments made. I had opined on someof these issues in my earlier posts referred to above and hence I updateon what are the clarifications so given .Curiously, the "clarifications" haveno formal standing or reference. It is neither a circular, nor a notification,nor even a press release. It is neither signed nor dated. But it seeks to"clarify" and giving meaning to the Regulations that have legal standingand where such "meaning" is quite contrary - as we will see - to theplain reading of the text. Having said that, the "clarifications" mostlyrelaxes the requirements and hence, being gift horses, one should notexamine them in the mouth too closely! Let us see the clarifications given.Recollect that specified persons were banned from carrying out oppositetransactions "(banned transactions") for six months of original buy/sale("original transactions"). The question was whether acquisition of sharesunder ESOPs scheme and sale of such shares would be considered as
transactions that trigger off such ban and whether these themselves arebanned .It is clarified that exercise of ESOPs will neither be deemed to be"original transaction" nor "banned transaction". Thus, by acquiring sharesunder ESOPs, you don't trigger a ban and if you are banned for sixmonths, you can still exercise ESOPs. The reasoning given is that the banis only on transactions in secondary market. (Incidentally, I had felt that"However, taking all things into account, perhaps the intention is not tocover shares acquired under ESOPs Schemes. ").But sale of sharesacquired through ESOPs is covered but it will only be deemed to be an"original transaction" and not a
―banned transaction‖.
In other words, evenif you are under a ban, you can still sell shares acquired under ESOPs butonce you sell such shares, you have triggered a ban of six months. Onthis aspect, I do not understand the basis of clarifying that the sale of shares acquired under ESOPs scheme will not be an "original transaction
logic of covering secondary market transactions should apply herealso .Then, it is clarified that every later transaction triggers a fresh sixmonth ban. A purchase on 1stFebruary results in ban till 1st August.However, if there is a fresh purchase on 15th March, there is a ban now till15th September. Effectively, this means that the ban period is from 2ndFebruary till 15th September. What about transactions before thisamendment - will the amendment create ban in respect of them too - thisis an academic issue now atleast as the six month period is nowcomplete. It is clarified though that the transactions before theamendment are not to be considered. On a similar note, unwinding of positions in derivatives held on the date of this amendment is possible. Acrucial clarification is that the ban on "sale" of shares for personalemergencies is permissible by waiver by the Compliance Officer. This isnot evident from a plain reading of the provision and I had opined that"This bar on such transactions is total. There are no circumstanceswhether of urgent need or otherwise
under which the bar can belifted. There is also no provision under which even SEBI could grant
But SEBI thinks it is so evident and hence let us accept thisgift without creating legal niceties! Note that this clarification applies onlyto sales and there can be no purchases within these six month ban periodobviously there cannot be any personal emergency to purchase shares!
Q.2 what is the provision of green shoe option and how is it used bycompanies to stabilize prices?Ans:-
Green Shoe Option (GSO) is an option where a company can retaina part of the over-subscribed capital by issuing additional shares.Oversubscription is a situation when a new stock issue has more buyersthan shares to meet their orders. This excess demand over supplyincreases the share price. There is another situation called under subscription. In under subscription, a new stock issue has fewer buyers than the shares available. An issuing company appoints a
stabilizing agent, which is usually an underwriter or a lead manager, to purchaseshares from the open market using the funds collected from the over subscriptionof shares. The stabilizing agent stabilizes the price for a period of 30 days fromthe date of listing as authorized by the SEBI. Green shoe option agreementallows the underwriters to sell 15 percent more shares to the investors thanplanned by the issuer in an underwriting. Some issuers do not include greenshoe options in their underwriting contracts under certain circumstances wherethe issuer funds a particular project with a fixed amount of price and does notrequire more funds than quoted earlier. The green shoe option is also known asover-allotment option. The over-allotment refers to allocation of shares in excessof the size of the public issue made by the stabilizing agent out of sharesborrowed from the promoters in pursuance of a GSO exercised by the issuingcompany .The green shoe option is popular because it is the only SEC-permittedmeans for an underwriter to stabilize the price of a new issue post-pricing.Issuers will sometimes not permit a green shoe on a transaction when they havea specific objective for the offering and do not want the possibility of raising moremoney than planned. The term comes from the first company, Green ShoeManufacturing now called Stride Rite Corporation, to permit underwriters to usethis practice in its offering. The mechanism by which the green shoe optionworks to provide stability and liquidity to a public offering is described in thefollowing example: A company intends to sell 1 million shares of its stock in apublic offering through an investment banking firm (or group of firms which areknown as the syndicate) whom the company has chosen to be the offering'sunderwriter(s). When the stock offering is the first time the stock is available for public trading, it is called an IPO (initial public offering). When there is already anestablished market and the company is simply selling more of their non-publiclytraded stock, it is called a follow-on offering. The underwriters function as thebroker of these shares and find buyers among their clients. A price for the sharesis determined by agreement between the company and the buyers. Oneresponsibility of the lead underwriter in a successful offering is to help ensurethat once the shares begin to publicly trade, they do not trade below theoffering price. When a public offering trades below its offering price, the offering
is said to have "broke issue ―or "broke syndicate bid".
This creates the perception of an unstable or undesirable offering, which canlead to further selling and hesitant buying of the shares. To manage this possiblesituation, the underwriter initially oversells ("shorts") to their clients the offering byan additional15% of the offering size. In this example the underwriter would sell1.15 million shares of stock to its clients. When the offering is priced and those1.15 million shares are "effective" (become eligible for public trading), theunderwriter is able to support and stabilize the offering price bid(which is also

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