Even lending or borrowing of stocks by employees of listed company who are in possession of unpublished price sensitive information (UPSI) could amount to insider trading, SEBI said.

The market regulator was responding to a query from HDFC Securities, who said that they had approached employees of a few companies requesting them to temporarily lend their shares on an exchange platform.

Stock lending borrowing (SLB) is a mechanism wherein a lender of shares gets to earn interest income without loosing the ownership of shares. The borrower can use the shares for going short or long in the market to earn the difference in share price without investing the entire amount equivalent to the price of the share. The borrower of shares under the SLB segment only has to cope up with the interest or commission that he has agreed to pay to the lender of the shares.

“The transactions of borrowing/ lending done under done under SLB mechanism constitute trade for the purpose of prevention of insider trading regulations. Further, regulations specify that no insider shall trade in securities that are listed or proposed to be listed on the stock exchanges, when in possession of UPSI. Accordingly, borrowing or lending of stocks when in possession of UPSI will result in insider trading, unless the insiders can prove their innocence,” SEBI said in its reply to HDFC.

Stock lending borrowing has not picked up so far in India as trading in derivative segment is cash settled and does not require delivery of shares. SEBI has mandated delivery based trading in around 50 shares this year.

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