To curb company insiders from taking advantage of price sensitive information to make short-term profits, the stock market regulator has proposed to introduce short swing profit regulations.
Under short swing profit, an insider in a company is compelled to surrender profits made out of buying and selling shares within six months. Owners, directors and executives of a company are not expected to make rapid buy/sell transactions as they are assumed to have a long-term investment in their company.
The consultative paper put up for public comment by the Securities and Exchange Board of India (SEBI) says, "The proposed regulation seeks to compel an 'insider' to surrender such profits of the company in any of his/her transactions concerning equity-based securities of the company (including its parents or subsidiaries) in the event both the buy and sell side of the transaction are entered into within six months of the other." SEBI proposes to use the last-in first-out method for determining the six-month period between trades.
The designated insider for the purpose of short swing profits is proposed to include all key management personnel, directors and all executives of the company who are beneficial owners, directly or indirectly, of 10 per cent or more of any class of equity securities. "Alternatively, all officers of the company as well as beneficial owners of the company in excess of 10 per cent holding, singly or in concert, would also be implicated in the definition of designated insider," says the proposed regulation.