Government servants and their family members cannot buy or sell stocks 'frequently' without doing this Read here to know what government servants and their family members need to know before investing in the stock market
There are certain service-related rules and regulations that every central government servant must follow even when acting in a personal capacity otherwise it could result in strict action. One such rule is about stock market transactions by government servants upon whom Central Civil Services (Conduct) Rules, 1964 are applicable.Rule 16 of Central Civil Services (Conduct) Rules states, "No Government servant shall speculate in any stock, share or other investment. Provided that nothing in this sub-rule shall apply to occasional investments made through stockbrokers or other persons duly authorised and licensed or who have obtained a certificate of registration under the relevant law."
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What does the rule say about government servants transacting in the stock market?
According to Manmeet Kaur, partner, Karanjawala & Co, a law firm, Rule 16 of Central Civil Services (Conduct) Rules puts a restraint on frequent and speculative stock trading including day trading. "Rule 16 puts a restraint on frequent and speculative trading which would include daily stock trading. However, the rule does not prescribe any standards for what constitutes frequent trading," says Kaur.According to Yashojit Mitra, Partner, Economic Laws Practice, a law firm., government servants need to watch what is called frequent trading. "What can be considered as frequent trading can also be fact or circumstance specific to the case. Further implications under the Insider trading Regulations and SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the securities market) Regulations, will also need to be considered," says Mitra.
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In this specific regard (stock market trading), the central government has also issued an office memorandum for its employees.
According to Kaur, the central government via an office memorandum dated February 7, 2019, has directed that if the total transactions in shares, securities, debentures, mutual funds schemes, etc. exceeds six months' basic pay of the government employee during a calendar year, an intimation in a specified format must be sent to the prescribed authority. "Similarly, Rule 14 of the All-India Services (Conduct) Rules, 1968 was also amended to include the requirement of intimation in case the corpus of such transactions exceeds six months' basic pay of the officer," Kaur added.
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Does Rule 16 apply only to IPS, IAS, IFS officers?
According to Mitra, a government servant means any person appointed by the government to any civil service or post in connection with the affairs of the Union and includes a civilian in a defence service."A Government servant whose services are placed at the disposal of a company, corporation, organisation or a local authority by the Government shall, for the purposes of these rules, be deemed to be a Government servant serving under the Government notwithstanding that his salary is drawn from sources other than the Consolidated Fund of India," says Mitra.
According to Kaur, Central Civil Services (Conduct) Rules, 1964 apply to central government employees except IAS, IPS, IFS(s) as they are governed by All India Services (Conduct) Rules, 1968. "Rule 16 of the CCS (Conduct) Rules, 1964 and Rule 14 of the All-India Services (Conduct) Rules, 1968 are similar in regard to restrictions on trading of stocks, shares and investments."
What government servants need to do if they want to make stock market or other investments
According to Mitra, government servants must send an intimation in a prescribed format to the designated authority if the total transactions in shares, securities, debentures, mutual fund schemes, etc exceeds six months' basic pay during the calendar year. "This intimation in a prescribed format needs to be submitted by January 31 of the subsequent calendar year," says Mitra.There are certain additional compliances too which a government servant has to follow. According to Mitra, where a government servant enters into a transaction in respect to movable property either in his name or in the name of the member of his family, he shall, within one month from the date of such transaction, report the same to the prescribed authority, if the value of such property exceeds his two months' basic pay.
"Further, it is also specified that previous sanction of the prescribed authority shall be obtained by the Government servant if any such transaction is with a person having official dealings with him," Mitra added.
Government servants can invest in an IPO, provided they are not involved in the price fixation process of the IPO or its follow-up activities. "As they are expected to focus on long-term investments and are not permitted to engage in frequent buying and selling, gains from listing may be considered speculative, although not necessarily from the perspective of the income tax law. Selling IPO-allotted stock on the listing day should be avoided by government servants, as stocks are expected to be held for the long term," says chartered accountant Bhavik Gandhi- Head- Operations, Mirae Asset Capital Market, a stock broker.
Gandhi further stated that a government servant is permitted to engage solely in long-term investments and is prohibited from participating in speculative or intraday trading. "Additionally, no government servant should engage in purchasing securities, including derivatives, on a 'carry forward' basis or partake in the 'short sale' of any security, including derivatives. Government servants engaging in purchase transactions must ensure they take delivery of the securities purchased before selling them," says Gandhi.
What if families of government servants invest in the stock market?
The rules state that no government servant or any member of his family or any person acting on his behalf shall make any investment that may embarrass or influence the government servant.According to Rule 16 of Central Civil Services (Conduct) Rules, "No Government servant shall make, or permit any member of his family or any person acting on his behalf to make, any investment which is likely to embarrass or influence him in the discharge of his official duties. For this purpose, any purchase of shares out of the quotas reserved for Directors of Companies or their friends and associates shall be deemed to be an investment which is likely to embarrass the Government servant."
Kaur explains the reason for this rule. "The rule does not contain an exception clause which permits any conflicting investment to be made with the permission of the government. However, the rule has been promulgated to ensure that the investments by a government servant do not cause any conflict of interest or influence in carrying out his duties," says Kaur.
This story originally appeared on: India Times - Author:Faqs of Insurances
