[Owais is a student at Government Law College.]
Recently, the Securities and Exchange Board of India (SEBI) released a consultation paper (paper) dated 9 November 2024, to revisit the definition of the unpublished price sensitive information (UPSI) under the SEBI (Prohibition of Insider Trading) Regulations 2015 (PIT Regulations) to include the material information as outlined in Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR Regulations) within the ambit of UPSI.
The article deliberates on the proposed recommendations in the paper, the limitations and suggestions thereto along with the resultant outcome of the same on the financial market.
Background
The present regime of UPSI is governed by its definition in the PIT Regulations. The definition outlines the categories of information which can materially affect the price of the security, with five explicit examples. The definition also includes the phrase “ordinarily including but not restricted to” (emphasis supplied). However, SEBI is of the view that only the explicit examples are classified as UPSI by the listed entities. This results in non-compliance with the spirit of law. Thus, to ensure regulatory clarity, certainty and uniformity in compliance for the companies, SEBI proposes to include material events in Regulation 30 of LODR Regulations in the classification of UPSI.
Overview of the Proposed Recommendations
The paper acknowledges that every material information in Regulation 30 of LODR Regulations does not affect the price of the security, for the benefit of the insider, to be classified as a UPSI. This reiterates the stance of the Supreme Court in SEBI v. Abhijit Ranjan wherein it stated that “the information may materially affect the price of the security either positively or negatively and the impact can be beneficial or adverse. Also, the effect can be bearish or bullish.”
Similarly, the paper outlines that considering all the material events as UPSI results in the trading window remaining closed for a longer period for the insiders who are in perpetual possession of UPSI and are restricted to trade by Regulation 4 of the PIT Regulations. It similarly affects the trading capacity of insiders who are oblivious of some aspects of UPSI as the promoter, director or key managerial personnel are not expected to be acquainted with every affair of the company and so every material information cannot constitute UPSI.
Thus, rather than a blanket incorporation of the entire Regulation 30 of LODR Regulations within the definition of UPSI, the paper recommends for including 13 material events to be classified as UPSI. Only for the sake of convenience and clarity in understanding, the author divides these 13 recommendations into two classes.
First, information relating to activities in the usual course of business of the listed entity which includes change in ratings, fund raising, agreements impacting the management and control of the company, change in key managerial personnel other than superannuation or end of term and resignation of auditors, resolution plan/ restructuring / one-time settlement in relation to loans/ borrowings, award or termination of order/ contracts not in the normal course of business, giving of guarantees/ indemnity or becoming a surety for any third party, and granting, withdrawal, surrender, cancellation or suspension of key licenses or regulatory approvals.
Second, information relating to misconduct, litigation or disputes affecting the listed entity which includes fraud or default by the listed entity, its subsidiary, promoters, directors or its key managerial personnel and their arrest, admission of winding-up petition, admission of initiation of corporate insolvency resolution process against the listed entity and its approval or rejection, initiation of forensic audit for misstatement, misappropriation or diversion of funds and receipt of final forensic audit report, actions or orders by any judicial, statutory, enforcement of regulatory body against the entity, its director, promoter, etc., and outcome of any litigation or dispute.
Analysis
The rationale of the paper remains to prevent market abuse, protect the interest of the shareholders, and promote confidence and respect in the capital markets. Thus, the paper duly makes a genuine attempt to further this outcome. The potential advantages are discussed below:
Promoting transparency
An explicit and unambiguous statute is always advantageous over an open-ended statute. By elaborately defining the class of information to be classified as UPSI, though increases the compliance for trading plans under Regulation 5 of PIT Regulations, makes the compliance and regulatory system much more robust. The expansion of the ambit of UPSI increases the investor confidence as not only the regular business activities but also other activities and their outcomes affecting the entity are now included as UPSI like initiation or outcome of litigation, insolvency, misstatement, frauds, arrests, etc.
Piercing the corporate veil
No doubt, a listed entity has a separate legal existence. However, the amendment seeks to include the misconduct of the promoters, directors, key managerial personnel and even the subsidiary companies as UPSI. This ensures that the insiders who are in receipt of this information, shall be unable to sell the securities to the ordinary person oblivious of the same, thereby protecting them from uncalled losses as this information are surely to have a negative impact on security prices.
Saving litigation time and cost
The clear demarcation of UPSI will enable the entities to have simplified compliance mechanism. Similarly, it leaves less to no room for the courts to apply the ejusdem generis principle, promoting a commercial friendly environment in the market by making the statute goal post and transparent, further promoting the ease of doing business.
Juxtaposing material event and UPSI
Every material event does not necessarily constitute a UPSI as the intent of disclosure of material information varies from that of UPSI. The former is aligned to promote good corporate governance and transparency in the company, whereas the latter is aligned to prevent the insiders from taking undue benefits with the possession of UPSI and affect the price of the security. This has also been upheld by Securities Appellate Tribunal in Rupesh Kantilal Savla v. SEBI. Thus, selectively incorporating Regulation 30 of LODR Regulations is pragmatic and makes the compliance for the entity much easier.
However, the paper is rather taciturn on some other important aspects of UPSI, which the author believes, if incorporated in the proposed amendment, can have a significant outcome. These are discussed as follows.
Exceptions to trading when in possession of UPSI
PIT Regulations are based on the doctrine of parity of information owing to the information disparity in favor the insider and thus restricts his trading. However, there are certain exceptions when an insider is allowed to trade. One sided amendment serves a single interest, whereas explicitly incorporating exceptions while expanding UPSI shall serve common good for all. Thus, undertaking trade for compelling reasons can be a ground for exceptions. In Shreehas P Tambe v. SEBI, the Securities Appellate Tribunal held the trade undertaken by the insider which is bona fide and not induced by UPSI was permissible. Similarly undertaking trade for legitimate corporate purpose can also be a ground for exception, recognized in Rajeev Vasant Seth v. SEBI, wherein the promoter in possession of UPSI was allowed to sell his securities to repay the loans.
When does UPSI cease to be UPSI
UPSI is surely a limiting factor for the trading capacity of the insider. However, the PIT Regulation is rather ambiguous on the thawing point when the information ceases to be a UPSI and becomes a generally available information (GAI), which is the information accessible to the public on non- discriminatory basis. The regulation provides that GAI includes only that information which has been disclosed to the stock exchange. The Securities Appellate Tribunal in Future Corporate Resources Private Limited v. SEBI has held that once the UPSI is reported in the media, it ceases to be a UPSI. Thus, it is imperative to establish a clear demarcation between UPSI and GAI.
What does not constitute UPSI
In the course of expanding the ambit of UPSI, it remains essential to delineate information outside the ambit of UPSI as the same would provide further clarity to the statute. Thus, we have the Shruti Vora v. SEBI, wherein it was held that WhatsApp forwards are based on the "Heard on Street” principle and thus outside the ambit of UPSI. Thus, discussions in the course of board meeting, electronically available information, public dissemination etc. can be some of the information in this category.
Conclusion
Thus, the paper is surely a step in the right direction, insofar as it seeks provide a concrete definition to UPSI, and balancing material information with UPSI. The expanded framework calls for a greater compliance and vigilance on the part of SEBI as well as the listed entity since acts or outcomes of acts outside the scope of regular business activity is also included within the ambit of UPSI.
However, the author is of the view that the one-sided expansion of UPSI, without clearly outlining the exceptions and information outside the ambit of UPSI, creates a regulatory imbalance and compliance conundrum which needs to be balanced and well thought to protect the interest of all the participants in the market.
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