Introduction
The Securities and Exchange Board of India (SEBI), the capital market regulator, intends to amend insider trading regulations due to inadequate reporting by listed companies regarding significant events that influence stock prices. A study conducted in collaboration with stock exchanges revealed that listed companies accurately identified Unpublished Price Sensitive Information in only 8 per cent of the cases, indicating that listed entities incorrectly classified UPSI in 92 per cent of the instances. In one of the consulting papers released in May 2023, SEBI proposed to review the definition of Unpublished Price Sensitive Information (UPSI) under SEBI (Prohibition of Insider Trading) Regulations, 2015. The regulator has proposed the review to ensure consistent adherence to compliance standards within the ecosystem by connecting material events, as provided in Regulation 30 of the SEBI Listing Obligation and Disclosure Requirements (LODR) Regulations, 2015. The Author seeks to analyse the significance of the proposed amendment to the definition of UPSI in the context of the existing SEBI regulations and whether the proposed amendment is necessary to curb the unfair practice of insider trading within the stock market.
Demystifying Unpublished Price Sensitive Information
As per the Regulation 2(1)(n) of SEBI Prohibition of Insider Trading (PIT) regulation 2015, Unpublished Price Sensitive Information means “any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities” and The information encompassed within the definition (UPSI), Although not limited to, includes financial results, dividends, changes in capital structure, alterations in key managerial personnel, as well as mergers, demergers, business listings, and other transactions.
The consultation paper shed light on the evolution of the current definition of UPSI. The current definition of UPSI came from a report submitted by the Committee on Fair Market Conduct in August 2017, chaired by TK Viswanathan. This report recommended amendments to several key regulations, including the SEBI Act of 1992, the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations of 2003, and the SEBI (Prohibition of Insider Trading Regulations of 2015. The committee noted that the definition of UPSI is inclusive, and all unpublished information likely to be price-sensitive would automatically fall under the definition of UPSI. However, it noted that under regulation 68 of LODR, disclosing all material events or information may or may not be price sensitive. Consequently, the mention of material events was omitted from the PIT Regulations, 2015.
Price sensitivity and materiality can be compared to two circles with the same centre, where price-sensitive information is the inner circle, and materiality is the outer circle. It means that what is ‘price sensitive’ is basically ‘material’, but the opposite is not true. The High-Level Committee’s report on the review of the SEBI Prohibition of Insider Trading Regulations, 1992, clearly mentioned that no information should be automatically classified as price-sensitive. In cases where the information simply repeats known events in a predictable manner, it should not be deemed to impact the stock price. The Securities Appellate Tribunal (SAT) also supported these distinctions in its judgments. If specific information is obligated to be disclosed to a stock exchange according to a listing agreement, it does not automatically qualify as price-sensitive. On the contrary, the determination of price sensitivity should solely depend on the impact of the information on the price of securities held in Anil Harsh v. SEBI. held that a divestment transaction conducted as part of a company’s regular business operations does not impact the price of its securities. Therefore, although such information is considered material and should be disclosed to the stock exchange, it is not price-sensitive.
The rationale of SEBI’s Proposed Amendment
According to the 2019 amendment in definition, SEBI observed that the listed entity failed to categorise an information or event as UPSI when it should have been appropriately classified. For instance, when a company wins a deal and claims it would drive revenue growth to the pinnacle in a specific sector, resulting in a 6% increase in its share price within one trading day, such a claim should be considered price-sensitive information. The amendment was brought with the presupposition that listed entities would exercise sound judgment and discretion in classifying information as UPSI and thereby adhere to the guidelines provided in the insider trading regulations. It was meant to encourage compliance in spirit with the regulations. However, according to SEBI’s Analysis, after the amendment in UPSI, companies mostly decided that unpublished information was UPSI only if it explicitly matched the list under regulation 2(1)(n) of PIT regulations. Most companies also considered this a ‘uniform practice’ as it is clearly articulated in PIT regulation.
When an employee of a company is found doing insider trading, the employee contends that when the company itself did not consider the information as UPSI, the employee had no reason to consider it as such, either. This emphasised the fact that companies were applying their discretion and sound prudence in classifying the information as UPSI according to regulatory guidelines.
Interestingly, SEBI argues that the non-categorisation of material information, as UPSI, has hindered its ability to effectively investigate cases flagged by its surveillance system for potential insider trading. Therefore, SEBI’s efforts towards curbing insider trading are hampered by the listed companies’ non-categorisation of material information as UPSI. According to Regulation 30, LODR, material events are events as determined by the board of directors of a listed entity that significantly affect the company. Companies typically establish their own materiality policies to determine such events, considering factors such as their effect on revenue, operations, and other relevant considerations. The changes have been implemented to enhance transparency and ensure the prompt disclosure of material events or information by listed entities.
Due to the aforementioned reasons, SEBI has proposed to amend the definition and disclosure as required under Regulation 30 of the LODR be brought into it. These modifications aim to create a more transparent environment where relevant information is disclosed promptly, benefiting investors and fostering a fair and efficient market.
Is Amendment Necessary or Redundant?
The proposed amendment strives to increase regulations’ effectiveness while promoting a level playing field for all market players. However, there may be a question as to whether this amendment is truly needed. All the unpublished, potentially price-sensitive information falls under the definition of UPSI, regardless of whether it is explicitly enumerated. SEBI often provides clarification through FAQ to address regulatory concerns, and SEBI could potentially use the same in the current scenario to achieve its objective. Also, making a precedent where clarification is done for every amendment could have broader consequences.
Considering the UPSI paper in conjunction with the proposed amendments to the LODR regulations, it becomes apparent that the scope of UPSI would widen considerably. This expansion could potentially encompass market rumours as well. Traditionally, market rumours, such as speculations about investigations or notices related to a company, may not have been considered as UPSI. Therefore, rumours regarding investigations or notices may become disclosable and treated as UPSI for the purposes of trading window compliance.
The suggested amendment is also expected to shift the focus from price sensitivity to the materiality of information. Regulation 30 of the SEBI LODR, already requires disclosing the material information which falls within the definition of UPSI. The amendment could impact the delineation between two categories of information, UPSI and material non-public information (MNPI)- a distinction made by Parliament in the SEBI Act, 1992. Section 12A(e) refers to MNPI, while Section 15G refers to UPSI.
While aiming to address concerns raised by SEBI, the proposed amendment may potentially increase the compliance burden on companies, which could be considered unnecessary. For instance, compliance measures such as closing the trading window and obtaining pre-clearances under the PIT Regulations for making disclosures under Regulation 30 of the LODR Regulations would necessitate compliance measures. Although SEBI’s concerns are valid, the remedial action proposed may not be the most appropriate solution. If SEBI intends to implement this remedial action, it would need to amend Regulation 30(4) of LODR accordingly.
Conclusion
It is submitted that unpublished price-sensitive Information is an evolving concept. As new developments, events, and trends emerge, the industry needs time to adapt and establish mechanisms to capture and assess the impact of these developments on stock prices. Implementing the changes in UPSI involves various challenges. Determining what constitutes UPSI can be subjective and context-specific, as it depends on the potential impact of the information on the price of securities. Currently, all unpublished, potentially price-sensitive information falls under the definition of UPSI, regardless of explicit enumeration. The proposal is unnecessary and superfluous as it will only increase the burden on listed entities. A more targeted approach is required to address the concerns raised by SEBI without imposing unnecessary compliance burdens on listed entities.
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