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The author is Isha Lodha, a fourth year student at Student at Gujarat National Law University, Gandhinagar.
Introduction
The Securities and Exchange Board of India (SEBI) recently issued a consultation paper dealing with a proposal to tweak the definition of Unpublished Price Sensitive Information (UPSI) under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations). The objective of the proposal has been identified as “bringing clear and uniform standards of compliance in the ecosystem” by amending the definition of UPSI to include ‘material events’ as defined under Regulation 30 of the SEBI (LODR) Regulations, 2015.
SEBI vide the PIT Regulations prohibits the practice of insider trading and the handling of UPSI through various appropriate measures. The Regulations are not only applicable to persons in possession of UPSI but also prohibit communication of UPSI with outsiders except in the cases where it is required for a legitimate purpose on a ‘need to know’ basis.
Furthermore, the regulator also requires disclosure of material events in accordance with Regulation 30 of the SEBI (LODR) Regulations, 2015 which is also an imperative compliance for greater transparency in the market. To trace the linkage between UPSI and material events, the consultation paper sheds light on the report of the Committee on Fair Market Conduct which recommended the exclusion of ‘material events’ from the PIT Regulations in 2019. However, the market regulator has observed frequent instances where events that are disclosed as material events are not being treated as UPSI despite the disclosure having a significant impact on the price of the scrip.
This article presents a critique on the consultation paper to re-align the definition of UPSI with material events disclosures. It highlights the probable consequences of the proposed amendment and casts the doubt whether an amendment is the panacea for SEBI’s regulatory concerns.
Tracing the evolution of the definition of UPSI
Regulation 2(1)(n) of the PIT Regulations define UPSI as any information that is related to a company or its securities, directly or indirectly, and not generally available, but is likely to affect the prices of the securities once it becomes generally available.
In 2017, the committee on Fair Market Conduct recommended to explicitly remove the inclusion of “material events in accordance with the listing agreement” in the definition of UPSI. The rationale behind this as noted by the committee was that the definition of UPSI is inclusive in nature. Pursuant to the mandate in Regulation 68 of LODR which requires disclosures of material events or information, the committee noted that, all material events that are required to be disclosed may not necessarily be UPSI under the PIT Regulations. Consequently, PIT regulations were amended and clause 2(1)(n)(vi) “material events in accordance with the listing agreement” was omitted.
The blurring difference between UPSI and material events/information
Since the amendment, there have been notable instances where despite the event being material and having an impact on the price, listed entities haven’t classified it as UPSI. In a study conducted by the market watchdog, upon analysing 1,100 press releases of the top 100 listed companies, it was noted that pursuant to the press release there was a significant impact on the price scrip in 227 instances. However, only 1.64% of the total press releases were categorised as UPSI by the companies.
To navigate this issue, SEBI in its consultation paper has proposed to amend the present definition of UPSI and bring the disclosures prerequisite to Regulation 30 of LODR under the ambit of UPSI. However, the regulator’s aim to bring clarity and uniformity in compliance regulations seems far-fetched. By broadening the ambit of UPSI, it is trying to blur the lines between UPSI and material non-public information which goes against the intent of the legislature. The SEBI Act of 1999 clearly demarcates between the two by defining MNPI in section 12(e) and UPSI in section 15(g).
It is pertinent to highlight the difference in treatment of information classified as UPSI as compared to an event categorised as a material event. While ascertaining and dealing with UPSI there is a higher threshold of compliance and disclosure requirements. It necessitates entry in the SDD, trading window closure, pre-clearances under the PIT Regulations as well as not disclosing the information till it is generally made available. On the other hand, it is required to promptly disclose the material event to stock exchanges as a threshold under Regulation 30 of LODR.
While SEBI is taking steps to reduce this dichotomy between the listed corporations and the market participants, it is actually disregarding the developmental phase that UPSI undergoes from its germination to it being converted into a material event. This proposal would undo that process resulting in an early start to the compliance requirements making the job of compliance officers burdensome. It puts the onus on them to engage with the employees and KMP’s of the company to decipher what would constitute as a UPSI, at what stage the information would become UPSI amongst a host of other various compliance queries. Additionally, usage of various terms like UPSI, MNPI, material event and material information by the Board across its several regulations and proposals will require a clarity given the proposal has blurred the regulatory landscape.
Potential consequences and challenges
This proposal, if implemented, will bring forth a slew of practical challenges for all the stakeholders involved. Taking a closer look at Regulation 30, it should be noted that under the three criteria listed for determination of materiality of events/information under 4(i) only one of them draws reference to significant market reaction. As a result, Regulation 30 casts a much wider net and will include a greater number of events that are not necessarily UPSI.
For instance, Para A of Part A of Schedule III lists out items such as appointment or discontinuation of share transfer agent, incorporation of a company, any action taken by regulator etc. While these constitute to have informational relevance and warrant disclosures, they do not have the ability to cause significant or material price variation in the scrip prices and thus cannot be classified as UPSI.
Similarly, Para B specifies the list of information/events which must be tested for materiality. SEBI recently released a consultation paper introducing quantitative criteria for determining materiality. Its implementation (approved by SEBI in its meeting dated 29 March, 2023) would result in numerous events calling for disclosures under Regulation 30. This might lead to situations of “deemed UPSI” as well as voluminous and information overdose which frustrates the intent of the lawmaker.
In the same vein, considering SEBI’s argument that out of 227 instances only 18 were classified as UPSI amongst the 1100 press releases. On the flip side if the proposal is enacted the 750 instances which were disclosed as material information will also have to be classified as UPSI which is a worrisome number.
Conclusion
Therefore, it is worth noting that simply because a certain sort of occurrence is described above as material information does not automatically imply that it is UPSI, irrespective of its apparent price implication. Certain SAT rulings also are in support of this finding. In the case of Anil Harish v. SEBI the tribunal ruled that information required to be provided to a stock exchange under a listing agreement does not automatically imply that the information is always price sensitive. In an instance of determining materiality of a divestment transaction carried out in the ordinary course of business, the tribunal observed that the event despite being material for disclosure purposes, did not have any impact on the price of the company’s securities and hence is not price-sensitive.
Enacting the consultation paper in its current form would result in PIT Regulations losing their essence as materiality would become the principal criteria instead of price sensitivity. With such a wide scope even a show-cause notice, market rumour or regulatory scrutiny will trigger this threshold. The regulator needs to specify that only material information emanating from the company will be considered as UPSI either through FAQ’s or informal guidance mechanism. However, not every query can be settled through this time-consuming process.
As a remedial measure, instead of including entire list of events provided under Regulation 30 read with Schedule III in the definition of UPSI, it is suggested that germination of UPSI for events/information listed enlisted under Para A and Para B of Part A of Schedule III which have been already tested out for materiality and found to be material should only be included under the ambit of UPSI.
Therefore, under the garb of increasing uniformity and transparency, SEBI through this proposal is attempting to over legislate and invite broader implications. An amendment to the definition of UPSI is not an elixir for its regulatory concerns, rather it will create its own domino effect by attracting unnecessary disclosures that do not amount to insider trading.