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Earlier this month, SEBI issued a consultation paper (“2024 Consultation Paper”) on the proposed review of the definition of the term ‘unpublished price sensitive information’ (“UPSI”) under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”). SEBI has averred that this is in view of bringing regulatory clarity, certainty and uniformity of compliance in the ecosystem. The proposal essentially seeks to align the definition of UPSI in PIT Regulations with specified events for disclosure under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”).
The 2024 Consultation Paper cites a SEBI study which highlighted that listed entities were only categorizing items expressly mentioned in Reg. 2(1)(n) of PIT Regulations as UPSI for material event disclosures, thus not complying with the law in spirit. In 2023 SEBI had sought public comments on its proposal to amend the definition of UPSI to include ‘material events in accordance with regulation 30 of LODR Regulations’ (“2023 Consultation Paper”). However, the responses perceptibly highlighted some of the issues including that not all information/events under Reg. 30 of LODR would have impact on price of securities; that there may be a risk of trading window being closed perpetually and of increased compliance management if this was taken forward.
Thereafter though, LODR was amended in 2023 enhancing disclosure requirements by introducing quantitative threshold for determining materiality of events/ information, disclosure of certain types of agreements binding listed entities, etc. PIT Regulations were also amended in September 2024 to enhance ease of doing business. A working group of SEBI has now proposed another revision to the definition of UPSI. At the outset, the current definition of UPSI under Reg. 2(1)(n), should be noted:
“2(1)(n) “unpublished price sensitive information” means any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon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 shall, ordinarily including but not restricted to, information relating to the following:-
(i) Financial results;
(ii) Dividends
(iii) Change in capital structure
(iv) Mergers, demergers, acquisitions, delistings, disposals and expansion of business and such other transactions;
(v) Changes in key managerial personnel”
The 2024 consultation paper has proposed enlarging the illustrative list provided at Reg. 2(1)(n) by inclusion of 12 new items from Para A and B of Part A of Schedule III of LODR. These include (1) change in rating(s); (2) decision with respect to fund raising proposed to be undertaken; (3) agreement, by whatever name called, impacting the management and control of the company; (4) Resolution plan/restructuring/one-time settlement in relation to loans/borrowings from banks/financial institutions; and (5) Granting, withdrawal, surrender, cancellation or suspension of key licenses or regulatory approvals. In addition, it proposes the inclusion after the word ‘business’ in sub-cl. (iv), the words “award or termination of order/contracts not in the normal course of business”
Evolution of the definition of UPSI under the 2015 Regulations
The NK Sondhi Committee in 2013 conceptualised defining ‘generally available information’ by laying down the principles of how it should be ascertained. Basically, it proposed that information that is accessible to the public on a non-discriminatory basis should be considered as generally available information. The Committee thought it best to leave the determination on whether something is available on a non-discriminatory basis as a question of fact, by adopting the standard of a reasonable man.
Noting that while these principles are also backed by the provisions containing prohibition on communication of UPSI and inducement of communication thereof under Reg. 3, the Committee felt it important to also articulate the concepts as intended to be understood. Thus it proposed specifying illustrative examples of what would ordinarily constitute UPSI to be set out to clearly understand the concept.
However, the committee emphasized the need to ensure that no piece of information is mandatorily regarded as UPSI. It also consequently noted the possibility of the enlisted items to not amount to UPSI as well. This analysis cannot be forgotten as it laid basis for the extant definition and more particularly, the design comprising the illustrative list.
Until 2019, an additional clause formed part of Reg. 2(1)(n), i.e., “(vi) material events in accordance with the listing agreements”. It may be noted that in 2018, the TK Viswanathan Committee had noted in this regard that LODR requires disclosure of material events or information which may or may not be price sensitive. It observed that all material events required to be disclosed per Reg. 68 of LODR may not necessarily be UPSI under PIT Regulations. Since the definition of UPSI is inclusive, the Committee had recommended the removal of the explicit inclusion of the terms ‘material events in accordance with the listing agreements’ in the definition of UPSI.
2023 Consultation Paper
The 2023 Consultation Paper noted that the omission of sub-clause (vi) was carried out with the expectation that listed entities guided by the principles as laid out in the definition of UPSI will exercise their judgment with prudence and categorize information as UPSI and thus comply in spirit with the principles laid out under the PIT Regulations. However, SEBI notes that this has not happened.
According to SEBI, the nature of information released/announcement made in several of the press releasees by listed companies studied by it warranted to be categorized as UPSI. These included (a) sales/ production related press release; (b) potential investments by the listed company, regulatory approvals, etc; (c) expansion of business including brand acquisitions, product launches, etc; and (d) strategic tie-ups.
Further, SEBI emphasised that by and large companies categorized only the items explicitly mentioned in regulation 2(1)(n) of the PIT Regulations as UPSI and that market feedback also suggested that most companies considered this to be a uniform practice since it is explicitly articulated in the PIT Regulations.
It noted further that despite significant number of alerts generated by its surveillance system that a number of entities made notional profits sometimes exceeding Rs. 20 Crore, they cannot be taken up for further examination due to non-categorization of material information as UPSI by the listed companies. SEBI said this hampers its efforts to curb insider trading.
Noting the concerns arising out of the 2023 Consultation Paper’s proposal of broader inclusion of Regulation 30 disclosure requirements in the definition of UPSI, the 2024 Consultation Paper narrowed the scope of thereof. As discussed earlier, the 2024 Consultation Paper proposed an identified 12 items to be introduced within the definition of UPSI.
Contrary view
At the outset, the dissonance between the understanding of the rationale for omission of sub-clause (vi) ought to be addressed. It was omitted on account of a two-pronged fact that (1) not all disclosures mandatory under LODR would be price sensitive; and (2) the inclusive nature of the definition comprises within its scope those disclosures under LODR which may be price sensitive. In this regard, it may also be noted that the expectation placed on listed entities to comply with the provision requires supervision and consequent enforcement action if there are any failures thereof.
On the point specified in the 2024 consultation paper to the tune that uniform practice among listed entities is to construe the definition of UPSI rather exclusively is alarming, in that it hints at regulatory uncertainty and lack of clarity as has been rightly taken cognizance of by SEBI. However, the answer as to how this clarity needs to be provided must be arrived at with extreme caution, especially since the proposal suggests a partial reversal to an older position.
As was noted by the Securities Appellate Tribunal (“SAT”) in Anil Harish v. SEBI, that when a company in the business of infrastructure projects bags an order in the normal course of its business, although it may be required to give intimation need not necessarily be price sensitive. SAT also noted that the determination of price sensitivity depends on facts and circumstances.
This ruling of SAT, the observations of TK Viswanathan Committee Report and the consequent omission of express linking of the definition of UPSI with listing disclosure requirements all highlight the underlying principle that the definition of UPSI ought to be inclusive and the illustrative list is merely that. Consequently also, any insertion to the list provided therein would still have to be price sensitive for it to be UPSI, raising a concern on the efficacy of the proposed amendment.
The solution to the complexities hampering SEBI's efforts to curb insider trading as cited by it in the 2024 consultation paper may be achieved by streamlining its supervisory enforcement. Supervision entails not merely ensuring compliance and enforcing regulatory norms but also actively monitoring and exercising flexibility to manage and response to issues on a real time basis.[1]
Somasekhar Sundaresan (now a Bombay High Court Judge since 2023) had back in 2013 refuted the then prevailing notion that US Securities Exchange Commission (“SEC”) had more powers than SEBI by noting as follows:[2]
“The SEC has had to file a complaint before a court…asking the court to pass orders to disgorge the alleged gains earned by way of insider trading, to restrain the accused from acting as officers or directors of any issuer of securities and to pay civil monetary penalties under the US securities laws. In India, SEBI itself is armed with powers to take each of the aforesaid actions in absolute terms — not just as interim measures.
On an almost daily basis, SEBI issues directions under Sections 11 and 11B of the SEBI Act asking people not to deal in securities or to access capital markets or to be associated with capital markets. SEBI has wide powers to issue “such directions as it deems fit” with the only touchstone of rationale being the “interests of the securities market
…Indeed, in the past, SEBI has even argued that it has the powers to get anyone who could have allegedly been more alert, and there-fore could have allegedly averted frauds on the system (regardless of any statutory obligation to play the role of gatekeeper), to pay the value of the impact of fraud and then chase the actual fraudsters as and when they are held guilty”.
Thus, this is an interesting conundrum.
It is quite challenging to try to create regulations accounting for every scenario and every non-compliance, more so as newer methods to deviate may continue to be carved. It can lead to a slippery slope towards a regulatory framework that adds compliance burdens with endless box-ticking.[3] The want of streamlining supervisory enforcement by active monitoring and placing accountability should not create perverse incentives to keep adding endless top-down regulations regardless of their effectiveness.
SEBI must reconsider complicating the definition of UPSI. Though it may be said that the definition of UPSI is inclusive, if SEBI feels that the need to provide regulatory clarity is pressing, then it may consider to alternatively provide the same vide an explanation to Reg. 2(1)(n). This may be on the lines that the items provided in sub-clauses (i) to (v) are for illustration purposes only and any information specified or not specified therein that otherwise fulfils the ingredients specified herein shall be construed as UPSI.
[1]Sanjeev Sanyal, DEA Discussion Paper titled ‘Risk vs Uncertainty: Supervision, Governance & Skin-in-the-Game’ (2020): Regulation on the other hand refers to minimum standards, rules and policy frameworks put in place for institutions to operate in. Since regulation is a more mechanical top-down approach, it often becomes the default response of policymakers.
[2] https://www.business-standard.com/article/economy-policy/sebi-has-greater-powers-than-us-sec-109102600040_1.html
[3] Supra, at 1.
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