The Sebi has proposed to amend the definition of unpublished Price Sensitive Information’ (UPSI), one of the most crucial parts of its Prohibition of Insider Trading Regulations, 2015.
By Lalit Kumar
The Sebi (Prohibition of Insider Trading) Regulations, 2015 is one of Sebi’s critical regulations and concept of ‘Unpublished Price Sensitive Information’ (UPSI) being most crucial. UPSI means any information which if made public is likely to materially affect the price of securities. As is known, trading in securities while in possession of UPSI is an offense. The Sebi has proposed to amend the definition of UPSI by linking it with ‘material events’ as provided in Regulation 30 of the Sebi (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR). If the proposal goes through, UPSI will include all material events listed in Regulation 30.
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What is now proposed to be changed was already a legal position until April 1, 2019. Until April 1, 2019, material events were treated to be UPSI. However, from April 1, 2019, the definition of UPSI was changed to delete material events to be treated as UPSI. The reason to change this was that it was felt that all material events mentioned in the listing agreement cannot be price sensitive information. As per Sebi, this proposal will bring greater clarity and uniformity of compliance in the ecosystem.
Since all things are based on material events under Regulation 30 of the LODR, it is important to know what entails material events. As per Regulation 30 listed entities are required to disclose material events or information to stock exchanges, such that these material events or information are disseminated widely to public shareholders.
The current definition of UPSI is an inclusive definition. It has a broad base concept of UPSI and also provides for illustrative list of items that would constitute UPSI based on this broad concept. The broad concept provides that UPSI would mean any information which if made public is likely to materially affect the price of securities. Then there are few illustrations (which have to be read as examples and not as an exhaustive list). For example, information relating to financial results, dividends, change in capital structure, etc. would be deemed to be UPSI. Although the definition has an inclusive list but it should not mean that UPSI will only be restricted to the items mentioned in the definition. As mentioned above, they should only be treated as examples constituting UPSI. In other words, while the listed items are definitely UPSI but UPSI shouldn’t be restricted to this list. In practice, listed companies and insiders were ignoring the broad concept and were only treating the listed items as UPSI that led Sebi to propose linking of UPSI to events and information as mentioned in Regulation 30.
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Since regulation 30 is important in the context of UPSI, it is good to understand Regulation 30. This regulation has three parts – A, B and C. Part A provides for events which are material in nature without applying any test of materiality. Part B provides for those events which are material if they meet certain materiality threshold. Part C is a generic clause – it provides that any other information/ event which is exclusively known to a listed entity which may be necessary to enable the holders of securities of that listed entity to appraise its position and to avoid establishment of a false market in such securities.
Regulation 30 has large number of events or information that are deemed material. A review of the items mentioned there will reveal that almost every event of a company is covered. For example, it covers acquisitions and disposal of shares, assets, issuance of shares, revision in ratings, entering shareholders’ agreement, joint venture agreement, changes in directorship, auditors, key managerial personnel, proceedings in shareholders’ meeting, etc. If all material events are treated as UPSI (as proposed by Sebi), then UPSI would mean every material event mentioned in Regulation 30. This will be an overkill.
Although Sebi’s proposal is a good one but where it needs to re-consider this proposal of linking all events as UPSI. Such an expansive concept of UPSI is bound to result in defaults by companies as they may not fully understand and then as a result commit default. It cannot be said that all items listed under Regulation 30 will be price sensitive, therefore, to link all events as UPSI will not be a correct approach. Therefore, a better way is to carefully carve out a specific list of UPSI from the material events mentioned in Regulation 30 and then make them a part of UPSI. Further, as Part C seems quite generic and subjective it is best it is not included in the proposed revised definition of UPSI.
Sebi’s step is a good one but it needs to carefully balance the interest of both listed entities and stakeholders and come out with a well-considered list of UPSI.
