In a move to bring about greater regulatory clarity and compliance, the Securities Exchange Board of India (“SEBI”) had published a consultation paper proposing an amendment to the definition of unpublished price sensitive information (“UPSI”) under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”) (the “Consultation Paper”)^[1]. SEBI proposes to specifically re-include a “material event” in accordance with Regulation 30 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“Listing Regulations”) within the definition of UPSI.

The legislative intent behind the proposal

 Regulation 2(1)(n) of the PIT Regulations defines UPSI as any information relating, directly or indirectly, to a company or its securities that is not generally available which, upon becoming generally available, is likely to materially affect the price of securities. The regulation also includes an illustrative list of items which would ordinarily constitute UPSI.

Through an amendment to the PIT Regulations, which came into effect from April 1, 2019, SEBI had omitted “material events in accordance with the listing agreement” (linked to the provision on disclosure of material events under Regulation 68 of the Listing Regulations) from the illustrative list of UPSI items^[2]. The amendment was made in light of observations made by the Committee on Fair Market Conduct (August 2017) that “material events” under Regulation 68 of the Listing Regulations may or may not be price sensitive and, hence, may not always and necessarily fall under the ambit of UPSI under the PIT Regulations^[3].

SEBI notes in the Consultation Paper that the amendment had been made with the expectation that listed companies would exercise sound judgment and comply with the principles laid out in the PIT Regulations when determining UPSI. SEBI also notes specific instances where announcements or claims were made by companies declaring growth in certain business verticals, which impacted the price of shares, or announcements under press releases which by their very nature warranted categorization as UPSI due to their impact on share price, but were not categorized as UPSI by the relevant listed companies.

SEBI along with the stock exchanges conducted a study on press releases made by top 100 listed companies between January 2021 to September 2022. It observed that out of the total press releases where price movement in the scrip of the companies (adjusted for movement in the Nifty/Sensex) was more than 2%, a mere 8% of press releases had been categorized as UPSI.

Several suspected insider trading cases alerted on the SEBI’s surveillance system, sometimes exceeding notional profits of even INR 25 Crore, escaped scrutiny because of non-categorization of the underlying material events as UPSI. SEBI observed that large companies generally only categorized items explicitly set out in the illustrative list under Regulation 2(1)(n) of the PIT Regulations as UPSI. An indication that a large quantity of price-sensitive information that should have been classified as UPSI has been slipping through the cracks. In an effort to navigate the above issues, the SEBI is exploring the possibility to amend the definition of UPSI to re-include a material event in accordance with the Listing Regulations within the definition of UPSI.

Practical challenges with linking material events to UPSI

Regulation 30 of the Listing Regulations requires listed entities to disclose any material events or information to the stock exchanges. “Material events or information” under Regulation 30 include certain deemed material events, as well as events which may be considered material, based on certain criteria (e.g., if the omission of the event/information would result in discontinuity or alteration of publicly available information, a significant market reaction if the omission came to light at a later date, or an expected impact exceeding certain quantitative thresholds linked to turnover, net worth, etc.).

However, not all events determined as material or mandated to be disclosed under Regulation 30 of the Listing Regulations can be construed as price sensitive. For example, events such as resignation of the listed company’s auditor or independent director, changes in directors or senior management, appointment or discontinuation of a share transfer agent etc., while having informational value for disclosure, may not always or necessarily be “price sensitive”. Further, Regulation 30 of the Listing Regulations now requires disclosure of all governmental notices and actions, any proceedings against directors, etc., all of which are to be disclosed in the interests of transparency and may not necessarily impact price.

It has also been observed by the Securities Appellate Tribunal (“SAT”) that, whether material events would constitute price sensitive information, would depend on the facts and circumstances of each case. SAT held that a particularly large order for an infrastructure company which, while a material event under the Listing Regulations, would not necessarily be price sensitive as it was in the company’s ordinary course of business.^[4] Similarly, sale of part of an investment company’s investments in order to acquire coal mining leases was held by the SAT to not be price sensitive information as this was normal activity undertaken by an investment company.^[5]

The proposed amendment expands the illustrative list widely and may not necessarily serve the objective of better compliance, especially as merely categorizing information as UPSI does not trigger any disclosure requirement. This may however create larger compliance issues, especially for compliance officers, in matters such as pre-clearance of trades, closing of trading windows, etc.

The amendment to the Listing Regulations notified by SEBI last year raises further concerns^[6]. In a significant change, the amendment has introduced quantitative thresholds to the guidelines for determining materiality under Regulation 30 of the Listing Regulations. Materiality is to be determined based on value or expected impact of the events or information, whichever is lower, as a percentage of prescribed thresholds of turnover, net worth and profit or loss of the company. Aside from practical challenges in the assessment of events or information which may not necessarily be quantifiable and other interpretational ambiguities, the amendment may lead to a significant increase in compliance requirements under the PIT Regulations.

Conclusion

While the concerns raised by SEBI are not unfounded, the reintroduction of a widely defined illustrative term may not address the issues but create greater ambiguity for compliance officers in relation to requirements such as maintenance of Structured Digital Databases and pre-clearance of trades. The objective of Regulation 30 of the Listing Regulations (greater transparency) and the PIT Regulations (avoidance of information asymmetry) do have overlaps, and these are already addressed in the definition of UPSI, as it exists today.

An alternate approach for SEBI to consider would be to provide a sub-category of material information as illustrations to UPSI which would bring greater clarity and help compliance officers ensure better compliance with the PIT Regulations.

Endnotes:

[1] SEBI Consultation Paper on ‘Proposed Review of the definition of Unpublished Price Sensitive Information (UPSI) under SEBI (Prohibition of Insider Trading) Regulations, 2015 to bring greater clarity and uniformity of compliance in the ecosystem’ dated May 18, 2023: SEBI | Consultation Paper on proposed review of the definition of Unpublished Price Sensitive Information (UPSI) under SEBI (Prohibition of Insider Trading) Regulations, 2015 to bring greater clarity and uniformity of compliance in the ecosystem

[2] Regulation 3(1)(d) of the SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2018.

[3] Para. 2.2, Page 42, SEBI Report of Committee on Fair Market Conduct for public comments: SEBI | Report of Committee on Fair Market Conduct for public comments

[4] Anil Harish v. SEBI (SAT – Appeal No. 217 of 2011).

[5] Gujarat NRE Mineral Resources Ltd. v. SEBI (SAT – Appeal No. 207 of 2010).

[6] Regulation 3(VII)(i)(b) of the SEBI (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2023.