Introduction – Laying Down Context
Recently, SEBI released a consultation paper dated 18th May, 2023 (“Proposal”) on SEBI (Prohibition of Insider trading) Regulations, 2015 (“PIT Regulations”) which broadens the scope for unpublished price sensitive information (“UPSI”). Regulation 2(1)(n) of PIT Regulations defines UPSI as “any information, directly or indirectly related to a company or its securities, that is not generally available and is likely to materially affect the securities’ price upon becoming generally available”. It contains an indicative list as to what all instances could be UPSI. In the Proposal, a new category of UPSI has been proposed which relates to material events as per Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”).
Regulation 30 of LODR was recently amended through an amendment effective from 14th June, 2023 which read conjointly with Schedule III to the LODR lays out a framework for determining the materiality of disclosable events. Currently, listed entities under LODR have to comply with higher disclosure requirements of governance standards; Materiality is now codified for the disclosure requirements. Under PIT Regulations, entities have the discretion of categorizing any information as UPSI. In lieu, SEBI has identified PIT misconduct by listed entities. Only 8% of information is categorized as UPSI; employees that undertake insider trading take shelter under the defense that the company itself has not categorized certain information as UPSI.
By inculcating “material events as per Regulation 30 of LODR” under the list of UPSI, SEBI seeks to lay down objective criteria to curtail the high amount of discretion that rests with listed entities qua qualification of information as UPSI vide the Proposal.
Operating in the multiverse of PIT and LODR
After any information is categorized as UPSI, there is an initiation of trade window closure requirement followed by the information entry in a structured digital database as per PIT Regulations. Ambiguity surrounds its very first step, i.e. identifying UPSI. This impedes the objective put forward by entire PIT mechanism to curb insider trading. For instance, in SEBI v. Abhijit Rajan, it was held that motive was necessary along with possession of UPSI for calling an act insider trading. This ultimately broadened the scope of insider trading leading to undesired contestation by companies.
Therefore, certain strict criteria are required for recognizing UPSI. In this spirit, the Proposal aims to incorporate the recent developments of LODR that explicitly states details of material information required to be disclosed by listed entities to stock exchanges. Regulation 30 is read conjointly with Para A and Para B of Part A of Schedule III under List 3 of LODR. Para A includes information which are inherently deemed to be material events; Such information is to be disclosed. Para B requires the information to be disclosed if it crosses the materiality threshold as per materiality policy of the listed entity.
This distinction ensures that material events at not solely at the discretion of listed entities entirely and promote transparency. In this regard, certain thresholds for material events are proposed by SEB犀利士 I in a consultation paper dated 12th November, 2022 which clarifies their categorization, i.e. all material events exceeding 2% turnover, or 2% of net worth, or 5% of three year average profit or loss, must be disclosed.
UPSI under PIT regulations encompasses “material events” defined under LODR. This ensures that SEBI Regulations are read together more cohesively and there are fewer conflicts within different SEBI regulations. SEBI has made this move to cure the defect from its roots i.e. the very first step of insider trading process which would lessen the practice of unlawful insider trading. By decreasing the ambiguities vis-à-vis UPSI, the Proposal would bring a significant welcoming change for entities involved.
The Proposal is in consonance with the previous position adopted before 1st April, 2019 where the clause “material events in accordance with the listing agreement” was present in the definition of price sensitive information. This position was omitted and liberalized as TK Vishwanathan committee, which drafted PIT Regulations, was of the view that material events under LODR may not necessarily be UPSI. Listed entities have been negligent in optimally categorizing information as UPSI on their own and only have relied upon the list provided by PIT regulations. Listed entities must be cognizant of the fact that the list provided is illustrative and not exhaustive in nature. Further, listed entities resort to certain problematic practices such as announcing press releases of closing a deal before disclosing it to stock exchanges which increases their share prices in just a day.
Due to non-categorization of certain material information (which is likely to affect the price of shares) as UPSI, SEBI has to exclude several cases from its inquiry where insiders and connected persons were making large profits and insider trading was suspected. This is a massive gap in regulatory environment which has to be curtailed.
Implications and the way forward
The implication of the Proposal has to be carefully considered for distinction between UPSI and material non-public information (“MNPI”) as mentioned under the SEBI Act, 1992. By this Proposal, the distinction between UPSI and MNPI would become redundant under law. If this amendment gets approved, materiality of information would become a subset for a larger common concept of price sensitive information. “Materiality” might become interchangeable with price sensitive information for the market participants; no definitions have been clearly laid down to distinguish between them. This could lead to a massive confusion for practical purposes as it cannot be possible practically as certain information could be material event but not price sensitive. One such instance is the appointment or suspension of additional director in a listed entity. This calls for a further clarification by SEBI regarding these two terms because pursuant to the Proposal, every material event to which price is indifferent, would also be UPSI. Due to this, PIT Regulations might get triggered very often for price insensitive information which would ultimately increase the workload on SEBI.
Additionally, there needs to be a threshold for materiality that assesses the influence of the event in question or its capability on the entity. Currently, the numeric threshold is only proposed for certain listed entities as per their materiality policy, is a significant step but this threshold must be extended to other material information.
Further, whenever a listed entity would want to make disclosures under Regulation 30 of LODR, it would also become necessary for them to comply with measures such as trading window, pre-clearances etc. under PIT Regulations. This would be complex, time-consuming and a compliance burden for listed entities, especially those who do not have a viable standing in the market. Thus, SEBI needs to outline specific and certain guidelines for the course of action for these cases.
PIT Regulations have been amended eight times in past three years with much lesser success than envisaged. These frequent developments might reduce the credibility of the PIT Regulations. A particular law takes time to establish its presence. If a particular law keeps proving itself inadequate so frequently, then it will not be followed in strict terms. PIT Regulations would shift from an enforcement mechanism to an escape route; insider trading action could be litigated and the punishment could easily be stalled.
To ensure that the efforts of SEBI do not go to waste, there has to be an effective implementation of the same. As this move would bring a direct change in the fundamental process of PIT Regulations, the country would become more hopeful for a fair and transparent level-playing field for stakeholders.