Whether regulatory approvals would be considered as unpublished price sensitive information? - MMJC

Background:

Unpublished Price Sensitive Information [‘UPSI’] is any event or information which when publicly available would affect the price of the securities of the company materially. Certain events or information undertaken by listed entities require approval of regulators or financial institutions or third-party approvals under contractual arrangement. These approvals are sometimes taken post approval of the transaction or event by members of the company in general meeting. Question that arises is whether the process of receipt of these approvals would be considered as UPSI even when it is already disclosed to members that the event or transaction is subject to approval?

Introduction:

Regulatory approval in the nature of no objection certificate, regulatory approvals for launch of product, removal of sanctions on product produced in a factory etc. are required by the listed entity in a particular field in order to carry on a particular transaction or event. It always not confirmed or certain that the regulatory approvals would be received or not?  

Non-receipt of regulatory approvals would lead to non-completion of transaction or events that are undertaken by the listed entity. This would certainly have a material impact on the listed entity and its share price consequently.

So even when the shareholders were made aware that a particular transaction or event is subject to regulatory approval or third-party approval, the receipt or rejection of approval will still be considered as UPSI as there is no certainty with respect to receipt of approvals.

Here are few cases where regulatory or third-party approvals were considered as UPSI.

• Adjudication order in the matter of PC Jeweller Ltd[i]: In this case insiders traded in the shares of PC Jeweller when they were in possession of UPSI relating to withdrawal of buyback by board of directors of PC Jeweller as its lender State Bank of India had refused to give no objection certificate for going ahead with buyback. PC Jeweller had decided to buyback its shares which was subject to approval of principal lender State Bank of India. State Bank of India refused to give NOC to PC Jeweller. Pursuant to this PC Jeweller could not go ahead with buyback. This non-receipt of NOC was considered as UPSI by SEBI. SEBI held that this refusal by State Bank of India affected the change in capital structure of PC Jeweller. So even when shareholders were aware that PC Jeweller is going to undertake the buyback but it was subject to approval of SBI and hence non-receipt of NOC from State Bank of India was considered as UPSI[ii].

• Adjudication order in the matter of Shakti Pumps Ltd [‘SPIL’][iii]: In this case the SPIL had applied for permission to set up inhouse R&D facilities u/s 35(2AB) of Income Tax Act 1961. In this regard SPIL made an application to Income Tax Department for same. Prior to getting this recognition from Income Tax SPIL needed to get permission from DSIR. This permission was already received by SPIL. This entire process of obtaining recognition from Income Tax Department for setting up inhouse R&D facility was considered as UPSI by SEBI. SEBI considering this as UPSI had stated that getting recognition to set up inhouse R&D facility would help company avail fiscal incentives. This would materially impact financial position of the company. Hence the regulatory approval of Income Tax department was considered as UPSI[iv].

• Adjudication order in the matter of Suven Life Sciences Ltd[v]: In this case the question was whether passing of clinical trials of a drug for public use would be considered as UPSI?  In this regard SEBI held that when a medicine clears clinical trial it moves closer to be ready to be sold for commercial use in the market. Clinical trials approval is long drawn process. So even when market is aware that the drug is patented but the actual regulatory clearance of all three clinical trials would make the drug ready for commercial use. As passing of clinical trials involves considerable progress hence it would be considered as price sensitive information.[vi]

Conclusion:

Regulatory approval pertaining to any nature of UPSI (viz. capital structure or launch of new product etc.) would be considered as UPSI even when members were aware that such regulatory approval is pending. Regulatory approval would allow the listed entity to either go ahead with the transaction or cancel the transaction. There is uncertainty whether the approval will be received or not. So once approval is received or rejected, till the time disclosure is made to stock exchange it will be considered as UPSI.

This article is published in Taxmann. The link to the same is as follows:

https://www.taxmann.com/research/company-and-sebi/top-story/105010000000024723/whether-regulatory-approvals-would-be-considered-as-unpublished-price-sensitive-information-experts-opinion

This article is written by Vallabh Joshi- Senior Manager- vallabhjoshi@mmjc.in

[i] https://www.sebi.gov.in/enforcement/orders/may-2021/final-order-in-the-matter-of-insider-trading-in-the-scrip-of-pc-jeweller-ltd-_50111.html

[ii] “I note that in terms of the disclosure made by the Company on May 10, 2018, the general public was made aware that the Company was going to buy-back upto 1,21,14,285 fully paid-up equity shares of the Company of Rs.10/- each at a price of Rs.350/- per equity share which was an unpublished price sensitive information within the meaning of Regulation 2(1)(n)(iii), as discussed in the previous para, as the said information was pertaining to the change in the capital structure of the Company. As the said decision of buy-back of shares by the Company was abandoned by the Company on July 13, 2018 when its board of directors decided to withdraw the buy-back offer, therefore, as a corollary, I find that the said information was also an unpublished price sensitive information within the meaning of Regulations 2(1)(n)(iii) of the PIT Regulations, 2015 as being an information pertaining to the change in capital structure of the Company. I find that as mentioned above, the said unpublished price sensitive information which has been identified as UPSI-II in the SCNs, came into existence on July 07, 2018 when the State Bank of India refused to give its NOC to the proposed buy-back of the Company and remained so till it was disclosed to the stock exchanges by the Company on July 13, 2018”.

[iii] https://www.sebi.gov.in/enforcement/orders/dec-2022/adjudication-order-in-respect-of-8-entities-in-the-matter-of-shakti-pumps-india-limited_65734.html

[iv] “Pursuant to obtaining recognition and Registration of In-house R&D Units(RDI), SPIL had an option to avail Fiscal Incentives for Scientific research (FI). SPIL having DSIR recognition and concerned manufacturing facility applied for approval of In-house Research& Development facility u/s 35(2AB) of IT Act, 1961. The grant of ‘Approval for In-house R & D facilities u/s 35(2AB) of Income Tax Act, 1961’ was identified as UPSI by SEBI. SPIL received Certificate for In-house R & D Recognition from DSIR on March 27, 2018 which is pre-requisite to apply for benefit u/s 35(2AB) of Income Tax Act, 1961. Thus the UPSI period was considered from March 27, 2018 till disclosure of grant of approval by DSIR on October 10, 2018.”

[v] https://www.sebi.gov.in/enforcement/orders/oct-2021/adjudication-order-in-respect-of-suven-life-sciences-limited-and-5-others-in-the-matter-of-suven-life-sciences-limited_53616.html

[vi] “62. Considering the process followed and the time taken for clinical trials, the progression from one stage to the next cannot be taken for granted. Hence, I recognise that the change in stage of a clinical trial/completion of a phase of clinical trial is significant and hence price sensitive information. The successful completion of a phase of clinical trial in respect of a patented molecule or compound or chemical entity is a milestone which investors would reasonably be expected to factor while considering sale or purchase of shares of the Company….I note that clinical trials take considerable time and progress to the next stage indicates a material progress towards commercial use of the drugs. Every successful stage of clinical trials takes an NCE closer to market and hence is likely to have positive price impact. Therefore, I am of the view that information pertaining to progress of clinical trials in respect of the 3 clinical state compounds was price sensitive in nature…..