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Deciphering the Commencement of Unpublished Price Sensitive Information (UPSI) - MMJC
In the labyrinth of insider trading regulations, the inception of Unpublished Price Sensitive Information (UPSI) serves as a critical focal point, yet its determination is far from straightforward and varies markedly from case to case. While conventional wisdom often ties UPSI’s genesis to the closure of the trading window, a deeper understanding reveals a more intricate process rooted in the crystallization of financial data. This article endeavours to delve into the complexities surrounding UPSI’s initiation, shedding light on its multifaceted nature and the nuanced considerations that dictate its start date.
Financial results serve as a crucial barometer of a company’s performance and financial health, influencing investment decisions and market sentiment. However, determining the precise start date of UPSI in the context of financial results is not a one-size-fits-all proposition; rather, it varies on a case-by-case basis. Factors such as the nature of the industry, the complexity of financial reporting, and the specific circumstances surrounding the company’s operations play a significant role in determining when UPSI begins. While regulatory guidelines provide some framework for identifying UPSI, companies must exercise prudence and diligence in determining the start date of UPSI to ensure compliance with insider trading regulations and maintain market transparency.
UPSI – Definition as per SEBI Prohibition of Insider Trading Regulations (PIT), 2015
UPSI is defined under SEBI PIT Regulations, 2015 under clause 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“Unpublished Price Sensitive Information” means any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon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:
- Financial Results
- Dividends
- Change in capital structure
- Mergers, de-mergers, acquisitions, delistings, disposals and expansion of business and such other transactions
- Changes in key managerial personnel
The trading window closure, a standard practice for equity and debt listed entities, occurs quarterly in conjunction with the announcement of financial results. However, the specifics of this closure vary among companies. While some choose to close the window at the end of the quarter, others opted to do so 15, 10, or 5 days prior to the quarter end. Consequently, the commencement of UPSI related to financial results hinges on this window closure is a common hunch. Determining precisely when UPSI begins remains a nuanced question.
Various cases concerning UPSI, particularly in the context of financial results, have yielded diverse interpretations from SEBI. In certain instances, SEBI has asserted that UPSI commences upon the availability of the trial balance, while in others, it aligns the start date with the moment the financial results reach the auditor. Additionally, there are cases where SEBI considers UPSI to have originated once sales volumes have been finalized. These discrepancies underscore the complexity surrounding the determination of UPSI’s start date and highlight the need for clarity and consistency in regulatory interpretation.
In a notable case, an incident involving a fire at a factory occurred approximately three months prior, prompting disclosure to the stock exchange due to its material significance. The aftermath of this event was substantial, leading to losses and significant impacts on the company’s financials. With production capacity hampered, machinery in disrepair, and product quality compromised, the implications were far-reaching. Consequently, the occurrence of the fire event was deemed the starting point of UPSI, reflecting its criticality in shaping market dynamics and investor sentiment.Top of Form
Let us now delve into several instances where the duration of Unpublished Price Sensitive Information (UPSI) periods varied, and the start date of UPSI was accordingly considered.
Apex Frozen Foods limited –
Company had practice of sharing following reports every quarter – Sales report, purchase report, Inventory valuation, Outstanding debtors, Outstanding creditors, and Export incentive reports. The company further stated that it is common practice to share the reports among staff, auditors, and management for finalization of books of accounts and declaration of results. Company submitted that UPSI relating to financial results came into existence.
Only 10 days before board meeting scheduled on November 14, 2017, to consider the unaudited results was not held tenable.
Hence it was observed that any recipient of the reports, generated and shared by the company with the Directors / CFO / Auditor and their respective staff, would have had an understanding of the financial performance of the company. Thus, by the end of the quarter, any person whom the reports earlier were shared, would have known whether the company had made profit in the said quarter.
SEBI in this very case held that UPSI period is first date of the relevant quarter i.e., Oct 03, 2017, to November 14, 2017. Thus, the mentioned period (Oct 03, 2017, to Nov 14, 2017) has been taken as UPSI period.
Cerebra Integrated Technologies Limited (CITL) –
It was noted that company initiated the process of preparation of the un-audited financial results for the quarter ending September 30, 2021, from October 01, 2021.
In this case on October 1, 2021, statutory audit activity, activity relating to giving access to the company’s accounting system and solving auditors’ queries as raised during the audit on daily basis. Noticees in this case submitted that it was too early to know the income for the said quarter and while it was fairly obvious that there would be substantial improvement in the financial results, we were certainly not aware of the actual financial results as the accounts were in the process of being finalized and lot of final accounting was required to be carried out before arriving at the net profit. It was too early to derive the revenue it was too early to know the income for the said quarter and while it was fairly obvious that there would be substantial improvement in the financial results, we were certainly not aware of the actual financial results as the accounts were in the process of being finalized and lot of final accounting was required to be carried out before arriving at the net profit. It was too early to derive the revenue. SEBI without accepting the argument concluded that UPSI came into existence from October 1, 2021.
While concluding in this case SEBI also made reference to decision of Hon’ble Securities Appellate Tribunal in Manoj Gaur vs SEBI, wherein Hon’ble SAT clarified that UPSI relating to financial results cannot be said to only arise on the date of finalization of the results. SAT held as follows, “…15. It was strenuously argued by the learned senior counsel for the appellant that the corporate announcement dated October 11, 2008, made to the stock exchange regarding three issues viz. financial results for the quarter, dividends and rights issue were in public domain and could not be considered as UPSI. We are unable to accept this argument. As stated above, the definition of price sensitive information as provided in regulation 2(ha) of the Regulations is wide enough to include information relating to periodical financial results. What has been disclosed to the stock exchange is that these issues will be considered in the board meeting to be held on October 21, 2008. What has not been disclosed are the financial results or the amount of dividend or details of the rights issue. If we accept this argument of the learned senior counsel for the appellant that the moment a notice is sent to the stock exchange with regard to consideration of certain issues without details thereof, the same cannot be considered to be UPSI, it will be narrowing down the scope of the regulations defeating the very purpose of framing the regulations to prohibit insider trading while in possession of UPSI. When the company receives trial balances which are to be collated and ultimately examined by the internal committees, only those persons who are dealing with the issue are privy to such information and such information cannot be said to be in public domain. In the facts and circumstances of this case, the availability of the trial balances from the various units in the corporate office, which were discussed with the Executive Chairman of the company, leads us to the only conclusion that on the basis of trial balances, the UPSI was in existence on October 11, 2008 and Mr. Manoj Gaur being the Executive Chairman of the company was in possession of the same..”
Dynamatic Technologies Limited (DTL) –
In this case, there was a decline in revenue of DTL for the quarter ended September 30, 2016, was mainly attributable to decline in revenue of two subsidiaries of DTL, namely Dynamatic Ltd, UK and Eisenwerk Erla GmbH, Germany.
Noting from the chronology of events submitted by DTL vide their letter dated June 14, 2019, that financials were received from Dynamatic Ltd, UK on October 18, 2016, and from Eisenwerk Erla GmbH on October 20, 2016.
Thereby, adjudicating officer is of the view that the information regarding possible decrease in profit of DTL for the quarter ending September 30, 2016, existed since October 18, 2016, when the financials of Dynamatic Ltd, UK were received. The information became public, with the declaration of financial results by DTL on November 11, 2016.
The information regarding decrease in profit after tax of DTL was technically a UPSI which existed since October 18, 2016, when financials of Dynamatic Ltd, UK were received, till the declaration financial results on November 11, 2016 (hereinafter referred to as “UPSI period”).
SEBI in the above case stated that the start date of UPSI was from October 18, 2016, as information regarding possible decrease in profit of DTL for the quarter ending September 30, 2016, existed since October 18, 2016, when the financials of Dynamatic Ltd, UK were received.
L&T Finance Holdings Ltd –
Based on the chronology of events related to corporate announcement made on July 20, 2018, by L&T Finance, the UPSI related to financial results for the quarter ended June 30, 2018, had come into existence on July 07, 2018 when draft standalone financial statements were shared with financial planning & analysis (FP&A) team.
SEBI in this case considered the start date of UPSI as July 07, 2018, as that is when FP&A team received the standalone financial statements.
Lux Industries Ltd –
As per information furnished by the Company, the drafting of the Financials Results started on April 20, 2021, which means, the period of UPSI commenced from April 20, 2021 and ended on May 25, 2021 i.e., the day when the said information was announced to public at large, thereby making the period (i.e. April 20, 2021 to May 25, 2021) to be considered as the UPSI period.
In the given case SEBI considered the start date of UPSI as April 20, 2021, because from the same date i.e. April 20, 2021 onwards with the sharing of various information related to financials of the company by the Senior Manager, Accounts and Finance, to the Chief Financial Officer (CFO) of the Company as evident from the email submissions of the Company.
Deepak Fertilizers & Petrochemicals Corporation Limited (DFPCL)
The SEBI adjudicating officer noted that the Trial Balance and other related information was extracted from the system and then compiled by Corporate Accounts Team in the reporting format on July 11, 2020. Therefore, the UPSI pertaining to the financial results of quarter ending on June 30, 2020, came into existence on July 11, 2020.
Therefore, in the given case the start date of UPSI was July 11, 2020, as was considered by SEBI when information was extracted and compiled by corporate accounts team in reporting format.
Sharon Biomedicine Limited
SEBI on investigation noted that there was a fire in factory of Sharon Biomedicine Ltd on June 3, 2014, due to which there was stock, material, and capital loss. Subsequently, Sharon had outsourced the manufacturing of its products, which resulted in several quality issues leading to rejection of sales and therefore the standalone sales went down from Rs.131,544.53 lacs to Rs.83,658.66 lacs during the FY 2014-15 in comparison to FY 2013-14 which resulted in accumulation of huge loss to the company. SEBI further observed that Sharon had started to receive the products back due to rejection from customers after around three months of fire incident. SEBI further stated that issues related to rejection/ return of products of the company which started from September 2014 resulting in accumulation of huge losses that have significant impact on the financial results of the company. Therefore, I hold that anyone in possession of material information about any such part would have reasonably known/understood the possible impact of such action on the company. Accordingly, they have access to UPSI regarding financial results of Sharon for QE December 2014, from September 01, 2014, itself (when the company started facing rejection/ return of its products and accumulation of losses). It is, therefore, evident that information with regard to rejection/ return of products on quality issues and accumulation of huge losses to the extent of Rs.103.37 crores within the period of three months which the company has not observed in the past as per the available financial statements of the company, is indeed an UPSI within the meaning of Regulation 2(ha) and 2(k) of the PIT Regulation which came into existence for the first time in September 2014
In this case SEBI took a very different view on the basis of chronology of events. SEBI stated that start date of UPSI relating to financial results for quarter ended December 2014 started from September 1, 2014, as against general practice of January 1.
Godfrey Philips India Limited
In this case the company had a practice of preparing Key Management Information System (MIS) report containing overall financial performance of the company on IGAAP basis referred to as ‘CEO report.’ This report was prepared and circulated by CFO with various relevant officials including president finance, managing director etc. On perusal of the CEO Report, it was observed that it contained clear figures relating to profit of the company in comparison to the respective quarter of the last financial year and also to the last year. Hence circulation of this report was considered as start date of UPSI by SEBI.
On perusal above stated judgments, it is clear that closure of the trading window does not mark the initiation of UPSI concerning financial results. Instead, UPSI originates when the profit figures or financial results attain a definitive and credible status, suitable for dissemination to the public.
Conclusion:
SEBI’s meticulous scrutiny of UPSI initiation, particularly in high-profile cases such as WhatsApp leaks, underscores the need for a nuanced approach. Contrary to widespread belief, UPSI is not a mere byproduct of the trading window’s closure; rather, its inception is intricately linked to the availability of concrete financial metrics. This could encompass various stages, including the preparation of financial results, auditor validation, or the distribution of board meeting agendas alongside financial statements, each representing a crucial milestone in UPSI’s journey. Also, the above cases highlight that identification of start of UPSI relating to financial results would differ each company wise. Top of Form
This article is published in Taxmann. The link to the same is as follows: –
This article is written by CS Vallabh M Joshi – Senior Manager – RND Team – vallabhjoshi@mmjc.in and CS Hasti Vora – Research Associate – RND Team – hastivora@admin
https://www.sebi.gov.in/enforcement/orders/jan-2022/interim-order-in-the-matter-of-insider-trading-in-the-scrip-of-lux-industries-limited_55523.html / https://www.sebi.gov.in/enforcement/orders/may-2022/confirmatory-order-in-the-matter-of-insider-trading-in-the-shares-of-lux-industries-ltd-_59267.html