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Implications of Re-defining Unpublished Price Sensitive Information Under the Prohibition of Insider Trading Regulations. - MMJC
Background:
Prior to April 1, 2019, “Material events in accordance with the listing agreement” was considered as Unpublished Price Sensitive Information [‘UPSI’]. Regulation 2 (1) (n)(vi) of the Securities and Exchange Board of India [Prohibition of Insider Trading] Regulations, 2015 [“PIT Regulations”] provided for the same. Regulation 2(1)(n) (vi) was omitted pursuant to the amendment dt: December 31st , 2018 to the PIT Regulations. This was understood as ‘Material events in accordance with the listing agreement” would not be considered as UPSI. This deletion of clause (vi) was pursuant to the recommendations of Committee on Fair Market Conduct (referred as FMC Committee) formed by Securities and Exchange Board of India [“SEBI”] in August 2017 [‘Vishwanathan Committee’]. Vishwanathan Committee recommended deletion of ‘clause (vi) of Regulation 2(1)(n) as it observed that definition of UPSI is an inclusive definition and hence it is not necessary to include list of material events that would be included in the definition of UPSI.
Now SEBI has vided a Consultation Paper dt: May 18, 2023, titled “Consultation Paper on proposed review of the definition of Unpublished Price Sensitive Information (UPSI) under SEBI (Prohibition of Insider Trading) Regulations, 2015 to bring greater clarity and uniformity of compliance in the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” [‘Consultation Paper 2023’] it is being proposed to amend the definition of UPSI under PIT Regulations and add “(vi) material event in accordance with Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015” in the definition of UPSI. So, it is proposed that material event in accordance with Regulation 30 would be considered as UPSI. Giving rationale behind this move SEBI highlighted that, “It was observed from the analysis that, by and large companies categorised only the items explicitly mentioned in Regulation 2(1)(n) of PIT Regulations as UPSI. The market feedback also suggested that most companies consider this to be a ‘uniform practice’ since this is explicitly articulated in PIT Regulations.”[1]
This highlights that companies were not exercising proper care and diligence in the matter, which has led to SEBI issuing a consultation paper proposing to amend the definition of UPSI under the PIT Regulations by linking it to the material events as defined under Regulation 30 of SEBI [Listing Obligations and Disclosures] Regulations, 2015 [“LODR Regulations”].
Now going forward if this gets approved then what would be the scenario? Let us try to understand the same in this article.
Introduction:
Para A and Para B, Part A Schedule III read with Regulation 30 of LODR Regulations, specifies disclosures of events or information to be made to the stock exchanges by listed entities which have specified securities listed on the stock exchange whereas Part B specifies disclosure requirements applicable to listed entities having non-convertible securities listed on the stock exchange.
On analyzing Para A and Para B of Part A of the Schedule III it is seen that there are forty-one sets of events or information which require disclosures to the stock exchanges. So, can it be said that all such forty-one sets of information be considered as UPSI? Amongst these forty-one instances of events or information there would be certain events or information which would be recurring nature viz. change in senior management, change in RTA, disclosure of events or information that are sent to shareholders etc.
Material information or events as stated above falling under the ambit of Part A Schedule III, if are considered as UPSI under PIT Regulations then listed entities would need to keep its trading window closed for the entire year and it would be difficult for designated persons to trade in the securities of the company except if he has a trading plan. Thus, there is a possibility that the requirement of trading plan might become a mandate for all the designated persons if the proposals under Consultation Paper dt: May 18, 2023, gets approved.
But as we have seen there are certain material events or material information under Part A that are recurring in nature and occurrence of such events might not materially impact the price of the securities of the company. But, if proposals under the Consultation Paper 2023 sails through then all the forty-one instances of material events or information would be considered as UPSI.
Navigating the nuances of materiality and price sensitivity:
All events listed under Schedule III are deemed material or are material subject to certain conditions, but can it be said that all of them carry inherent price sensitive implications. Distinguishing between materiality and price sensitivity is crucial to effectively identify UPSI.
There may be scenarios wherein all the Board of directors of the listed entity have resigned or majority of senior management employees in the listed entity have resigned or there are instances of frauds made by the directors or senior management personnel then in such events which are exceptional in nature it would be justified to treat such information as price sensitive not just because it is material event covered under Schedule III but also because such events may have potential impact on the stock prices of the listed entity.
This leads us to an understanding that not all material events or information may be considered as a UPSI just because it is covered under Schedule III the criteria for categorizing any material event as an UPSI would depend upon the situation or scenarios at that point in time. So, identification of UPSI would differ from company to company.
Every company thus would have to assess at and accordingly frame a policy or a Standard Operating Procedure [‘SOP’] to categorize material events or information under Part A Schedule III as an UPSI rather than categorizing each material event or information as an UPSI. SOPs would help listed entities to identify and discriminate between materiality and UPSI. Also, while formulating such SOPs, it becomes important that listed entities bear in mind that SOP is not a parallel law, and it cannot be inclusive of all the possible situations and thus exercise of proper judgement in exceptional circumstances shall always be required on behalf of listed entities.
Precedents and Regulatory bindings:
Regulation 9A of the PIT Regulations mandates the establishment of adequate internal controls to prevent insider trading.
Regulation 9A (1) and 9A (2) of the PIT Regulations reads as follows:
9A. (1) The Chief Executive Officer, Managing Director or such other analogous person of a listed company, intermediary or fiduciary shall put in place adequate and effective system of internal controls to ensure compliance with the requirements given in these regulations to prevent insider trading.
(2) The internal controls shall include the following:
(a). all employees who have access to unpublished price sensitive information are identified as designated person;
(b). all the unpublished price sensitive information shall be identified and its confidentiality shall be maintained as per the requirements of these regulations;
(c). adequate restrictions shall be placed on communication or procurement of unpublished price sensitive information as required by these regulations;
(d). lists of all employees and other persons with whom unpublished price sensitive information is shared shall be maintained and confidentiality agreements shall be signed or notice shall be served to all such employees and persons;
(e). all other relevant requirements specified under these regulations shall be complied with;
(f). periodic process review to evaluate effectiveness of such internal controls.
Regulation 9A casts responsibility on the Chief Executive Officer or Managing Director to have internal controls with respect to identification of UPSI. There are precedents set by SEBI wherein it was highlighted that due to non-existence of Internal Controls for identification of UPSI even press releases were considered as UPSI.
Mr. Punit Goenka, as the MD & CEO of Zee Entertainment Enterprise Ltd [‘ZEEL’] recently settled violation of PIT Regulations with SEBI. In this case it was found that ZEEL had failed to recognize certain information as UPSI. The announcement of ZEEPLEX, a pay per view service, was considered as an ‘expansion of business,’ as per definition of UPSI under PIT Regulations. It was a new content consumption medium for consumers and a film distribution model which gave consumers flexibility and convenience to watch films from the comfort of their homes.
In this SEBI settlement order dt: April 13, 2023 it was held that ZEEL did not have sufficient internal controls for identification of UPSI. Mr. Punit Goenka, MD & CEO, was responsible for establishing and maintaining internal controls as per Reg. 9A of PIT Regulations. For settling this violation Mr. Punit Goenka paid a settlement amount of Rs 50,70,000/- to settle violation of Regulation 9A (1) and 9A (2) of PIT Regulations with SEBI.
Conclusion:
To understand the rationale of material events and information disclosure, it is evident that not every significant occurrence automatically translates into UPSI. The determination of UPSI relies heavily on the specific circumstances at hand. This implies that different companies might assess situations differently, leading to varied conclusions about what constitutes UPSI.
Consequently, it becomes necessary for each listed entity to meticulously evaluate the gravity of events and devise policies or Standard Operating Procedures [SOPs] to categorize information or events as UPSI. It is essential to bear in mind that these SOPs should not attempt to cover every conceivable scenario as they are not a parallel law. Instead, they should serve as guidelines providing a structured approach to ascertain price sensitive factors within material events.
By following consistent practices outlined in SOPs, listed entities can effectively justify their stance on disclosure or non-disclosures to regulatory bodies like SEBI. SOPs serve as crucial evidence, highlighting that decisions regarding disclosures are not arbitrary but are grounded with reasoned judgement and a consistent approach.
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 – vallabhjoshi@mmjc.in
- Mr Shravan Pai – Management Trainee – shravanpai@mmjc.in
[1] https://www.sebi.gov.in/reports-and-statistics/reports/may-2023/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-uni-_71337.html