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Deciphering the Commencement of UPSI in Acquisition Scenarios- A Comprehensive Analysis - MMJC
Understanding UPSI and its Regulatory Implications
Before delving into specific cases, it’s essential to grasp the concept of UPSI and its regulatory implications. UPSI refers to crucial information that has not been disclosed to the public and, if revealed, can significantly impact the price of securities. Regulatory bodies like the Securities and Exchange Board of India (SEBI) mandate stringent guidelines to ensure transparency and fairness in disclosing UPSI, particularly in the context of acquisitions where sensitive information can influence market dynamics and investor sentiments.
UPSI – Definition as per SEBI (Prohibition of Insider Trading) Regulations (PIT), 2015 [‘PIT Regulations’]
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“Unpublished Price Sensitive Information” means any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon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
Acquisition, disposal or expansion of business is considered as UPSI as per PIT Regulations unless it is proved otherwise. Question may arise as to when can we say UPSI relating to Acquisition, disposal or expansion of business has been crystallised for the purpose of various compliances under PIT Regulations? Exact start date of UPSI relating to Acquisition, disposal or expansion of business would differ on case-to-case basis. But it is necessary to ascertain event when UPSI relating to Acquisition, disposal or expansion of business is considered to have started. To analyse the same, we would go through few of the adjudication orders of SEBI.
Case Studies in UPSI Initiation:
- Unravelling Key MilestonesSEBI Adjudication order in the matter of Edelweiss Financial Services Limited(‘EFSL’)[1]: In this case Ecap Equities Limited (‘Ecap’), a wholly owned subsidiary of EFSL, had acquired Alternative Investment Market Advisors Private Limited (hereinafter referred to as ‘AIMIN’), a fintech company, on April 05, 2017 by entering into a share purchase agreement (SPA). Further, a Term Sheet in respect of the said transaction was signed between Ecap and AIMIN on January 25, 2017. SEBI considered this acquisition by step down WOS of EFSL as UPSI. Question now was as to when did UPSI relating to acquisition start? SEBI stated that the date of signing of term sheet by EFSL would be start date of UPSI. With respect to the question as to when did UPSI relating to this acquisition start it was argued before SEBI that signing of term sheet cannot be considered as start date of UPSI as there were various rounds of discussions going on even after signing term sheet. SEBI further stated that major terms and conditions including consideration for the transaction was given in the term sheet. SEBI further stated that EFSL had already commenced its due diligence (transaction) during the period from September 2016 to October 2016. Clause 11 of the term-sheet states that it is binding in nature and cannot be terminated by parties in any manner whatsoever. This clearly showed that the intent and plans of acquisition by Ecap had concretised at the time of signing of Term Sheet itself. Hence SEBI further stated that general argument that the Term Sheet, prima facie, is non-binding and revocable in nature factually incorrect and not acceptable in this case. SEBI considered signing of term sheet as start date of UPSI in this case citing terms and conditions mentioned in the term sheet. So it is not always that term sheet signing would be start date of UPSI but in this case terms and conditions depicted that parties have in principally agreed to do the transaction hence it was considered as start date of UPSI. This led to understanding that it is concrete now that EFSL would do the acquisition.
- In the matter of Jubilant Life Sciences Ltd: Deliberation had also happened with respect to start date of UPSI in the matter of Jubilant Life Sciences ltd[2]. SEBI and SAT in this case held that UPSI relating to sale of entire business of subsidiary (i.e. Jubilant First Trust Healthcare Ltd [‘JFTHL’] was a price sensitive information and it had come into existence on December 24, 2013 when Memorandum of Understanding (MoU’) was entered into. Signing of MOU in general parlance would mean coming to an understanding and not actual sale but in this SEBI and SAT agreed that signing of MOU was the start date of UPSI with respect to sale of business of subsidiary. SEBI further noticed that board meeting of Jubilant Life Sciences Ltd was held on February 6, 2014 to discuss sale of business of subsidiary. SEBI further noticed that Business Transfer Agreement was signed on March 3, 2014 and disclosure regarding same was made to stock exchange on same day. SEBI held that from the series of these events it can be inferred that when the MOU was signed by JFTHL and Narayana Health regarding entire sale business of JFTHL, at that point of time this became a PSI. In general parlance signing of the Memorandum of Understanding would not have much legal implications but in this case, it was considered as start date of UPSI relating to sale of business of subsidiary.
- SEBI adjudication order in the matter of Gammons Infrastructure Projects Ltd[3]: In this case Gammons Infrastructure Projects Ltd (‘GIPL’) and Simplex Infrastructure Projects Ltd (‘SIPL’) were awarded road construction projects by National Highway Authority of India. On April 26, 2012, GIPL entered into two Shareholders Agreements (“SHA”) with Simplex pursuant to which GIPL and SIPL would invest each other’s road construction projects. As a result of the aforementioned, GIPL and Simplex would hold 49% equity interest in the other’s project. Subsequently board of directors of GIPL on August 9, 2013 decided to terminate SHAs entered with SIPL. This was considered as UPSI. Question was as to when would this UPSI be deemed to have come into existence. On investigation SEBI was informed by the GIPL that telephonic discussions between the senior management of GIPL and Simplex regarding termination of the aforementioned SHAs, had commenced during the second week of July 2013. GIPL also forwarded copies of several e–mails/correspondences from July 29, 2013 to August 28, 2013 exchanged in connection with termination of the SHAs, wherein it was observed that communication regarding modifications in the draft Termination Agreement had continued between GIPL and Simplex up to August 9, 2013 i.e. date of Board meeting where a decision for termination of SHAs was taken. SEBI stated that this initiation of conversation was the start date of UPSI as it was the date when discussion was initiated with an intent to terminate the SHAs. They were concentrated towards a specified objective. With that intent drafts were being shared of termination etc.
- SEBI adjudication order in the matter of Satyam Computers Services Ltd[‘SCSL’][4]: In this case Mr Ramalinga Raju was contemplating some acquisitions to fend off takeover attempts. In this regard he called an urgent meeting at his residence for all senior officials of Satyam Computers incl. compliance officer. During the meeting he said that he was contemplating acquisition of Maytas Infrastructure Ltd (MIL) & Maytas Projects Ltd (MPL) by SCSL. Shri Ramalinga Raju further added that he planned to apprise the Board of Directors of SCSL of the proposed acquisitions. SEBI on observing the chronology of events from December 06, 2008 (i.e. the day when Mr Ramalinga Raju contemplated acquisitions and informed company secretary to call a meeting) reveals that the said acquisition proposal was not one which could be viewed as premature or improbable. It was well known that all the three companies involved in the said acquisition proposal viz. SCSL, MIL and MPL were controlled by the same family i.e. family of Shri B. Ramalinga Raju. The proposal regarding the acquisition was made by none other than Shri B. Ramalinga Raju himself who was the chairman of SCSL at that time. All these facts coupled with the facts that the proposal was discussed with top ranking officials of SCSL, that Mr. B. Ramalinga Raju intended to apprise the Board of directors of SCSL regarding the acquisitions and that Shri B. Ramalinga Raju instructed all those who met him at his residence to keep the matter confidential till the board meeting on December 16, 2008 leave no doubt whatsoever that it was a significant proposal and considering the size of MIL & MPL the same had vast financial and other implications for SCSL. Thus, it was clear that the acquisition proposal was price sensitive information having huge implications. The events of December 06, 2008 and other factors as mentioned above not only establish that the acquisition proposal was ‘price sensitive information, they also prove that the said proposal was price sensitive information right on the day it was initiated i.e. December 06, 2008. In this case SEBI considered the December 6 as start date of UPSI because as all actions were concentrated towards ensuring that merger of three companies materializes. The pivotal role of key decision-maker Raju Ramalingam, in conducting negotiation and finalizing the deal before formal board sanction was a defining factor in determining the start date of UPSI.
- SEBI adjudication order in the matter of Biocon Ltd[5]: This matter pertains to UPSI where Biocon was entering into a collaboration agreement with Sandoz. In determining what would be the start date of UPSI SEBI held that on December 20, 2017, a draft of press release and question and answers were exchanged between the respective PR teams of the collaborating companies. This indicates that the negotiations between the companies had reached a stage where there was a high probability of the transaction to go through. In other words, the events of December 20, 2017 indicate a high degree of crystallisation of information and certain specific points were pending to be ironed out. The reason being that apart from the deal team who were working on the negotiations for the collaboration, now the PR teams of the respective companies were also involved in the transaction, indicating that in-principle agreement was reached / crystallised between the companies, though certain specific details were still being discussed. Thus, the wheels for the process of finalisation were set in motion by entering into a phase of final discussion on December 20, 2017, after almost 14 months of ongoing discussion since October 7, 2016.
Conclusion:
Beyond specific cases, understanding decision-making structures and their impact on UPSI initiation is crucial. In scenarios for instance where a demerger committee is formed, UPSI initiation aligns with the committee’s inception due to its centralized decision-making authority. Initiation of talks for termination of SHAs or floating a concrete proposal of merger of group companies by promoter director to fend off takeover clearly highlight that all actions should be directed to materialise that event. So, the stage in the acquisition from where all actions are directed towards achieving a specific outcome would be ideally the start date of UPSI. In different organisation structures this stage would be marked by different characteristic. This highlights the importance of organizational governance structures in delineating UPSI timelines and ensuring compliance with regulatory frameworks. The determination of UPSI initiation in acquisition cases necessitates a comprehensive understanding of decision-making dynamics, milestone events, and internal communication protocols.
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
[1] https://www.sebi.gov.in/enforcement/orders/jul-2020/adjudication-order-in-respect-of-b-renganathan-in-the-matter-of-edelweiss-financial-services-ltd-_47075.html