Deciphering the start date of UPSI: Navigating the variations - MMJC

Introduction

Securities and Exchange Board of India (Prohibition of Insider Trading), Regulations 2015 [‘PIT 2015’] defines ‘Unpublished Price Sensitive Information (UPSI)’ as follows: Unpublished Price Sensitive Information means any information relating to company or its securities that is not generally available which upon becoming generally available is likely to materially affect the price of securities and shall, ordinarily including but not restricted to, information relating to the following: (i) financial results; (ii) dividends; (iii) change in capital structure; (iv) mergers, de-mergers, acquisitions, delisting, disposals and expansion of business and such other transactions; (v) changes in key managerial personnel.

Corporate actions leading to change in capital structure is considered as UPSI unless otherwise proved. As per Reg. 3(5) of PIT 2015 board of directors or head(s) of the organisation of every person required to handle unpublished price sensitive information shall ensure that a Structured Digital Database (‘SDD’) is maintained providing nature of UPSI, date of sharing of UPSI and name of persons with whom it is shared. Bombay Stock Exchange (‘BSE’) and National Stock Exchange (‘NSE’) vide their circulars dt: January 29, 2023, had asked listed companies to intimate events or information as required under regulation 29 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 [‘SEBI LODR’] in XBRL form and specify the ‘start date’ of UPSI for events or information for which prior intimation is being given. So, the question now arises as to when it can be considered that UPSI relating to any corporate action has started? In this article we would understand through various Securities and Exchange Board of India (‘SEBI’) adjudication orders as to when is generally UPSI considered to have been started.

Commencement of UPSI for various corporate actions

A piece of information may germinate in any department in the organization or at factory level employees in the organization but not all these pieces of information would be UPSI. Also, some information may not be UPSI at the very beginning. Hence it becomes necessary identify as to when an information became UPSI. Ascertaining the start date of UPSI is always a contentious issue. Start date of UPSI would differ on a case-to-case basis.

SEBI has in its adjudication orders dealt with the issue relating to the start date of UPSI. We would now have a look at adjudication orders where SEBI concluded on start date of UPSI for stock split, bonus issue and buyback.

1. Start date of UPSI in case of declaration of stock split:

In the matter relating to Infibeam Avenues Ltd[1] dt: April 27, 2021, SEBI was posed with a question as to when would the UPSI relating to decision of stock split by the board of directors of the company be considered to have started? In this case Infibeam Avenues Ltd announced the decision of the board of directors to go ahead with a stock split on July 13, 2017, to stock exchanges. Prior to this disclosure there were a few entities who had traded in shares of Infibeam Avenues Ltd. So, the question had arisen whether UPSI relating to stock split was in existence during this period? On investigation SEBI found that on October 22, 2016, Chief Financial Officer of Infibeam Avenues Ltd for the first time had introduced this proposal and an understanding of stock split concept was given with advantages and disadvantages and real-life examples. The chronology of events posts this date depicted that planning was being done towards materializing the event of stock split. The board of directors in their held-on July 13, 2017, approved the stock split. SEBI in this regard concluded that the consensus amongst management to do a stock split had been done on October 22, 2016. Post these steps were being taken to ensure that stock split is done. Hence the date of presentation by CFO about stock split is considered as ‘start date of UPSI.’

2. Start date of UPSI in case of declaration of bonus issue:

In SEBI adjudication order dt: April 26, 2021, in the matter of Tulsi Extrusions Ltd[2] “Issue of bonus shares to the existing shareholders of the company” was UPSI. In this case SEBI had alleged violation of code of conduct framed for prevention of insider trading by certain employees, promoters, and directors. On investigation and going through the chronology of events SEBI understood that the proposal to do a bonus issue was floated on October 16, 2010, when Mr. Pradip Mundhra, Managing Director ideated the concept of bonus issue for improving liquidity in the market. Further on October 18, 2010, discussion happened between Mr. Sanjay Taparia (‘CEO’) and Mr. Sudarshan Taparia (‘CFO and Compliance Officer’) with respect to bonus issue. Post this board meeting agenda was circulated for considering bonus issue. Tulsi Extrusions on November 18, 2010, intimated the stock exchanges about approval of bonus issue by board of directors. So, the question was as to when was the start date of UPSI for bonus issue? In this case even if idea of going for a bonus issue was made by Mr. Pradip Mundhra, Managing Director on October 16, 2010, but the start date of UPSI was considered as October 18, 2010, the date on which discussion happened and consensus was reached between MD, CEO and CFO. Also, it is seen only post this discussion agenda circulated to the board of directors for consideration of bonus issue. Hence October 18, 2010, was considered as the start date of UPSI.

3. Start date of UPSI in case of buyback:

SEBI adjudicated on the point relating to start date of UPSI in case of buyback in its adjudication order in the matter of ADF Foods Ltd[3] dt: June 23, 2022. In this case ADF Foods gave prior intimation to the stock exchange on May 23, 2016, stating that board of directors are going to consider buyback in its board meeting going to be held on May 27, 2016. SEBI on investigation also found that few entities had done insider trading in the shares of ADF Foods Ltd. SEBI then investigated to ascertain as to when was the UPSI relating to buyback of shares had started. On investigation SEBI found that the proposal for buyback of equity shares of ADF Foods Ltd was first discussed on May 21, 2016, amongst Mr. Girish Nadkarni (representative of Motilal Oswal), Noticee 6 / Mr. Bhavesh R. Thakkar (Executive Director) and Mr. Mishal A. Thakkar (Senior Manager of the company). Post this company secretary was asked to initiate preparation for undertaking buyback of shares and share board meeting agenda papers for considering proposal of buyback of shares. ADF Foods Ltd argued that UPSI relating to buyback came into existence on May 23, 2016, when board meeting agenda for discussion of buyback was circulated. In this regardSEBI held that, “the argument cannot be accepted that, the UPSI came into existence on May 23, 2016 (when agenda was circulated) and ceased to exist on May 27, 2016, just because the decision on the proposal was deferred to next Board meeting, and the same PSI again revived as an UPSI before the next Board meeting. I note that, the decision on the proposed buyback was merely deferred to next Board meeting and no conclusive decision was taken by the Board on the issue till its next meeting held on July 27, 2016, the argument of the Noticees that the UPSI ceases to exist as soon as the Board meeting was over on May 27, 2016, is without and merit and hence rejected. In this regard, it is established that the proposed range of buyback is an UPSI along with the first proposal to make buyback offer per se mooted by the Company and internally decided on May 21, 2016”. In view of the above, the UPSI pertaining to the buy-back offer not only came into existence on May 21, 2016, but also continued till July 27, 2016, when the Company made a public disclosure about the Board’s approval of the proposed buy-back of the Company (with a proposed range of offer size and offer price). Thus, in the context of the proceeding, the period of UPSI was from May 21, 2016, to July 27, 2016. A similar view was taken by SEBI in its adjudication order dt: May 11, 2021, in the matter of PC Jeweller Ltd[4]. Question in this case was similar as to when UPSI related to buyback would be considered to have been started. SEBI while concluding in this matter held that, “preliminary discussion among MD, ED, COO and CFO in relation to the proposal for buyback of fully paid-up equity shares of the Company took place on April 25, 2018. Therefore, I find that UPSI-I came into existence on April 25, 2018.’ In this case also SEBI had a similar view that the date when discussion relating to buyback had initiated would be considered as a start date of UPSI.

Conclusion:

Understanding the intricacies of the start date of Unpublished Price Sensitive Information (UPSI) is pivotal in effectively implementing and enforcing the regulations outlined in the Prevention of Insider Trading (PIT) 2015 guidelines. The determination of this date is not standardized but rather contingent upon several factors, particularly the nature of the UPSI and the organizational structure in question.

In the context of corporate actions pinpointing the start date of UPSI is paramount. This date is identified as the moment when a consensus is reached within the company’s management to proceed with the proposed action. It signifies the stage where all subsequent actions and decisions are directed towards the implementation of the proposed corporate action. Importantly, even if the decision regarding the corporate action is deferred at a board meeting for further deliberation, the initial date of consensus among management is recognized as the start date of UPSI.

This distinction is critical as it sets the baseline for compliance with insider trading regulations and helps in determining the appropriate disclosure timelines. By recognizing the start date of UPSI accurately, organizations can ensure transparency, uphold regulatory standards, and mitigate the risks associated with insider trading allegations.

[1] https://www.sebi.gov.in/enforcement/orders/apr-2021/order-in-the-matter-of-insider-trading-in-the-scrip-of-infibeam-avenues-ltd_49954.html

[2] https://www.sebi.gov.in/enforcement/orders/apr-2021/adjudication-order-in-respect-of-pradip-jasraj-mundhera-kiran-pradip-mundhera-sunil-taparia-sanajay-taparia-and-sudarshan-taparia-in-the-matter-of-tulsi-extrusions-limited_49944.html

[3] https://www.sebi.gov.in/enforcement/orders/jun-2022/adjudication-order-in-the-matter-of-adf-foods-limited_59981.html

[4] 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

The article is written by Mr. Vallabh Joshi – Senior Manager and Published in Taxmann.