Start date of Unpublished Price Sensitive Information (‘UPSI’) – Fund raising activity - MMJC

Background:

UPSI means any information that is likely to materially affect the price of the securities of the company[1]. It is important to identify and track UPSI within the organisation to comply with provisions of Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 [‘SEBI PIT’] in that regard. Also, persons in possession of UPSI or having access to UPSI are inter-alia required to enter the details of UPSI in Structured Digital Database [‘SDD’]. To comply with this, it is necessary to identify to start date of UPSI. In this article we will ascertain what would be the start date of UPSI in case of fund-raising activity undertaken by a listed entity.

Precedents on start date of UPSI in case of fund-raising activity.

Change in capital structure by way of fund raising is considered as UPSI. SEBI in its recent adjudication orders[2] has considered activity of fund raising as UPSI and has also penalised designated persons for dealing in shares during this period. In this regard it becomes pertinent to understand as to when will UPSI start in case of fund-raising activity.

SEBI in its adjudication order in the matter of Shalimar Paints Ltd [‘SPL’] had deliberated on this. SPL had initiated preliminary discussions with Ernst and Young (E&Y) on May 18, 2021, to raise funds through issuance of equity and signed a confidentiality agreement dated May 21, 2021. SPL signed the engagement letter with E&Y on September 01, 2021, for identification of potential investors for loan, equity, debt, or a combination thereof. E&Y started identifying potential investors from September 2, 2021, onwards. Further, SPL had signed another non-disclosure agreement with Perigon Consilario LLP (Perigon) on September 02, 2021, to assist it in relation to the potential induction of a financial/ strategic investor. On October 04, 2021, SPL had signed a confidentiality agreement with Hella Infra Market Pvt. Ltd. (Hella), a prospective investor and other potential investors also. SPL further submitted that Hella infra was not the only investor with which confidentiality agreement was signed there were many such potential investors with which SPL had signed confidentiality agreement and at the stage of signing the confidentiality agreement, there exists an uncertainty w.r.t investor getting finalized. SPL disclosed to stock exchange on January 18, 2022, that Board of Directors had considered and approved raising of funds through issuance of equity shares and optionally convertible debentures. On receipt of show cause notice alleging start date of trading window closure SPL submitted that the UPSI Period was not the same and as alleged UPSI never existed till January 13, 2022 (i.e., the date on which it had notified exchanges that a board meeting would be held on January 18, 2022, to consider and evaluate proposal for fund raising activity).

In this regard SEBI stated that the date of execution of the engagement letter with E&Y related to proposed fund-raising activity by SPL was start date of UPSI as it was a material information in terms of Regulation 2(1)(n) of SEBI PIT. UPSI conspicuously came into existence on September 01, 2021, as the said information was not generally available information. SEBI further stated that UPSI ceased to be in existence when SPL informed the stock exchanges on January 18, 2022, that its board of directors had considered and approved raising of funds through issuance of equity shares and optionally convertible debentures. At this stage of signing the confidentiality agreement, there exists an uncertainty w.r.t investor getting finalized.                

SEBI in the matter of DEN Networks Ltd [‘DEN’] also adjudicated in the matter of start date of UPSI. In this case DEN made a corporate announcement on October 13, 2018. DEN inter alia announced that a meeting of the board of directors of DEN shall be held on October 17, 2018, to consider and approve a proposal for raising of funds. Initial discussions between DEN and Reliance Industries Ltd [‘Reliance’] for a potential investment by Reliance in DEN in mid of 2017, however, the said discussions were not pursued. This information relating to raising of funds by DEN got published on BSE and NSE on October 13, 2018. This information had positive impact on the price of the scrip after the announcement. SEBI further stated that UPSI (announcement regarding fund raising by DEN) came into existence on August 08, 2018, when discussions between the officials of DEN and Reliance was initiated. Accordingly, UPSI came into existence on August 08, 2018, and remained unpublished till the date of announcement by DEN on October 13, 2018

In case of SPL SEBI stated that date of execution of agreement with E&Y for identification of potential investors. In case of DEN Networks Ltd it was held that official discussion between DEN and Reliance was start date of UPSI. Hence it is seen that in case of fund-raising different view was taken with respect to start date of UPSI in two different cases.

What can be the start date of UPSI?

BSE and NSE vide its circular dt: October 28, 2022, had stated that UPSI germinates when the information starts taking shape of a price-sensitive information i.e. where the probability of going ahead with the information/concerned event is higher than not going ahead and such information is likely to “materially” affect the prices of the securities of the company when published, sharing of such information shall be recorded in the Database. Further SEBI in its order dt: June 30, 2021, in case of Biocon Ltd[i] has held that, “However, it may be noted that there exists a distinction between the timelines when the parties to a transaction have opened discussions, UPSI period and the final signing. During the former, the parties are still exploring the possibilities of a potential transaction between them. Thus, the discussions are exploratory in nature and the information generated at this stage is imprecise in nature, without a reasonable probability of the transaction going through and without any specific details. Juxtapose this with the UPSI period. Discussions during UPSI period starts with high degree of crystallization and proceeds towards a greater degree of crystallization with a reasonable probability of the transaction going through”. Hence for every transaction start date of UPSI would differ.

Conclusion:

Start date of UPSI would differ for various types of fund-raising transaction (viz. private placement, preferential allotment, rights issue etc.). In accordance with principle as stated by SEBI in its adjudication order of Biocon Ltd, UPSI starts at a stage where the probability of going ahead with the transaction or event is more than not going ahead with the transaction. For different types of fund-raising this stage would differ in accordance with the structure of the organization, approvals required etc.

In certain types of fund-raising (viz. private placement, preferential allotment) there comes a stage where the investor is identified. Prior to identification of investor, discussions move around fund raising are exploratory in nature as there is no clarity as to who will buy, what price, when, in what form etc. Discussions around fund raising would reach a level of crystallization only once an investor has been identified. Then it would move further with the intent of raising funds. So, this stage (viz. identification of investor) may atleast be considered as the start date of UPSI in case of fund raising through private placement or preferential allotment.  

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

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

[1] “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: – (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.

[2] https://www.sebi.gov.in/enforcement/orders/jun-2021/order-in-respect-of-mr-shreehas-p-tambe-in-the-matter-of-biocon-ltd-_50830.html