[By Mainak Mukherjee]
The author is a student of National Law University and Judicial Academy, Assam.
Introduction
The Securities Exchange Board of India (SEBI), through its Consultation Paper dated May 18, 2023, has proposed an amendment to the definition of Unpublished Price Sensitive Information (UPSI) as outlined in the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT). This proposed amendment seeks to incorporate the term “material events” following Regulation 30 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) within the existing definition of UPSI as provided under Regulation 2(1)(n) of the PIT Regulations. This article explores how bringing ‘material events’ under the purview of UPSI could lead to increased confusion in the market, potentially contradicting the initial goal of implementing the amendment.
Understanding UPSI and ‘material event’ under SEBI Regulations
Before delving into this analysis, it is pertinent to understand the definition of UPSI and Regulation 30 of LODR. SEBI has defined UPSI in the matter of Biocon Limited. The watchdog has said that a host of factors determine if a UPSI exists; these are the nature of the transaction; progress and negotiation; increasing probability of the transaction, and so on. Therefore, for each unique matter, the entire facts and circumstances of the matter must be examined without giving any undue weightage to any one aspect before arriving at a conclusion on the existence of UPSI. On the other hand, Regulation 30 of the LODR necessitates that listed companies promptly disclose all material events to the stock exchanges within 24 hours of the occurrence of such events. Material events encompass a range of significant occurrences, including acquisitions, potential investments, changes in management, and financial results. These events have the potential to impact the company’s share price significantly. Nevertheless, despite their impact, these events are not classified as UPSI but are announced through press releases.
In its Consultation Paper, SEBI refers to a study conducted between January 2021 and September 2022, wherein 1,100 press releases issued by 100 listed companies were examined. The study revealed that in 227 instances, the index experienced price movements exceeding 2%. However, out of these 227 instances, only 209 press releases were not categorized as UPSI by the respective companies. Although, this demonstrates the need for SEBI to address this issue quickly; the question remains: Can UPSI under PIT and material events under LODR go hand-in-hand?
Exploring the relationship between UPSI and ‘material events’
Sub-regulation 2 of Regulation 30 of LODR states that events specified under Para A of Part A of Schedule III are deemed material events, and all listed entities must disclose such events. This indicates that the LODR has a deeming fiction in play, and one must not refer to external factors to determine the necessity of disclosure. The Hon’ble Supreme Court in Smt. Sudha Rani Garg v. Sri Jagdish Kumar[1] has ruled that the usage of the word “deemed” in legislation expresses the legislative intent of creating fiction. On the other hand, the definition of UPSI outlines two main elements; firstly, the information should not be generally available, and secondly, the information, on becoming generally available, is like to affect the price of the securities materially.
Interestingly, the definition further states that UPSI shall ‘ordinarily include, but not be restricted to…’ followed by certain aspects. The presence of the term “ordinarily” indicates that the list is non-exhaustive and that there could be information not covered by the list, which may be UPSI. This shows that the concept of “deemed” is absent in the definition of UPSI.
The most crucial test for UPSI is whether the information will likely affect the price if it becomes generally available materially. This test is similar to the “Vendibility Test” of marketability formulated by the Supreme Court in Union of India v. Delhi Cloth and General Mills Company Limited. In this case, the apex court, while determining the existence of a market, stated that the presence of an actual market containing buyers and sellers should not be considered; instead, it should consider the aspect: whether a market exists or not. Similarly, when it comes to UPSI, the actual focus is not on the actual impact of securities’ prices but on the likelihood of such information materially affecting the price of securities upon becoming generally available.
Moving on, Regulation 30(4) of LODR states the different criteria a company should consider for determining the materiality of information and events. Further, sub-clause (b) of sub-regulation 4 states that “the omission of an event or information is likely to result in a significant market reaction if the said omission came to light at a later date”. This throws light on the fact that there is a likelihood that such information will result in a market reaction if the said omission gets disclosed at a later date. Now reading the definition of UPSI and interconnecting it with Regulation 30 tells us that there could be situations where a piece of information which is deemed material under LODR can also be considered as a UPSI if it triggers materiality based on LODR Regulations 30(4)(b) – where a failure to disclose the information can create a market reaction when later revealed. Market reaction refers to interference with the market, which affects the demand, supply, and price. Therefore, a common thread exists between SEBI’s PIT Regulations and LODR Regulations, particularly the definition of UPSI and Regulation 30.
Conversely, although listed in Para A, every material information under Regulation 30 is not a UPSI because the test for UPSI is one, whereas the test in LODR, particularly Regulation 30(4)(b), is three-fold. The test for UPSI is based on likelihood; that is, there must be a likelihood of information which can materially affect the price, so if this parameter is met, the information qualifies as material information as well as UPSI. To put it in simpler terms, since every UPSI will materially impact the price and likely result in a significant market reaction, it would be considered “material” under LODR. This means that every UPSI can be called material, but every piece of information recognized as material under LODR is not a UPSI.
Further, the Securities Appellate Tribunal (SAT), in its order in Rupesh Kantilal Savla v. SEBI, has held that any information disclosed under the listing agreement or the relevant provisions of the LODR Regulations “may or may not” materially affect the price of the securities. Not every piece of information disclosed under the listing agreement / LODR Regulations needs to affect the price of the securities. This further solidifies the claim that not all material events can be classified as UPSI – something that the market regulator proposes to do.
Moreover, looking at the proposed amendments from an investor perspective, one might argue that material events such as mergers, acquisitions, contracts, or financial updates have a significant direct impact on a company’s operations and ultimately affects its stock prices. Restricting this information can impede transparency in the market as investors have a legitimate interest in knowing this information to make prompt investment-related decisions. Furthermore, bringing material events under the ambit of UPSI can restrict the ability of companies to share vital information with stakeholders. For example, if a company plans a strategic partnership, it must engage in discussions with potential partners and investors. However, such discussions can be hampered if the information shared is UPSI, potentially hindering business. Nevertheless, this amendment can impede the free flow and dissemination of information in the market, which helps potential investors make informed decisions. A transparent and efficient market fosters better capital allocation and price discovery and enables more participation, ultimately benefitting the country’s entire economy.
Conclusion
The interplay between PIT and LODR is very complex, and it is essential to understand the objectives of both statutes. While LODR primarily focuses on governance, compliance, disclosures, transparency and broader dissemination of information, PIT Regulations are meant to restrict insider trading and address the market information asymmetry. PIT is a peremptory law that curbs unfair advantages resulting from insider information. The PIT and LODR are essentially two different legislations with two different objectives. While it is understandable from SEBI’s perspective as they aim to align the definition of both UPSI and material event to bring greater clarity and uniformity in the market, it must have considered that there still exists an anomaly in bringing UPSI and material event together. Therefore, it remains to be seen how SEBI addresses this polarity between UPSI and material events – as has been discussed in this blog.
[1] AIR 2004 SC 5120