[By Debarchita Pradhan]
The author is a student of National Law School of India University, Bangalore.
Introduction
Put simply, insider trading means trading by a person in a company’s securities while he/she has some secret price-sensitive information that is not generally available to the public. However, there have been substantial issues regarding whether the information is generally available to all.
In the recent case concerning allegations of insider trading in Future Retail Ltd. (FRL) scrip, the Securities Appellate Tribunal (SAT) opined that if the information is published in media, then it would cease to be unpublished and would be considered generally available. However, it was the last opportunity to form such an opinion because later, the amendment to the SEBI (Prohibition of Insider Trading) Regulations, 2015 (hereby referred to as “2015 Regulations”) excluded “unverified event or information reported in print or electronic media’ from the definition of “generally available information” (hereby referred to as GAI).
The paper argues that this amendment is too restrictive and would further disincentivize the investors rather than protect them. It would first, give a brief overview of the jurisprudence around information being generally available under insider trading law. Secondly, it would provide the repercussions that may flow from the recent amendment. Thirdly, it will provide a pragmatic alternative to the amendment. Fourthly, the paper will conclude.
Chapter I: Development of the idea of “generally available information”
Presently, in the 2015 Regulations, an insider is defined to be someone who is either a connected person or one who possesses unpublished price-sensitive information (UPSI). In the SEBI (Prohibition of Insider Trading) Regulations, 1992 (hereby referred to as “1992 Regulations”), the definition of “unpublished price-sensitive information” provided that for information to be UPSI, it should not be generally known or published by the company. The use of “or” indicates that information can be generally known in ways other than the publication by the company itself. This rationale was visible in the order passed in Hindustan Lever Ltd v. SEBI1, where it was observed that expectations regarding an event, being already in the media, were considered to be generally known. Later, through an amendment in 2002, the definition of “unpublished” was given. It provided that information would be considered unpublished if it is not “published by the company or its agents. This indicates that for the information to be generally available, it needs to be made available by the company itself. So, the 2002 amendment was narrower than the 1992 Regulations with regards to the meaning of generally available information.
Later, a High-Level Committee was appointed under the chairmanship of Justice N.K. Sodhi to review the 1992 Regulations and further provide a draft for the 2015 Regulations. In these regulations, GAI is separately defined. It is broader than the 2002 amendment since the only condition required for information to be generally available is that it should be available to the public in a non-discriminatory manner. This broader view was recently evident in the ruling given by SAT in the Future Corporate Resources Pvt. Ltd. (FCRPL) v. SEBI. The SAT opined that the information doesn’t need to be only from the company itself to be considered as generally available. The same logic was also followed in previous cases that arose after the 2015 Regulations. However, later through an amendment to the definition of GAI on 18 May 2024, “unverified event or information reported in print or electronic media” were excluded from its ambit.
Chapter II: Repercussions That Follow
[A] Ignoring the Channel
When holding someone accountable for insider trading, especially if they are not directly connected but are said to have used undisclosed price-sensitive information (UPSI) for trading, it’s important to consider whether there is any evidence about how the accused received this information and from whom. In many cases where SEBI has omitted this requirement, the SAT has come down heavily on it. For instance, in Shruti Vora and Ors. v. SEBI, the question was whether a “forwarded as received” WhatsApp message regarding the quarterly financial results of a Company, before the company’s official publication, would amount to a UPSI. In this case, the SEBI admitted that despite their thorough investigation, they could not find the original leakage of the information. On such admission, the SAT rightly condemned SEBI for downplaying the requirement of establishing a linkage between the source of UPSI and the person alleged to have possession of UPSI before pinning liability on anyone. Similarly, in Samir C. Arora v. SEBI, SAT held that SEBI has the burden to provide concrete evidence showing that the accused actually received the UPSI from a source. However, the recent amendment closes the doors for inquiring whether there was any such linkage or where an un-connected person has received the UPSI from. No matter the existence of any such linkage, if a person, alleged to be an insider, trades while possessing information published only in unverified media, he may still be liable. This is particularly concerning when such liabilities require a higher degree of proof than a normal civil suit.
[B] Reducing assistance for investors:
The above issue is further concerning when the conditions for information to be UPSI as well as that of disclosures of UPSI is already lowered. Nowhere in the Regulations, it is mentioned that the UPSI should be only concrete information. In the Satyam Computer case, the AO had clarified that not only concrete decisions, but any information (including proposals, etc.), which if published is likely to materially affect the price of securities of a company, would constitute price-sensitive information (PSI). Further, in the K.K. Maheswari case, the AO reiterated that PSI would include “any information”, i.e., not only a ‘final decision’ but would include the probable and most likely event. So, UPSI can include proposals or just mere possibilities of an event.
Now, as per Schedule A of the 2015 Regulations, there should be prompt public disclosure of UPSI no sooner than “credible and concrete information” comes into being to make such information generally available. Here, one may opine that information that is not credible and concrete, i.e. any possible and not final event/decision, would be excluded from this requirement of disclosure.
This has two implications: (1) Anyone trading based on market speculations about probable events (no matter how widely circulated) published only in unverified media, would be liable for insider trading. This is because that information would not be considered GAI but can still constitute UPSI. (2) The statutory disclosure mandates require only concrete information to be disclosed by the company. If the probable events would not be promptly disclosed by the company due to such statutory language, no matter how circulated the probability of an event is in (unverified) media, the investors would be precluded from trading on it since it would be a UPSI but not a GAI.
Further, the 2015 Regulations omit to state that research and analysis derived from public information would itself fall under GAI. If the purpose of the amendment is to exclude unverified information from the definition of UPSI, then a possible inference is that it would also exclude such unverified research information. This would impact the laymen who would not be able to comprehend the complicated statistical data of the company.
Hence, these implications are detrimental to the investors who many times rely on either the market speculations in the media or research reports about the financial prospects of a company.
Chapter III: At the price of a more flexible alternative
The Sodhi Committee of 2013, which was constituted for a revamp of the insider trading law by replacing the 1992 regulations with the 2015 Regulations, was very much aware of the difficulty of proving insider trading. Nevertheless, it didn’t narrow down the definition of “GAI” to restrict it to only the information that was published by the company itself. The only requirement was that the information should be available in a non-discriminatory manner.
The Sodhi Committee Report was against the understanding that the meaning of GAI is restricted to only that published on the website of the stock exchange. In fact, the SAT in FCRPL v. SEBI, termed such understanding as a “very narrow and restrictive view”. It is also interesting to note that the securities law of the US which is treated as a model by many countries doesn’t adopt this narrow understanding. As per its insider trading law, for information to be considered public, the only requirement is that it should be widely disseminated and time has been given to the public to absorb that information. However, the recent amendment codified the restrictive understanding in the definition of GAI. The rationale behind such an amendment was posed to be the existing information asymmetry between insiders who possess UPSI and others who possess unverified events or information in media.
However, as the Sodhi Committee Report had suggested, whether information is generally available should be a question of fact to be answered through a reasonable man standard. So, while there is a possibility of information asymmetry, this should remain a question of fact to be decided by various factors. Firstly, whether the trading patterns of the insider conform to the extra information possessed by him? Secondly, whether the news was specific enough to give others the complete information that the insider possessed? Thirdly, whether the whole price-sensitive information which is alleged to be possessed only by the insider was available in a non-discriminatory manner and so on.
In fact, such factors were taken into account in many cases before the amendment. In FCRPL v. SEBI, the SAT took into account that the information about the merger/de-merger was “fairly specific” to conclude that it was generally available. Similarly, in the Bharti Airtel case, the Adjudication Officer (AO) took into account that the trading pattern of the accused didn’t conform to the UPSI that he was alleged to possess. Moreover, in Hindustan Lever Ltd. v. SEBI2, the Tribunal considered the large number of reports along with widespread market speculations and opined that everyone is reasonably expected to know about the information. In both Bharti Airtel and FCRPL cases, it was accepted that the information available through newspapers and news channels can be considered to be available in a non-discriminatory manner to the general public. Even though the information in the media might be unverified, these factors would safeguard the interests of the investor. For instance, if the information is false or insufficient, it would not be specific, the trading pattern of an insider wouldn’t match the information in the news, and so on.
Concretizing a blanket exclusion of the information in unverified media from the ambit of the definition of GAI would discard these factors from being taken into account. Instead, it would render all insiders liable for trading on information that is generally available to everyone through newspapers and electronic media as the Sodhi Committee Report had cautioned.
Chapter IV: Conclusion
The recent amendment tries to ensure that all investors possess the same verified information by preventing anyone from trading based on unverified information in media. In doing so, it tends to move towards an “equal information” theory. No matter how ideal it sounds, isn’t appealing to everyone. Instead, people like to take risks and the stock market has to allow for risks.
It is true that people like to take risks only when there is a (i) calculable chance to win and, (ii) a level playing field. Generally, there is a calculable chance to win when some information is published in the media. For instance, a person may want to take a risk by trusting a news source about a merger by using his own or his agents’ research skills to gauge the probability of the merger to have a competitive advantage over other investors who do not do so. While the level-playing field is not equal from the start due to the information symmetry, there are sufficient safeguards against abusing this absolute advantage. By treating the question of UPSI as a question of fact, the factors given in Chapter III can be used to protect the disadvantaged.
Instead of reserving this question for the adjudicatory institutions, the recent amendment has incorporated a narrow and restrictive understanding of UPSI in the 2015 Regulations itself. This would result in various repercussions for the investor whom the SEBI was supposed to protect.