Co-authored with Manas Dhagat and Rishabh Jain, associates, Finsec Law Advisors.
The Securities and Exchange Board of India (SEBI) released a consultation paper on November 9, 2024 proposing revisions to the definition of Unpublished Price Sensitive Information (UPSI) under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”). To this effect, Sebi has introduced 13 new proposals to broaden the scope of the UPSI definition to include certain material events specified under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”). These include, among others, revisions of credit ratings, proposed fund-raising activities to be discussed at Board meetings, agreements impacting the management and control of the company, initiation of forensic audits, outcomes of certain litigations, and the award or termination of significant contracts or orders not in the ordinary course of business. Some additions are well-founded, as such events significantly influence investor decisions and market movements. However, certain inclusions may dilute the framework’s purpose by covering routine operational matters or classifying less material disputes as UPSI.
The relationship between material events and UPSI has evolved over time. Initially, the definition of UPSI under the PIT Regulations included within its scope information related to all material events as per the listing agreement. However, an amendment to the PIT Regulations in April 2019 removed the direct link to materiality. Despite this, instances of failing to categorise information apart from those explicitly specified under the PIT Regulations continued to persist. To address this issue, Sebi released a consultation paper on May 18, 2023, proposing to align the definition of UPSI with material events under Regulation 30 of the LODR to improve clarity and ensure consistent compliance.
In its latest consultation paper, Sebi aims to address concerns raised in public feedback regarding the proposal to include material events under Regulation 30 of the LODR Regulations within the definition of UPSI. These include concerns over the limited impact of all Regulation 30 events on securities prices, recommendations to prioritise specific material events, and difficulties in compliance management. In this context, determining whether a material event falls within the scope of UPSI requires evaluating whether events warranting disclosure are, in most cases, also price-sensitive.
The new proposals recommend including regulatory actions against the listed entity, its directors, key managerial personnel (KMPs), and subsidiaries within the definition of UPSI. However, not all regulatory actions or orders carry the same level of significance or are likely to impact prices. For example, regulatory actions such as notices resulting in minor penalties for technical defaults are unlikely to have a substantial effect on stock prices. Similarly, actions against non-material subsidiaries not directly involved in the listed entity’s core operations may not significantly alter market perception. More importantly, even if material, ‘action initiated’ should never be the standard for disclosure. Everyone is assumed innocent unless proven guilty. To put in public domain a very preliminary charge or prima facie case would be unfair to the individual or company being investigated. The only acceptable standard must be when a person is indeed found to have committed a wrong.
The Consultation Paper also proposes including changes to KMPs within the UPSI definition, even in cases unrelated to governance concerns, disputes, or financial irregularities. Additionally, it suggests incorporating information about the outcomes of litigation or disputes that could impact the listed entity. While rulings that result in significant financial liability may affect stock prices, outcomes that are pre-disclosed or anticipated where the market has already priced in the potential impact may not always be price-sensitive. As a result, events covered under Regulation 30 of the LODR Regulations require further independent analysis to determine whether they should be included within the scope of UPSI.
However, proposals for information such as changes in ratings are inherently price-sensitive, as they directly affect the perception of a company’s creditworthiness and are closely monitored by investors. Similarly, including award or termination of order/ contracts not in the ‘normal course of business’ is justified because these often indicate significant changes to the company’s future cash flows, market position, or operational strategy. Of course, a material filter should also be applied, as a outside normal course of business contract should not require to be disclosed.
The proposal to include information related to initiation of forensic audit or receipt of final forensic audit may raise speculations about potential mis-statements, misappropriations, or irregularities in a company’s financial dealings is too pre-mature. Indeed, if this is required to be disclosed at the preliminary stage, few companies would initiate a forensic audit for the fear of bad press. Mandating a disclosure pre-maturely would be a regulatory self-goal.
At this juncture, it is important to note that the definition of UPSI is intended to be inclusive, already covering disclosures under the LODR Regulations that may be price-sensitive. The current proposals reflect Sebi’s intention to better align its regulations with the realities of market dynamics. By broadening the definition of UPSI to include material events required to be disclosed under Regulation 30 of the LODR, Sebi acknowledges that certain events, even if not inherently market-sensitive at first glance, could have significant implications for investor perception and are not currently being disclosed. As a free market supporter, the authors believe in the current approach, but Sebi may be right in changing standards if it has data that people are being too cute with disclosures.
Through this approach, Sebi seeks to capture a wider range of corporate actions and events that could influence the financial standing or public perception of a listed entity. However, this broad interpretation introduces complexity, as it may lead to the classification of at least some routine operational events as UPSI, even if their market impact is limited or uncertain. Similarly, some other concerns with forensic audits and under investigation or enforcement events should not be disclosed till a finding of fault.
Sebi’s proposed revisions aim to address changing market conditions and improve investor protection. However, it also creates challenges in distinguishing between price-sensitive information and routine operational matters. A consistent and focused approach, based on the likelihood of an event affecting market prices, reducing adverse impact on innocents, and preventing self-audits by pre-mature disclosure would ensure that only truly relevant disclosures are classified as UPSI. This would help maintain the effectiveness of insider trading regulations and reduce compliance burdens while aligning rules with current market practices.
The article was originally published in the Financial Express and can be accessed here.
