Sebi to realign UPSI definition with material events to curb insider trading

Insider trading, which is inherently unethical, can be deterred or rendered infructuous, if not entirely, at least to a significant extent, by an effective regulatory mechanism, armed with prohibitive penalties and punishments. The Securities and Exchange Board of India (Sebi) has put in place appropriate measures for prohibiting insider trading and handling of unpublished price-sensitive information (UPSI) under the provisions of Sebi (Prohibition of Insider Trading) Regulations, 2015.

The regulations not only prohibit trading, while in possession of UPSI, but also prohibit communication about UPSI to outsiders unless required for legitimate purposes on a ‘need-to-know’ basis. They also provide for creating Chinese Wall procedures within market entities. The regulations are required to be operationalized by listed companies, market intermediaries and fiduciaries handling such UPSI. Sebi is empowered to levy penalties to the extent of the higher of ₹25 crore or thrice the amount of gains in respect of insider trading violations. Further, as a measure towards greater transparency in the markets, the market regulator mandates disclosures of material events under Regulation 30 of the Sebi (Listing Obligations and Disclosure Requirements) Regulations, 2015, as early as possible within 24 hours.

Earlier, the material events under the Listing Regulations were explicitly included under the definition of UPSI. However, the Committee of the Fair Market Conduct in its report on 8 August 2018, suggested the removal of explicit inclusion, as it observed that material events may not necessarily be price-sensitive, and recommended that the discretion to classify a material event as UPSI may be left to listed companies. Sebi heeded to the recommendation and after getting positive market feedback, removed the provision from the definition of UPSI, effective 1 April 2019.

However, since the divorce of material events from the definition of UPSI, Sebi has observed that events that get reported as material events have not been treated as UPSI, even though the disclosure of the events has had a price impact and ought to have been classified as UPSI. When a company does not treat an information which is not yet made available as UPSI, the notional trading window is kept open, during which time company insiders may trade in the company’s shares, albeit with some restrictions and conditions. However, if the information proves to be price-sensitive, such trades would have resulted in losses to unsuspecting investors. In this background, Sebi on 18 May 2023 issued a consultation paper on reviewing the definition of UPSI to align, or rather re-align it with the material events disclosure.

Sebi has found that among 1,099 press releases issued by the top 100 listed companies between January 2021 and September 2022, there were 227 press releases that triggered a price movement of over 2% (adjusted for movement in the market indices). However, only in 18 of the 227 cases, the information was treated as UPSI. Some of the cases where Sebi has indicated that the matter should have been treated as UPSI are sales or production-related press releases, expansion of business, potential investments by a company, strategic tie-ups, or in other circumstances, where the company knows or could have known an event could have an impact on revenue or profits, and thereby on market prices. From the observations of Sebi, it may be understood that many companies conveniently categorized only those explicitly coming under the UPSI definition like financial results, dividends, change in capital structure, capital restructuring exercises such as mergers, de-mergers, and changes in key managerial personnel, as UPSI. This is done despite the fact that the term UPSI is defined to mean any information, which upon becoming generally available, is likely to materially affect the price of securities. Those instances, which were explicitly stated are merely to serve as examples and not an exhaustive list. Listed entities have been expected to follow this provision in spirit and do a self-analysis of whether material events might be price-sensitive, too, and if so, initiate the mechanisms to prevent insider trading like trading window closure, Chinese Wall policy and recording the details of sharing of such information in a structured digital database.

However, since this ideal has not yet been realized in the markets, Sebi proposes to include material events explicitly back in the definition of UPSI. Comments can be sent to Sebi till 2 June.

Dr Ranjith Krishnan is Faculty Member and industry liaison officer at National Institute of Securities Markets and Usha Ganapathy Subramanian is company secretary, Chennai.