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SEBI proposes amendment to Insider Trading Regulations: But is it necessary?

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SEBI’s proposal to review the definition of Unpublished Price Sensitive Information to include all material events, irrespective of whether they are deemed to be price sensitive or not, could blur the line between UPSI and material non-public information. Moreover, any unpublished information likely to be price sensitive already falls under UPSI definition. So why an amendment when an FAQ can clarify the position?

The Securities and Exchange Board of India (SEBI) recently released a series of consultation papers, inviting public comments on various regulatory matters. Among these papers, one caught the attention of market participants — the proposal to review the definition of ‘Unpublished Price Sensitive Information’ (UPSI) under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations).

The motive behind the proposed review, as stated by SEBI, is to establish uniform compliance standards in the ecosystem by linking material events under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) to the definition of UPSI. However, some question the necessity of this change.

What Is Unpublished Price Sensitive Information?

The consultation paper sheds light on the existing definition of UPSI under Regulation 2(1)(n) of the Prohibition of Insider Trading (PIT) Regulations. According to this definition, UPSI refers to any information, directly or indirectly related to a company or its securities, that is not generally available and is likely to materially affect the securities’ price upon becoming generally available.

The Committee on Fair Market Conduct, chaired by Dr TK Viswanathan, recommended the removal of explicit mention of “material events” from the PIT Regulations in 2019. The committee observed that all unpublished information likely to be price-sensitive would automatically fall under the definition of UPSI. However, it noted that all material events may or may not be price sensitive. Consequently, the mention of material events was omitted from the PIT Regulations.

There are certain SAT judgements also that clarifies the distinction. For example, in a matter a divestment in the normal course of business operations of the company was held to have no effect on the price of its securities and such information, even though material for the purpose of disclosure to the stock exchange under Listing Regulations, was not a UPSI under PIT Regulations.

The Debate Over Material Events, Information

SEBI’s analysis shows that since the omission, companies have primarily categorized unpublished information as UPSI only if it expressly falls within the enumerated list under the definition of UPSI in PIT Regulations, such as financial results, dividends, M&A etc. The consultation paper reveals that SEBI examined over 1000 instances where the top 100 companies made announcements through press releases. Out of these instances, around 20 percent saw a price movement of the company’s scrip exceeding 2 percent (adjusted to the index), but only 8 percent of them were categorised as UPSI by the companies.

Interestingly, SEBI argues that due to the non-categorisation of material information as UPSI, cases flagged by SEBI’s surveillance system for suspected insider trading could not be further examined. Therefore, SEBI’s consultation paper proposes a new amendment to the PIT Regulations, to include “material event in accordance with Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015” within the definition of UPSI.

Under Regulation 30, material events are the events as determined by the board of directors of a listed entity that have significant effect on the company. Generally, companies formulate their own materiality policy to determine the same based on effect on revenue, operations, etc.

Is An Amendment Necessary? 

However, critics question whether this amendment is truly necessary. The Prohibition of Insider Trading (PIT) Regulations explicitly state that no insider shall trade in securities while in possession of UPSI. The classification or non-classification of information as UPSI does not absolve individuals from liability under the PIT Regulations.

SEBI contends in the consultation paper that insiders often argue that if the company itself has not identified any information as UPSI, how are they expected to do so? To address this supervisory challenge, SEBI proposes to impose regulatory responsibility.

It is worth noting that this proposed amendment will shift the focus from price sensitivity to the materiality of information. Regulation 30 of the LODR Regulations already requires listed companies to disclose material events or information, which will now fall within the definition of UPSI. And for determining materiality, SEBI separately has proposed another consultation paper suggesting the criteria of 2 percent of turnover or net worth or 5 percent of 3-year average profit/loss after tax, basis audited standalone financial statements.

This amendment would blur the line between UPSI and material non-public information (MNPI)—a distinction made by Parliament in the SEBI Act, 1992. Section 12A(e) refers to MNPI while Section 15G refers to UPSI. It would also necessitate compliance measures such as closing the trading window and obtaining pre-clearances under the PIT Regulations for making disclosures under Regulation 30 of the LODR Regulations.

Why Overlegislate? Clarify Through FAQs  

SEBI itself acknowledges that all unpublished information likely to be price-sensitive falls under the definition of UPSI, regardless of whether it is explicitly enumerated. This raises the question of whether an amendment is truly needed.

SEBI has frequently provided clarifications through FAQs to address regulatory concerns. In the current scenario, SEBI could potentially achieve its objectives by issuing necessary clarifications and examples through FAQs. Additionally, setting a precedent where amendments are made for every clarification could have broader implications.

The consultation process will provide an opportunity for stakeholders to express their views and shape the final decision. Ultimately, the proposed amendment aims to enhance regulatory effectiveness and ensure a level playing field for market participants. Intent remains to curb arbitrage of two regulations by market players.