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FIG Paper - Navigating SEBI’s Definition of UPSI

Introduction:

The objective of the PIT Regulations is to prohibit insiders with access to Unpublished Price Sensitive Information (“UPSI”) from making illicit gains and to ensure timely, adequate and even disclosure of UPSI to the public. Hence, the determination of what constitutes as UPSI becomes necessary. In this regard, the Securities and Exchange Board of India (“SEBI”) has signalled a shift from a principle-based regime to a more prescriptive regime, which is likely to result in increased compliance obligations for the listed companies.

On May 18, 2023, SEBI issued a consultation paper to review the definition of UPSI under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”) (“Consultation Paper”). It proposes including ‘material events’ as defined under Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”), to the definition of UPSI. Further, by way of various amendments in the past few months, SEBI has significantly expanded the scope of events, which warrant a disclosure in terms of Regulation 30 of LODR.

Historical Background:

Previously, ‘material information’ per the listing agreement used to be part of the definition of UPSI.  However, it was deleted by way of an amendment in 2018[1] following the recommendations[2] of SEBI-constituted Fair Market Conduct Committee. The committee was of the opinion that all material events, which are required to be disclosed under LODR, may not necessarily be UPSI.

However, after the 2018 amendment, SEBI observed various instances where listed entities did not categorise information that should have been categorised as UPSI. One such event was highlighted by SEBI in its Order against Mr. B. Renganathan[3], where SEBI noted that information pertaining an acquisition by the company was disclosed under LODR mentioning that the acquisition would help to grow the business of the company. However, the said information was not classified as UPSI. After considering various factors, such as a 4.79% increase in the company’s share price in one trading day after the announcement, SEBI concluded that the acquisition was likely to have a direct impact on the revenue and profits and thus, such information should have been categorised as UPSI. Accordingly, SEBI in the Consultation Paper, observed that the objective of the 2018 amendment, which was to bring clarity and reduce hardship, was not being met as listed entities were not exercising their judgment with prudence and were not disclosing price-sensitive material events.

Implications:

The Consultation Paper proposes to once again include events which require disclosures per Regulation 30 of LODR within the definition of UPSI under PIT Regulations, with the aim to bring in more clarity in terms of what information should be categorised as UPSI.

The events specified in Para A of Part A of Schedule III of LODR are deemed to fall under the realm of material events and listed companies must mandatorily disclose this information. As noted above, several items have been recently added in Para A of Part A of Schedule III of LODR, which are required to be disclosed without considering any materiality threshold. For instance, actions taken, or orders passed by any regulatory, statutory, enforcement authority or judicial body against the listed entity or its directors, key managerial personnel, senior management, promoter or subsidiary are to be disclosed. It has been observed that fines as low as a few thousands are being disclosed and such a strict view, if taken, may have absurd consequences for large companies which are likely to have several litigations on a regular basis.

The disclosure of events under Para B of Part A of Schedule III of LODR is dependent on application of the guidelines for materiality, which must be framed by listed entities based on criteria specified in Regulation 30(4) of LODR. Hence, these guidelines are dependent on the discretion of the entity, thereby leading to situations of ambiguity in certain cases of whether or not a particular piece of information warrants disclosure. In this regard, in recent orders, SEBI has reiterated the principle that companies must choose to disclose in case of an ambiguity with regards to whether or not a disclosure is warranted. In the matter of IFL Promoter[4], SEBI reiterated SAT’s Order in the matter of ICICI Bank Limited vs. SEBI[5], wherein it was held that all material and price sensitive information should be disclosed and even when there is a matter of doubt about an event, the event should be disclosed without finer legal examination.

Conclusion:

There is a wide range of information/events that may be relevant from an LODR perspective and warrant a disclosure. However, the same may not be significant enough to be classified as UPSI and inter-alia require the closing of the trading window. It may indeed be beneficial to have separate thresholds for the purposes of classification of UPSI and for the triggering of a disclosure obligation, with the latter being more stringent to ensure timely and adequate dissemination of information about the listed entity to the general public without increasing the compliance burden within the company by classifying such information as UPSI.

In this regard, a reference may be drawn to SAT’s Order in Dr. Prannoy Roy v. SEBI and Ors.[6], which reaffirmed its decision in Quantum Securities Pvt. Ltd. v. SEBI[7] whereby certain disclosures made in relation to the Board’s decision to evaluate options for reorganisation of the Company, was held to not be UPSI by SAT. SAT was of the opinion that neither any specific plans were contemplated, nor was any definite decision made and the Board was merely exploring possibilities. However, such items would automatically be treated as UPSI if disclosures per Regulation 30 of LODR were to be brought within the ambit of the definition of UPSI.

Recently, SEBI has formed the Industry Standards Forum[8], to formulate standards for implementation of specific regulations and circulars based on feedback from industry and stakeholders, in consultation with SEBI. The Industry Standards Forum has taken up the disclosure requirements under Regulations 30 and 30A of LODR as a priority area. Such standards drafted in consultation with the industry would not only help combat challenges that arise, but also guide listed companies to effectively comply with the said regulations.


[1] PIT (Amendment) Regulations, 2018 (here).

[2] Report of Report of Committee on Fair Market Conduct for public comments dated Aug 09, 2018 (here).

[3] SEBI Order dated July 16, 2020 in respect of Mr. B Renganathan in the matter of Edelweiss Financial Services Limited (here); upheld by the Securities Appellate Tribunal (“SAT”) vide Order dated March 24, 2021 in Appeal No. 272 of 2020 (here).

[4] SEBI Order dated September 20, 2023 in the matter of IFL Promoters Limited (here).

[5] SAT Order dated July 8, 2020 in ICICI Bank Limited v. SEBI (here).

[6] SAT Order dated October 5, 2023 in Appeal No. 557 of 2020.

[7] SAT Order dated February 2, 2023 in Appeal No. 49 of 2021.

[8] SEBI’s Press release dated August 7, 2023 (here).

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Photo of Anu Tiwari Anu Tiwari

Partner (Head – Fintech and FSRP) at Cyril Amarchand Mangaldas. Anu represents Indian and multinational banking, broker-dealer, exchange, asset management, speciality finance, fintech and information/ emerging technology companies on transactional, enforcement and regulatory matters. His transactional practice focus is on public & private…

Partner (Head – Fintech and FSRP) at Cyril Amarchand Mangaldas. Anu represents Indian and multinational banking, broker-dealer, exchange, asset management, speciality finance, fintech and information/ emerging technology companies on transactional, enforcement and regulatory matters. His transactional practice focus is on public & private M&A, capital raising, commercial agreements and activism matters. Anu advises financial services clients on matters before the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Ministry of Finance, Enforcement Directorate and appellate tribunals. He can be reached at anu.tiwari@cyrilshroff.com

Photo of Vasudha Goenka Vasudha Goenka

Partner in the Dispute Resolution practice at the Mumbai office of Cyril Amarchand Mangaldas with a special focus on Securities Regulatory work. Vasudha has over 16 years of experience, before joining the firm, Vasudha was a Deputy General Manager with SEBI. She can…

Partner in the Dispute Resolution practice at the Mumbai office of Cyril Amarchand Mangaldas with a special focus on Securities Regulatory work. Vasudha has over 16 years of experience, before joining the firm, Vasudha was a Deputy General Manager with SEBI. She can be reached at vasudha.goenka@cyrilshroff.com

Photo of Karthik Narayan Karthik Narayan

Associate in the Financial Services Regulatory Practice (FSRP) at the Mumbai office of Cyril Amarchand Mangaldas. Karthik advises on corporate, financial regulatory matters and cross border transactions. He can be reached at karthik.narayan@cyrilshroff.com.

Photo of Navjot Chhabra Navjot Chhabra

Associate in Dispute Resolution Practice at the Mumbai office of Cyril Amarchand Mangaldas. Navjot is currently working in the securities litigation team at CAM. She can be reached at navjot.chhabra@cyrilshroff.com