Demystifying SEBI's Recent Consultation Paper on UPSI: Another One that Bites the Dust?
[Jahnavi and Samarth are students at National Law University Jodhpur.]
The need for inclusion of material information under Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations), within the ambit of unpublished price sensitive information (UPSI) was felt due to inadequate disclosures by the Indian companies. It is evident from the recent findings of the Securities and Exchange Board of India (SEBI) in the consultation paper dated 18 May 2023 that in only around 8% instances, information was categorised as UPSI, which consequently leaves most of the information out of its ambit thereby allowing companies to escape SEBI’s surveillance for suspected insider trading. Intention behind inclusion of material information under Regulation 30 of LODR Regulations within USPI is to correct one major fallacy i.e., to curb insider trading. In this regard, the proactive approach taken by the regulator to prohibit Insider Trading cannot be neglected, which can be seen from the eight amendments the SEBI (Prohibition of Insider Trading) Regulations, 2015 (Prohibition of Insider Trading Regulations), witnessed in the last three years.
What is interesting to note is that the consultation paper brings the strides made by TK Viswanathan committee report back to square one. While the committee had proposed that material information under Regulation 30 of LODR Regulations and UPSI cannot be said to be of similar nature and there certainly does exist several information which fall outside the scope of UPSI, the consultation paper seems to turn a blind eye to it.
Proposal of including material information under Regulation 30 within UPSI, it is argued, does provide the needed clarity and timely disclosure. However, the repeated changes that have occurred in the legal position since 2015 when it was first introduced in India to now, raises the question as to whether this consultation paper is the requisite solution or just another one that bites the dust.
SEBI’s Consultation Paper: Navigating Through its Course
SEBI issued a consultation paper dated 18 May 2023, proposing to review the definition of UPSI to bring clarity and uniformity. In this regard, the proposal seeks to link the definition of UPSI with ‘material events’ defined under Regulation 30 of LODR Regulations.
This amendment, if approved, will have significant impact on the corporate regime, as it will broaden the ambit of disclosures under Prohibition of Insider Trading Regulations. Interestingly, UPSI, defined under Section 2(n) of Prohibition of Insider Trading Regulations, forms the basis for every section of Prohibition of Insider Trading Regulations, and thereby classification of any information under its ambit would yield in the company coming under these regulations’ radar. Furthermore, once a particular piece of information has been labelled as UPSI, certain conditions need to be met: [i] initiation of trade window closure requirement; [ii] entry to be made in structured digital database; and [iii] non-disclosure to anyone other than for a legitimate purpose.
The current position is a little dubious. The Securities Appellate Tribunal, in some cases, has observed material information to be excluded from UPSI. On the other hand, in other set of judgements, it has observed that as long as a company believes some data to be material information, it has to be disclosed and subsequently, mere knowledge of the same will make it UPSI.
Expanding the ambit of UPSI to entail material events under Regulation 30 warrants a closer look at what all will it actually entail. In this regard, Regulation 30 has to be read with List 3 of LODR Regulations, which contains Schedule 3. Pursuant to Regulation 30, events or information encapsulated in Para A and B of Part A of Schedule III are required to be disclosed to the exchange. While Para A of Part A includes information, being relevant to the shareholders, which are deemed to be material and is subject to disclosure, Para B requires disclosure to be made only if it meets materiality policy of the entity. Pertaining the latter, SEBI released a consultation paper proposing a quantitative criterion for disclosures, i.e., threshold value of the events must exceed 2% turnover, or 2% of net worth, or 5% of 3 year average profit or loss. This provides great relief from the vast discretion that rests with SEBI.
A Step in the Right Direction?
The aftermath of inclusion of material events/information within UPSI will be an intriguing development. While it will usher a new era in the Indian insider trading regime, given the repeated changes in the position, its success needs to be weighed.
The proposed amendment, introduced with a view to counter insider trading, surely tends to implement a tighter regime, thereby obliterating any chances of any material event or information escaping from the clutches of UPSI, and subsequently insider trading regulations. This will ensure that the companies are left with no opportunity to take any advantage of the loophole in the system.
However, the measure is not immune to certain probable obstructions. Inclusion of all information, specifically under Para A of Part A of Schedule III, raises the moot question as to whether all such information is of the nature of UPSI. The authors submit that the answer should be in negative.
Several information such as appointment/discontinuation of share transfer agent or proceedings of annual general meeting may be of informational relevance but cannot be said to cause price variation in scrip prices. This is where the difference between UPSI and material event/information under Regulation 30 creeps in, where the former has the potential to cause significant price movement and the latter does not. Consequently, the said move tends to overregulate, and include material information within UPSI’s purview, even when it is not. Furthermore, once an information is termed as UPSI, all the compliances under Prohibition of Insider Trading regulations have to be mandatorily followed, thereby resulting in additional burden on companies and being time consuming.
It is submitted that while SEBI is right in saying that there exists a problem, the solution that SEBI is adopting needs some tweaking. From compliance perspective, SEBI should introduce a clarification as to what specific compliances are to be made, in order to imbibe certainty and foreseeability in the text of the regulation.
It is suggested that the primary reform that must be brought about is to include a specific threshold in materiality. Presently, on account of threshold criterion being absent, SEBI warrants disclosures to be made no matter how insignificant the event/information is. Threshold must be present so as to adjudicate if the information is going to have any impact on the company or its ability to conduct business. In this regard, the consultation paper introduced by SEBI in November 2022, comes in handy. While it only focuses at providing a numeric threshold for events/information under Para B of Part A of Schedule 3, it is suggested that the scope must be broadened to cover Para A and other material information as well.
The proposed amendment, in recent times, is certainly a positive step to enhance regulatory effectiveness and create a level playing field for market participants. It will help to resolve the issue of non-disclosure by companies by providing clarity and fill the loophole that currently exists. However, inclusion of all material information within the ambit of UPSI might prove to be a little extreme, considering the findings of TK Viswanathan Committee which identified “all material events may not necessarily be UPSI.” Considering the frequency of changes being made by SEBI, it is important that SEBI undertakes longer deliberations so as to reach a sound conclusion. It is interesting to note how SEBI is shifting its approach from looking only at price sensitivity to now looking at materiality of information too. Only time shall tell as to whether this consultation paper will be welcomed by the industry, and whether it will be able to bring clarity with respect to UPSI in true sense or not.