Expanding UPSI an Antidote: Reflections on the SEBI Consultation Paper
[Akshat is a student at National Law University Delhi.]
Last month, the Securities and Exchange Board of India (SEBI) proposed a review of the definition of unpublished price sensitive information (UPSI) to bring greater clarity and uniformity of compliance in the stock markets. The consultation paper now attempts to classify “material events” as UPSI, which was removed from the definition after the report of the Dr TK Vishwanathan committee in 2018.
The SEBI found that the categorisation of information as UPSI was done in less than a fifth of the cases, prohibiting the securities regulator’s efforts towards curbing insider trading due to the non-categorisation of material information by listed entities.
This article attempts to explore the drawbacks that the amendment aims to address. It provides further recommendations for categorising information as UPSI to curb insider trading. It undertakes a comprehensive study of international practices. Overall, it explores the legitimacy of the proposed amendment to meet its purported aim, i.e., to curb insider trading in the stock market.
UPSI: (Not to) Disclose?
UPSI, as it stands presently, includes information related to financial results, dividends, changes in capital structure, mergers, demergers, acquisitions, delistings, disposals, expansion, and changes in key managerial positions. While the list is not exhaustive, the classification of the provided five events as UPSI is mandated by law.
In 2018, the regulator removed the words “material events” from the erstwhile definition of UPSI on the recommendation of the SEBI Committee on Fair Market Conduct (FMC). Material events comprise information which is either price sensitive and/or has a bearing on the performance/operation of the listed entity. The committee believed that since material events do not necessarily impact the price of a security, and the definition of UPSI was an “inclusive definition”, there was no need for such an inclusion.
Five years hence, the SEBI has taken a complete turn in an attempt to undo the 2018 amendment. It found that on multiple occasions, information which was price sensitive and should have been classified as a UPSI was not done so. For instance, a SEBI analysis of 1,099 press releases by the top 100 listed companies revealed that only 8% of press releases with more than 2% impact on stock price were classified as UPSI.
This led to a situation where even if the SEBI detected insider trading by the employee of a company since the information was not classified UPSI by the company, no action could be taken. In essence, the regulator faced a failure by the entities themselves to disclose anything more than the categories explicitly provided in the regulations.
The proposed amendment attempts to include, for classification as UPSI, any information considered ‘material’ as per the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR).
It may be recalled that in June 2023, SEBI introduced amendments to the LODR as a response to another consultation paper seeking to streamline the nature of ‘material’ disclosures. It has introduced thresholds for reporting of events where an event or information’s value exceeds a certain threshold. In this respect, the regulator must be lauded for partially responding to criticism by prescribing quantitative “materiality thresholds” to determine events requiring disclosure. However, the amendment continues to ignore qualitative factors which have a bearing on a corporation’s stock price. For instance, events which carry strategic importance and reputational risks and are open to subjective interpretations of 'material'. In effect, the classification of what classifies as “material” can remain subject to the company's interpretation in such cases.
This has the practical effect of retaining the problem with the erstwhile definition of UPSI, as it further compounds the problem. Entities would now be required to classify all 'material' information as UPSI, and the classification of information as 'material' is ambiguous and left to the company itself. If the company does not want qualitative information to be available to the public, it will discourage companies from classifying information as 'material' in the first place. This would lead to two results. First, it will lead to non-disclosure of qualitative information to the public when the company does not deem it to be ‘material’, and it does not fall within the other four set parameters. Second, it will not be disclosed to the stock exchanges because the information will not be deemed 'material'.
Ultimately, the proposed amendment has the potential of retaining the practical effects of eroding investor trust and confidence, increasing market manipulation, and leading to market volatility and unfair trading. It can act as an antidote to the disease it aims to solve, the asymmetry of information in the stock market.
Global Comparative Framework: What is UPSI?
In the United States, the equivalent of the Indian UPSI is material non-public information (MNPI). Rule 10-b5 of the United States Securities and Exchange Commission (SEC) Act 1934 prohibits officers, directors, and other employees who have access to non-public information from trading on such shares intending to gain a profit. The terms 'material' and 'non-public' have not been explicitly defined. Information is considered material if there is a “substantial likelihood” that a reasonable investor would find it important in deciding. However, there is no bright line rule, and it is contingent upon the circumstances of the case. Further, information is non-public if not disseminated to the marketplace.
Interestingly, the SEC dealt with a similar problem of selective disclosure by issuers of material non-public information almost two decades back. It incorporated Regulation FD, the fair disclosure rule, to address such selective disclosure concerns. It provides that when an entity discloses MNPI to enumerated persons, such as holders of securities and securities market professionals, prompt public disclosure is mandatory. It was seen as a step to address the “integrity” of the US stock markets.
In the United Kingdom, the Market Abuse Regulation governs the UPSI equivalent – known as 'insider information'. It is defined as information of a precise nature that has not been made public and relates directly or indirectly to the issuers or financial instruments. If it is made public, it 'would be likely' to significantly affect the prices of those financial instruments or their derivatives. It requires prompt disclosure of any such information. However, the definition of what classifies as 'prompt' remains open to interpretation.
It follows that even in developed stock markets such as the United States and the United Kingdom, there remains ambiguity in assessing materiality and time frames. This leads to substantial discretion with the issuer of the information itself due to the subjective nature of such information.
Altering UPSI: The Way Forward
To preserve investor trust and confidence, the definition of UPSI must be explored for revision in the following manner.
Revisiting 'material' under the LODR
It is critical that the flagged issues with the classification of an event as material, which requires disclosure under the LODR and the proposed regulations, be resolved. SEBI must classify quantifiable marquee indicators for treating a qualitative event as carrying strategic importance or reputational risks. This will ensure that information to both the stock exchange and the investor is disseminated promptly.
Establishment of statutory disclosure committees
It is helpful to explore the concept of a statutory disclosure committee within a company, comprising senior management representatives from various departments providing a holistic view of the materiality of business development. It will be responsible for identifying, handling, and disclosing such information based on a data-driven approach to the likelihood of change in stock price. Similar to SEBI’s approach in the consultation paper, an analysis of events likely to have an impact over a set threshold historically must be disclosed. Records and proceedings of such a committee must also be recorded for review by the regulator, including deliberations, decisions, and rationale.
Whistleblower and review mechanism
SEBI must consider a whistleblower mechanism specifically for violation of UPSI disclosure norms. Companies must be required to develop a comprehensive policy, clearly defining types of concerns that can be flagged and the protection and confidentiality measures provided to whistleblowers.
In conclusion, information symmetry with large public corporations remains the need of the hour to ensure and build investor trust and confidence. Expanded disclosure requirements have always been met with backlash, and there is likely displeasure with such requirements. SEBI’s move is rather welcome, considering these corporations deal with public money. SEBI’s move to incorporate financial materiality frameworks is welcome. However, the subjectivity of what constitutes 'material' information remains a blurred line regarding information being classified as price sensitive or otherwise, prohibiting disclosure. This is not only within India but in advanced economies as well. Thus, a regular review of such a definition to meet market demand must be made and proposed steps be undertaken.