The UPSI Period Conundrum – Analyzing SEBI’S Order in The Matter of Reliance Industries
[Deesha is a student at National Law University, Jodhpur.]
Insider trading is perceived as a problem across capital markets. The SEBI (Prohibition of Insider Trading) Regulations 2015 (PIT Regulations) and the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR Regulations) respectively criminalize and govern insider trading. Further, the PIT Regulations and the LODR Regulations aim to create information asymmetry by preventing insiders from taking unfair advantage over other shareholders and by maintaining “a level playing field in terms of access to material information between the insiders and market participants”.
However, ambiguity in the implementation of the PIT Regulations and the LODR Regulations may lead to selective disclosure practices. Recently, the Securities and Exchange Board of India (SEBI) fined Reliance Industries Limited (RIL) and two of its compliance officers for failure to undertake the prescribed legal recourse upon the selective disclosure of undisclosed price sensitive information (UPSI).
The circumstances surrounding the fine related to Facebook Inc.’s (Facebook) investment of INR 43,574 for a 9.9% stake in RIL’s wholly owned subsidiary, Jio Platforms Limited. Announcements on the stock exchanges were made by RIL on 22 April 2020. SEBI held that the violations were pursuant to the non-adherence to the disclosure norms with respect to the announcement by the RIL post the UPSI period of the investment. According to SEBI, the UPSI period of this particular investment began on 1 September 2019, when the initial discussion on a potential transaction with Facebook started, and the same ended on 24 March 2020, when the speculative report in the Financial Times, London was published.
SEBI held that because of the publication of the news reports, UPSI had become selectively available and RIL was obligated to promptly provide clarifications on its own accord. RIL denied these allegations and stated that although the UPSI period rightly began on 1 September 2019, it only ended on 21 April 2020, when the binding agreement between RIL and Facebook was signed, and the corporate announcements were made by the companies on the respective stock exchanges. For this, reliance was placed on Principle 1 of Schedule A of the PIT Regulations which requires the disclosure of the information “no sooner than credible and concrete information comes into being”.
Reviewing the Availability of ‘Concrete And Credible’ Information
It was the stance of RIL that since the parties were yet to agree on the final valuation and value of the investment by Facebook, and there was no binding agreement in place as on 24 March 2020, there was no ‘concrete and credible’ information available on the matter which would obligate RIL to make disclosures.
However, it may be noted that what is ‘concrete and credible’ has not been defined by the PIT Regulations. Further, upon a review of the SEBI’s earlier orders, it becomes apparent that SEBI has mandated disclosures at different stages. In the adjudication order in the matter of Bank of Rajasthan, it was held that the information in concern had become ‘concrete’ on the signing of the binding agreement which had to be disclosed regardless of the future consequences. The order even provided the instance of an ideal disclosure by TATA Chemicals which made a public announcement of acquiring a 100% stake in British Salt after the signing of a binding agreement.
Given that it is the responsibility of the entity to prove that they made the right disclosures at the right time, this lacuna of a bright-line test to determine the end of the UPSI period creates a a double whammy. On the one hand, as in the RIL’s case, delay in disclosure of UPSI leads to the violation of the PIT Regulations, and on the other hand, a premature disclosure may amount to inducement and invite penalties under Regulation 4(2)(f) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations 2003. Regulation 4(2)(f) prohibits the disclosure of information which is not true, or not believed to be true – at the pre-dealing stages.
Did the Information Require Disclosure?
Another line of defense which, although was not adopted by RIL, is whether the information had the characteristic of UPSI in order to trigger RIL’s disclosure obligations. Any information must comprise three essential ingredients, to be characterized as UPSI. First, the information should be directly or indirectly related to a company or its securities. Second, such information should not be generally available. Third, upon becoming generally available, the information must materially affect the price of the securities. Therefore, one of the ingredients of UPSI is that it is not ‘generally available’ i.e., it is “not accessible to the public on a non-discriminatory basis”.
In the case of Hindustan Lever Limited v. Securities and Exchange Board of India, where there was a merger of two companies and it was to be determined whether there was insider trading on the basis of UPSI under the SEBI (Insider Trading) Regulations 1992, it was held that where there were a “large number of press reports indicating market speculation on the merger during that period”, then although the information “was not formally acknowledged or published, [it] was in one sense generally known.” In other words, disclosure on behalf of the company was not required where UPSI had become generally available due to its wide reporting.
Similarly, in the present circumstance where UPSI had become generally available through the wide dissemination on news platforms, RIL could contend that formal acknowledgment via disclosure was not necessary.
Law should be available in a clear, specific, and predictable manner for a just and transparent regulatory system. While there are a host of factors that determine the existence of UPSI, the importance of having an objective test to determine the appropriate stage of the disclosure cannot be undermined. In the absence of correct guidance, companies may face difficulties in managing their affairs and be subject to needless prosecution and hefty fines. This is compounded by the fact that there is little judicial adherence – as the orders passed by the SEBI only have a persuasive value and not precedential value.
In RIL’s case, one may cull out multiple adjudicatory inconsistencies with potential to cause uncertainty. Companies may be unable to determine the appropriate time to make the mandated disclosures, despite wishing to comply in earnest with the PIT Regulations, among other requirements of the SEBI framework. As the first step, it is recommended that SEBI proactively fill the lacunae in the law through its orders, circulars, FAQs, or informal guidance.