Republished from A First Taste of Law archives. In this blogpost, Pramit Bhattacharya, Student, Damodaram Sanjivayya National Law University, writes about, basic concept of Insider/ Price Sensitive Information. The post also touches on the subject that what should be done in various scenarios where some Insider/ Price Sensitive Information is leaked.

Knowledge is the key to being successful in any walk of life. This is true for trading and business too. In every company, there exist some piece of information which if made public will have an effect on the value of securities of the company. Such information should be released in the market in such a way that it is not prejudicial to the interest of a particular section and is beneficial for all. Anyone who leaks out such information for acquiring personal gains is guilty of insider trading.

Unpublished price sensitive information means any information which relates to the internal matter of a company and is not disclosed by the company in the regular course of business. If such information is leaked, it affects the price of securities of the company in the stock market.[1]

Insider trading means entering into a transaction with regards to the securities of the company by the insiders of the company such as the employees or the associates, based on the information which they have derived within the company. Insiders are those whose association with the company gives them the access to information about internal information of the company.

Trading by insiders is not totally restricted. Insiders such as employees, associates, directors, etc. can trade as long as they are not using the information which relates to the internal affair of the company and is not present in the public sphere. This type of trading is also regulated through reporting and monitoring.

Securities Exchange Board of India (SEBI) is the regulatory bodies of stocks and securities present in the Indian Capital Market. There are other regulatory bodies also like Central Electricity Regulatory Commission (CERC) and Telecom Regulatory Authority of India (TRAI), but SEBI is one of the prime regulatory body. Functions[2] of SEBI includes-

1. Development of Market
2. Protection of Investors
3. Proper Regulation on Security Markets

In order to fulfill these functions, the regulators must be given genuine powers through various legislations.

One of the most important aspects of “corporate governance” is the concept of insider trading. It has to be made sure that insiders who possess the knowledge about internal matters do not exploit their positions and take undue advantage of that knowledge. To prevent this from happening, companies should publish and circulate sensitive information in proper and suitable manner. They should also make sure that insiders of the company do not enter into transactions based on such information, till the information is made public. For this, the company should have an internal system of regulation that discloses information sufficiently and at the opportune moment, maintain confidentially norms, report in a proper manner and come up with specific rules or code of conduct for the insiders. Insider trading is not trading with the knowledge of market regulators but trading with the knowledge of unpublished and undisclosed information.

What is Insider/ Price Sensitive Information?

Any matter which is unpublished and is not available in the public domain, and relates to internal matter is known as insider information. This information might have a material effect on the price of the securities if disclosed. Any information regarding public matters can’t be called sensitive information, because, without any specific information, the price of the securities will not be affected. In accordance with the Regulations provided by the SEBI, no insider (including employees, directors or associates of the company) shall either on his own behalf or on behalf of any other person deal in securities of the company on the basis of such price sensitive and insider information.[3]

Section 15G of the SEBI Act, 1992 states the penalty for insider trading. An issuer of securities may face unexpected events or situations which will have an impact on the price of the securities and the business activities. It is very crucial that the issuer of securities makes a proper assessment to decide what information can turn out to be price sensitive and need to be disclosed. The company may also go for suspension of its securities, if necessary, till a formal step can be taken. Some examples[4] can be given of such events-

• The signing of important deals and contracts.
• Entering into a crucial joint venture with some other company.
• Exceptional matters such as merger, acquisition, etc.
• Fund-raising campaign.
• A large amount of loss relating to foreign exchange.
• Cancellation of an agreement with any party which may affect the business operations.
• Any significant change in the accounting policy of the company which will affect the business activities.
• Comments on potential future earnings by the company.
• Premature removal of any Chief Official of the company before their term ended.

There cannot be a definite list of events which might impact the price of securities if disclosed. It depends on case to case. What may be price sensitive for one may turn out to be irrelevant for the other. An example of this can be given. A fundraising campaign will be considered material for a company which is facing insolvency. But the same thing will become relevant when the company starts functioning properly.

The Listing Rules ensures that the market functions properly and efficiently through timely and competent disclosure of insider information. They also make sure that any information which is being disclosed is done in a general manner, and it is not disclosed only to a particular section. Clause 32 (b)[5] of the new listing puts the issuer under a duty to keep the Stock Exchange, holders of their listed securities and their shareholders informed about price sensitive information as soon as it is reasonably practicable. This is often known as the general disclosure obligation. The principle behind this policy is to set out practices and policies in relation to-

• Administration of the company policies;
• Monitoring of any event so that any information which has the potential to become insider/ price sensitive information is identified and the Board of Directors can take decisions regarding such information.

Disclosure of Information

The guiding principle relating to insider/ price sensitive information is that it should be announced and disclosed in a proper manner without any delay after it becomes known to the management of the company. Until any such disclosure is made, the management of the company should ensure that the information remains strictly confidential, and no insider of the company trades on the basis of such information.

The issuer company may consider implementing additional means of broad communication such that the news will be disseminated to the shareholders and the public in a timely and uniform manner.

Unusual Movement in Trading Volume and Prices of the Securities

The Stock Exchange usually informs the issuing company if they see any unusual and eccentric movement in the trading volume or price of its securities. In such circumstances the issuing company should respond immediately to the Exchange, and if practicable, issue a statement through the Board of Directors, as to whether the company is aware or not about the reasons for such unusual movement in the trading volume and price of securities.

Guidance in Particular Situations–

1. Unintended Publication of Insider Information– If the company comes to know that some information, which might affect the price of its securities has been published inadvertently to a third party, the issuer should make an announcement and disclose the information to the general public so that the third party isn’t able to take advantage of the information. If necessary, they should suspend the trading of their securities till the information is properly disclosed.
2. Profit Warning Statement– where the company gains the knowledge that the actual results may be significantly worse than what they estimated, the company should publish a “profit warning” statement as it may impact the price of the securities in the market.
3. Profit Forecast- If the company makes a public forecast and later realizes that the basis on which the forecast was made may not be correct, it should make an announcement, as soon as possible and should disclose the impact of the incorrect estimates. They should also disclose how the actual outcome will differ from the previous forecast.
4. Incomplete Negotiations- If a company has entered into any discussion and negotiations which related to some price sensitive or insider information, sometimes it becomes difficult to maintain the confidentially as a lot of parties are involved in the discussion and negotiations. In case the discussion or the negotiation has reached a delicate stage, where any information related to it will affect the securities of the company or if major elements of the negotiations are yet to be finalized, the company should consult with the Exchange as soon as possible and if necessary suspend trading of securities until such negotiations are finalized.
5. Annual Report and Meeting- A Company should always communicate with the investors. A company can strengthen its goals and provide indications about the future to its investors through the annual reports. Such arrangement should be made by the company so that they can aptly disclose and discuss price-sensitive information in the meetings with the investors.
6. Making a party an “Insider”- Sometimes, it may happen that a Company is compelled to give confidential information to some parties, for example, to potential business partners, financers, parties with whom they are negotiating, or underwriters. Before a meeting, a proper procedure should be followed where the opposite party should be told that whatever information is being provided to the party is strictly confidential, and the party wouldn’t be able to trade in the company’s security using the provided information before it is made public. The party should give consent to become an “insider” which should be recorded.
7. Employees- many employees have access to insider information because of the nature of their duty. The employee should be made aware that they are under the obligation to keep the information confidential. There should be an internal policy in place that restricts the access of an employee to price sensitive information. Also, strict action should be taken against any employee who leaks such information.

It can be very easy for a person with insider information to take advantage of the fact that he has got a piece of information about which others have no knowledge and engage in deals which will benefit him personally. But business ethics calls for prudence and that such information shouldn’t be used for trading.

[1] S. Ramesh, S. Padmalata And Asis … vs Securities And Exchange Board Of … on 22 June, 2004

[2] http://www.lawctopus.com/academike/price-sensitive-information/#_ftn1

[3] Dsq Holdings Limited vs Securities And Exchange Board Of … on 15 October, 2004

[4] Supra 2

[5] http://www.corporate-cases.com/2013/01/clause-32-of-listing-agreement.html