This article is written by Kashish Khattar from Amity Law School, Delhi (IPU), currently enrolled in the Ace your Internship course at Lawsikho. This article is about the mechanics of sharing Unpublished Price Sensitive Information (UPSI).

Introduction

Insider Trading, as may be familiar to a lot of us is principally the act of dealing in securities with the advantage of having asymmetrical access to unpublished information which when published would impact the price of securities in the market. Anybody who uses price sensitive information to make a profit either for themselves or a third party in the shares of a company is in breach of insider trading laws of the state.

What is Unpublished Price Sensitive Information?

Unpublished Price Sensitive Information (UPSI) means any information which relates to the internal matter of a company and is not disclosed by the company in the regular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].

What is Insider Trading?

Insider trading refers to transactions in a company’s securities, such as stocks or options by corporate insiders or their associates based on information deriving within the firm that would once overtly disclosed, affect the prices of such securities. Corporate Insiders are individuals whose employment with the firm (as executives, directors, or sometimes rank-and-file employees) or whose privileged access to the firm’s internal affairs (as large shareholders, consultants, accountants, lawyers, etc.) gives them valuable information[2]. Trading by insiders is also not totally restricted. They can trade until the time they are not using the information that is not present in the public domain. This type of trading is also regulated through reporting and monitoring these trades closely.

Securities and Exchange Board of India

Securities and Exchange Board of India (SEBI) is the prime regulator of Stocks and Securities in the Indian Financial Market. The other regulators include the Central Electricity Regulatory Commission (CERC) and the Telecom Regulatory Authority of India (TRAI). The main functions of SEBI[3] include:

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

Disclosure of Information

The guiding principle relating to Insider Trading or UPSI 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. Insider Trading is regulated and governed by various legislation and regulations which are given as under:

1. By SEBI mainly through Regulation 8 contained in Chapter ‐ IV of SEBI (Prohibition  of Insider Trading) Regulation, 2015 (PIT Regulations) and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and Section 15G of the SEBI Act, 1992 which states the penalty for insider trading.
2. Section 195 of the Companies Act, 2013 prohibits insider trading by the director or key managerial person. Section 458 of the Companies Act delegates powers to SEBI to prosecute insider trading in securities of listed companies and companies which intend to get their securities listed.

Steps to Disclose UPSI

A draft copy of the Code that is to be drafted by a Company in consonance with the principles of fair disclosure specified in SEBI (Prohibition of Insider Trading) Regulations, 2015. The companies have to adhere to following practice and procedure for fair disclosures in respect of Unpublished Price Sensitive Information (UPSI) relating to the company and its securities:

1. Any information that could have a material impact on the price of shares/securities of the Company shall be promptly disclosed to Stock Exchanges where the shares/securities of the Company are listed. Such disclosure would subject to receipt of internal approvals and made through authorised personnel of the Company in accordance with applicable corporate and securities laws.
2. Uniform and universal dissemination of UPSI would be ensured by the Company by adopting a common platform i.e. Stock Exchanges for public disclosure. Once the UPSI is communicated to Stock Exchanges as aforesaid, then other medium of dissemination may also be used to ensure such information is made accessible to the public on a non-discriminatory basis.
3. The Head-Investor Relations of the Company would be the ‘Chief Investor Relations Officer’ of the Company for the purpose of this code and Insider Trading Regulations. He is authorized by the Company to ensure proper and timely dissemination of information in the ordinary course of the business of the Company and also to disclose UPSI relating to the Company and its securities to the investors/analysts, press, electronic/social media and other concerned members of the public.
4. In the unlikely event of any UPSI being disclosed selectively, inadvertently or otherwise, at any forum whether in India or abroad, the Chief Investor Relations Officer of the Company shall take effective steps to promptly disseminate such information to the Stock Exchanges for public disclosure.
5. The ‘Chief Investor Relations Officer’ of the Company is authorized to respond to any queries that may be received from stock exchanges, press, electronic/social media or investors of the Company for verification of any market rumors relating to the Company and any of its subsidiaries, subject to internal clearances.
6. In case any disclosure of UPSI is inadvertently made at a meeting with analysts or at any investors relation conference, which if made public could materially impact the price of the securities of the Company on the stock exchange(s) would be promptly communicated to the stock exchanges on which the securities of the Company are listed, so as to ensure such information is generally available to the public.
7. Any information that may be classified as UPSI would be dealt with by the Directors and Employees on ‘Need to Know’ basis only.

Kotak Committee Report

SEBI constituted a committee under the chairmanship of Mr. Uday Kotak (Kotak Committee) to propose changes to reforms related to regulations governing listed companies. The committee recently submitted its report[4]. The whole purpose of the report is to enhance the standards of Corporate Governance of listed companies in the country.

Need for Corporate Governance[5]

The focus of the companies is primarily to create long-term value for the protection of its stakeholders at large. It seems that it is not being achieved in the spirit given the recent event on boards of corporate not only in the nation but also internationally. Some of the issues recognised by the Committee are:

1. The pace of change of market conditions requiring companies and boards to quickly adapt to the technological and demographic changes and increasingly complex regulatory environment.
2. The focus of the board on short-term quarterly performance rather than the long-term performance of the company wherein the board is not far-sighted but is inclined to meeting short-term objectives than long-term strategies.
3. Increase in the number of passive institutional owners.
4. The outperformance of private equity-owned companies than the publicly listed ones because of the belief that directors in PE-Owned Companies are believed to spend far more time on strategy and risk management have deeper functional and industrial expertise and engage more actively in talent management.
5. Significant value erosion in several Public Sector Enterprises (PSEs).

The above factors, therefore, call for the need to review the Corporate Governance measures in the country by way of better board structures, rigorous checks and balances, and striking a balance between devotion of time to quarterly reviews, audit reports, budgets and matters crucial to the future direction of the business.

Recommendations of the Committee

The Committee has acknowledged that there are inevitable instances of flow of information to promoters/significant shareholders through informal channels. Given their importance as decision-makers, the Committee has recommended amendments to allow the flow of information to any counterparty who:

1. Is part of the promoter group;
2. Is in direct or indirect control of the persons under (1); or
3. Has a nominee director on the board.

The information should be pursuant to a formal agreement in accordance with the regulations. Such flow of Unpublished Price Sensitive Information (UPSI) shall be considered for ‘legitimate purpose’ and not an offence under the SEBI (Insider Trading) Regulations, 2015. Further, communication of information must comply with the Insider Trading Regulations[6].

The report proposes the following amendments:

1. Insertion of a New chapter IV-A in LODR Regulations;
2. Insertion of a new sub-regulation (2A) under Regulation 3 of the PIT Regulations.

Sharing of Information with the Promoters or Controlling Shareholders with Nominee Directors

• Current Provision: The PIT Regulations restrict communication/procurement of information of Unpublished Price Sensitive Information (UPSI) except for legitimate purpose etc. However, there is no provision enabling sharing information with the select group of shareholders either under the PIT Regulations or the Listing Regulations.
• Recommendation: A new chapter IV-A titled “Information Rights of certain Promoters and Significant Shareholders” is recommended to be added to the LODR Regulations, which mainly provides for enabling transparent framework regulating the information rights of certain promoters and significant shareholders to reduce subjectivity and provide clarity for ease of business. Amendments are also proposed by way of insertion of sub-regulation (2A) under Regulation 3 of the PIT Regulations.
• Rationale: The Committee has highlighted the need of flow of information to the ultimate controlling stakeholders being the promoters wherein the information flows from formal/informal channels and that while there is a substantive law for restriction on the flow of UPSI except for purposes mentioned, the ground reality is different from the legal framework.

The rationale provided in the Report indicates scenarios thought of by the Kotak Committee for the purpose of communication and use of UPSI by a listed entity:

• Information flow generally happens mainly through informal channels, matrix structures and through nominees. Generally, these are for genuine business reasons, such as strategic transactions, including acquisitions, mergers, divestments, financing, etc., which often need the help of the promoter to be successful.
• As there is no right way or to say a “green channel on information access” or an explicit framework recognizing a legitimate right to information of promoters and significant shareholders, all communication of UPSI to promoters and significant shareholders (even those for legitimate purposes and on a need-to-know basis) are open to regulatory checks on a post facto basis.
• The regulation white space has been filled in by virtue of legal interpretation. It may affect the companies, their time and money with so many checks introduced by SEBI.

The amendments proposed by the Kotak Committee about UPSI would aid in bringing about transparency in operation of the listed entities. All thanks to the presence of a green channel and a transparent framework for sharing of UPSI, the ‘information flow’ between the promoters or controlling shareholders and the listed entity would now be properly administered.

Conclusion

The panel has recommended the adoption of a transparent framework for exchanging UPSI with promoters or any significant entity not part of the board. It has called for the creation of special agreements enabling the management to share any UPSI with designated persons. Under the current framework, such information can be shared with members only if they are part of the decision-making process. This issue had assumed immense significance during the no-holds-barred tussle at Tata sons between their erstwhile chairman Ratan Tata and Cyrus Mistry and the latter had to quit under unrelenting pressure exerted on him by the former. Panel member Keki Mistry who is Vice Chairman and Chief Executive Officer HDFC said that, ‘These measures would bring clarity and create a pathway where promoters can access sensitive information, subject to certain restrictions’[7].

Unfortunately, SEBI did accept 40 recommendations out of the 80 recommendations proposed by the Kotak Committee[8]. The provisions related to UPSI were not one of them. The main reason behind this could be the proposals in the Report do not contain any restrictions on the use of the UPSI by the listed entity at all.

References

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

[2]http://www.econlib.org/library/Enc/InsiderTrading.html

[3]https://www.lawctopus.com/academike/price-sensitive-information/#_ftn2

[4]https://www.sebi.gov.in/reports/reports/oct-2017/report-of-the-committee-on-corporate-governance_36177.html

[5]http://vinodkothari.com/wp-content/uploads/2017/10/highlights-of-the-corporate-governance-committee-report-SEBI.pdf

[6]http://www.mondaq.com/india/x/636080/Corporate+Governance/Kotak+Committee+Way+Forward+For+Corporate+Governance+In+India

[7]https://www.businesstoday.in/magazine/cover-story/best-indian-ceos-2014-keki-mistry-hdfc-financial-services/story/212785.html

[8]https://www.moneylife.in/article/sebi-accepts-40-out-of-80-recommendations-of-kotak-committee-allows-shared-co-location-facility-for-algo-trading/53554.html