[Yash Arjariya is a third-year law student at Hidayatullah National Law University, Raipur]
I. Introduction
The Securities Exchange Board of India ("SEBI") through its consultation paper, has proposed a change to the SEBI (Prohibition of Insider Trading) Regulations, 2015 ("PIT"). The proposed change seeks to tweak the definition of ‘unpublished price sensitive information’ ("UPSI") by adding clause vi under Regulation 2(1)(n) of PIT regulations. The amendment shall add the following nuance to the definition of UPSI: "material event in accordance with Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015." Regulation 30 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 ("LODR") deals with the material information that a listed entity is obliged to disclose to the stock exchange(s). This proposed change, as SEBI explains, will bring greater clarity and uniformity of compliance in the ecosystem.
Thus, the proposed amendment will make every material information qualify as UPSI. It is hereby underlined that every UPSI, unlike material information, is not required to be disclosed to the stock exchange(s), but the trading window is closed for designated persons who are in receipt of UPSI by the compliance officer. The article critiques SEBI's proposed change by pointing out its impact on the distinction between UPSI and material UPSI. It also discusses how the change blurs the line between material non-public information and UPSI. Additionally, it analyzes how the proposed change introduces the concept of 'adequacy' from the disclosure-based regime into UPSI regulations.
- Materialising price-sensitive information
The proposed amendment while classifying every material information as UPSI, necessarily shifts the focus from price sensitivity to the materiality of information. The amendment fundamentally ascribes a notion of 'materiality' to price-sensitive information, thereby categorizing every material piece of information as price-sensitive. This approach contradicts the well-established principle that distinguishes between material price-sensitive information and other forms of price-sensitive information. Even the recent rulings by the SEBI Appellate Tribunal (“SAT”), like the case of Shreehas P. Tambe vs. SEBI, and recent SEBI orders, such as in the matter of New Delhi Television Limited, have differentiated between the two concepts. They highlight that while information considered 'material' may be disclosed to stock exchanges for good governance, it might not always be price-sensitive in nature. The logic of SEBI has also been the same; in the matter of Kushal Limited (2022 SCC OnLine SEBI 94), it was admitted as a fact that any material event in accordance with the listing agreement would not be termed UPSI on its own; it may or may not be UPSI. Thus, reading material information as meaning price sensitive sends the settled principle of law to a toss, that too by the mere virtue of an amendment to an executive notification.
While the proposed amendment vouches for linking the definition of material information as given in LODR with PIT regulations, this process imports the ‘materiality’ directly from LODR into the landscape of PIT regulations. However, SEBI’s approach, as the author submits, is different from this proposed change. SEBI’s current approach is very evident from the matter of the IPO of Onelife Capital Advisors Ltd., wherein the test to determine whether a fact was ‘material’ or not depended upon the facts and circumstances of each case. Thus, not only does this proposed change compulsorily transform material information into UPSI, but it also imports the test of materiality, which is alien to PIT regulation.
II. Blurring Lines Between Material Non-Public Information and UPSI
This amendment would blur the line between UPSI and material non-public information (MNPI), a distinction made by Parliament in the SEBI Act, 1992. Section 12A(e) refers to MNPI, while Section 15G refers to UPSI. The amendment would essentially make every material information a UPSI, let go of the smaller class of MNPI. What is more glaring is that this distinction between two classes of information as envisaged by a statute is not dissolved by an amending act but by mere regulation.
As also enumerated about the differentiation between UPSI and material UPSI, it is also pertinent to refer to the order given in the matter of DCB Bank Ltd., wherein the SEBI itself ordered that even if it is assumed that information is UPSI, it is incumbent on the SEBI to demonstrate and establish that it is material and will have a significant impact on price once made public. Interestingly, SEBI qualified the discharge of burden as proving beyond doubt. However, by ignoring the settled principles in limine, the amendment plainly makes all material information a UPSI. The decision given by SAT in Rupesh Kantilal v. SEBI comes as a direct contrast as one of the pandora of judgements wherein it crystallised that a disclosure required by LODR regulations (which the proposed amendment seeks to bring within UPSI) may or may not affect the pricing of the securities and will not qualify as UPSI.
III. Implanting Adequacy in the shoes of Sufficiency
In Mr. B. Renganathan vs. SEBI, the SAT examined whether something as immensely material as the acquisition of a company may be UPSI or not. Interestingly, what the SAT devised as a test for adjudicating the issue is exactly what the proposed amendment defies. Though it can be logically argued that even this order condensed into setting the materiality of information as classifying it as UPSI, the qualifying caveat cannot be overlooked. SAT cautioned that the interpretation of UPSI through materiality cannot be done arbitrarily, which is exactly what the proposed change does. Reading the entire canvas of material information as UPSI thus deludes a benchmark as a compulsory criterion and, as explained in earlier parts, merges material UPSI into UPSI.
One of the underappreciated aspects of this proposed change is that it entangles the end of material information, which includes material USPI and UPSI. The disclosure of material information as provided in LODR and Disclosure and Investor Protection Guidelines is to protect and facilitate the decision-making process of the investors, or as the SAT explained in DLF Limited v. SEBI, for the purpose of formulating a complete opinion by prospective investors’. Thus, materiality relates to the adequacy of disclosure. On the contrary, the entire dogma of UPSI warrants the prohibition of insider trading, i.e., people with access to sensitive and unpublished information may not encash it to the exclusion and prejudice of other stakeholders by not closing the trading window for those in receipt of such information. The proposed amendment transforms the scheme of adequate disclosure into making the knowledge of material information sufficient for UPSI. The decision of SAT in Gujarat NRE Mineral Resources Ltd. vs. SEBI is a fine substantiation for this argument. In this decision, SAT did not consider disinvestment a UPSI, though it may be a settling point for an entity. This, in addition to the grounds raised in earlier parts, compromises and frustrates the meaning and ends of two distinct genres of information.
IV. Conclusion
The authors have brought forth how the proposed change shakes the foundations of the settled principles of jurisprudence of SEBI itself while also confusing the ends of disclosure of material information with the closure of trading windows under PIT. What is more glaring is that this change undoes the whole jurisprudence with respect to UPSI through an arbitrary classification, and that too is borrowed from LODR, a disclosure regulation much distinct from PIT, as already discussed earlier. Apart from that, this also increases the compliance requirements for listed entities. Further, this will curtail and immensely limit the trading opportunities of the insiders or designated people, as now receipt of every material piece of information would qualify as UPSI, and the trading window will close.