Custom Mold or Ready Made? Rethinking the Approach to UPSI Listings

Summary: The definition of Unpublished Price Sensitive Information (UPSI) under SEBI’s Prohibition of Insider Trading Regulations (2015) has undergone a significant evolution. Originally UPSI covered material events, but recognizing that not all material events affect stock prices, SEBI improved the definition. In 2023, SEBI prescribed quantitative thresholds for materiality and recommended that UPSI be aligned with events falling under Regulation 30 of SEBI Listing Obligations and Disclosure Requirements (LODR). However, feedback from industry stakeholders has revealed gaps in the definition of UPSI due to events such as acquisitions and major deals that impact stock prices but are often overlooked as UPSI. SEBI’s analysis showed inconsistencies in the classification of such events, hindering efforts to curb insider trading. The regulator identified systemic challenges, including inadequate mechanisms for UPSI identification and changing sectoral practices. To address these, SEBI issued an advisory in May 2023 proposing a clearer and more inclusive list of UPSI events such as litigations, major deals and strategic tie-ups. While SEBI aims for clarity, the dynamic nature of industries makes it difficult to compile a comprehensive list, highlighting the need for companies to develop dedicated UPSI frameworks. This consultative approach aims to increase transparency and prevent insider trading while adapting to sectoral nuances.

I. Evolution of UPSI:

The definition of Unpublished Price Sensitive Information (UPSI) under SEBI regulations has evolved significantly to increase sensitivity on price sensitive information and prohibition of insider trading. Under the Securities and Exchange Board of India (SEBI) Prohibition of Insider Trading Regulations (PIT) Regulations, 2015, UPSI initially handled material events in accordance with the listing agreement on the recommendation of the 2017 FMC committee constituted by Sebi. However, they believed that not all material events may be UPSI and hence approved the removal of the same from the definition.

Further, in March 2023, SEBI laid down quantitative thresholds to determine materiality to ensure uniform harmonization across companies and later in May 2023, an advisory proposed to include material events under regulation 30 of SEBI Listing Obligations and Disclosure Requirements (LODR) prepared. Regulations, 2015, as UPSI. However, upon feedback from Indian Inc. The Working Group is looking into issues that could potentially be price sensitive and include issues such as lawsuits, fines, credit score, etc. certain types of agreements (e.g., shareholder and joint venture agreements) and significant legal consequences because they can materially affect a company’s stock price. SEBI’s revisions may seek to align or differentiate the definition of UPSI with material events under Regulation 30 of SEBI LODR, providing clarity for listed entities and investors.

II. Need for revision of UPSI:

We have tried to compile some relevant interesting points from the consultation document issued by SEBI in May 2023, which made SEBI reconsider its decision and include certain regulation on SEBI LODR activities as UPSI 30.

• Events that have a potential impact on the company but are not considered UPSI:

It has been observed that in many cases, an information/event that should be classified as UPSI is not made by the listed entity. Here are a few examples where information is not classified as such despite being UPSI as stated by SEBI:

3.2.1. A company acquired another company and announced it through a press release. The press release claimed that the acquisition would help grow a particular business line, indicating that the acquisition could have a direct impact on revenue and profits. Following this announcement, the company’s share price increased by 4.79% in 1 trading day.

3.2.2. A company wins the largest deal in the history of a particular industry within that company. The company itself claimed that the deal would drive revenue growth in that sector. Following this announcement, the company’s share price increased by 6.09% in 1 trading day.

• Events that allegedly provoke a market reaction but are not considered UPSI:

Thus, in 227 samples out of 1,099 press releases, the price movement in the scenario adjusted for the movement in Nifty/Sensex was more than 2%. However, out of these 227 samples, only 8% (18) were classified as UPSI by the companies listed in the press release.

• Not-so-ordinary events that have the potential to impact performance:

It was also observed that the nature of the information published/announced in many of these press releases actually warranted their classification as UPSI. However, the same situation is not classified as UPSI by the organizations. Some of the announcements made in these press releases that are guaranteed to be classified as UPSI include:

3.6.1. Press release regarding sales/production.

3.6.2. Potential investments of the listed company, regulatory approvals, etc.

3.6.3. Brand acquisitions, product launches, etc. expansion of business including.

3.6.4. Strategic mergers

• Insider trading could not be detected due to non-UPSI identification:

The analysis found that companies largely classify as UPSI only those items expressly mentioned in Regulation 2(1)(n) of the PIT Regulation. Market feedback also suggested that most companies consider this to be a ‘uniform practice’ as this is clearly stated in the PIT Regulations.

Moreover, SEBI’s surveillance system also generates a significant number of alerts regarding suspected cases of insider trading, where a significant number of entities have been observed making fictitious profits, sometimes even exceeding Rs. Twenty-Five Million Rupees. However, a significant portion of these alerts could not be taken up for further scrutiny by SEBI due to material information not being classified as UPSI by the listed companies. Therefore, SEBI’s efforts to curb insider trading are hampered by non-classification of material information as UPSI by listed companies. SEBI observed that there was no system for identification of UPSI and started asking questions to Managing Directors. There have been 3 such instances in the recent past where the questioned party had to resolve the matter with SEBI. Enforcement is the last option for any regulator and SEBI, taking a constructive approach, has reconsidered the UPSI list and issued advisory to expand the open UPSI list. For SEBI too, it is difficult to give a clear list of UPSI, considering demographics and dynamic factors like size, sector and industry type.

Therefore, based on their analysis, they recommend adding to the open part of the UPSI events that are guaranteed to materially affect the price of securities.

III. Is the UPSI listing provided good enough?

An interesting question is whether an explicit list of events under all circumstances would be considered UPSI, and whether events considered not explicitly covered would be UPSI. Let’s try to evaluate this with a few examples:

• Can routine capital expenditure (capex) in manufacturing companies be considered ordinary and not UPSI?
• Routine fundraising activities, whether in the financial sector, are generally not UPSI, but acquiring a new loan portfolio might be?
• Isn’t ordering a new material in the normal course of business for engineering companies? Will it qualify as UPSI? And compared to this, can a new order in the service sector be considered UPSI?
• Can the resignation of a director be UPSI, or can resignation due to governance concerns also be UPSI?
• Could 1 lakh penalty be UPSI or could there be linkage with PAT of penalty which could show the impact of financial performance of the company as a parameter for UPSI?

MMJC Conclusion:

The above illustration shows that it is not that easy for SEBI to provide definition or list of UPSI that is ideal, comprehensive or inherently suitable for any company. Therefore, there is a serious need to prepare customized list/parameters in an objective manner to determine USPI and more importantly not to be considered as UPSI. This can be done in broad consultation with the head of staff concerned.

Consultation Paper on the proposed review of the definition of Unpublished Price Sensitive Information (UPSI) under the SEBI (Prohibition of Insider Trading) Regulations, 2015, to bring greater clarity and compliance uniformity to the ecosystem, published on 18 May 2023.

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Article written by Ms. Yashika Dharamshi – Associate Director – (email protected) and Mr. Saurabh Agarwal – Partner – (email protected).