As the stock market evolves and the channels through which investors can obtain information grows multi-fold, those in possession of price sensitive information, not publicly known, have a distinct advantage over others. Such information asymmetry is certainly not conducive for the credibility of the market. The recent consultation paper put out by the Securities and Exchange Board of India (SEBI), however, shows that companies are making the most of the rather narrow definition of ‘unpublished price sensitive information’ or UPSI under the insider trading regulations and not categorising most announcements as sensitive. This is allowing company insiders to profit from this knowledge.
SEBI’s proposal to broaden the scope of UPSI by including material events under regulation 30 of the LODR Regulations in its definition, appears to be a sound one. This will substantially increase the list of announcements which will fall under insider trading rules, allowing SEBI to take action when misconduct is noticed. As of now, definition of UPSI includes only announcements dealing with financial results, dividends, change in capital structure, mergers, de-mergers, acquisitions, delistings, disposals and expansion of business and changes in key managerial personnel. SEBI’s move now will lead to inclusion in UPSI of a broad spectrum of events including buybacks, share split, revision of rating, significant order win, sale of a unit or subsidiary, restructuring or resolution plan for company debt, insolvency proceedings, capacity addition and product launch.
Restoring material events in the definition of UPSI also makes sense since it was originally included in the definition and removed in 2018. Moreover, SEBI’s analysis of 1,099 press releases of companies shows that there was significant price movement after almost one-fourth of the releases, but only 18 of the announcements had been classified as UPSI by companies. The regulator deserves compliments for its data-based approach in this matter. SEBI’s surveillance system picked up many instances of insider trading where notional profit exceeded ₹25 crore. But these cases could not be taken up for further investigation due to the exclusion of material events as UPSI.
India Inc. has always been rather stingy about sharing information with the public and the disclosures by Indian companies fall well short of the data shared by those in advanced economies. There has always been significant resistance from Indian companies whenever the regulator tried to broaden the disclosure requirements. They are likely to be displeased with the broadening of UPSI now but SEBI would do well to ignore it. The window for trading and other restrictions on company insiders will get narrower if more events are included under UPSI. But this is needed to safeguard the stock market ecosystem and protect investor interest.