Should the definition of ‘material events’ for listed companies for the purpose of making timely stock exchange disclosures, be identical to that for ‘price-sensitive information’ under the insider trading regulations? After suggesting that it should, and receiving a lot of pushback, the Securities and Exchange Board of India (SEBI) is striving to arrive at a compromise that takes a less stringent view on insider trading rules.
It recently floated a consultation paper that seeks to explicitly define which material events under Regulation 30 of the LODR (Listing Obligations and Disclosure Requirements) Regulations will also qualify as UPSI (Unpublished Price Sensitive Information) under the PIT (Prohibition of Insider Trading) regulations. SEBI’s efforts at making this distinction are welcome. Enforcing the onerous insider trading law on all material events will impose a significant compliance burden on companies. In theory, it seems reasonable to argue that corporate events that need quick disclosure to the exchanges must also qualify as UPSI. But the LODR today lists over 35 categories of corporate actions including financial results, buyback/bonus offers, regulatory orders, schemes of arrangement, sale of divisions, change in voting rights and so on, which need to be explicitly disclosed as material events. Besides these, LODR also defines material events as those whose non-disclosure will result in ‘discontinuity of information’ to the markets.
It additionally requires companies to judge materiality of events based on whether they have the potential to impact the company’s turnover by 2 per cent, or net worth by 2 per cent, or profits by 5 per cent. As these tests will throw up a large number of events both internal and external to the company, enforcing insider trading rules on every such instance is likely to prove tough. Insider trading laws require closure of the trading window in the company’s shares for key employees when they are likely to be in possession of UPSI. Therefore, an umbrella definition of UPSI can lead to the trading window for listed companies remaining shut most of the time. This apart, many material events that require stock exchange disclosures are also not significant enough to warrant insider trading curbs. These include deals or order wins in the ordinary course of business, changes in directors or auditors in the normal course, or sale of investments.
Companies may argue that even the selective inclusions to the UPSI list being proposed by SEBI impose a burden. The paper seeks to include credit rating revisions, proposed fund-raising, agreements impacting management control, fraud or defaults by promoters or key management personnel, admission of winding up petitions by NCLT, etc., as UPSI in insider trading laws. Given that SEBI has already heard India Inc on this issue and has had this list reviewed by a working group, it can be implemented without further ado.