Two friends met over lunch and started discussing unpublished price sensitive information (UPSI)

Akshat: Hey! What are you reading constantly on your phone? Can you share the information with me?

Rahil: Hi! It’s about a consultation paper put out by SEBI on UPSI relating to insider trading.

Akshat: Hey, wait! I won’t be able to understand if you throw jargon at me. Can you explain UPSI in a simple manner ?

Rahil: Sure. UPSI is that information relating to a company which is not made generally available to public but if done it has potential to have a material impact on the stock price. This could be, say, unpublished M&A, unpublished quarterly results or any other such information not disseminated in public through, say, a press release.

Akshat: Okay. But how are we impacted by UPSI?

Rahil: That’s exactly where insider trading comes into the picture. So insider trading is basically when a person who has access to UPSI trades on that information before it is given outto the general public. Insiders can be those relating to the company — such as its directors, employees, its bankers, consultants, etc, typically those who are privy to the company’s information.

See, if insiders trade on such information before it gets public, retail investors like us who spend time and effort analysing stocks will be at the losing end of the trade. That is why the trading window remains closed around the time of germination till dissemination of the information.

Akshat: Okay. Now I understand. Any instances when such a thing has happened?

Rahil: Sure. For instance, take the case of Infosys. SEBI found that there were a few people who were trading in the shares of Infosys in 2020 when in possession of the company’s financial results i.e. ahead of it being put out in the public domain. In this case, two Infosys employees who had access to UPSI i.e. the quarterly results ended June 30, 2020, had shared the information with two entities, Capital One and Tesora, which resulted in illegal gains through derivatives. Ultimately those involved in the insider trading were penalised and banned from the securities market.

Akshat: Okay, but won’t it be difficult to always classify information as UPSI? How has SEBI acted on that front?

Rahil: Yes you’re right here. Though not restrictive, but in the defination per se, only events such as financial results, dividends, change in capital structure, M&A and changes in key management personnel have been explicitly mentioned. For others, it was expected that the management would prudently classify information as UPSI. But as per the SEBI study, it seems to have not been done. Hence, the consultation paper brought out by SEBI recommends including all material information relating to any major development in the company under the ambit of UPSI.

Akshat: Oh that’s great. So let’s just hope such moves by SEBI indeed curb insider trading so that interest of retail investors are protected.

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