Regulatory Clarity and Uniformity: SEBI’s Proposed Changes to the definition of UPSI

The Indian securities market regulator – Securities and Exchange Board of India (SEBI), published a consultation paper dated November 9, 2024 (which can be viewed by clicking on this link) (Consultation Paper), proposing comprehensive amendments to the definition of unpublished price sensitive information (UPSI) under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations). Pursuant to the Consultation Paper certain material disclosure events under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) have been proposed to be included within the illustrative items/matters provided under the definition of UPSI. The proposed amendments aim to bring greater regulatory clarity and uniformity in compliance by aligning the UPSI definition with events specified under Paragraph A of Part A of Schedule III of the LODR Regulations (Para A) and Paragraph B of Part A of Schedule III of the LODR Regulations (Para B). The Consultation Paper has been brought in furtherance of the SEBI consultation paper dated May 18, 2023, that proposed review of definition of UPSI under the PIT Regulations.

 

The changes proposed in the Consultation Paper have been approved vide SEBI’s 208^th board meeting (the press release of which can be accessed by clicking on this link), however, the amendments under the PIT Regulations in this respect haven’t been notified yet.

 

The existing definition of ‘UPSI’ under Regulation 2(1)(n) of the PIT Regulations defines UPSI as any information, relating to a company or its securities, directly or indirectly, that is not generally available and is likely to materially affect security prices when made generally available. The current definition also provides an illustrative list of certain items/events that are considered as ‘UPSI’, which are as follows — (i) financial results; (ii) dividends; (iii) change in capital structure; (iv) mergers, de-mergers, acquisitions, delistings, disposals and expansion of business and such other transactions; and (v) changes in key managerial personnel. The proposed framework under the Consultation Paper aims to further add to this illustrative list of items/events to ensure that certain ‘material’ events in relation to a listed entity, which are likely to be price sensitive, are considered as ‘UPSI’ by all listed entities.

 

The key changes proposed in the Consultation Paper are as follows:

 

1. Credit Ratings and Fund Raising

SEBI has proposed to include ‘Change in Rating(s)’ as an illustrative item/event that is considered as ‘UPSI’, pursuant to Clause 3 of Para A. This proposal recognizes that while new ratings for fresh instruments are already covered under existing UPSI definition, the revision of ratings (both upward and downward) warrants specific inclusion as they may be price sensitive in nature.

2. Fund Raising Initiatives

While many board meeting outcomes like dividends, buybacks, and bonus shares are already explicitly included within the definition of UPSI, SEBI has also proposed to include ‘fund raising proposed to be undertaken’ as an illustrative item/event that is considered as ‘UPSI’, pursuant to Clause 4 of Para A. The same acknowledges that fund-raising proposals may also be price sensitive in nature.

3. Agreements Impacting Management and Control

The Consultation Paper proposes to include ‘Agreements, by whatever name called, impacting management and control of the company’ as an illustrative item/event that is considered as ‘UPSI’, pursuant to Clause 5 and Clause 5A of Para A, acknowledging that binding agreements affecting management or control of the listed entity may be price sensitive in nature.

4. Fraud or Default

The proposal seeks to expand the definition of UPSI to include ‘Fraud or defaults by a listed entity, its promoter, director, key managerial personnel, senior management, or subsidiary or arrest of key managerial personnel, senior management, promoter or director of the listed entity, whether occurred within India or abroad’ as an illustrative item/event that is considered as ‘UPSI’, pursuant to Clause 6 of Para A and Clause 9 of Para B. This inclusion recognizes that any fraud or default by a listed entity or its key officers/directors or their arrest can be price sensitive for the company.

5. Key Management and Auditor Changes

It is proposed to expand the existing inclusion of ‘change in key managerial personnel’ under the definition of ‘UPSI’ to now also include the following – ‘Change in key managerial personnel, other than due to superannuation or end of term, and resignation of a Statutory Auditor or Secretarial Auditor’, as an illustrative item/event that is considered as ‘UPSI’, pursuant to Clause 7 of Para A.

6. Financial Restructuring

SEBI proposes to include ‘resolution plan/restructuring/one-time settlement in relation to loans/borrowings from banks/financial institutions’ as an illustrative item/event that is considered as ‘UPSI’, pursuant to Clause 9 and 10 of Para A. This has an underlying understanding that any restructuring or settlement of a company’s debt could impact its financial health and therefore, be price sensitive in nature.

7. Winding Up and Insolvency

The definition of UPSI is now proposed to include ‘admission of winding-up petition filed by any party/creditors, admission of application by the corporate applicant or financial creditors for initiation of corporate insolvency resolution process (CIRP) of a listed corporate debtor and its approval or rejection thereof under the Insolvency Code’ as an illustrative item/event that is considered as ‘UPSI’, pursuant to Clause 11 and 16 of Para A. This recognizes that insolvency proceedings can have a significant impact on a listed entity and therefore, be considered as price sensitive in nature.

8. Forensic Audits

Pursuant to Clause 17 of Para A, it is now proposed to include ‘Initiation of forensic audit (by whatever name called) by company or any other entity for detecting misstatement in financials, misappropriation/ siphoning or diversion of funds and receipt of final forensic audit report’ as an illustrative item/event that is considered as ‘UPSI’. The proposed revision emphasizes the price sensitive nature of any investigations and potential financial irregularities concerning a listed entity.

9. Regulatory and Enforcement Actions and Orders

SEBI has proposed to include ‘Action(s) initiated, or orders passed by any regulatory, statutory, enforcement authority or judicial body against the listed entity or its directors, key managerial personnel, senior management, promoter or subsidiary, in relation to the listed entity’ as an illustrative item/event that is considered as ‘UPSI’, pursuant to Clause 19 and 20 of Para A. This broad inclusion emphasizes that any regulatory/enforcement actions or orders against the listed entity or its key officers/directors could be material for the company and therefore, be price sensitive in nature.

10. Material Business Contracts

The Consultation Paper proposes to include ‘award or termination of order/contracts not in the normal course of business’ alongside the existing categories of mergers, de-mergers, acquisitions, delistings, disposals, and business expansion, as an illustrative item/event that is considered as ‘UPSI’, pursuant to Clause 4 of Para B. This recognizes that award or termination of orders/contracts can have a significant impact on the revenue and profitability of a company and hence, they may be price sensitive in nature.

11. Litigation Outcomes

Regarding litigation(s), SEBI has taken a nuanced approach. While the initial filing or pendency of a litigation is not considered as ‘UPSI’ due to the same being available in public domain on the website of the relevant judicial authority, however, the ‘outcome of any litigation(s) or dispute(s) which may have an impact on the listed entity’ is proposed to be included as an illustrative item/event that is considered as ‘UPSI’, pursuant to Clause 8 of Para B.

12. Guarantees and Indemnities

It is proposed to include ‘giving of guarantees or indemnity or becoming a surety, by whatever named called, for any third party’ as an illustrative item/event that is considered as ‘UPSI’, pursuant to Clause 11 of Para B. This recognizes that such events have the potential to adversely impact the financials of the listed entity, when they are not in the normal course of business and hence, may be price sensitive in nature.

13. Regulatory Approvals/Licenses

It is proposed to include ‘granting, withdrawal, surrender, cancellation or suspension of key licenses or regulatory approvals’ as an illustrative item/event that is considered as ‘UPSI’, pursuant to Clause 12 of Para B. This recognies that the grant or cancellation of key regulatory approvals can impact a company’s operations, and hence, may be price sensitive in nature.

These changes have been introduced by SEBI as although the existing definition of UPSI was broad enough to cover ‘any information, relating to a company or its securities, directly or indirectly, that is not generally available and is likely to materially affect security prices when made generally available’, however, it was observed that most listed entities were only considering the illustrative list of events/information as ‘UPSI’ for the purposes of the PIT Regulations and compliances thereunder. Therefore, to ensure that ‘material’ events in relation to a company are recognized as ‘UPSI’ by all listed entities, certain disclosure events provided under Para A and Para B – which were considered to be price sensitive in nature – have now been specifically included under the definition of ‘UPSI’.

In addition, SEBI has clarified that for identification of events as ‘UPSI’, the ‘materiality’ threshold limits prescribed under Regulation 30 of LODR Regulations would be applicable. Further, flexibility has been provided to listed entities for making entries in the structured digital database (SDD) on a deferred basis, within 2 (two) days, and not have mandatory trading window closure for events emanating from outside the company.