As we get into a comprehensive guide of UPSI, click here for our pointed articles to understand the difference between what is and what isn’t UPSI.
Let us reiterate the base definition though – Unpublished Price Sensitive Information (UPSI) refers to any information related to a company or its securities that is not yet publicly available and has the potential to significantly affect the price of the securities when disclosed.
In this comprehensive guide, we explore the examples, regulations, responsibilities of companies and compliance officers in handling UPSI. Elevated controls apply to certain categories of persons, such as Designated Persons, which can be automatically deployed and maintained by applications like Affinis(IDD). However, in this article we focus on the general obligations as they apply to UPSI in general rather than to persons.
Definition of Unpublished Price Sensitive Information (UPSI)
UPSI is defined as any information relating to a company or its securities, directly or indirectly, that is not generally available and, upon becoming generally available, is likely to materially affect the price of the securities. The definition of UPSI is inclusive and typically covers the following aspects:
- Financial results
- Dividends
- Change in capital structure
- Mergers, de-mergers, acquisitions, delistings, disposals, and expansion of business and other transactions
- Changes in key managerial personnel
- Material events in accordance with the listing agreement
This is not an exhaustive list, just an illustrative one. Many (many) other types of information may also be considered UPSI if they have the potential to materially affect the price of the securities.
Determining Whether Information is UPSI
Determining whether a piece of information is UPSI or not requires a careful examination of the facts and circumstances surrounding the event or information. The following factors can help in identifying UPSI:
- Nature of the event or transaction
- Progress of the surrounding discussions
- The relevant outcome of each of the various stages of discussions and developments
- An increase in the likelihood of the transaction being successful.
These factors must be assessed without giving undue weight to any single aspect to ensure a balanced determination of UPSI.
Examples of UPSI
Here are a few instances where information could be considered UPSI:
- A company secures a major work order that has not yet been disclosed to the stock exchange.
- A corporate announcement regarding a buyback of equity shares, followed by its subsequent withdrawal.
- An executive director of a company making unlawful gains through insider trading based on the knowledge of a subsidiary’s sale of land and property.
Regulations Governing UPSI
In order to protect investors and maintain market integrity, the Securities Exchange Board of India (SEBI) has introduced the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations). These regulations provide a framework for the prohibition of insider trading in securities and outline the obligations related to communication of UPSI.
Communication of UPSI
Under Regulation 3 of the SEBI (PIT) Regulations 2015, insiders are prohibited from communicating, providing, or allowing access to UPSI relating to a company or securities listed or proposed to be listed, to any person, including other insiders, except in cases where such communication is for legitimate purposes, performance of duties, or discharge of legal obligations.
The board of directors of a listed company must create a policy for the determination of ‘legitimate purposes’ as part of their ‘Codes of Fair Disclosure and Conduct’ formulated under Regulation 8 of the PIT Regulations.
Maintenance of Structured Digital Database
The board of directors of a company is also required to ensure that a structured digital database is maintained, containing the names of all the designated persons and persons brought inside the company. The compliance officer may be designated to maintain the database using solutions like Affinis(SDD) and enter the names based on the information received from other departments, starting from the name and identification of the senders, the receivers, their employers, the nature of the UPSI and the relevant dates and times.
Disclosure of Material Events and Information
Listed companies are required to disclose material events or information in accordance with Regulation 30 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015. Companies must exercise caution and prudence in determining which of these events or information should be considered UPSI, as they are likely to affect the price of the securities of the company.
Controlling the Sharing of UPSI within the Company
To control the practice of sharing UPSI within the company on an informal basis, companies should:
- Conduct educational sessions for employees to minimize instances of unauthorized sharing of UPSI.
- Require the compliance officer to immediately report any such instances to SEBI.
Permitted Communication or Procurement of UPSI
There are certain exceptions under Regulation 3(3) of the SEBI (PIT) Regulations, 2015, which allow for the communication or procurement of UPSI in connection with transactions that:
- Trigger an open offer under the takeover regulations, where the board of directors of the listed company believes that sharing the information is in the best interests of the company.
- Do not trigger an open offer under the takeover regulations, but where the board of directors of the listed company believes that sharing the information is in the best interests of the company. In this case, the UPSI must be made generally available at least two trading days before the proposed transaction is effected.
In order to utilize these exceptions, the board of directors must ensure that the parties involved in the transactions maintain confidentiality and non-disclosure obligations.
Trading While in Possession of UPSI
Trading while in possession of UPSI is generally prohibited under Regulation 4 of the SEBI (PIT) Regulations, 2015. However, insiders may prove their innocence by demonstrating certain circumstances, such as:
- Off-market transfers between insiders possessing the same UPSI.
- Transactions carried out through the block deal mechanism between persons possessing the same UPSI.
- Transactions carried out pursuant to a statutory or regulatory obligation or a bona fide transaction.
- Transactions undertaken pursuant to the exercise of employee stock options.
- Transactions undertaken pursuant to a trading plan.
- Pledging of shares for a bona fide purpose.
- Transactions undertaken pursuant to respective SEBI regulations, such as bonus issues, rights issues, preferential allotments, buyback offers, open offers, etc.
All transactions must therefore, be controlled, tracked, reviewed and verified using automation systems like Affinis(ETT) for all-round end-to-end compliance with regulatory requirements
Company Responsibilities in Handling UPSI
Companies have several responsibilities in handling UPSI.
The following require exercise of judgement (and hence offline).
Identifying all employees who have access to UPSI as designated employees and preventing insider trading.
Amending the Code of Fair Disclosures to include a policy for determining legitimate purposes for sharing UPSI.
Placing the right level of restrictions on the communication or procurement of UPSI, as required by the SEBI (Prohibition of Insider Trading) Regulations, 2015.
Preparing a Code of Conduct policy for the preservation of data to prevent insider trading and for designated persons and their immediate relatives.
The following obligations can be met with the right well-designed systems.
Conducting reviews and tracking reports to evaluate the effectiveness of internal controls.
Maintaining a Structured Digital Database with details of persons or entities with whom UPSI is shared.
Educating insiders about the sensitivity of information and highlighting the ‘need-to-know’ principle.
Closing the trading window when the compliance officer deems it necessary and when designated persons can reasonably be expected to be in possession of UPSI.
Maintaining a list of all employees and other persons with whom UPSI is shared or serving notices to all such persons.
Important Case Laws on UPSI
Here are some notable case laws relating to UPSI:
- Bala Reddy Case: In this case, a company secured work orders but did not disclose them to the stock exchange, as the contract was not yet issued. The company contended that it could not be considered UPSI, but the promoter, chairman, director, their spouse, and relatives were penalized with a Rs. 40 crore fine.
- V.K. Kaul Case: Mr. Kaul, a non-executive independent director of Ranbaxy, was fined Rs. 50 lakhs, while his wife was fined Rs. 10 lakhs for insider trading based on UPSI.
- NDTV Case: NDTV was fined Rs. 1.75 crores, and its compliance officer was fined Rs. 3 lakhs for not promptly informing UPSI.
- Indiabulls Ventures Ltd. Case: Pia Johson, a non-executive director of IVL, and her spouse Mehul Johnson were fined Rs. 87,21,918.55 for unlawful gains through insider trading based on UPSI.
- P.C. Jewellers Case: Corporate announcement of buyback and subsequent developments led to fines for Shivani Gupta, Sachin Gupta, Amit Garg (relatives of Chairman and MD of PC Jewellers), and a group company, amounting to approximately Rs. 8.3 crores.
Understanding and handling UPSI is crucial for companies and compliance officers to ensure market integrity and protect investors. By adhering to the SEBI (Prohibition of Insider Trading) Regulations, 2015, and maintaining robust internal controls, companies can prevent insider trading and uphold their responsibilities in managing UPSI.
