An article titled โ๐๐๐๐โ๐ฌ ๐๐ฐ๐๐๐ค๐ฌ ๐ญ๐จ ๐ญ๐ก๐ ๐๐ง๐ฌ๐ข๐๐๐ซ ๐๐ซ๐๐๐ข๐ง๐ ๐๐๐ ๐ฎ๐ฅ๐๐ญ๐ข๐จ๐ง๐ฌ ๐๐ข๐ฌ๐ซ๐ฎ๐ฉ๐ญ ๐ ๐๐๐ง๐ฎ๐ข๐ง๐ ๐๐๐๐๐ง๐๐โ authored by our Partner,ย Abhiraj Aroraย and Associate Trainee,ย Ritvik Mishra, has been published byย ETGovernment.
Last year, the market regulatorย SEBIย brought into effect amendments to theย LODR Regulationsย obligating the top 250 listed companies to verify rumours circulating in the market. To harmonise these changes with the existing securities law framework, amendments were also brought to numerous other regulations. The amendments to theย Insider Trading Regulations, in particular, drastically altered the understanding we have of insider trading.
Here, we critically examine the implications of the amendments and ascertain whether this attempt at harmonisation has brought more clarity or has it taken away a genuine defence available to those alleged to have indulged in insider trading.
The Duty to Verify, Confirm or Deny
The LODR Regulations now mandate the top 250 listed entities to either verify, confirm or deny any reported event or information in mainstream media which suggests that a rumour is circulating amongst the investing public. The amendments were aimed at enhancing transparency and reducing speculation. In line with the LODR, SEBI also implemented a critical amendment to the Insider Trading Regulations.
Reshaping the meaning of โGenerally Available Informationโ
The Insider Trading Regulations prohibit individuals from dealing in securities while being in possession of Unpublished Price Sensitive Information (โUPSIโ).
These regulations defineย UPSIย as any information regarding the listed company or its shares which is notย generally available, which upon being disseminated is likely to materially affect the price of the companyโs shares. Earlier, the term โgenerally available informationโ, under the regulations, was defined as information accessible to everyone on a non-discriminatory basis, and accordingly trades based on such information did not constitute insider trading.
The definition of โgenerally available informationโ was amended in line with the LODR Regulations to exclude information reported in print or electronic media that was not verified by the listed company. The intent behind the amendment to the Insider Trading Regulations was to prevent insiders from trading based on unverified information in print or electronic media and subsequently taking the defence that the information was generally available.
Now, as per the amendment, if information is published in a newspaper or online, and not verified by the company, it will not be considered asย “generally available”,ย but as UPSI. Accordingly, if an individual trades based on such information, they are deemed to have traded on the basis of UPSI.
When Different Regulations Collide
SEBIโs attempt at harmonization gives rise to several key issues. The LODR Regulations and the Insider Trading Regulations have strikingly different objectives. The LODR Regulations aim at ensuring transparency and symmetricity of information in the market, by obligating the disclosure of material information by listed entities. On the other hand, the Insider Trading Regulations prohibit those in possession of UPSI from dealing in securities and benefitting from the asymmetry in information.
In line with the object of the Insider Trading Regulations, any information that could be accessed without the breach of any law, was considered as โgenerally availableโ and not as UPSI. Accordingly, trades on the basis of such information were not considered as insider trading. In fact,ย SEBI/Securities Appellate Tribunalย in numerous orders had exonerated people from the charge of insider trading when the alleged UPSI was subsequently published either in a newspaper or available on social media.
However, with the amendment, a failure to fulfil the obligations under the LODR Regulations are being punished by bringing out a penal charge in the Insider Trading Regulations, despite glaring differences in their objectives. It is pertinent to note that the charge is not even created on the entity with the obligation under the LODR Regulations.
The Unfairness of it All
The obligation of rumour verification is selectively on the listed company. However, the amendment to the Insider Trading Regulations do not apply selectively. This creates a scenario where an individual can be punished, not for having traded on the basis of UPSI obtained illegitimately, but for an omission on the part of the listed entity to verify, confirm or deny information that was already available in public and accessible to everyone.
But what happens when the requirements under the LODR itself are not fulfilled? Not all listed companies are required to verify rumours, nor must every rumour be verified. The responsibility to verify rumours rests solely on the top 250 listed companies and is subject to specific conditions The rumour must:
- Be reported in mainstream media, i.e., top 20 national dailies with a circulation of 100,000 or more, business and financial news dailies, regional dailies, as well as digital/online news sources.
- Concern an impending specific event rather than being general in nature.
- Result in a material price movement in the shares of the listed entity
The Insider Trading Regulations, however, do not recognise any such conditions. Also, what about the 251st company which is not required to verify rumours? In such cases, a rumour about that company may still persist and an investor who has genuinely traded on the basis of an article published in mainstream media will be held guilty for insider trading!
A Case for Change?
The effort to enforce the obligation to verify rumours through amendments to the Insider Trading Regulations appears to create more problems than it resolves. The object of the LODR Regulations would be better served by selective enforcement in cases where there is an omission to fulfil the obligation, rather than by amending an unrelated regulation.
Further, reverting to the previous approach under the Insider Trading Regulations, where information is classified as UPSI or generally available based on its accessibility rather than verification by the listed entity, would better align with the objectives of the Insider Trading Regulations. Alternatively, if SEBI insists on retaining the amendment, it must clarify that the definition of โgenerally available informationโ will exclude unverified information only when there is an obligation to verify this information under the LODR Regulations in the first place.