Taming UPSI and tampering disclosure requirements

By CS Vinita Nair, corplaw@vinodkothari.com

It is a fact that certain decisions are taken by Board impromptu/ surprise item and is not a part of the agenda. Therefore, the agenda includes an item ‘With the permission of Chairperson’ to keep the agenda flexible. It is a good thought to ponder upon that whether all tabled items are impromptu in true sense? Can companies put Unpublished Price Sensitive Information (UPSI) as tabled items and cut the prior intimation requirements?

Certain items are sensitive and have an impact on market prices and therefore, ideally are not tabled items as these are planned in advance with adequate closure of trading window for all designated persons in order to ensure no false market gets created. Regulation 29 of Listing Regulation, therefore, mandates giving of prior intimation for items viz. financial results, proposal for buy-back, voluntary delisting, fund raising by way of issuance of securities, declaration/ recommendation of dividend and proposal for declaration of bonus securities.

Prior intimation of atleast 2 working days in advance (5 working days in case of financial results), excluding the date of the intimation and date of the meeting is required to be given to the stock exchange. Simultaneously, trading window closure also has to be ensured atleast from the date of notice to stock exchange till 48 hours after the information becomes generally available.

Financial results:

Board meeting dates are pre-fixed especially in case of approval of financial results. Therefore, in case of a listed company, it is unlikely for this item to be a tabled item. The agenda can be adjourned, in case further clarity is required or any other reason, however, the matter can never be a tabled item.

Fund raising:

Fund raising by way of issue of securities requires pre-planning as there is a need for shareholder’s approval, deciding on terms and conditions, deciding on delegation of powers, timelines for compliance as per applicable regulations etc. It will appear strange if the Board happens to decide on matters for issue of shares/ debentures under ‘any other item with the permission of Chairperson’.

Dividend:

Declaring of interim dividend or recommendation of final dividend is incidental on several factors viz. the financial results, dividend policy, future plans etc. It will be against the spirit of corporate governance if the Board instantly decides to consider dividend proposal. It will equally be against the spirit and intent of corporate governance if the Board approves any proposal in relation to dividend, for eg. proposal to consider dividend proposal in next Board meeting, without complying with prior disclosure requirements.

Exception in case of bonus issue:

Proviso to Regulation 29 (1) (f) exempts the requirement of intimation on declaration of bonus securities in case it is not on the agenda of the meeting. Clause 19 (b) of Listing Agreement mandated giving notice simultaneously to the Stock Exchanges in case the proposal for declaration of bonus is communicated to the Board of Directors of the company as part of the agenda papers. Wordings of Reg. 29 (1) (f) are not exactly similar to Clause 19 (b).

The exemption makes sense if the Board meeting was convened to discuss 10 agenda items and in the process of discussing on those agenda items, it was decided to approve bonus issue of securities. This could be on account of favorable financial results or intent of management to reward shareholders with something even valuable than a dividend. Additionally, where the agenda is a part of same meeting wherein financial results are being approved, this will not give an extra edge to designated persons as the trading window will anyways remain closed till 48 hours after the information becomes generally available.

But can a company take the benefit of aforesaid proviso if a separate board meeting is convened for considering the proposal of bonus issue only? Can it be said the Board met without any agenda? Will such a Board meeting not require a separate trading window closure? Whether intimating just the outcome of meeting under Regulation can be regarded as sufficient compliance of Listing Regulations and PIT Regulations[1] in view of the intent of law?

Nexus between trading window closure and Reg. 29: 

Trading window is required to be closed when the DPs are expected to be in possession of UPSI. The period for which trading window is closed is usually specified in the Code of Conduct framed under PIT Regulations. Intimation of trading window closure to stock exchange is not mandatory as closure of trading window is for insiders and not general public. Generally, for financial results, the trading window closure commences from 1^st day following end of relevant quarter till 48 hours after the information becomes generally available. For matters other than financial results, the window should be closed from the time UPSI generates. Intimation to stock exchange under Reg. 29 is subsequent. The purpose of intimation is to inform all shareholders about the proposed action of the Company in order to enable them to adjust their holdings. There is no nexus between period of trading window closure and intimation under Regulation 29.

Conclusion:

In author’s view, Regulation 29(1) enlists items that are planned in advance as they have significant impact on market sentiments and consequentially, the market price. Higher the chance of variation in market price, greater is the need to monitor and prohibit insider trading. Therefore, the role of compliance officer becomes onerous to ensure no false market is created and there is timely trading window closure to comply with requirement of law in letter and spirit. Prior intimation and intimation of outcome of such Board meetings as well as adequate closure of trading window are pre-requisite for any price sensitive item. Any deviation from the aforesaid requirements is likely to be regarded as violation of SEBI Regulations.

[1] SEBI (Prohibition of Insider Trading) Regulations, 2015