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Critical Reg. 30 events assimilate into illustrative list of UPSI as SEBI strives for EoDB and easier compliance requirement

Refer Consultation Paper | Time to provide comments – by Nov 30

Vinita Nair | corplaw@vinodkothari.com

If your idea of price sensitive information, which companies have to guard as confidential until disclosed to investors, is something which may impact the stock prices, you will now have a long list of things which are purely operational or business-as-usual for listed companies, but still sitting in the long list of “deemed UPSIs” that a SEBI Consultation Paper seeks to insert, thereby making compliance officers do the drill of digital database entry to even trading window closure every time such an event occurs. And some such events seem like inconsequential for the stock prices and frequently occurring for companies.

Consider, for example, a debt-raising proposal by a financial entity—something that might be happening every now and then. Or consider an officer in the company hopping into a job at a new employer. The market will dismiss these organisational changes, but the compliance officer will not only have to keep close-to-chest the letter of resignation till it is made public and all the remaining UPSI compliances.

In our view, price sensitivity of an event has to do with the impact of the event on the company’s profitability, turnover, long-term or short-term prospects, shareholding base, etc. The identification of these events is done based on the materiality of the event to the business and business model. The more prescriptive the lists supplied by the lawmaker are, the more one takes away the sense of responsibility and accountability to the corporate team that flags corporate events as material. If the lawmakers flag them all, or flag a lot, the very seriousness of tagging an information as price sensitive is taken away. Last year, a related amendment made the list of “material event” disclosures under reg. 30 long enough, with over 20 items being in the list of “deemed material”. The present proposals go in the same direction of making the regulations more prescriptive.

Background:

• Earlier, SEBI had proposed considering every material event as UPSI. Based on the feedback received for earlier CP citing concerns of significant increase in compliance management and potential perpetual closure of trading window, SEBI now proposes to include specific material events of Schedule III to SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR’) as UPSI instead of all material events under Reg. 30 of LODR.
• SEBI recently approved LODR amendments in Reg. 30 & Schedule III for EoDB (yet to be notified) and made Trading Plans flexible (effective November 1, 2024).

Deemed material events (Para A of Schedule III) added to the UPSI list:

1. Credit ratings: Upward/ downward revision to be considered UPSI. [Clause 3]

• New ratings for fresh issue of securities will get covered under ‘change in capital structure’ or ‘fund raising proposed to be undertaken’;
• VKCo Comments: Rating revision need not necessarily result in security/ instrument going below investment grade or resulting in a breach of any covenant to be considered as UPSI. By virtue of the proposed amendment, revision from AAA to AA+ or from AA to AA (-) will also be considered as UPSI, as it will impact the cost of funds, investor’s perspective etc.

2. Fundraising proposed to be undertaken. [Clause 4(d)]

• VKCo Comments:Reg 29 covers intimation of fund raising by issue of securities, term loans are anyways excluded. While fundraising by way of issue of capital is deemed UPSI, every instance of debt issuance may not necessarily be UPSI.  

3. Agreements impacting management and control of the company. [Clause 5]

• Where the company has knowledge about the agreement. 

4. Fraud or defaults by a listed entity, its promoter, director, KMP, SMP, or subsidiary or arrest of KMP, SMP, promoter or director of the listed entity, whether occurred within India or abroad [Clause 6]

• As explained in LODR, default by a promoter, director, key managerial personnel, senior management, subsidiary shall mean default which has or may have an impact on the listed entity.

5. Change in KMP, other than due to superannuation or end of term. [Clause 7]

• VKCo Comments:MD/WTD/CEO not proposed to be re-appointed may be potential UPSI. Further, resignation of CFO or CS for better prospects, while may result in a change, may not be in the nature of UPSI. Resignations citing governance issues should be considered as UPSI. 

6. Resignation of the Statutory Auditor or Secretarial Auditor of the listed entity. [Clause 7A]

• VKCo Comments: Resignation on account of corporate governance concerns, may be considered as UPSI. Every instance of resignation need not be UPSI.

7. Resolution plan/ Restructuring/one-time settlement in relation to loans/borrowings from banks/financial institutions. [Clause 9]

8. Admission of winding-up petition filed by any party / creditors, admission of application by the corporate applicant or financial creditors for initiation of CIRP of a listed corporate debtor and its approval or rejection thereof under the Insolvency Code. [Clause 11]

9. Initiation of forensic audit (by whatever name called) by company or any other entity for detecting mis-statement in financials, misappropriation/ siphoning or diversion of funds and receipt of final forensic audit report. [Clause 17]

10. Action(s) initiated or orders passed by any regulatory, statutory, enforcement authority or judicial body against the listed entity or its directors, KMP, SMP, promoter or subsidiary, in relation to the listed entity. [Clause 19]

• VKCo Comments:Intent is to include matters covered in Clause 19 and 20 of Para A. Clause 19 items viz. search or seizure, re-opening of accounts, investigation may be in the nature of UPSI, but each of clause 20 items may not be UPSI. Actions like suspension, disqualification, debarment or closure of operations may be in the nature of UPSI. However, in case of fines & penalties, SEBI had proposed to impose monetary limits for disclosure of fine or penalty under clause 20 – Rs. 1 lakh for fine/ penalty imposed by sector regulators/ enforcement agencies and  Rs.  10  lakhs for other authorities. Lower amount thresholds to be disclosed on a quarterly basis as part of the Integrated Filing  (Governance). While imposition of penalty or fine by sector regulators/ enforcement agencies reflect on the state of governance/ functioning of the entity, every instance of levy of fine or penalty may not be UPSI. 

Determined material events (Para B of Schedule III) added to UPSI list

11. Award or  termination  of  order/contracts  not  in  the  normal course of business [Clause 4]
12. Outcome of any litigation(s)/dispute(s) which may have an impact on the listed entity [Clause 8]
13. Giving of guarantees or indemnity or becoming a surety, by whatever name called, for any third party [Clause 11]
14. Granting, withdrawal, surrender, cancellation or suspension of key licences or regulatory approvals. [Clause 12]

VKCo Comments: In our view, each of the events that is determined to be material by the listed entity are in the nature of UPSI. The clauses not expressly covered above viz. product launch, capacity addition, strategic tie-up, loan agreements not in the normal course of business etc can be in the nature of UPSI.

Actionable arising on UPSI identification under PIT Regulations

• Closure of trading window for DPs in possession of UPSI;
• Recording of sharing of such UPSI, internally or externally, for legitimate purpose in the Structured Digital Database;
• Preserving the confidentiality of UPSI and ensuring making it generally available in accordance with the Code of Fair Disclosure.

Conclusion

While the present proposal of indicating specific material events is better than the earlier proposal, law cannot prescribe an exhaustive list of UPSI events as it will differ from entity to entity. Given the diverse items of information that may be material, it will be impossible to have a closed list of all; therefore, the list of potential UPSI items (UPSI Library) needs to be formulated by every listed entity which is (a) Dynamic – it will have to be populated regularly, based on a feedback system and (b) Granular – the more granular the items are, easier it will be assign the first point of responsibility and to minimise the nodes or the stop-overs that information travels, from its first source of recognition to the ultimate centre. 

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Refer to our related resources below:

1. Prohibition of Insider Trading – Resource Centre
2. Will Insiders Tread Trading Plan 2.0?
3. SEBI widens the definition of ‘Connected Persons’ for facilitating enhanced enforcement against insider trading
4. Mutual Fund units now under the net of insider trading regulations