They Know Something You Don’t: The UPSI Advantage

By Mohd. Sahil Khan 10 Minutes Read

Introduction

Have you ever wondered when you observed the market during the pre-opening and saw a massive gap up or down opening in some stocks? The general audience infers that some good news has skyrocketed a stock or bad news has plummeted a particular stock. But what is the term that causes such volatility in the stock markets? The term is Unpublished Price Sensitive Information or U.P.S.I.

Now, the question arises: what is U.P.S.I.? As the term suggests, it seems like confidential information associated with a company that results in volatility in the market. But what if such information is not kept confidential? What will be the implications of it being released in the public domain?

What is U.P.S.I.

• Imagine waking up to discover your investment portfolio has plummeted. The culprit? A piece of information that slipped through the corporate gates before the rest of the world knew about it.
• U.P.S.I. has been defined under Regulation 2(1)(n) of the S.E.B.I. (Prohibition of Insider Trading) Regulations, 2015.
• Unpublished Price Sensitive Information (U.P.S.I.) refers to any company-related information that isn’t publicly accessible but could significantly impact its stock price once revealed. Essentially, it’s confidential news that can move the market.
• U.P.S.I. typically includes information such as financial results, dividends, changes in capital structure, mergers, acquisitions, delisting, business expansions, and key management personnel changes.
• This includes information that can materially alter the price of securities. When the information comes into the public domain, people trade based on this information, resulting in massive fluctuations in the price of securities.
• When U.P.S.I. leaks out before it’s officially announced, it can create a frenzy of trading activity. Investors who get wind of the news early can make substantial profits, while those who are unaware can suffer significant losses.
• For instance, there is an automobile stock priced at Rs 900. The company’s annual results are awaited. Suddenly, the news leak happens from the company’s insider or otherwise, which suggests that the company has generated a profit of 30% on a Year-on-Year basis. Based on this news, the stock gained 8%; therefore, such information can be considered U.P.S.I.

Determination of U.P.S.I.

• Determining U.P.S.I. (Unpublished Price Sensitive Information) involves careful analysis of information related to a company or its securities.
• Key factors include whether the information is generally available, its potential material effect on the share price, and its accessibility to the public.
• Companies often have internal procedures to identify U.P.S.I., involving designated personnel and strict confidentiality measures.
• The question that emerges is, suppose a merger between two big companies is possible. Now, if the negotiations are going on and it has not been concluded, will such negotiations amount to U.P.S.I.?
• In Rakesh Agrawal v. Securities Exchange Board of India[1], the Tribunal observed that “Negotiations may sometimes fail. It may sometimes fructify. Till the negotiations are concluded and a decision is taken, it is not possible to conclude the ultimate result of the negotiations. But sometimes halfway through, a shrewd negotiator would be in a position to see the would-be outcome of the negotiation”. The tribunal ruled that U.P.S.I. may come into existence before negotiations are officially concluded. However, they may not have “crystallized.” They may be in a “fluid stage.”[2]
• Another issue in this situation is that suppose there is a preliminary agreement between the two companies. Both companies in this situation have not signed a final agreement and are, thus, non-binding. Will the non-disclosure of the preliminary agreement amount to U.P.S.I.?
• In the landmark case of Top-Class Capital Markets Pvt. Ltd. v. Securities & Exchange Board of India[3], between July 2008 and December 2008, Aurobindo Pharma established three licensing and supply partnerships with Pfizer. On March 3, 2009, Aurobindo Pharma publicly announced the licensing and supply agreements with Pfizer. Subsequently, S.E.B.I. determined that the company should have disclosed these agreements earlier, despite Aurobindo’s claim that they were preliminary.
• The Securities Appellate Tribunal upheld S.E.B.I.’s decision regarding Aurobindo Pharma. The Tribunal ruled that the information about the preliminary agreements with Pfizer was considered material unpublished price-sensitive information (U.P.S.I.) due to its potential to impact the company’s share price significantly.

Legal framework associated with UPSI

The S.E.B.I. has issued strict guidelines for non-disclosure of U.P.S.I. Following are the S.E.B.I.’s guidelines:

• Schedule A of the P.I.T. Regulations contain guidelines about “Prompt public disclosure of unpublished price sensitive information that would impact price discovery no sooner than credible and concrete information comes into being in order to make such information generally available.”
• Schedule A allows the dissemination of unpublished price-sensitive information equitably to all market participants to prevent preferential treatment.
• Regulation 8(1) of the S.E.B.I. (Prohibition of Insider Trading) Regulations, 2015 requires listed companies to establish a formal process for disclosing unpublished price-sensitive information (U.P.S.I.). This process must be publicly disclosed and adhere to the guidelines outlined in Schedule A of the same regulations.
• Section 12A(e) of the S.E.B.I. Act 1992 prohibits individuals from trading securities or sharing confidential information if doing so violates the provisions of the Act or its associated rules and regulations.
• Companies must establish information barriers to prevent U.P.S.I. leakage to unauthorized personnel.
• Listed companies must have a code of conduct for preventing insider trading.

Obligations associated with U.P.S.I.

• Section 3(1) of the S.E.B.I. (Prohibition of Insider Trading) Regulations, 2015 prohibits insiders from sharing U.P.S.I. with anyone.
• This prohibition applies to other insiders unless the disclosure is necessary for legitimate business operations, fulfilling duties, or complying with legal obligations.
• The S.E.B.I. (Prohibition of Insider Trading) Amendment Regulations 2018 introduced Section 3(2A) to clarify “legitimate purposes.” This section mandates listed companies to define these purposes within their Code of Fair Disclosure and Conduct, as required by Regulation 8.
• Section 5 of the S.E.B.I. (Prohibition of Insider Trading) Amendment Regulations, 2018 requires listed companies to maintain a digital database of individuals or entities receiving U.P.S.I., including their P.A.N. or other authorized identifiers.
• This database should have strong internal controls and audit trails to ensure data integrity and prevent unauthorized modifications.

Precautionary measures to be taken by the companies

The company should follow adequate procedures to ensure they are not penalized for not disseminating U.P.S.I.

• Identify all employees with access to U.P.S.I. as designated employees.
• Clearly identify all U.P.S.I. and maintain strict confidentiality as per S.E.B.I. regulations.
• Implement strict controls on the communication and procurement of U.P.S.I. as per S.E.B.I. regulations.
• Maintain a detailed list of individuals who receive U.P.S.I., along with confidentiality agreements.
• Ensure full compliance with all relevant regulations.
• Conduct regular reviews to assess the effectiveness of internal controls.

Penalties

• Section 15G of the S.E.B.I. Act, 1992, as amended in 2010, imposes a substantial penalty for insider trading.
• Offenders can be fined at least 10 lakh rupees, extending up to 25 crore rupees or three times the illegal profits, whichever is higher.

Conclusion

Unpublished Price Sensitive Information (U.P.S.I.) is critical in maintaining market integrity and fairness. The disclosure and handling of U.P.S.I. are strictly regulated to prevent insider trading and ensure that all investors have equal access to significant company information. Companies must implement robust internal controls and adhere to S.E.B.I. regulations to safeguard such information. Failure to comply can result in severe penalties, including hefty fines and imprisonment. By understanding and respecting the legal framework surrounding U.P.S.I., companies, and individuals can contribute to a more transparent and equitable financial market.

[1] 2003 SCC OnLine SAT 38.

[2] Armaan Patkar, Insider Trading Law and Practice (1st edn, EBC 2019).

[3] 2022 SCC OnLine SAT 59.

Mohd. Sahil Khan