Guest Post: Insider Trading and “Price Sensitive Information”

[The following post is contributed by Yogesh Chande, who is a Consultant with
Economic Laws Practice, Advocates & Solicitors. Views of the author are
In a recent order
passed by the Adjudicating Officer of SEBI, an aggregate penalty of INR 2.50 million
was imposed on five noticees consisting of Chairman, Vice-Chairman &
Managing Director, Executive Directors and the Company Secretary of a listed
The penalty was
imposed under section 15HB of the SEBI Act, 1992 for:
1.         delay in disseminating price sensitive
information to the stock exchanges regarding bagging of certain orders; and
2.         the code of conduct not being in line
with the one prescribed under the SEBI (Prohibition of Insider Trading)
Regulations, 1992 (Regulations).
The code of
conduct did not take into consideration the amendment to the Regulations on 19
November 2008, pursuant to which even the dependants of
directors/officers/designated employees were required to seek pre-clearance of
trades from the Company Secretary & Compliance Officer.
The inquiry and
investigations revealed as follows:
1.         Issuance of announcement by the company
to stock exchanges on 29 April 2009 that the company had bagged two orders
worth INR 13,400 million;
2.         The two contracts for the above orders
were entered on 1 March 2009 and 22 April 2009;
3.         Thus, there was a delay of 59 days and
7 days from the date of entering the two contracts and date of intimation to
stock exchanges on 29 April 2009;
4.         On 29 April 2009 the stock price closed
4.74% higher than the opening price; and
5.         The daughter of the Managing Director (MD)
traded in the scrip without seeking pre-clearance for certain trades, which
could have been avoided, if the code of conduct was duly amended.
Due to lack of
sufficient evidence as regards trades done by the daughter of the MD, the
noticees were given benefit of doubt. However, the penalty of INR 2.50 million was
levied for delay in disseminating the price sensitive information in terms of
the Regulations.
The order of the
Adjudicating Officer deals with what constitutes “price sensitive information”
under the Regulations, which needs to be disclosed by a listed company to the
stock exchanges on a continuous and immediate basis. The term “price sensitive
information” under the Regulations has been defined to mean any information
which relates directly or indirectly to a company and which if published is
likely to materially affect the price of securities of company
It is important
to note that, in para 17 of the order, the Adjudicating Officer while
explaining the aforesaid term has also observed that “……the information
has to be construed as price sensitive information irrespective of actual
price witnessed post disclosure of the information
”. This is
interesting because while the definition under the Regulation states that, if
published, the information is likely to have material effect on the price of
securities, the observation made does not give any weightage to the term
“materially affect” the price of the security.
From the
material available on record, it was observed by the Adjudicating Officer that
the orders bagged by the company constituted a substantial percentage of the
turnover of the company i.e. the orders were worth INR 13,400 million as
against the net sales turnover of the company of INR 18,834.2 million for the
year ended March 2009 and INR 15,059.6 million for the year ended March 2010.
In view of the enormity and the magnitude of the orders, the orders were
considered as constituting “price sensitive information”.
While what
constitutes “price sensitive information” that should be disclosed to stock
exchanges is subjective in nature, one of the guiding factors available to
listed companies in determining their disclosure obligation upon them receiving
orders in the ordinary course of business could be if the orders bagged by them
are of a substantial percentage to the sales turnover of the company. In this
case, the orders bagged by the company were around 71% based on the sales of
March 2009 and around 88% based on the sales of March 2010.
While it can be
argued that it is the business of the company to bag such projects, the orders
bagged by it are in the nature of stock in trade in the business and it is not
an unusual occurrence, however from a practical standpoint it is advisable for
listed companies to have an internal policy for example stating that:
(a)        as and when the company reaches a level
of orders of a particular amount; or
(b)       as and when the company reaches a single
order aggregating a particular amount,
the same shall
be immediately disclosed to stock exchanges. Such an approach will to an
extent, enable a company in ensuring compliance of the Regulations and clause
36(7) of the equity listing agreement [dealing with disclosure of any other
information having bearing on the operation/performance of the company], and
perhaps also act as a mitigating factor in case of inquiry / investigation by
SEBI or stock exchanges.
Needless to say,
not merely bagging of orders, but even writing off of slow moving orders[1], forming
a material part of certain parameters like the existing order book, sales
turnover of the company, and which [the writing off] if published, is likely to
have an impact on the price of the securities of the company, will also require
disclosure in terms of the Regulations.
– Yogesh Chande

[1] For reasons such as long delays in securing
clearances, regulatory hurdles, policy uncertainty and at times predatory
bidding by the competitors

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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