[Anuj Bansal is a 5th year B.A. L.L.B. (Hons.) student at the Dr. Ram Manohar Lohiya National Law University, Lucknow]
The approach of the securities law adjudicatory bodies, as observable through the orders on insider trading, has often given rise to an interesting issue of much academic relevance: what distinguishes ‘price sensitive information’ under SEBI (Prohibition of Insider Trading) Regulations, 2015 (the ‘PIT Regulations’) from information otherwise material and bound to be disclosed to stock exchanges under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (the ‘LODR Regulations’). The LODR Regulations are a comprehensive set of regulations prescribing the disclosures that listed entities are obliged to make to stock exchanges.
Principally, the idea behind regulation of the securities market is that securities trading must not be unfairly prejudicial or beneficial for a certain class of investors. Therefore, a better understanding of the abovementioned distinction becomes important because treating every material information as price-sensitive would make compliance unjustly rigid and jeopardize the legitimate investment interests of a those associated with any listed entity and generally in possession of material information relating to it. Conversely, merely because all material information is required to be disclosed to the stock exchanges, it cannot be said that insiders may not be in possession of unpublished price sensitive information (‘UPSI’). The interplay between the PIT Regulations that deal with insider trading and the LODR Regulations that deal with continuous disclosure requirements not only create a dichotomy in the regulatory position, but the need to address it is a matter that has received limited attention.
The PIT Regulations define price sensitive information as information which, upon becoming generally available, is likely to materially affect the price of the concerned securities.[1] Interestingly, the illustrations provided thereunder are stated to ‘ordinarily’ qualify as price sensitive information. It is at this juncture that the dichotomy starts to blur, in that one of the entries assumes ‘material events in accordance with the listing agreement’ to be price-sensitive information. A textual construction of the provision therefore leads to the premise that all information mandated to be disclosed under the LODR Regulations is price sensitive. However, such a construction is inconsistent with the orders of the Securities and Exchange Board of India (‘SEBI’), wherein it has chosen to adhere to the demarcation between price-sensitive and otherwise material information, even when the erstwhile operative SEBI (Prohibition of Insider Trading) Regulations, 1992 ‘deemed’ certain information to be price sensitive,[2] comparably a standard of much higher threshold.[3] In fact, the Indian Supreme Court in Smt. Sudha Rani Garg v. Sri Jagdish Kumar (AIR 2004 SC 5120) has ruled that usage of the word ‘deemed’ in a statute expresses the legislative intent of creating a legal fiction. On the other hand, the term ‘ordinarily’ (used in the illustration to Regulation 2(n) of the PIT Regulations) is of a lesser degree, meaning ‘normally’ but not creating a legal fiction.[4]
It is therefore inferable that the jurisprudence extends to the new framework, which is why I argue that the aforesaid illustration is not tantamount to elevate the status of every material information to that of price sensitive.
Price Sensitivity and the Theory of Concentrics
Price-sensitivity and materiality in general can be considered analogous to a pair of concentric circles, wherein the price sensitive information constitutes the core. It follows that what is ‘price sensitive’ is essentially ‘material’, but the converse is not true. My reasoning is furthered by a reference to the Report of the High-Level Committee to review the SEBI (Prohibition of Insider Trading) Regulations, 1992 which unambiguously mentions at paragraph 31 that no piece of information should mandatorily be regarded as price sensitive. Explaining the provision further, paragraph 33 of the report mentions that information from specific inclusions under the definition shall not be considered as price-sensitive if it is a repetition of the same events on predictable lines. The explanatory note contains:
Merely because a particular type of event is listed above it should not lead to inexorably being regarded as UPSI regardless of its potential price impact. For example, where a very large company makes a non-material and inconsequential acquisition of a tiny business, or where a company declares the same rate of dividend that it has declared for several years as per publicly stated dividend policy.
The above-mentioned claims find support in some of the orders by SAT as well. In Anil Harish v. SEBI, is was ruled that if certain information is bound to be disclosed to a stock exchange under listing agreement, the information is not necessarily a price sensitive information. Quite to the contrary, price-sensitivity shall be determined solely on the basis of its impact upon the price. Likewise, in Gujarat NRE Mineral Resources v. SEBI, it was held that a transaction of divestment being carried out in the normal course of business operations of the company has no effect whatsoever on the price of its securities and such information, even though material for the purpose of disclosure to the stock exchange, is not price-sensitive.
Determining Tests for Price-Sensitivity of Information
Now that the dichotomy between ‘materiality’ and ‘price sensitivity’ is clearer, the focus needs to be placed on the latter’s determination in a given case whenever the distinction appears blurred. SEBI in its Discussion Paper on a review of clause 36 and related clauses of Equity Listing Agreement has discussed in-depth the criteria for such determination, which hold equally good for the purpose of the PIT Regulations.
To determine if a piece of information is ‘price sensitive’, the regulator prescribes the price impact test and the reasonable investor test, akin to English law under the Financial Services and Markets Act, 2000. The essence of the price impact test is contained in the statutory definition of price-sensitive information as the test provides that any information which relates to the listed entity directly or indirectly and is likely to materially affect the price of its securities upon publication is a ‘price-sensitive information’. It therefore serves a limited purpose in determining whether the information is price-sensitive in complex situations.
Useful, however, is the reasonable investor test which prescribes that if the impugned information is of such nature that it is likely to be used by a reasonable investor to base its investment decision on, then such information is price-sensitive. It can be said that the reasonable investor test is a road to the price impact test. That is, if an investment decision is bound to get affected by a piece of information, the same shall inevitably reflect on its price. The Discussion Paper itself iterates that a significant impact on price cannot be quantified. It can therefore be observed that the same demands a case-by-case determination, and that the reasonable investor test comes handy in such determination. Unless these tests are applied, there is a serious risk of misconstruing the materiality of an information with its price-sensitivity.
Another approach adopted impliedly by SEBI is that of the ‘probability-magnitude test’[5] which finds its origin in US jurisprudence. The test postulates that the price sensitivity of an information about an event shall be gauged by the probability of its occurrence and the anticipated magnitude of impact resulting from it, that is, gravity of such event. In the matter of DSQ Biotech Ltd., it was held that the gravity and frequency of an event is important. If disclosure will cast an outlasting effect on the price of securities, the same qualifies as price-sensitive. Consequentially, even the early stage discussions as to a rights issue was held to be price sensitive. In essence, the test can be deemed to be a refined version of the price impact test. This is observable from the order In the matter of MAN Industries (India) Limited.
Conclusion
Conclusively, it can be said that the apparent overlap between materiality and price-sensitivity, as posed by the new regulations is legally untenable, and could pose some difficulties in interpretation. Given that there is no legal fiction created under the PIT Regulation (as compared to its predecessor) so as to deem certain events as ‘price-sensitive’, there appears no tinge of doubt to the existence of this important dichotomy. It can safely be concluded that any person in possession of a material information about a listed entity is free to trade in its securities if such information is not determined to be ‘price-sensitive’ as per the abovementioned inviolable tests.
– Anuj Bansal
[1] Reg. 2(n), SEBI (Prohibition of Insider Trading) Regulations, 2015.
[2] Reg. 2 (ha), SEBI (Prohibition of Insider Trading) Regulations, 2015.
[3] See Consolidated School District of St. Leon Village No. 1425 v. Ronceray et al (1960), 31 W.W.R. 385; 23 D.L.R. (2) 32
[4] See Major Y.K. Bammi v. Jawahar Lal Nehru University, AIR 1993 Del 239.
[5] See SEC v. Texas Gulf Sulphur Co 401 F.2d 833 (2d. Cir.1968).