Research Reports: Converting UPSI into Public Information

[Ashlesha Mittal is an associate at Cyril Amarchand Mangaldas and a graduate of National Law University, Jodhpur]

Five orders were released by the Assessing Officer of Securities and Exchange Board of India (SEBI) on April 22, 2020, April 13, 2020 and March 26, 2020 against Kotak Mahindra Life Insurance Company Limited, Aditya Birla Sun Life AMC Limited, SBI Funds Management Private Limited, IDFC Asset Management Company Ltd. and BNP Paribas Asset Management (I) P Ltd. (AMCs) respectively, in the matter of selective disclosure of unpublished price sensitive information (UPSI) by Manappuram Finance Ltd. (MFL). The AMCs had traded in the securities of MFL after receiving a research report by Ambit Capital Private Limited (Ambit) that disclosed UPSI about MFL.

In March 2013, MFL was anticipating negative financial results due to a fall in gold prices and an under-recovery of Rs. 250 crore from its gold loans. The information was first referred to in the board meeting of March 13, 2013. Subsequently, on March 18, 2013 the management approached a research analyst, Ambit, to discuss the future outlook and seek market guidance. In the morning of March 19, 2013, Ambit released research reports to more than 2000 persons, changing the outlook of MFL from ‘buy’ to ‘under review’ and disclosing information about negative financial results and the under recovery. In the afternoon of March 19, 2013, at 1.20 p.m. MFL released an update on its website informing investors of a conference call to be held. The call was held from 2.30 p.m. to 3.40 p.m. where the investors were informed about the financial results. At 6.17 p.m., the following stock exchange intimation was made: “reduction in profit numbers for the 4th quarter ending March 31, 2013”. On March 20, 2013, minutes after trading hours (at 3.36 p.m.) a further clarification was released on the stock exchange: “expect a one-time hit of Rs. 250 crore during this quarter either by way of crystalized income not being received or expected to be not received resulting in Q4 loss up to Rs. 50 crore”.

The AMCs had sold their shares in MFL on March 19, 2013 and March 20, 2013, after receiving the research reports. Show-cause notices were issued to these AMCs under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations) for trading while in possession of UPSI and responses were subsequently filed. The SEBI orders revolved around three key issues.

Whether the AMCs traded while in possession of UPSI?

To hold the AMCs liable for insider trading, it must be established that the information received by them was unpublished and that they traded while in possession of such UPSI. In terms of regulation 2(n) of the PIT Regulations, “unpublished price sensitive information” means any information, relating to a company or its securities, directly or indirectly, that is not generally available which, upon becoming generally available, is likely to materially affect the price of the securities and shall ordinarily include, but not be restricted to, information relating to inter alia financial results of the company.

Therefore, the information relating to financial results shall be deemed to be price sensitive information and the information remains as UPSI until published by the company or its agents and is not specific in nature. Looking at the nature of the financial information, SEBI was of the view that the information was price sensitive. Rather in this case, once the information became public, it led to a sharp decline in the price of the shares.

This leaves us with the question: at what point in time did the information cease to be unpublished? Looking at the sequence of events, SEBI was of the view that the information ceased to be unpublished as soon as the research report was distributed to 2194 email addresses in the morning of March 19, 2013. The recipients included clients of Ambit and also finance news platforms. This conclusion was in line with the view of the N.K. Sodhi Committee Report (Report) that had stated: “a research report that is priced for purchase and is made available to all clients of a stock broker would be considered non- discriminatory inasmuch as any client of the broker or any class of clients of a broker having a certain risk profile may acquire that research report”.

SEBI further analyzed the argument that the information became public once the TV channel CNBC TV 18 from 9.22 AM onwards covered the news about the MFL’s income reversal issue in the third quarter and stated that MFL was under pressure. SEBI referred to the SEBI Whole Time Member’s (WTM’s) order dated January 31, 2018 in the matter of 63 Moon Technologies Limited whereby the WTM held that a newspaper article in which there had been publication of the complete and precise details of the UPSI is not speculative in nature, and thereby the information ceased to be UPSI from the date of such publication. SEBI found that the media coverage about MFL by the well-known TV channel CNBC TV18, and timing of such coverage, cannot be dismissed either as speculative in nature. The information disclosed in the conference call and disseminated through the news channel was the same as disclosed to the stock exchanges.

SEBI has clarified the position that the disclosure of information in a research report that is available to a large number of investors would imply that the information is now public. Further, a reporting of the UPSI by a news channel based on reliable sources would also amount to making the information public.

SEBI was dealing with the charges relating to the AMCs and was of the view that at the time when the AMCs had sold their shares, the information had ceased to be unpublished. Interestingly, the matter against Ambit was settled on December 13, 2019 by way of a settlement order, and there is no order against MFL in this matter as of date. Since the information was still in the nature of UPSI when disclosed by MFL to Ambit and when Ambit published the research report, the entities would have been liable for breach of the PIT Regulations.

Whether the mutual funds could claim the innocent recipient’s defence?

Though the information was held to be published at the time of trade, SEBI further delved into the issue as to whether the AMCs could claim the innocent recipient’s defense in such a case. The PIT Regulations put forth a strict interpretation of insider trading and leave no scope for considering subjective factors including the intent of the offender. According to the explanation to regulation 4(1), when a person who has traded in securities has been in possession of UPSI, his trades are presumed to have been motivated by the knowledge and awareness of such information in his possession.

The concept of the innocent recipient’s defense was first suggested by the Report (in paragraph 55): “where a person trades on the basis of contents of a research report which later turns out to have contained UPSI illegally procured by the research analyst, the fact that a bona fide recipient of that report trade when in possession of that report should not be visited with the charge of insider trading.” The Report further suggested (in paragraph 55) by way of an example that a person will be said to have traded in a bona fide manner if he can establish that (i) he had no reason to believe that the research report was in violation of the law and (ii) he had no role in the violation of law. The suggestion was rejected since it introduced a subjective criterion for determining insider trading, understood as a fluid concept based on the facts of case. SEBI, in the alternative, proposed to include the following defense: “An insider may prove his innocence by demonstrating the inclusive list of circumstances provided in the regulations, in a case and it is up to the authority adjudicating to consider it.” Pursuant to the suggestion, a few circumstances could be considered such as a transaction between two insiders or trading due to a bona fide transactions pursuant to a statutory or regulatory obligation.

The innocent recipient’s defence did not find place in the PIT Regulations. However, SEBI analysed whether the AMCs in this case could claim the defence. SEBI was of the view that in the first place, it was the obligation of the management to not reveal any UPSI to a research analyst, followed by the research analyst, who had the obligation to not issue a research report based on UPSI. Rather, the research report issued by Ambit came with a disclaimer that the report was based on publicly available information. The report mentioned that Ambit had a discussion with the MFL’s executive director. However, that was not held sufficient for the AMCs to know that information in the research report was not public.

SEBI held that the AMCs were in no position to know that the information distributed in the research report, communicated in the conference call and disseminated by the media was in fact UPSI. The AMCs were innocent recipients of the UPSI and did not have any obligation to verify if the information received in the form of the research report or through the TV channels was public or not.

This decision could act as a precedent in future matters to provide a defense to innocent recipients of UPSI, and also reduces their burden of proof. However, to prevent misuse of the interpretation provided by SEBI, it must be observed that persons raising this defense must establish beyond doubt that, first, they had no reason to believe that such information was in fact UPSI, and second, they had not traded while in possession of the information when it was still UPSI in nature.

Whether the mutual funds have a fiduciary duty to sell shares as soon as they receive a negative tip on a share, to prevent loss to the unit holders?

SEBI found that the act of selling of the scrip of MFL during the said time was necessary to avoid significant loss to the unit holders and to act in the best interest of the unit holders. It noted that the management did not derive any personal benefit and the fall in price of the shares could be attributed to sale of shares by AMCs. SEBI opined that the AMCs had acted in a diligent manner as any other reasonable institutional investor in order to avoid significant loss to the unit holders.


SEBI has dealt with critical concerns regarding insider trading violations arising due to UPSI circulated by the way of research reports. Researchers, being privy to confidential information, are in a position to provide trading advice to their clients that could eventually amount to insider trading. By clarifying that the publication of information in a widely circulated research report would make the information ‘public’ and introducing reliance on the ‘innocent recipient’s defence’, SEBI provides the necessary protection to receivers of the research reports. SEBI has also given emphasis to the fact that a mutual fund has a fiduciary duty while taking an investment decision, such that the decision is in the best interest of its unit holders. However, a thorough enquiry into facts would be necessary for SEBI to allow a similar defence in a future instance.

Ashlesha Mittal

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