Hidden Hatchery: The Birth Of Unpublished Price Sensitive Information

Emerging from the depths of corporate operations, financial results, mergers/acquisitions, expansions, strategic alliances, capital issues, financing activities, changes in key managerial personnel and even from regulatory/judicial actions; UPSI's relevance is transient. Like the fleeting brilliance of a sunset, its impact on stock prices wanes as market participants digest, interpret, and incorporate this information into their assessments, only to be replaced by the next wave of information. Investors, driven by the relentless pursuit of advantage, leap from one piece of information to another, their sentiments swayed by the latest developments. The very essence of economic activity ensures that no piece of information holds perpetual sway over market dynamics, also the dimension of inherent asymmetry owing to the unequal distribution of information.

In this delicate dance, the Securities and Exchange Board of India (SEBI) plays the role of vigilant guardian, ensuring that UPSI remains protected from premature exposure. The parasitic behaviour of insiders, who seek to leverage UPSI for personal gain, is a threat to market fairness that is always on the radar of SEBI to combat. By containing this sensitive information until its formal release, SEBI upholds a level playing field, preventing a privileged few from exploiting market-moving secrets.

Yet, the challenge is profound. Information, by its very nature, is subjective and prone to variable interpretations. What one perceives as critical, market-moving insight might be dismissed as trivial by another. This subjectivity brings us to a pivotal question: When does UPSI truly spring into existence, and when does it fade into irrelevance?

From Birth to Bust

Unveiling the exact moment when UPSI emerges is crucial yet complex, given the myriad of situations that can trigger its existence. From decisions made during Board Meetings to Internal Confidential Communications, from External contracts and Negotiations to Regulatory Submissions and Approvals, UPSI's boundaries are constantly tested. Therefore, investigating the intricate scenarios that mark the birth of UPSI through the judicial lens reveals how diverse contexts and subtle cues can transform seemingly innocuous development into critical, market-moving information.

In the matter of Emami Limited, the timeline of the Kesh King acquisition reveals the intricate layers of corporate negotiations and the genesis of UPSI. The journey commenced on April 30, 2015, when Emami Limited, alongside the financial and legal advisors representing the seller, began in-depth discussions and negotiations to finalize a definitive agreement, sowing the first seeds of UPSI. The transaction, valued at Rs. 1,681 crores and constituting approximately 6% of Emami's market capitalization, underscored its material nature as per SEBI (Prohibition of Insider Trading) Regulations, 2015. Despite some contentions about its impact, SEBI found notable stock price movements following the May 14, 2015 disclosure affirming its materiality. An excerpt from the Order makes it conspicuous :

“However, I am of the view that, when the total income of the company is taken into consideration i.e. Rs. 524.93 Crores in March 2015 quarter, the Kesh King will amount to a deal of significant value having possible impact on the financials.”

Thus, UPSI concerning the Kesh King acquisition emerged on April 30, 2015, representing the start of confidential negotiations and strategic deliberations. The formal public announcement on June 2, 2015, transitioned this information from confidential to public knowledge, completing its regulatory journey.

In United Spirits Limited, the open offer announcement by HSCI and JMFL on April 15, 2014, unveiled a saga of clandestine strategy and market intrigue. SEBI noted that this episode began on March 12, 2014, when Platinum Partners (Legal Counsel of Diageo in India) received the initial directives in a strategic quorate meeting for the takeover of United Spirits Limited (USL), marking the inception of specific and actionable UPSI. This strategic intelligence crystallized on March 19, 2014, with the Board of Directors of Relay B.V (The Acquirer) for formal endorsement of the open offer. Final deliberations with Diageo (The Person Acting in Concert) on April 13-14, 2014, meticulously refined the offer, safeguarding its confidentiality until the grand reveal. Despite rampant media conjecture, SEBI observed that only the officially sanctioned disclosure on April 15, 2014, transitioned this UPSI into the public domain. In other words, the open offer information remained UPSI from March 12, 2014, to April 14, 2014, illustrating the birth of UPSI upon initial directives for the takeover.

The Judgment of Rakesh Agarwal unveiled that the information pertaining to Bayer's acquisition of a 51% stake in ABS Industries unequivocally constituted UPSI, owing to its definitive and material essence. Initially, the secrecy agreement inked in July 1995 and ensuing discussions were of a tentative and exploratory nature, lacking the requisite actionable specifics to be deemed UPSI. These early negotiations, characterized by their fluidity and uncertainty, did not meet the stringent criteria of specificity and materiality.

The Securities Appellate Tribunal (SAT) observed that the character of the information underwent a transformative evolution as negotiations intensified in early 1996, with seminal developments occurring during the period from July to October 1996. A pivotal juncture was reached during the meeting on 5-6 September 1996, where the discourse advanced to a stage of considerable specificity. The finalization of legal modalities, valuations, and the offer price, achieved through meticulous deliberations between 29 September and 3 October 1996, culminated in a commercial understanding on 1 October 1996. This crystallization of information rendered it definitive, specific, and material, thereby satisfying the criteria for UPSI due to its potential impact on ABS's stock price.

The absence of public disclosure or media reportage prior to 1 October 1996 underscored the information's unpublished status. The formal announcement to the BSE and NSE on this date signalled the transition from UPSI. Consequently, the definitive and material nature of the information, crystallized through the finalization meetings and epitomized on 1 October 1996, firmly establishes its characterization as UPSI.

The Concept of 'Materiality', as witnessed in Rakesh Agarwal, resides at the core of a UPSI. Even though materiality has been labelled as a murky concept, the Hon'ble Supreme Court in SEBI v. Abhijit Rajan put forth a nuanced exploration of the concept of materiality in the context of UPSI. The Apex Court spotlighted that in assessing the materiality of UPSI, the focus must be on the likely market impact of the information, taking into account the broader context and the realistic expectations of how such information would affect a company's securities. In other words, materiality hinges not merely on the financial value or scale of the transactions involved but on the potential impact of the information on the market price of the securities.

In the case of Apex Frozen Foods, the focal point was the company's disclosure of quarterly financial results. SEBI's examination revealed that the financial results were approved by the board of directors on October 30, 2020, and subsequently disclosed to the stock exchanges on the same day. The critical determination was that the UPSI came into existence on October 21, 2020, when the audit committee reviewed and finalized the financial results. This marked the point at which the information transitioned from being confidential internal data to UPSI, as it had the potential to significantly impact the company's stock price once disclosed. SEBI emphasized that the period between October 21 and October 30, 2020, thus represented a window of heightened sensitivity, where utmost confidentiality was imperative to preclude any form of insider trading.

With regards to financial results, Godfrey Philips India Limited engraves another instance wherein the 'CEO report' by Godfrey Philips India Limited, detailing financial performance on an IGAAP basis, was circulated by the CFO to key officials, including the president of finance and the managing director. SEBI deemed this report's circulation as the initiation of UPSI, given its clear profit figures compared to previous quarters and years. SEBI's Order clarifies that UPSI begins not with the closure of the trading window but when financial results become definitive and credible, suitable for public release.

In the case of Jubilant Stock Holding Pvt. Ltd.^[1], SAT examined five specific instances of delayed disclosure between February 2013 and February 2014. Key among these were warnings from the US FDA and announcements from the Ministry of Commerce in China, which were deemed material and potentially impactful on the company's stock price. Despite arguments that these events were not significant, the Tribunal found that these pieces of information were indeed UPSI.

For instance, the Canada warning letter, received on February 22, 2013, was considered UPSI, coming into existence immediately upon receipt. Similarly, the Washington warning letter, received on December 1, 2013, was UPSI, with the Tribunal rejecting the defense of a necessary decision-making process for disclosure. The information was deemed sensitive upon receipt, thus necessitating immediate disclosure.

Furthermore, the sale of the hospital business, encapsulated in the Memorandum of Understanding (MOU) on December 24, 2013, became UPSI prior to the share purchase on February 28, 2014, as the finalization of the transaction became imminent.

In the landmark case of Kemefs Specialities Pvt. Ltd., the SAT's scrutiny unfurled the genesis of UPSI in January 2005, when PricewaterhouseCoopers facilitated an introduction between Helios and Matheson and the vMoksha group, igniting intense negotiations for the acquisition of three vMoksha entities. These talks crystallized into a Term Sheet on April 8, 2005, delineating the modalities of the deal, including the fixed consideration and additional value to promoters. The definitive Share Purchase Agreement, signed on May 11, 2005, further entrenched the terms, solidifying the negotiations into a binding commitment.

The Tribunal found that the information regarding these high-stakes negotiations was unequivocally price sensitive, given its potential to significantly impact Helios and Matheson's stock price upon public disclosure. Thus, the tribunal concluded that the UPSI came into existence by January 2005, intensifying as the negotiations progressed and solidified with the Term Sheet and Share Purchase Agreement.

In the case of E. Sudhir Reddy, Mr. E. Sudhir Reddy, Vice Chairman of Hindustan Dorr Oliver Ltd., was found to have traded shares while in possession of information that his company was the lowest bidder for a contract awarded by Uranium Corporation of India Limited (UCIL). The adjudicating officer of SEBI imposed a penalty on Mr. Reddy, asserting that this information was UPSI.

Further, the SAT concluded that the UPSI crystallized and came into existence when the company was declared the lowest bidder, well before the final award of the contract. This information was significant because it directly related to the company's potential future earnings and business prospects. Being the lowest bidder in such a substantial contract implied a high probability of winning the contract, which could materially impact the company's stock price once made public.

In Gujarat NRE Mineral Resources^[2], In the case of FCGL, the board's decision to sell a portion of its investment in the Coke company to fund the acquisition of coal mines in Australia was scrutinized by SAT for compliance with insider trading regulations. Given FCGL's nature as an investment company, such transactions were deemed routine business activities. The crux of the matter lay in the misinterpretation: the disposal of shares by an investment company does not materially affect its stock price, thus not requiring mandatory disclosure. The real price-sensitive event was the acquisition of coal mines in Australia, which was appropriately disclosed and influenced the stock price. In conclusion, the board's decision to sell shares was not UPSI. The UPSI, in this case, was the coal mine acquisition, arising at the moment of the decision and necessitating prompt market disclosure.

In the landmark case of Anil Harish^[3], the appellants, Mr. Anil Harish, chairman of Valecha Engineering Ltd., and his mother, Mrs. Ratna Harish, were accused of trading shares while in possession of UPSI. The core issue revolved around whether the information regarding Valecha Engineering Ltd. bagging multiple projects worth Rs. 172 crores constituted UPSI. The appellants contended that such project awards were routine business activities, not unusual occurrences, and had a long-standing policy of disclosing substantial orders to stock exchanges when they crossed a specific threshold.

The SAT scrutinized whether the said information, disseminated on August 25, 2009, was price-sensitive or not. The tribunal emphasized that the determination of price sensitivity depends on the facts and circumstances of each case.

Tailoring an Understanding

In summation, these seminal judgments collectively illuminate the dynamic terrain of legal interpretation, leaving an indelible mark on the annals of jurisprudence. They offer profound insights and establish enduring precedents with regards to the birth of UPSI, enriching the legal canon and guiding the path of future deliberations. All in all, every UPSI embodies materiality, yet not all material information ascends to the status of UPSI. Information devoid of materiality shall never be deemed UPSI, and rumors, in their speculative essence, remain eternally beyond the sanctified realm of UPSI.

• Emami Limited reflected that UPSI is born the moment detailed and material negotiations or strategic discussions start, marking the transition from ordinary business activities to potentially market-moving events. The key takeaway is that UPSI is not merely a matter of formal announcements but is rooted in the early stages of significant corporate transactions.
• The genesis of UPSI in cases like United Spirits Limited is marked by the receipt of initial strategic directives in a confidential setting. UPSI comes into being the moment specific, actionable, and non-public information is deliberated upon by authorized parties, such as the legal counsel or the board of directors, in pursuit of a corporate action like a takeover.
• Rakesh Agarwal served as a profound illustration showcasing that UPSI does not arise from mere preliminary negotiations or exploratory discussions, which often lack the definitive specifics necessary to affect stock prices materially. Instead, UPSI is crystallized through a transformative process where initial uncertainties give way to concrete, actionable information. For the sake of an illustration, a relevant excerpt of the judgment is quoted below :

“But negotiations are negotiations. Negotiations may sometimes fail. It may some times fructify. Till the negotiations are concluded, and a decision is taken, it is not possible to conclude the ultimate result of the negotiations. But some times half way through a shrewd negotiator would be in a position to see the would be outcome of the negotiation. ABS's negotiations/discussions with the overseas parties is in no way different.”

• Apex Foods Limited underscored the nuanced nature of how UPSI originates, emphasizing that it is not merely the final disclosure that matters, but the point at which financial data gains a definitive form within the company. This case elucidated the intricate dynamics of how key managerial personnel, by virtue of their roles, access unaudited financial numbers, positioning them at the threshold of possessing UPSI well before the crystallization of official financial reports.
• Kemefs Specialities Limited revealed genesis of UPSI is not confined to the finalization of a deal but commences with the inception of substantial negotiations and progressively solidifies as those discussions advance towards definitive agreements. Thus, UPSI is established when preliminary negotiations possess the propensity to influence market valuations significantly.
• Jubilant Stock Holding Pvt. Ltd.^[4] rhapsodised that UPSI comes into existence at the point of receipt or finalization of sensitive information, not upon the company's internal deliberation or decision-making.
• E. Sudhir Reddy determined that UPSI arose when Hindustan Dorr Oliver Ltd. was identified as the lowest bidder for the UCIL contract. This moment was critical as it marked the information's crystallization into UPSI, given its material impact on the company's potential earnings and business prospects. This establishes a legal principle that UPSI materializes when information is sufficiently definite to influence investor decisions.
• Gujarat NRE Mineral Resources^[5] showcased that the mere decision to sell a portion of investment in the Coke company by FCGL, an investment company, was routine and did not constitute UPSI. In other words, for an investment company, routine share disposals do not materially affect stock prices and do not require mandatory disclosure.
• On similar lines, Anil Harish^[6] pontificates that the information regarding the award of contracts, which included multiple projects and not just a single large project, did not significantly impact the company's stock price. This judgment underscores the nuanced interpretation of what constitutes UPSI, highlighting that routine business activities disclosed in accordance with established policies may not necessarily be deemed as such.

Just as the precise moment a seed sprouts within the soil cannot be pinpointed with exacting precision, so too does the birth of UPSI evade rigid measurement and mechanical exactitude. Instead, it calls for a blend of common sense and perceptive judgment. Through this refined approach, we can artfully maintain the delicate balance of transparency and market integrity.

Authors: Ravi Prakash (Associate Partner) assisted by Mohit Sirohi (Associate), Siddhant Sekhri (Associate) and Paras Taneja (Associate) of the Securities Litigation Team of Corporate Professionals Advisors & Advocates. Views are personal.