Restrictions on Communication of Unpublished Price Sensitive Information

Nikhil Mogha

29 May, 2024

Communication forms a key part of any organisation, especially when the principle business is related to securities trading. Any information that may influence the price of a share in the market will significantly impact the interests of the investor and the company’s goodwill in the securities market. Henceforth, the information that remains unpublished shall be preserved in a way that will not be known to a person outside the company or to a person with a direct or indirect interest in the affairs of the company. In order to avoid this situation, the board of directors are required to frame such policies and procedures that will prohibit any activity of insider trading and list out the provision for communication of unpublished price sensitive information. The article will discuss in detail the meaning of unpublished price sensitive information and the restrictions on the communication and procurement of such information.

Who is Insider?

As per Regulation-2(1) (g) of the SEBI (PIT) Regulations 2015 (PIT Regulation), the word “Insider” means any person who is:

• a Connected Person or
• Possess or have access to unpublished price sensitive information 

Therefore, from the plain reading of the above definition, anyone who possesses or has access to unpublished price sensitive information shall be an insider irrespective of how one came in possession or had access to such information. The burden of proving that a person is in possession or has access to unpublished price sensitive information shall lie on the person who is levelling the charge. After which, the onus will be tranferred to the person who has traded the securities while in possession or having access to such information to prove that he does not possess or have access.

What is Unpublished Price Sensitive Information?

It means any information relating to a company or its shares which is not generally available. Such information has the capacity to materially affect the price of the company’s shares when it comes into the public domain. As per Sub clause n clause 1 of Regulation 2 of SEBI (PIT) Regulations 2022, the types of information which, if leaked, would be termed as unpublished price sensitive information are:

• Financial results
• Dividends
• Change in capital structure
• Merger or De-merger, Acquisitions, Delisting, Disposals, Activities of Business expansion and such other transactions
• Information on change in Key Managerial Persons
• Material pieces of evidence in relation to the listing agreement

What are the Restrictions on communication of Unpublished Price Sensitive Information?

Since any information relating to the company to its shares is materially important, restrictions must be imposed on the communication of Unpublished Price Sensitive Information. In order to ensure that the information does not escape from the company, Regulation 3 of SEBI (Position of Insider Trading) Regulations 2015 imposes certain obligations on the insider, which are enumerated below.

1. Communication of Unpublished Price Sensitive Information

As per clause 1 of Regulation 3, any person who possesses unpublished information shall not communicate, provide or allow access to such information relating to the company or securities to any other person, including other insiders. This provision casts an obligation on all the insiders of the company to handle such information with due care and deal with the information when transacting their business on a need-to-know basis.

Exceptions: The situations under which the insider can make the communications are:

• Furtherance of Legitimate Purposes
• Performance of Duties
• Discharge of legal Obligations

2. Procurement of Unpublished Price Sensitive Information

As per clause 2 of Regulation 3, the person shall not procure or cause the communication by an insider of unpublished information relating to a company or securities. This provision prohibits unlawfully procuring possession of information. Therefore, any information obtained through inducement would be unlawful and illegal.  

Exceptions: The procurement of information would be held legal if it is in furtherance of:

• Legitimate purpose
• Performance of Duties
• Discharging legal obligations

3. Communication or Procurement of information for certain transactions

As per clause 3 of Regulation 3, the communication of unpublished price sensitive information may take place in the following transactions:

• Attracts Obligation for Open offer under Takeover Regulations: Where there is an obligation for an open offer under takeover regulation and the board of directors of the company beleives that the proposed transaction is in the best interests of the company, then it would allow communication of unpublished information to the shareholders. The current provision intends to acknowledge the necessity of communicating, procuring or allowing access to such information for substantial transactions such as takeovers, mergers & acquisitions. In an open offer, not only the same price will be offered to all the shareholders but also all the information necessary for the published shareholder to make an informed decision shall be made in the letter offer.
• Does not Attract Obligation for Open offer under Takeover Regulations: Where there is no obligation for an open offer under takeover regulation but the board of directors of the company beleives that the proposed transaction is in the best interests of the company then it would allow communication of unpublished information to be made generally available at least 2 days before the proposed transaction. The board of directors cause public disclosures of such information before the proposed transaction in order to rule out the possibility of any information that needs to be aligned with the market.

4. Confidentially and Non-Disclosure Agreement

Any communication of unpublished price sensitive info to the parties in an open offer under takeover regulation shall not be made publicly available. Therefore, to avoid making the unpublished information generally available, the board of directors shall require the other parties to sign confidential and non –disclosure agreements. Such parties shall also keep the information confidential and must not trade securities of the company when possessing unpublished price sensitive information.

Conclusion

The SEBI has made continuous efforts to protect the interests of the investor. Hence, any information that may affect the company or its shares shall not be communicated by the insider to any person unless authorised under the regulation. In order to make unpublished price-sensitive information generally available, the SEBI has imposed restrictions on the communication of unpublished price-sensitive information. The restriction will make any act of procurement or inducement or communication of unpublished price sensitive information from the insider unlawful and make the concerned person liable for such an act.

Read our Article: SEBI Amends Regulation of Prohibition of Insider Trading