Price sensitive information

By Tanvi Praveen, Symbiosis Law School, Noida

Editor’s note: Knowledge is said to be power. Nowhere does this hold truer than in the case of price sensitive information in a company. Such information ought to be released in a manner that benefits all investors equally, without prejudice, and not in a manner to make a profit secretly. Insider trading relates to such unpublished information which can materially affect the price of securities, and is only permissible by employees as long as it does not rely on substantive information unknown to general public. This paper analyses how SEBI monitors the same, § 55A of Companies Act, 1956, and landmark judgments on the same.

Introduction

There exists information that, if made public, would be likely to have a significant effect on the price of a companys securities. Such information must, in connection with a listed company, be released to the market in a fashion that is fair to all investors. Any person who uses price sensitive information to make a profit either for themselves or a third party in the shares of a company is in breach of insider trading laws.

“Unpublished Price sensitive information” means any information which relates to the following matters or is of concern directly or indirectly to a company and is not generally known or published by such company for general information but which if published or known is likely to materially affect the price of securities of that company in the markets[1]

Insider trading refers to transactions in a company’s securities, such as stocks or options, by corporate insiders or their associates based on information deriving within the firm that would, once overtly disclosed, affect the prices of such securities. Corporate insiders are individuals whose employment with the firm (as executives, directors, or sometimes rank-and-file employees) or whose privileged access to the firm’s internal affairs (as large shareholders, consultants, accountants, lawyers, etc.) gives them valuable information.[2]

Trading by specific insiders, such as employees, is commonly permitted as long as it does not rely on substantive information not in the public domain. However most jurisdictions require such trading be reported so that these can be monitored. In the United States and several other jurisdictions, trading conducted by corporate officers, key employees, directors, or significant shareholders must be reported to the regulator or publicly disclosed, usually within a few business days of the trade.

SEBI is a capital market regulator of India. There have been various regulators in India that have been set up, the more conspicuous of which have been SEBI (securities markets), TRAI (telecom) and CERC (energy). Of these, SEBI was among the first, and has been seen to be one of the more operative in terms of delivering on a mandate that includes

  1. protection of the investor,
  2. prudential regulation of securities markets intermediaries and
  3. development of the markets.

In order to execute the mandate, the legal practicalities to create regulators must have extensive enabling legislation. The legislation provides the regulator authority to issue regulations for the sector and to administer based on the regulation. The legislation also ascribes powers to the regulator to effect subordinate legislation which are required to be listed in Parliament after they have been issued. This makes it feasible for comprehensive domain knowledge to be entrenched in subordinate legislation, which could develop rapidly. The regulator would then operationalise these regulations in its supervisory function.

An important aspect of corporate governance relates to issues of insider trading. It is important that insiders do not exploit their position of knowledge and access to inside information about the company, and take unjust advantage of the consequential information asymmetry. To prevent this from happening, corporates are expected to disseminate the material price sensitive information in an apt and proper manner and also warrant that till such information is made public, insiders abstain from transacting in the securities of the company. The principle should be ‘disclose or desist’. This therefore calls for companies to an internal procedure for adequate and timely disclosures, reporting requirements, confidentiality norms, code of conduct and specific rules for the conduct of its directors and employees and other insiders. Insider trading, though not defined by the markets regulator, is essentially trading in securities with the advantage of having access to unpublished information, which when published would impact the price of securities in the market.

S. 55A of Companies Act, 1956

Historically, the Companies Act, 1956 did not envisage any direct role either for SEBI or its predecessor (the Controller of Capital Issues). Since the establishment of SEBI in 1992 and until 2000, SEBI’s role was confined to the SEBI Act and regulations there under without any specific role under the Companies Act. It is only with the Companies (Amendment) Act, 2000 that SEBI was granted a role in the Companies Act. Section 55A of the Companies Act states,

Powers of Securities and Exchange Board of India

The provisions contained in sections 55 to 58, 59 to 81 (including sections 68A, 77A and 80A) , 108, 109, 110, 112, 113, 116, 117, 118, 119, 120, 121, 122, 206, 206A and 207, so far as they relate t issue and transfer of securities and non-payment of dividend shall,-

  1. in case of listed public companies;
  2. in case of those public companies which intend to get their securities listed on any recognized stock exchange in India, be administered by the Securities and Exchange Board of India; and
  3. in any other case, be administered by the Central Government. [3]

SEBI was made responsible for administering provisions regarding securities regulation under the Companies Act in relation to listed companies or companies which were going to be listed on stock exchanges. In these circumstances, SEBI’s role was expected to be one of “administering” the provisions rather than altering the fundamental basis of company’s law.

Objective of study

This paper discusses important considerations regarding to the concept of price sensitive information and board meetings. The reader of the project would be able to appreciate provisions regarding price sensitive information, along with powers of the Board with respect to the same, and the loopholes regarding the same in the 1956 Act, being filled by SEBI Act, Rules, Guidelines or Listing Agreement. The research project will focus on the inter-relationship between price sensitive information and board meetings and the corporate laws.

Scope

The field of Research covers writings and description regarding insider trading and price sensitive information and board meetings with respect to the Company legislation, SEBI Act, Rules and Guidelines. The field of Research is limited to reviewing of the various views and opinions put on this subject under the light of company law and may also compare the provisions of 1956 Act with the provisions of 2013 Act.

Financial markets have an important relationship with economic development. Regulation has been acknowledged to enable the orderly functioning of the securities market. The Securities and Exchange Board of India (SEBI) is the regulator charged with the orderly functioning of the securities market in India, protect the interests of investors and ensure development of the securities market. Since the establishment of SEBI in 1992, the Indian securities market has grown enormously in terms of volumes, new products and financial services. The literature examining the role of SEBI in this growth and development is limited and somewhat dated.

It was only about three decades back that insider trading was recognized in many developed countries as what it was – an injustice; in fact, a crime against shareholders and markets in general. At one time, not so far in the past, inside information and its use for personal profits was regarded as a perk of office and a benefit of having reached a high stage in life. It was the Sunday Times of UK that coined the classic phrase in 1973 to describe this sentiment – “the crime of being something in the city”, meaning that insider trading was believed as legitimate at one time and a law against insider trading was like a law against high achievement. “Insider trading” is a term subject to many definitions and connotations and it encompasses both legal and prohibited activity. Insider trading takes place legally every day, when corporate insiders – officers, directors or employees – buy or sell stock in their own companies within the confines of company policy and the regulations governing this trading. It is the trading that takes place when those privileged with confidential information about important events use the special advantage of that knowledge to reap profits or avoid losses on the stock market, to the detriment of the source of the information and to the typical investors who buy or sell their stock without the advantage of “inside” information.

The paper aims to describe how 27 large UK case companies sought to adapt their City and stock market disclosure policies to cope with the changes brought about by the publication in March 1994 of the Stock Exchange’s Guidance on the Dissemination of Price-sensitive Information. Legislators and regulators have long sought to define and regulate the corporate decision problem in the price-sensitive information area. This paper employs corporate case interview data to describe models of corporate behaviour and to investigate how the case companies have dealt with this problem area. The paper concludes by (a), considering the effectiveness of regulation in providing a clear boundary for corporate behaviour, and (b), by discussing the relationship between this research and another major field study of corporate disclosure management (Gibbins, Richardson and Waterhouse, 1990), developing the disclosure model that they present.

Regulators require firms to disclose all price-sensitive information at the earliest possible date. The going-concern opinion constitutes a fundamental uncertainty for the firm and thus is likely to be of a price-sensitive nature. This paper explores whether going-concern uncertainty disclosures are price sensitive in the London market, and then tests whether managements report such audit report information to investors on a timely basis. We capitalize on a London Stock Exchange regulatory loophole which, in effect, allows financially-distressed firms to choose either to report a forthcoming going-concern at the preliminary results announcement stage, or to delay this crucial information to their annual report release. In line with the regulatory requirements, we expect that firms with more price-sensitive, i.e., more serious, adverse news will disclose their forthcoming going-concern opinion at the earliest stage i.e., in their preliminary announcement, rather than delay to their annual report. We find that there is significant market price reaction associated with the going-concern disclosure, irrespective of when first published, but no evidence that market price reaction to early disclosure is any greater than to late disclosure. However, we do find that late disclosers, paradoxically, are distinguished from early disclosers by having more negative going-concern audit opinions as measured by their narrative content. They are also subject to weaker market monitoring in terms of lower analyst following. We conclude that many managements are postponing going-concern uncertainty disclosures to their annual report. In public policy issue terms, our results suggest that regulators in such situations cannot rely on a general catch-all requirement to ensure managements act in accordance with the relevant listing regulations, instead they need to specify the timing of such information disclosures and monitor firm compliance. Auditors similarly have a role in encouraging timely disclosure of this adverse information.

Price sensitive information

“Unpublished Price sensitive information” means any information which relates to the following matters or is of concern directly or indirectly to a company and is not generally known or published by such company for general information but which if published or known is likely to materially affect the price of securities of that company in the markets[4]

The information regarding the public cannot also be called price sensitive since mere knowledge about the public issue without specific information cannot be considered as one which will affect the price of the scrip. In view of the above it cannot be said that the information relating to the public issue by MCML was unpublished or price sensitive. It is noted that the aforesaid eight specified matters relating to the company, as “price sensitive information” include any information relating to the issue of shares by way of public, rights, bonus issues etc. Further, any information which is of concern directly or indirectly to a company which is not generally known or published by such company for general information but which after publishing is likely to materially affect the price of its securities in the market shall be considered as unpublished price sensitive information[5].

In accordance with the said Regulation “no insider” shall either on his own behalf or on behalf of any other person shall deal in securities of a company listed on any Stock Exchange on the basis of any unpublished price sensitive information. “Insider” means any person who is or was connected with the company or is deemed to have been connected with the company and who is reasonably expected to have access by virtue of such connection, to unpublished[6]

Section 15G of SEBI Act, 1992 provides that penalty for insider trading and reads as under

If any insider who, – (i) either on his own behalf or on behalf of any other person, deals in securities of a body corporate listed on any stock exchange on the basis of any unpublished price sensitive information; or (ii) communities any unpublished pric e sensitive information of any person, with or without his request for such information except as required in the ordinary course of business[7]

An issuer may face unexpected and significant events and there are many events which can affect prices and market activity. It is thus vital for the issuers to make a prompt assessment of the likely impact of these events on their share price/activities and decide consciously whether the relevant information would be price-sensitive and need to be disclosed. If necessary, issuers should request a suspension in the trading of its securities until a formal announcement can be made. Some common examples of such events include:

  • regularly recurring matters (such as financial results and dividends);
  • exceptional matters (such as acquisitions, realisations transactions with connected persons);
  • signing an important contract;
  • entering into a significant joint venture;
  • fund-raising exercises;
  • comments on the prospects for future earnings or dividends;
  • release of any projected profits of the group by issuers or their directors;
  • entering into an agreement for the issue of options convertible into securities;
  • a large foreign exchange loss;
  • major market upheaval in the industries, countries or regions where the issuer has significant operations or transactions;
  • premature removal of auditors before end of their term in office;
  • cancellation of an agreement which was previously the subject of an announcement;
  • resignation of chief executive;
  • the issuer being aware that its auditors will issue a qualified report on its results;
  • any change of accounting policy that may have a significant impact on the accounts; or
  • events beyond the control of the issuer and is of material significance to the issuer’s business, operations or financial performance.

However, no definitive list can be given. What may be price-sensitive information to one party to a contract may be immaterial to the counterparty. A fund-raising that may be material to an issuer facing liquidity problems may be immaterial to the same company in better times. Later in this guide examples of situations are discussed to reflect some of the criteria that the Exchange will consider in its interpretation of the Listing Rules. It is important to note that “price-sensitive information” includes potentially price-sensitive information. Thus, references in this guide to “price-sensitive information” should be construed accordingly.

Deciding on what information is price-sensitive is a matter of judgement. In considering whether the decision or information is price-sensitive, directors should make reference to definition.

The Listing Rules seek to ensure the efficient functioning of the market through timely and accurate public disclosure of price-sensitive information. They also seek to ensure that any such disclosure must be made to the market generally (and not just to a section of the public). Clause 32(b) of the new listing agreement  impose an obligation on issuers to keep the Exchange, their shareholders and other holders of their listed securities informed, as soon as reasonably practicable, of any price-sensitive information relating to the issuer’s group. This is often referred to as the “general disclosure obligation”. The Company is committed to:

  1. complying with the Listing Rules, the Securities and Futures Ordinance and other regulatory requirements in relation to the disclosure of inside information / price sensitive information;
  2. preventing uneven, inadvertent or selective dissemination of inside information / price sensitive information; and
  3. ensuring shareholders and the public are provided with full, accurate and timely information about the Company’s activities and its financial condition.

The purpose of the Inside Information / Price Sensitive Information Disclosure Policy (“Policy”) is to set out the practices and procedures in relation to:-

  1. the monitoring of business and corporate developments and events so that any potential inside information/ price sensitive information is promptly identified and relayed to the board of directors (the “Board”) to enable it to make timely decisions on disclosure, if necessary;
  • Administration of the Policy:

The authority to approve changes to this Policy is delegated to the Audit Committee of the Company.

  1. Determination of whether developments constitute inside information / price sensitive information.
  2. The Board decides whether or not a transaction, development or event constitutes inside information / price sensitive information and disclosure of which shall be made immediately, and when a trading suspension/ trading halt is required.

Disclosure of information

The guiding principle is that information which is expected to be price-sensitive should be announced promptly after it becomes known to a director or senior management of the issuer and/or is the subject of a decision by the directors or senior management of the issuer. In cases where a decision by the directors or senior management of the issuer is pending or in cases of incomplete negotiations, issuers should refer to the guidelines set out in paragraphs 15 to 17. For this purpose, “promptly” means as soon as reasonably practicable after the senior management of the issuer learns (or when any reasonable issuer should have been aware) that the information is both material and non-public.

Until such an announcement is made, the directors must ensure that such information is kept strictly confidential. Where it is felt that the necessary degree of security cannot be maintained or that security may have been breached, an announcement must be made.

The general disclosure obligation will be satisfied by the issuer publishing the relevant information in the newspapers by means of a paid announcement in one Chinese language and one English language newspaper or other means and manner as stipulated in the Listing Rules.

Issuers may consider implementing additional means of broad communication such that the news will be disseminated to the shareholders and the public in a timely and uniform manner. Such means tight include a press release through widely disseminated news or wire services and/or directly sent to international and local media, an announcement of a conference of which the public has notice and may have personal or electronic access, or direct email or fax to shareholders whose address is known. Posting the announcement on an issuer’s website is an appropriate action, but cannot be regarded of itself as an announcement of information.

Unusual movements in price or trading volume

The Exchange will usually contact an issuer if it notices unusual movements in the price or trading volume of its securities, or in response to press reports or market rumours which may affect market activity in or the price of its securities. In those circumstances, the issuer must promptly respond to any enquiries from the Exchange and, if appropriate, issue a statement authorised by the board as to whether the issuer is aware of any matter or development that is or may be relevant to the unusual price movement or trading volume of its listed securities (including any negotiations or discussions in relation to a price-sensitive matter).

Establishing a communications policy and procedure

The systematic dissemination of price-sensitive information is greatly assisted by having a communications policy and procedure in place. In particular:

(a) while the board is generally responsible for the proper dissemination of price-sensitive information, the actual implementation is usually delegated to one or more executive directors and/or other authorised senior executives of the issuer. A procedure should be put in place to ensure that the information to be disclosed does not constitute unpublished price-sensitive information. Such procedure may include clearance with a compliance officer before disclosure of the information. The board of directors of the issuer should approve the procedure before it is implemented;

(b) responsibility for communication with parties outside the issuer should be clearly defined. Specific directors or senior officers who are aware of the issuer’s business and the relevant regulatory requirements should be assigned for such purpose and all communication should be made through such directors or officers. Other directors and/or staff should be prohibited from communicating information unless they are nominated;

(c) issuers should consider making their internal policies on communication known outside the company. This could be a useful tool to assist issuers in withstanding pressure to disclose prematurely confidential price-sensitive information;

(d) the directors of an issuer should put in place appropriate procedures to keep price-sensitive information confidential until a formal announcement is made. Information must not be allowed to leak (to selected groups, or otherwise) in order to “test” the market. If confidentiality cannot be maintained, or is in fact breached, the directors of the issuer have a responsibility to notify the Exchange and, if necessary, request a suspension in the trading of its securities until a formal announcement is made; and

(e) where appropriate, issuers should consult their professional advisers who can assist in determining whether information is price-sensitive.

Guidance on particular situations and issues

Incomplete negotiations

Issuers are sometimes confronted with the problem of how long to keep an issue confidential and what constitutes the proper time for its release. The overriding principle is that information which is expected to be price-sensitive should be announced promptly3 after it becomes known to a director or senior management of the company and/or it is the subject of a decision by the directors or senior management of the issuer. Until it is released, it is essential to maintain confidentiality. Issuers should consider implementing procedures to maintain the confidentiality of information such as: the use of codenames in correspondence, the use of private fax lines and e-mail accounts, limiting dissemination of the information to those who “need to know”, and reminding parties involved of the need to keep all such information strictly confidential.

If negotiations or discussions regarding a potentially price-sensitive matter are extended to include more than a small group of people or if it becomes difficult to ensure the confidentiality of the information, an announcement should be made as soon as practicable.

If negotiations have reached a delicate stage or major elements have not been finalised, the issuer should consult the Exchange as soon as possible. It may be necessary for the securities to be suspended from trading pending a formal announcement.

Inadvertent dissemination of information

If an issuer becomes aware that price-sensitive information has inadvertently been given to a third party, it should immediately issue an announcement disclosing the relevant information and, if necessary, request a suspension in the trading of its securities pending a formal announcement.

Profit forecasts

If an issuer has made a public forecast and subsequently becomes aware that any of the assumptions upon which the forecast is based may not be correct, or that the outcome will be materially different from the forecast figure, an announcement should be made as soon as possible. In such an announcement, the issuer should state the likely impact of the ncorrect assumption on the profit forecast, the extent to which any intervening event will affect the profit, or how the actual outcome will differ from the original forecast.

Profit warning statement

Where an issuer becomes aware that its results may be significantly worse than generally accepted market expectation, the issuer should publish an announcement “warning” investors of the likely impact.

The annual report and general meeting

Issuers are encouraged to communicate with investors. An issuer may reinforce its corporate messages and provide indicators of its future direction through its annual report, or through the Chairman’s address at the annual general meeting.

Arrangements must be made for any price-sensitive information that is to be discussed at the meeting to be announced simultaneously as described in this guide.

Conduct of meetings

Some issuers are concerned that they may be misinterpreted or mistakenly accused of providing price-sensitive information following meetings with analysts. Such risk can be reduced by having appropriate internal procedures. These procedures could, for example, include ensuring that more than one company representative and the compliance officer, if any, are present during these meetings and that accurate records of all discussions are kept.

Alternatively, issuers could consider opening up such meetings to the press and the public, or announcing in advance the fact of an analysts’ meeting and, where price-sensitive information is to be made public, publishing at the same time the information to be disclosed as required by the Listing Rules.

Issuers should also be aware of the possibility of analysts obtaining pricesensitive information during visits to the issuer’s premises. Employees meeting the analysts during the visit should be briefed as to the extent and nature of information that can be communicated.

Dealing in the issuer’s shares

Directors must also not deal in the relevant securities at any time when they are in possession of unpublished price-sensitive information.

Announcements by third parties

Announcements by industry regulators, government departments and other bodies may affect the share price of an issuer or market activity in its shares. If such announcement is expected to have a particularly significant impact on an issuer, an announcement should be made by the issuer providing the issuer’s view on the impact of the relevant announcement.

Making parties “insiders”

At certain times, issuers may need to give information in confidence to, for example, prospective financiers, potential business partners, underwriters or other parties with whom they are negotiating. Before a meeting at which pricesensitive information is to be given, an established procedure should be followed unless the relationship with the participants is automatically one of confidentiality.

The relevant party should be told that, if he attends the meeting, he must keep the relevant information strictly confidential and that he will not be able to deal in the issuer’s securities before the information is made public. He should give consent to being made an ‘insider’ and this should be recorded. No one should be made an insider without his consent or for a longer period than necessary.

Employees

Employees may have access to unpublished price-sensitive information. Some employees have regular access to price-sensitive information because of their duties. Employees must be made aware of the need at all times to keep confidential all unpublished price-sensitive information given to them. Issuers should have a policy for employees such as limiting their access to price sensitive information and providing information to employees on a “need-to know” basis.

Increasingly, issuers publish “in-house” publications or publish information on its intranet. Issuers must ensure that their “in-house” publications of personal presentations to employees do not inadvertently include unpublished price sensitive information.

Issuer listed on more than one exchange

If the securities of an issuer are listed on more than one stock exchange, the issuer should co-ordinate the release of information so that the Exchange is simultaneously informed of any information released to any such other exchanges and that such information is released to each of the markets at the same time. If a price-sensitive announcement is made in another market while the Indian market is closed, the issuer should ensure that a corresponding announcement is published in Indian before the Indian market opens for trading, and, if necessary, request a suspension of trading of its securities on the Exchange pending the publication of the announcement.

Judicial pronouncements

Case 1: Universal Salvage

Universal Salvage had a rolling contract with Direct Line Insurance for vehicle salvage that could be terminated on three months’ notice. The contract was responsible for approximately 40 per cent of the vehicles handled by the company and for a significant proportion of its turnover.

The FSA decided that Hynes was “knowingly concerned” in the breach as he was the director best placed to take appropriate steps to ensure that the company notified the market without delay and he had failed to do so.

The company was fined £90,000; Hynes, £10,000.

Case 2: Pace Micro Technology

On January 8, 2002, Pace announced its interim results but failed to reveal that its trade credit insurance for future deliveries to one of its largest customers had been withdrawn. The FSA judged this to be a breach of the obligation to ensure that information released to the market is not misleading and does not omit anything “likely to affect the import” of information already released.

The case underlines the need to include all material information when making announcements. The loss of the insurance cover was not deemed to be price-sensitive – just material to the matter being announced.

The FSA accepted that Pace had not acted recklessly or deliberately but had simply come to the wrong conclusion about what was material. The company was nonetheless fined a hefty £450,000 for breaching the two rules.

Case 3: Wolfson Microelectronics

Wolfson Microelectronics supplies the semiconductors that are found in many digital consumer goods such as mobile phones and portable media players. Its largest customer generated 18 per cent of its 2007 revenue, but on 10 March 2008 Wolfson was told that it would not be supplying parts for future editions of two of the customer’s products: $20m, or eight per cent of Wolfson’s forecast revenue for the year, had disappeared.

The FSA held that, given the significance of the customer’s business and the impact of the loss of supplies for the first two products, the bad news was inside information. A reasonable investor would have been likely to use it as part of his investment decision. There could be no offset of the negative against the positive news – each had to be looked at independently and announced where necessary. And if the bad news were likely to depress the share price, the company could not withhold the information because it thought the market would over-react or fail to understand the true value of the company.

The FSA was also clear that a confidentiality agreement was no excuse for not announcing price-sensitive information. (A well drafted contract should in any event allow for announcements required by law or by a regulator; names can always be anonymised and the text agreed with the other party.) Wolfson was fined £200,000, reduced to £140,000 for an early settlement.

Conclusion

SEBI is concerned about companies mostly preferring the media for making public some of their key business developments while the stock exchanges are intimated about these matters only later and, in some cases, not at all.

SEBI notes, however, that the companies might not be held responsible for this practice as the Agreement does not specifically mandate the use of stock exchange platform for making public quite a number of price-sensitive developments.

Sebi has noticed that companies generally tend to reply that they have complied with all the clauses of the Agreement and any ‘price sensitive information’ required as per the guidelines, have been duly shared by them.

The information considered to be ‘price sensitive’ as per the current guidelines include, any change in general nature of business, disruptions due to natural calamity, commencement of commercial operations, developments arising out of change in regulatory framework, litigation or disputes having a material impact and revision in credit ratings.

Edited by Neerja Gurnani

[1] S. Ramesh, S. Padmalata And Asis … vs Securities And Exchange Board Of … on 22 June, 2004

[2] http://www.econlib.org/library/Enc/InsiderTrading.html

[3] http://indiacorplaw.blogspot.in/2009_08_01_archive.html

[4] S. Ramesh, S. Padmalata And Asis … vs Securities And Exchange Board Of … on 22 June, 2004

[5] Sebi vs Mefcom Capital Markets Limited on 21 September, 2004

[6] Dsq Holdings Limited vs Securities And Exchange Board Of … on 15 October, 2004

[7] S. Ramesh, S. Padmalata And Asis … vs Securities And Exchange Board Of … on 22 June, 2004

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