This is the second piece in our series entitled "Those Were the Days", which will be published monthly. We hope you enjoy reading this as much as we have enjoyed putting this together.
This post deals with Securities Exchange Board of India's (SEBI) interpretation of the term "Unpublished Price Sensitive Information" (UPSI) arising from the alleged insider trading by Hindustan Lever Limited (now Hindustan Unilever Limited) (HLL) in its purchase of shares of Brooke Bond Lipton India Limited (BBLIL).
While the subject SEBI order employed provisions of the SEBI (Prohibition of Insider Trading) Regulations, 1992 (1992 Regulations), this post also analyses the relevant provisions of the subsequently notified SEBI (Prohibition of Insider Trading) Regulations, 2015 (2015 Regulations) in relation the subject case.
Case Analysis: Hindustan Lever Limited v. SEBI1
The facts of the case concerned the purchase by HLL of 8 lakh shares of BBLIL from the Unit Trust of India (UTI) on March 25, 1996. This purchase was made barely two weeks prior to a public announcement for a proposed merger of HLL with BBLIL.
Upon investigation, SEBI by its Order dated March 11, 1998 (Order) found that, at the time of the purchase of shares of BBLIL from UTI, HLL was an "insider" as under Section 2(e) of the 1992 Regulations, the relevant extract of which describes an insider as any person who:
- is or was connected with the company or is deemed to have been connected with the company and is reasonably expected to have access by virtue of such connection to unpublished price sensitive information in respect of securities of the company, or
- has received or has had access to such unpublished price sensitive information."
SEBI held that, since, HLL and BBLIL were subsidiaries of the same London based Unilever, and were effectively under the same management, HLL and its directors had prior knowledge of the merger. Thus HLL was covered under the definition of an insider as above defined.
SEBI also held that HLL was in possession of UPSI as defined under Section 2(k) of the 1992 Regulations which includes any information in relation to amalgamation, merges and takeovers that "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 market". As per SEBI, the fact that the information about the merger was available with HLL was enough to satisfy the requirement of Section 2(k) above.
An appeal was filed by HLL against the said SEBI Order before the Securities Appellate Authority. On the question of whether HLL could be termed as an insider, the Appellate Authority agreed with the SEBI Order to hold that, the information available with HLL in relation to the merger was beyond merely self-generated information, i.e., information arising out of its own decision making. Further, with respect to the merger, the Appellate Authority noted that the existence of directors common to both HLL and BBLIL, and a common parent company in Unilever meant that they (i.e., HLL and BBLIL) were in effect under the same management. Consequently, HLL could be termed as an insider under the 1992 Regulations and it could reasonably be presumed that HLL was privy to decision making on the merger issue in the BBLIL board.
On the question of whether the information available with HLL constituted UPSI, the Appellate Authority agreed with the contentions of HLL that, for information to be considered as UPSI, it must meet the dual requirements envisaged under Section 2(k) of the 1992 Regulations, i.e.:
- The information must not be generally known or published by the company; and
- If published or known, is likely to materially affect the prices of securities of that company in the market. [...Emphasis supplied]
The Appellate Authority held that for information to be generally known, it is not required to be confirmed or authenticated by the company as it would otherwise fall under the category of information "published by the company". The Appellate Authority appreciated the evidence produced by HLL, including various news articles covering the merger, and concluded that the information of the merger was generally widely known to the public, and thus failed the first test to qualify as UPSI as per the abovementioned Section 2(k) of the 1992 Regulations.
HLL also argued that, the information of the merger of two healthy, profit – making companies is per se not price sensitive, as price sensitivity would arise in case of merger between a strong company and a weak company, which impacts the share price of the companies. The Appellate Authority however noted that even in the merger of two healthy companies there are synergistic possibilities which could lead to price sensitivity for either company. Thus, the Appellate Authority agreed with SEBI's conclusion that information of the merger was price sensitive (though not 'unpublished'). The matter is currently pending before the Supreme Court.
Aftermath and consequences of the decision of the Appellate Authority
Subsequently, SEBI by the SEBI (Insider Trading) Amendment Regulations, 2002 amended the definition under Section 2(k) to the following:
""unpublished" means information which is not published by the company or its agents and is not specific in nature.
Explanation.—Speculative reports in print or electronic media shall not be considered as published information."
Consequently, under the revised definition speculative reports in print media, as was the case in relation to the HLL and BBLIL merger, would not be considered as published information, and HLL's knowledge in relation to the merger would be considered as unpublished information. By the same Amendment Act, SEBI also introduced a new provision, Section 2(ha) which defined "price sensitive information" to include any information relating to an amalgamation, merger or takeover as deemed price sensitive information, regardless of whether such information actually has any affect the price of the securities in the market.
However, the amendments did not definitively and expressly define "generally available information",
Regime under the 2015 Regulations
The 2015 Regulations finally set out what constitutes UPSI by defining "generally available information" under Section 2(1)(e) as follows:
"generally available information" means information that is accessible to the public on a non-discriminatory basis;"
The term "non-discriminatory access", however, was left undefined and deliberately open-ended. Instead, several instances were provided for what would constitute non-discriminatory access. The illustrative (non-exhaustive) list included instances of information provided on the website of a stock exchange. A rule of thumb would to be see if the information is capable of being accessed by any person without breaching any law.
Sometime in early 2017, the SEBI provided Kirloskar Chillers Private Limited (KCPL) with an informal guidance on broad issues. Significantly, one of the questions addressed to SEBI was whether a KCPL, as a promoter group entity of Kirloskar Brothers Limited (a listed company), requires a pre-clearance from such listed company even though it has no role in the management of that company or have any access whatsoever to UPSI. SEBI referred to the 2015 Regulations, and the listed company's internal code of conduct, to broadly state that:
- Unless a promoter is designated as a "Designated Person" by the Board of Directors in consultation with their compliance officer, no pre-clearance for trading is needed.
- There exists an assumption that the actions of compliance officers, Board of Directors and other entities entrusted with ensuring adherence to Insider Trading Regulations, should be to ensure compliance with the regulatory framework and not for an "ulterior motive".
- An action of a compliance officer, whether it is extraneous to his or her powers, is to be examined by the Board of Directors and the audit committee.
- The 2015 Regulations by nature are prohibitive and the applicability of its provisions is with respect to insiders and such concerned securities to which a UPSI might pertain. This is to avoid any undue advantage accrued to classes of investors on account of their access to UPSI.
This development may encourage companies to devise their own code of conduct such as to limit the persons who may be considered insider, and privy to UPSI and clearly identify the universe of "Designated Persons". That said, SEBI may nonetheless review the scope of "Designated Person" to evaluate if it has been formulated in accordance with applicable regulations.
The test for UPSI laid down under the 2015 Regulations grants SEBI the ability to analyse, on a case by case basis, whether certain information is available on a non-discriminatory basis, thus achieving the balance of regulation.
1 (1998) 18 SCL 311 MOF
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