Saturday, April 5, 2014

Guest Post: Insider Trading and “Price Sensitive Information”

[The following post is contributed by Yogesh Chande, who is a Consultant with Economic Laws Practice, Advocates & Solicitors. Views of the author are personal]

In a recent order passed by the Adjudicating Officer of SEBI, an aggregate penalty of INR 2.50 million was imposed on five noticees consisting of Chairman, Vice-Chairman & Managing Director, Executive Directors and the Company Secretary of a listed company.

The penalty was imposed under section 15HB of the SEBI Act, 1992 for:

1.         delay in disseminating price sensitive information to the stock exchanges regarding bagging of certain orders; and

2.         the code of conduct not being in line with the one prescribed under the SEBI (Prohibition of Insider Trading) Regulations, 1992 (Regulations).

The code of conduct did not take into consideration the amendment to the Regulations on 19 November 2008, pursuant to which even the dependants of directors/officers/designated employees were required to seek pre-clearance of trades from the Company Secretary & Compliance Officer.

The inquiry and investigations revealed as follows:

1.         Issuance of announcement by the company to stock exchanges on 29 April 2009 that the company had bagged two orders worth INR 13,400 million;

2.         The two contracts for the above orders were entered on 1 March 2009 and 22 April 2009;

3.         Thus, there was a delay of 59 days and 7 days from the date of entering the two contracts and date of intimation to stock exchanges on 29 April 2009;

4.         On 29 April 2009 the stock price closed 4.74% higher than the opening price; and

5.         The daughter of the Managing Director (MD) traded in the scrip without seeking pre-clearance for certain trades, which could have been avoided, if the code of conduct was duly amended.

Due to lack of sufficient evidence as regards trades done by the daughter of the MD, the noticees were given benefit of doubt. However, the penalty of INR 2.50 million was levied for delay in disseminating the price sensitive information in terms of the Regulations.

Analysis

The order of the Adjudicating Officer deals with what constitutes “price sensitive information” under the Regulations, which needs to be disclosed by a listed company to the stock exchanges on a continuous and immediate basis. The term “price sensitive information” under the Regulations has been defined to mean any information which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of company.

It is important to note that, in para 17 of the order, the Adjudicating Officer while explaining the aforesaid term has also observed that “......the information has to be construed as price sensitive information irrespective of actual price witnessed post disclosure of the information.”. This is interesting because while the definition under the Regulation states that, if published, the information is likely to have material effect on the price of securities, the observation made does not give any weightage to the term “materially affect” the price of the security.

From the material available on record, it was observed by the Adjudicating Officer that the orders bagged by the company constituted a substantial percentage of the turnover of the company i.e. the orders were worth INR 13,400 million as against the net sales turnover of the company of INR 18,834.2 million for the year ended March 2009 and INR 15,059.6 million for the year ended March 2010. In view of the enormity and the magnitude of the orders, the orders were considered as constituting “price sensitive information”.

While what constitutes “price sensitive information” that should be disclosed to stock exchanges is subjective in nature, one of the guiding factors available to listed companies in determining their disclosure obligation upon them receiving orders in the ordinary course of business could be if the orders bagged by them are of a substantial percentage to the sales turnover of the company. In this case, the orders bagged by the company were around 71% based on the sales of March 2009 and around 88% based on the sales of March 2010.

While it can be argued that it is the business of the company to bag such projects, the orders bagged by it are in the nature of stock in trade in the business and it is not an unusual occurrence, however from a practical standpoint it is advisable for listed companies to have an internal policy for example stating that:

(a)        as and when the company reaches a level of orders of a particular amount; or

(b)       as and when the company reaches a single order aggregating a particular amount,

the same shall be immediately disclosed to stock exchanges. Such an approach will to an extent, enable a company in ensuring compliance of the Regulations and clause 36(7) of the equity listing agreement [dealing with disclosure of any other information having bearing on the operation/performance of the company], and perhaps also act as a mitigating factor in case of inquiry / investigation by SEBI or stock exchanges.

Needless to say, not merely bagging of orders, but even writing off of slow moving orders[1], forming a material part of certain parameters like the existing order book, sales turnover of the company, and which [the writing off] if published, is likely to have an impact on the price of the securities of the company, will also require disclosure in terms of the Regulations.

- Yogesh Chande


[1] For reasons such as long delays in securing clearances, regulatory hurdles, policy uncertainty and at times predatory bidding by the competitors

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