Under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”), trading window of a listed entity is required to be closed when the compliance officer is of the opinion that designated persons can reasonably be expected to possess unpublished price sensitive information (“UPSI”). While the definition of UPSI has been provided in the PIT Regulations, what constitutes UPSI is, at times, a subjective interpretation. In its recent order in the matter of B. Renganathan v. SEBI, the Securities Appellate Tribunal (“SAT”) had the opportunity to clarify the role of materiality in determination of UPSI in cases where the listed entity is acquiring another company.
Ecap Equities Ltd.(“Ecap”), a wholly owned subsidiary of Edelweiss Financial Services Ltd. (“Edelweiss”) (a listed entity) acquired 100% shareholding of a company called AIMIN. A disclosure was made to the stock exchanges in April 2017. However, the trading window was not closed at any point in time for this transaction. In light of this, SEBI passed an order stating that the compliance officer of Edelweiss has violated the code of conduct of the PIT Regulations.
Before SAT, the appellant argued that the test of UPSI is the likelihood of an event materially affecting the price of securities. In the present case, AIMIN was acquired by Ecap for a mere Rs. 4 crore, while the gross income of Edelweiss during that period exceeded Rs. 5000 crore per annum. Further, Ecap’s contribution to this income is around 20%. Thus, it was contended that this transaction is not a material transaction for Edelweiss and is not UPSI requiring a closure of the trading window.
Not accepting the appellant’s contention, SAT held that 100% acquisition of a company, irrespective of the value or size, is material and liable to bring in UPSI. SAT opined that regulatory certainty will be lost if entities are allowed to interpret acquisitions by their relative sizes. Thus, the compliance officer was required to close the trading window. However, since it was not the case of SEBI that any designated person or insider traded in the securities nor that anyone else benefitted illegally during the period of UPSI, SAT reduced the penalty from Rs. 5 lakhs to 1 lakh.
This judgment clarifies that irrespective of the size of the acquisition relative to the size of the acquiring listed company (or its subsidiary), a 100% acquisition is required to be considered to be a material event for the purpose of UPSI determination. The reduction in subjective determination of UPSI engenders regulatory clarity, which benefits both, the listed entities as well as investors.
