Freedom versus Responsibility – an experiment in business, through SEBI’s Prohibition of Insider Trading (PIT) Regulations, 2015
Business, like any other sphere of human endeavour is a place for giving free rein to creative and ‘animal’ spirits. This may and does lead sometime to exuberant, even irresponsible behaviour. While in the days of yore, it was known that great fortunes were built by buccaneers and pirates. The idea that one could make money without looting has come in only recently. The joint stock company brought the possibility of small shareholders being able to invest in wealth-creating enterprises. In India, Reliance Industries Ltd became the path-breaking company to bring this possibility to fruition. Today, the BSE Sensex is around the 60,000 mark and the NSE Nifty around 18,000. Covid 19 has not yet fully disappeared – it probably never will – like renewable patents, Covid 19 is now showing up as Covid 22 or Omni-something…But business is back to being business. India, the economy which is its own demand engine first and potentially will become the world’s supply and demand engine, is back to being in the black.
On this background, SEBI is giving a fresh lease of life to a regulation that brings in the tempering of responsibility to the ‘animal’ spirits of our business moguls, through the Prohibition of Insider Trading (PIT) Regulations, 2015, and it’s requirement to create a Structured Digital Database (SDD). SEBI is the world’s first regulator to require the creation of such a mechanism. While SEBI had issued these regulations in 2018, and the SDD was made mandatory from April 1, 2019, the regulator has only now decided to start checking up seriously on compliance with the regulations. It is only now, therefore, that the conflict between freedom and responsibility is beginning to be felt. To be specific, from the feeling began from August 4, 2022.
Promoters who come to the market for raising funds to help them fulfil their dreams of creating business empires can be un-mindful or simply unaware of the responsibility for both information disclosure and non-disclosure, as a part of their fund-raising freedom. PIT Regulations are to do with non-disclosure and non-trading when in possession of UPSI or Un-published Price Sensitive Information. Each listed company is required to create an SDD and host UPSI and track its movement in it till it is either disclosed to the market or closed because it is not coming to realization. What is UPSI? An example would be say a big order that could increase the company’s revenues by more than 20% for the next 2-3 years. Such information before the deal is signed and sealed could certainly impact positively on the company’s share price, and is therefore UPSI. Similarly, a law suit lost in a key export market could threaten sales generation there, and if known to the market could depress the share price. Again, UPSI.
Companies have been ignoring the requirement to create such a database. DPs or Designated Persons (DPs) don’t want to either enter the UPSI they have into it, or stop trading when they possess UPSI, as the regulations require. This is in essence the conflict between Freedom to raise and invest money as promoters please, with the responsibility to be circumspect about who should invest and when. No investor in possession of UPSI is permitted to trade. This is a habit changing regulation, which seeks to curtail the freedom of promoters and key members of listed companies’ management to trade in company shares, when they are aware of UPSI. Till January end, January 21st, SEBI has asked listed entities to certify compliance with the SDD requirement with the clear promise that BSE or NSE, whichever exchange the company’s paper is listed in, could come for inspection to confirm compliance with a day’s notice.
As this plays out over the coming two quarters, and the years beyond, we will learn whether SEBI’s experiment with trying to make businessmen more responsible has succeeded or not.