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Handling of price-sensitive information has become a contentious issue for India Inc after the Tata-Mistry events. Fears of violating the new insider-trading norms is impacting the information flow between boardrooms and parties concerned, particularly in listed multinational companies (MNCs).
Earlier, it was common practice for board members of MNCs to consult their foreign promoters while taking critical decisions. Although the practice isn’t illegal, companies are ensuring the new rule book is followed.
Under the new insider-trading norms, the so-called unpublished price sensitive information (UPSI) can only be shared on a need-to-know basis — with those who are part of the decision-making process.
According to legal sources, companies have stopped sharing information through official channels with individuals representing their foreign promoters but don’t qualify under the need-to-know criteria.
“Often, the managing director and chief executive officers of MNCs listed on Indian bourses have to consult their foreign promoters before taking a final call on issues such as dividend payouts. Although, the foreign promoters can guide such decision-making, it cannot be ad hoc anymore. Companies are setting up proper processes to ensure compliance with new insider-trading rules,” said a legal expert, asking not to be named.
The issue of such information sharing had come to light after Cyrus Mistry, ousted chairman of Tata Sons, in a letter, alleged various boards of the Tata group were violating insider-trading rules by sharing price-sensitive information with people who don’t fall under the purview of need-to-know.
“After the development, MNCs have realised conveying any such communications for approval by promoter could make the company vulnerable to the current insider-trading norms. These days, they are encouraging boards to do any consultations over the phone or through personal messaging,” said the person quoted above.
Legal experts say merely communicating sensitive information would not be a serious violation unless an individual makes unlawful gains by trading on the information.
“Need-to-know is a moral principle in the Law of Insider Trading. Mere communication has never been an offence and even in the new insider-trading rules, it is an offence with limitations,” said Sumit Agrawal, formerly with the Securities and Exchange Board of India (Sebi) and partner, Suvan Law Advisors.
According to regulation 3 of Sebi’s prohibition of insider trading rules, any unpublished price-sensitive information should be shared strictly on a need-to-know basis and any person not involved in the transaction should not be informed, irrespective of his or her position in the company or relationship with promoters. Price-sensitive information is defined as any information which relates directly or indirectly to a company and which, if published, could impact its share prices.
Corporate governance experts say a majority of the violations are committed not due to mala fide intention but due to lack of awareness about what could amount to price-sensitive information.
“In a majority of the cases, the companies go by what their chief compliance officer says. However, whenever there is a good amount of doubt, the company should consult the regulator. Further, it would also be a good practice if a company maintains a clear list of what could be price-sensitive information,” said Shriram Subramanian, founder and managing director of proxy advisory firm InGovern.
The issue of information sharing had also come up when Sebi had passed an order against Piramal group officials earlier this year. The regular had penalised the promoters of Piramal Enterprises for violating insider-trading norms while selling its pharmaceutical wing, Abbott Laboratories, in 2010. In the final order, the regulator had alleged information about the Abbott sale was provided to Anand Piramal, son of Ajay Piramal, who was neither an employee nor a director of the company. The regulator had levied a fine of Rs 6 lakh on the promoter.
