In pursuance with the application letter dated February 11, 2022 (“Application”), Deepak Nitrite Limited (the “Company”) recently sought guidance from the Securities and Exchange Board of India (“SEBI”). The Board of Directors of the Company (“Board”) prior to making the Application, announced a qualified institutional placement of equity shares of the Company up to INR 2,000 crores (“QIP”) vide a meeting of the Board held on December 22, 20212. Further, the QIP was approved by the Company’s shareholders through a special resolution passed on January 27, 2023.
It is pertinent to mention that the Application specifies that the QIP will be launched at a suitable time and for a size that may be decided by the Board or any committee thereof, and that the issue price of the QIP will be decided in accordance with the SEBI (Issuance of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”).
Keeping in view, the material facts and backgrounds, the Company sought an informal guidance from SEBI, for the following queries:
- Whether the pending QIP issue, its pricing and probable impact on the share capital of the Company, which is not yet known and shall be determined per the ICDR Regulations, be considered as unpublished price sensitive information (“UPSI”)?
- In view of the above, whether the individual Promoters which include the Chairman & Managing Director, the Executive Director and the CEO of the Company or any member of the promoter group of the Company, can purchase the shares of the Company from the open market during the pendency of the QIP?
In response to the inquiries in the Application, SEBI issued a letter dated July 12, 2022 (the “Guidance Letter”) to the Company. In relation to the first query, SEBI relied upon the definition of UPSI provided under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”), which are reproduced below:
“unpublished price sensitive information” means any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities and shall, ordinarily including but not restricted to, information relating to the following:
- financial results;
- dividends;
- change in capital structure;
- mergers, de-mergers, acquisitions, delistings, disposals and expansion of business and such other transactions;
- changes in key managerial personnel”
Listed companies can raise money through QIPs by issuing acceptable securities to qualified institutional purchasers on a private placement basis. Since a QIP entails issuing securities, SEBI noted in its Guidance Letter[1] that the Company’s QIP issue by the Company will enhance its capital and, as a result, cause a change in its capital structure. Therefore, SEBI stated in its letter that, “Accordingly, the QIP issue, its pricing and probable impact on the Share Capital of the Company, is UPSI”. The terms of the statement issued by the SEBI have a wider scope. Since the QIP’s fact has already been made published, it cannot be UPSI. Till such time as the pricing and size are not determined, there does not exist such information and therefore no UPSI. It is only during the period that the price and size is known to the insiders and not published, can there be said to be UPSI.
Regarding the second query of the Company, SEBI relied on the PIT Regulations’ definitions of “Insider”[2] and “Connected Person”[3]. The Chairman & Managing Director, the Executive Director, and the CEO of the Company meet the criteria to be “connected persons” under the aforementioned categories, and as a result, are considered to fall within the ambit of “insiders”. According to SEBI, a member of the promoter group may, on a case-by-case basis, be considered a “connected person” or may be in possession of UPSI, accordingly, such members of the promoter group may also fall under the definition of “insider”.
Additionally, when in possession of UPS, Regulation 4(1) of the PIT Regulations prohibits an insider from trading in securities that are listed on a public market. Based on the aforementioned comprehension, SEBI provided a negative response to the Company’s second enquiry. However, it specifically drew a reference to the exemption by way of a pre declared trading plan as the permitted means for persons perpetually in possession of UPSI to trade in the relevant security.
[1] SEBI Informal Guidance Letter dated July 12, 2022, available at: https://www.sebi.gov.in/sebi_data/commondocs/jul-2022/Deepak_Nitrite_IG_p.pdf
[2] Regulation 2(1)(g) of the PIT Regulations: “insider” means any person who is: i) a connected person; or ii) in possession of or having access to unpublished price sensitive information;
[3] Regulation 2(1)(d) of the PIT Regulations: “connected person” means, any person who is or has during the six months prior to the concerned act been associated with a company, directly or indirectly, in any capacity including by reason of frequent communication with its officers or by being in any contractual, fiduciary or employment relationship or by being a director, officer or an employee of the company or holds any position including a professional or business relationship between himself and the company whether temporary or permanent, that allows such person, directly or indirectly, access to unpublished price sensitive information or is reasonably expected to allow such access.
[1] SEBI Informal Guidance Letter dated July 12, 2022, available at: https://www.sebi.gov.in/sebi_data/commondocs/jul-2022/Deepak_Nitrite_IG_p.pdf
[1] Regulation 2(1)(g) of the PIT Regulations: “insider” means any person who is: i) a connected person; or ii) in possession of or having access to unpublished price sensitive information;
[1] Regulation 2(1)(d) of the PIT Regulations: “connected person” means, any person who is or has during the six months prior to the concerned act been associated with a company, directly or indirectly, in any capacity including by reason of frequent communication with its officers or by being in any contractual, fiduciary or employment relationship or by being a director, officer or an employee of the company or holds any position including a professional or business relationship between himself and the company whether temporary or permanent, that allows such person, directly or indirectly, access to unpublished price sensitive information or is reasonably expected to allow such access.
Conclusion
We are aware that it is customary for listed corporations to approve QIP resolutions that are enabling in nature, which seldom do not result in fund-raising activities. Simply enacting an enabling resolution that excludes specifics about a QIP, such as its time, cost, magnitude, etc., should not be considered UPSI. However, market watchdogs should intervene, if a Company proceeds with such enabling resolutions, to determine whether any PIT Regulations restrictions have been activated.
However, in the current situation, the QIP becomes publicly accessible information after being approved by the Board and the Company’s shareholders. In light of this, it ought to have been legal to trade in a company’s securities even after a QIP enabling resolution for a QIP has been approved, provided that the company did not take any more actions that could have given rise to UPSI. To determine whether any PIT Regulations restrictions have been triggered, the corporation and any relevant insiders will need to move forward with such enabling resolutions. Accordingly, it may be said that, SEBI has adopted a conservative approach, in the current situation, by forbidding trading by individual Promoters and members of the Promoter Group until the Company’s QIP issue is resolved.
SEBI’s reference to Regulation 4(1) of the PIT Regulations providing for an exception by way of a trading plan is of limited use, given its unlikely adoption by market players (not least on account of the obligation to follow the trading plan even in the face of adverse market conditions).
Author – Shyamli Shukla
Associates
Co-Author – Manshaa Nagpaal
Intern
