[ad_1]
Understanding unpublished price sensitive information and prevention of insider trading
The object behind the regulator’s decision is to facilitate ease of doing business for listed companies, which are regulated by it. The issue around unpublished price sensitive information (UPSI) is tricky, especially in context of insiders using such information to gain unfairly at the expense of other shareholders not privy to such information. This is in violation of Sebi’s prevention of insider (PIT) trading regulations.
For instance, if a promoter or senior management (insider) leaks out information about a corporate action in advance to a regional newspaper in a far-flung area after initiating insider trades in her own shares, he or she can argue that the information is published and not unpublished to justify a material price impact on its shares on the stock exchanges.
This makes regulatory task far more difficult to determine whether insiders could have used unpublished price sensitive information to gain unfairly. But, as a listed entity must confirm or deny such rumours to the stock exchanges, the applicability of an unaffected price in case the entity confirms the rumour makes the mechanism much more efficient to thwart violation of prevention of insider trading (PIT) norms.
In simple terms, it is to prevent any insider from using unpublished price sensitive information to benefit at the expense of other shareholders who are unaware of the unpublished price sensitive information through violation of prevention of insider trading regulations.
How an insider gains from floating a rumour
The rumour could pertain to management seeking board approval for preferential allotments, buybacks, open offers, etc . Very often UPSI pertaining to such corporate actions could be used by myriad sources, namely, the promoters or senior management or juniors who get a whiff of some imminent corporate action.
For instance, senior management wants to do a buyback and takes such a proposal to the board. Any junior level staff at the company gets to know of such action and makes use of it to unfairly gain advantage without the promoter’s knowledge, to the exclusion of other shareholders. In such a case, if the share price moves materially, and the company confirms the rumour within 24 hours, the unaffected price shall be considered on which pricing norms are specified by Sebi or the stock exchanges from time to time.
What is unaffected share price?
The unaffected price used excludes a formula based variation in prices due to the rumour and provides a level playing field. The unaffected price shall be applicable for a period of 60 days or 180 days from the date of confirmation of the market rumour till the relevant date of public announcement by the company, board approval, etc .
This framework for unaffected price will be applicable to the top 100 listed entities from 1 June 2024 and to the next top 150 by 1 December this year .
What is volume weighted average price, or VWAP?
Before delving further , understanding the concept of volume weighted average price is important. Each day of trading a scrip of index, one observes mention of volume weighted average price. This is the price at which maximum volumes happen. If the share or index trades above VWAP it implies bullishness and if below, it signals bearish sentiment.
To better understand, if an investor buys 100 shares at ₹50 apiece, 150 shares at 60 apiece and 200 shares at ₹80 apiece, the average price per share is ₹63.33 (50+60+80)/3 .
But, weight is also important here. This tells you at what price was the maximum transactions happened.
In the above example, the volume weighted price will be ₹66.66 a share. This is arrived by multiplying the number of shares with the price, adding up the products and then dividing the same by the total number of shares.
For instance: (100X50) + (150X60) + (200X80) / 450
Adjusting VWAP post rumour
If a company confirms the rumour within 24 hours, the unaffected price will be arrived at by excluding the variation in the weighted average price from daily weighted average price in case of a material price movement.
This formula will be applicable until the board approves the relevant corporate action or public announcement is made.
Thus, unfair advantage enjoyed by a few insiders privy to price moving information is done away with.
A Sebi illustration serves to show this. Say on 26 July, 2023 the weighted average price of a share was ₹1,060.76 apiece. Next day, on 27 July, the share jumped to ₹1164.47 on rumours of a preferential allotment to qualified institutional bidders. Assume on 28 July, the price jumps further to ₹1,173.45 on confirmation of the rumour by the company and on 31 July, the day after confirmation, to ₹1,178.90. The variation in WAP will be ₹118.14 (1,178.90 minus 1,060.76). This variation will be deducted from the daily weighted average price to arrive at an adjusted volume weighted average price each day after 31 July. From 27 July to 31 July, the adjusted VWAP will be the same as that existing on 26 July ( ₹1,060.76), the day before the material price movement.
In the above instance, the rumour has been confirmed on 28 July and the unaffected price is applicable till 26 September, 2023 (60 days from the confirmation based on stage of transaction). If the same transaction is reported in media the unaffected price for rumour confirmation on 28 August will be applicable from 29 august to 26 September (another 60 days) and so on through 180 days .
