Mint Explainer: How Sebi wants to prevent insider trading violations

livemint.com:

Mint takes a closer look at what it means. 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The issue around unpublished price sensitive information (UPSI) is tricky, especially in context of insiders using such information to gain unfairly at the expense of other shareholders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area after initiating insider trades in her own shares, he or she can argue that the information is published and not unpublished to justify a material price impact on its shares on the stock exchanges. This makes regulatory task far more difficult to determine whether insiders could have used unpublished price sensitive information to gain unfairly.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 In simple terms, it is to prevent any insider from using unpublished price sensitive information to benefit at the expense of other shareholders who are unaware of the unpublished price sensitive information through violation of prevention of insider trading regulations.

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