Any Information which is likely to have an impact on the price of a company’s tradable securities is termed as price sensitive information. More specifically, anything which is likely to influence the public to buy or sell the securities including the stock of a company.
It does not matter whether such information actually has an impact, significant or otherwise, on security prices. What is important is that the information was considered “price sensitive” before it was made public.
Who Decides What Constitutes Price Sensitive Information
Every listed company must have an internal policy document which defines those responsible for determining whether any news, transaction or any other development pertaining to the company or otherwise constitutes price sensitive information.
Typically, the board of directors and the top management (-the CEO & CFO, by whatever name called) serve this purpose since they are most likely to be the first to become aware of any material developments with respect to the company. In addition, the internal policy document may specifically state those who shall fall within the definition of insiders who must then disclose anything material that comes to their knowledge. This internal document mostly called the model code also specifies periods of time during which the ‘insiders’ i.e. those specified in the document shall not trade in the securities of the company on their own account or through anyone else (“blackout period”), whether or not they are in possession of any material information during such blackout period or not.
Principle of fair disclosure demands that any material information which is likely to have an impact on the price of a company’s stock should be made known to the market in a uniform way so that nobody gets disadvantaged by trading with limited knowledge in relation to someone else.
Outsiders on the Inside
Of course on paper the regulations and the systems look full proof but in reality things are far greyer. In modern day business it is common for a large group of people to become aware of inside price sensitive information. Company’s advisors, lawyers, bankers, accountants while engage with the company in an independent capacity, are nevertheless more likely to be aware of material information than those in full time employment of the company.
The big confusion that people have with respect to insider trading laws is the extent to which they are applicable to outsiders who may become aware of insider information which is of price sensitive nature.
Can you trade on Price Sensitive Information?
– NO !
On this page, I had listed some scenarios under which you may or may not get away by trading on inside information. The truth is that whatever starts as illegal information stays illegal and whoever trades on such information is in violation of insider trading laws.
But again, this is just the law and hardly if anyone follows such law and logic. In addition to the examples of all events of illegal insider trading on the above page, consider the example below:
You work for Infosys; you become aware that your company has developed a new technology which enables free internet connectivity for every laptop based on a small chip which pre-stores internet data. This is likely to completely kill competition and take your company’s sales to another level. Now instead of buying shares in your own company (which will be insider trading), you go ahead and short sell shares of TCS, a competing company. Next day as the news become public, TCS share tanks.
– You sir should now go to jail (of course in an ideal world). This was as illegal as trading in INFY share.
The rule to remember is that when it comes to trading on price sensitive information, you are answerable not to your company or boss but to the Securities and Exchange Board (SEBI) of India who constantly monitor such trades with a view to creating a level playing field.
Oftentimes, you may become aware of certain possible developments that are most likely to take place in a company just by looking at their financials, hearing what the management is saying and by keeping a close eye on developments in the industry what I call educated speculation. What if in such a case you happen to over-hear someone from the management about something which is extremely price sensitive but something you had always suspected will eventually happen?
The answer is such situations should legally be based on truth –“I was tracking this company for a long time and just incidentally (and luckily), I ended up buying a huge lot of stock in the company just a few hours before the merger announcement was made.What happened a few hours after I bought, and what could possibly happen in a few days from now is destiny”.