What is PSI?
Price Sensitive Information (PSI), also referred to as “inside information” under Part XIVA of the Securities and Futures Ordinance (SFO), is a legal concept that came into effect on 1st January 2013.
“Insider information”, is defined by section 245(1) of the SFO as “specific information” that:
(a) is about
i. the corporation;
ii. a shareholder or officer of the corporation; or
iii. the listed securities of the corporation or their derivatives; and
(b) is not generally known to the persons who are accustomed or would be likely to deal in the listed securities of the corporation but which would if it were generally known to them be likely to materially affect the price of the listed securities;”
Selected examples of inside information set out in the “Guidelines on Disclosure of Inside Information” published by the SFC (“SFC Guidelines”):
– Changes in performance, or the expectation of the performance, of the business or its financial condition;
– Changes in auditors or any other information related to the auditors‟ activity;
– Issue of debt securities, convertible instruments, options or warrants to acquire or subscribe for securities;
– Takeovers and mergers (corporations will also need to comply with the Takeovers Codes that include specific disclosure obligations);
– Changes in expected earnings or losses; and
– Legal disputes and proceedings.
When are you required to make announcements regarding PSI
As soon as reasonably practicable under section 307B(1) of the SFO.
PSI Awareness Among Listed Companies and Directors
The concept of PSI is generally known to most directors and listed companies due to its critical role in maintaining transparency and fairness in the securities market. However, the practical application and understanding of PSI can be complex and nuanced, leading many directors to struggle in this area.
• Recognizing PSI
Recognizing PSI is one of the first challenges faced by listed companies and directors. The information’s specificity, its effect on the price of securities, and its general availability to those dealing in securities are the three main criteria that determine whether information is deemed PSI.
However, these factors can be subjective and depend on the specific circumstances. For example, what may be considered as “specific” in one context may not be viewed the same way in another. Similarly, the potential effect of information on the price of securities often depends on market dynamics, which can change rapidly.
• Disclosure Obligations
According to section 307B(1) of the SFO, once the company or its directors have identified PSI, they are legally required to disclose this information to the public “as soon as reasonably practicable”. Inside information has come to the corporation’s knowledge if: (a) the inside information has, or ought reasonably to have, come to the knowledge of an officer of the corporation in the course of performing functions as an officer of the corporation; and (b) a reasonable person, acting as an officer of the corporation, would consider that the information is inside information in relation to the corporation (section 307B(2) SFO). This can be a complex process, as it requires understanding what is deemed “reasonably practicable” under the law. It also involves making judgements about when the information has come to their knowledge, which can be subjective and may depend on the specific internal structures and processes of the company.
• Compliance Measures
Understanding the requirements for PSI disclosure is just one aspect of compliance. Listed companies and their directors also need to implement appropriate measures to ensure compliance with these requirements. This could involve setting up systems to detect and manage PSI, training staff and executives to identify and handle PSI, and establishing procedures for timely disclosure of PSI.
• Reputational Risk
Beyond the legal implications, non-compliance with PSI disclosure requirements can also damage a company’s reputation. If a company, or its management, is perceived to be withholding information or engaging in insider trading, this can erode trust among investors, customers, and the public. This reputational damage can have a long-term impact on the company’s share price and its ability to attract investment.
While many listed companies and directors may be aware of the term PSI, fully understanding its implications requires a deep understanding of the law, the application, the market practice, and the company’s internal processes. It also requires a proactive approach to compliance, including the implementation of robust systems and procedures and ongoing training and monitoring.
Consequences of Non-compliance
Non-compliance with PSI disclosure requirements can lead to severe consequences, both legal and reputational. Under Part XIVA of the SFO, both the company and its directors can be held liable for failing to disclose PSI in a timely manner. Besides civil liabilities, in some serious cases, it may result in criminal liability. The SFC can take civil proceedings before the High Court, criminal proceedings before the District Court or proceedings before the Market Misconduct Tribunal (MMT). Both CCB and ICAC could also be involved depending on the nature of the case.
The MMT is empowered to impose civil sanctions, including but not limited to,
(i) fines of up to HK$8 million on the corporation and its directors in certain circumstances;
(ii) disqualification of the director or officer from being a director or senior management of a corporation for up to five years; and
(iii) a “cold shoulder” order on the director or an officer (i.e. the person is deprived of access to market facilities for dealing in securities, futures contracts and other investments) for up to five years.
In terms of criminal penalties, the SFC has the ability to seek sentences involving imprisonment and/or fines. Therefore, the potential repercussions of non-compliance demonstrate the seriousness of the possible wrongdoings.
Case Example: The 360 Ludashi Holdings Limited Incident
Recently, on 11 September 2023, 360 Ludashi Holdings Limited (3601.HK) announced discussions on special dividends, leading to a 70% surge in its stock price the next day. However, a major shareholder sold a substantial number of shares on 20 September 2023, just before the announcement of the cancellation of the special dividends, raising suspicions of insider trading.
As of now, it is not confirmed whether an official investigation into the matter is underway, and no definitive conclusions have been reached. However, it serves as a potent illustration of the complexities surrounding PSI and the potential risks associated with non-compliance. The consequences can be far-reaching, from hefty fines to disqualification of directors, and damage to the company’s reputation, as well as may have criminal implications.
At this point, it’s worth highlighting the value of expert assistance in navigating PSI complexities. Experts can be instrumental in court proceedings and can help establish systems for detecting and disclosing PSI promptly. In addition, they provide a clear understanding of PSI’s legal aspects, help avoid potential risks like fines and legal issues, and assist in risk management to prevent breaches and ensure compliance with SFO’s PSI disclosure guidelines.
In conclusion, understanding and handling of PSI requires a deep understanding of the market and the legal landscape. Breaches can lead to significant consequences, including substantial fines, imprisonment, and damage to a company’s reputation. Therefore, navigating PSI is not an option but a prerequisite for companies and their officers. With Pelican as your guide, we empower you to meet these challenges head-on, turning compliance into a strength that drives your company’s success in the financial market.
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