Material Nonpublic Information Definition
Material Nonpublic Information, also known as the insider information is the information which is important in nature but is not supposed to be disclosed to the public as the disclosure of the same have to affect on the price or decision of investors’ of the company and this information is known only to authorized personnel of the company.
Explanation
The information which is only known to authorized persons and which is related to internal decisions of the company and is not for general public disclosure is known as material nonpublic information. The disclosure of information led to affect the price of shares in the stock marketStock MarketStock Market works on the basic principle of matching supply and demand through an auction process where investors are willing to pay a certain amount for an asset, and they are willing to sell off something they have at a specific price.read more and which can affect adversely or favorably to the working of the company. If any personnel of the company disclosed the information to persons other than persons authorized by the company and that information is used for earning a profit, then that person will be penalized and can be liable for imprisonment. Information is considered to be material only if it has the power affect the price of shares such as information about increase or decrease of dividendDividendDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company.read more, decision regarding sale or purchase of assets by company, amalgamationAmalgamationAmalgamation is the consolidation or combination of two or more companies, known as amalgamating companies, usually in the same or similar line of business, to produce a new legal entity, known as the amalgamated company, with the same shareholders, assets, and liabilities.read more or merger decision, stock splitStock SplitStock split, also known as share split, is the process by which companies divide their existing outstanding shares into multiple shares, such as 3 shares for every 1 owned, 2 shares for every 1 held, and so on. The company's market capitalization remains unchanged during a stock split because, while the number of shares grows, the price per share decreases correspondingly.read more, or consolidation of shares, etc.
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Examples of Material Nonpublic Information
Below are some examples to understand the concept in a better manner –
Example #1
XYZ Ltd, a Mobile manufacturing company, developed a new method through which manufacturing cost can be reduced to half of the current cost, and this gives huge profits to XYZ Ltd. This information could affect the share price of the company in the stock market if it got publicized.
Also, if any employee of the company knows or has access to the information in the company and used it by purchasing the shares of the company through relatives or friends, then that person will be penalized and can be terminated by the company and liable for imprisonment.
Example #2
Another Example of Material Non-Trading information can be the case of ABC Ltd, which is a software manufacturing Government company. It invented a software which can be inbuilt in robots and that robots can be used as a military force and can be proved beneficial for the country and this information, when available to the public, the demand for shares of ABC Ltd can rise to a large extent. Hence company prohibits its employees from trading on stock exchange till the information is released to the public at large if any employee indirectly trades on an exchange, it would amount to insider tradingInsider TradingInsider trading is buying or selling the stocks of publicly traded companies based on confidential information acquired from direct or indirect sources, which will influence the security prices. It is stated as an illegal practice in many countries.read more and can be liable for strong actions.
Example #3
Another Example is a food product manufacturing company comes to know on the basis of a research report that one of their product contains such element which can affect the health of blood pressure patients, and they do not disclose the fact on the batch of product that the product is not safe for blood pressure patients and the disclosure of which can lead to loss of trust on the product by society and can result into decline in a sale. If the information is circulated to the public by unofficial sources, i.e., by insider trading, the company has to bear heavy losses and have a negative image in public. So to prevent this company may frame policies that prevent the unofficial disclosure or leak of information by insiders of a company as this can have a large effect on the share price of the company and situation may demand the shutdown.
What does Material Nonpublic Information Include?
Information about the following can be considered material –
- New discovery of products by the company;
- Development of patents and obtaining copyrights;
- Sale or purchase of material assets by the company;
- Mergers and acquisition decisions and planning;
- Long-pending litigation.
- New and long-term investments.
- Heavy loan obtained or default in repayment of a loanRepayment Of A LoanA loan repayment calculator helps in determining the amount of each installment payable by the borrower on taking a certain amount as a loan at a specific interest rate to be repaid in periodic installments for a particular tenure.read more.
- The bankruptcy of debtor or creditor;
Impact
- Affects the share price of the company in the stock exchangeStock ExchangeStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read more;
- Affects the decision power of investors about whether to invest or not or to purchase or sell the investment.
- Material nonpublic information can be used as insider trading.
- Impacts on the image or goodwill of the companyGoodwill Of The CompanyIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company's net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company's net identifiable assets from the total purchase price.read more;
- It can affect the trading of a security in the stock market, i.e., suddenly demand and price can increase or decreased.
- Prohibition on giving trading advice by auditors and other experts or professionals related to the company;
Material Nonpublic Information Policy
The policies on material nonpublic information depend on company to company. Some of the policies are as under:
- Ban on direct or indirect trading in securities by employees or relatives of employees (in some cases) until the information becomes public.
- Authority to access material nonpublic information to top management or by the permission of top management only;
- Imposing restrictions on contra trade till information officially announced, i.e., none of the employees or persons related to an employee can purchase or sell the shares of the company six months prior to the information disclosed in public.
- Initial disclosure policy, i.e., employees are required to submit the holding by them, their relatives, or persons connected with employees within a few days of purchasing securities and changes thereon.
- Regulations to be followed by every company with regards to the listing, issue, and right issue or further issue of shares;
- Policy and agreement on maintenance of confidential information between the company and employees or third party
Conclusion
Material nonpublic information is the information which is material and can affect the price and decision of investors,’ but the information is related to internal matters of a company as a decision on investment in a certain project, dividend declaration rate, litigation on lender, purchase or sale of fixed assets, defaults by and to the company, etc. If material nonpublic information is used by employees of the company to earn a profit, then it is called insider trading. To prevent insider trading companies, form policies on insider trading and the policy differs from company to company and which can include the restriction on employees to disclose information or trade on the stock exchange or heavy penalties and banned from the job for a specific period, signing of agreement from employees regarding maintenance of confidentiality, etc. Due to this insider trading, policies got strict and more transparent in nature so that it can be prevented.
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