1.1 With effect from May 15, 2015, the new insider trading
regulations, notified by the Securities and Exchange Board of
India ("SEBI") have come into
force. The SEBI (Prohibition of Insider Trading)
("New Regulations") will replace
the SEBI (Prohibition of Insider Trading) Regulations,
1992 ("1992 Regulations").
1.2 While the New Regulations can be considered as progressive, SEBI
is facing criticism for the restrictions imposed by the New
Regulations on exercise of employee stock options
("ESOPs") by employees of listed
2. Restrictions on Exercise of ESOPs
2.1 As per the New Regulations, no 'insider' shall
'trade' in securities of the company, when in possession of
unpublished price sensitive information
("UPSI"). UPSI has been defined to
include any information relating to: (i) financial results of the
company; (ii) dividends; (iii) change in capital structure; (iv)
mergers, de-mergers, acquisitions, delisting, disposals and
expansion of business and such other transactions; (v) changes in
key managerial personnel; and (vi) material events as per the
Listing Agreement. The definition of 'Insider' includes
directors, officers and employees of the company. As a result,
among others, no officer or employee of a company may trade in
securities when he may actually possess or due to his role is
expected to possess UPSI.
2.2 In practice, when an event or transaction involving UPSI is
under consideration ("UPSI Event"), the
compliance officer of the company declares closure of the trading
window for designated employees of the company. The window closure
period usually continues till 48 (forty eight) hours after the
disclosure of UPSI on stock exchanges.1
2.3 While restrictions stated in paragraph 2.1 were imposed even by
the 1992 Regulations, an exception for exercise of ESOPs was
provided under Clause 3.2-6 of the Model Code of Conduct. Pursuant
to the exception, employees could convert their stock options into
shares, even during window closure periods. As no such exception is
available under the New Regulations, exercise of ESOPs during
window closure period shall now be treated as Insider Trading.
2.4 Such a change will also affect the marketability of ESOPs
per se, as frequency of UPSI Events leave little window
for an employee to exercise his ESOPs. For example, the trading
window closure period for declaration of financial results,
stretches up to 45 (forty five) days from the end of each quarter.
Therefore, a designated employee cannot exercise his stock options,
for almost 188 (one hundred and eighty eight) days in a year.
Further, there is lack of clarity on whether the exemption for
trading in converted shares and fresh issuance of ESOPs, within the
restricted period of 6 (six) months, would still be available.
3. IndusLaw Quick View
3.1 Stock options are usually used by companies as incentives, to be
granted to its preferred employees. The changes introduced by the
New Regulations do little to keep employees interested in such
instruments. While regulatory intervention can permanently cure the
situation, listed companies, at this stage, will have to take
3.2 Employees of listed companies are therefore advised to explore
the new option of submitting trading plans with the compliance
officers. Such a submission of the trading plan will allow the
employees to implement their pre-decided ESOP trades without
any threat of indictment. But, the employees will be able to
commence trading only after six (6) months from public disclosure
of such plan. Further, the inability to amend the trading plan will
restrict the trading options available to employees. Thus, listed
companies themselves will have to take lead in educating their
employees and compliance teams, to avoid any collateral damage.
1 IL Comment: Post disclosure,
non-trading period was 24 (twenty four) hours under the 1992
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