Securities Exchange Board of India (SEBI) released a consultation paper1 on November 24, 2023 to invite public comments from market players on the recommendation of a working group (Working Group) to review and provide flexibility in provisions pertaining to the insider trading laws. This consultation paper was in the works since only a handful of 30 trade plans were submitted annually by the insiders in the last five years. The data for FY 2022-23 reveals a significant lack of adoption of trading plan due to associated complexities and hindrances.2 The proposed amendments in the current framework are an attempt by SEBI to offer flexibility to those who might always have access to unpublished price-sensitive information (UPSI) to develop trading plans.
Despite having access to UPSI, insiders are allowed to trade as long as they adhere to the checks and balances provided in the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT).
Regulation 5 of the PIT deals with the provisions of trading plan where the SEBI currently allows management to trade in the shares of their respective companies under their disclosed "trading plans" without violating the laws intended to prevent insider trading which could impact the market price of the traded securities.
According to the consultation paper, "Since the introduction of trading plans in 2015, data and market feedback suggest that the current regulatory requirements in respect of trading plans are onerous and consequently, trading plans are not very popular".
Insiders, typically senior management and key managerial personnel who often have access to UPSI, have a small window to carry out trades in their company shares, making it challenging for them to sell company shares without violating insider trading regulations as they are required to submit a "trading plan" detailing the share price, quantity, and transaction date in advance.3
The recommendations in the consultation paper are discussed below:
- Cooling off period:
The current six-month cooling-off period between the announcement and the implementation of trading plan is proposed to be reduced to four months.
The reduction of cool-off period is a necessary move since any price sensitive information for a listed entity is unlikely to remain unpublished for as long as six months and market conditions, while implementing the trading plan may be largely different from the time it was formulated.
- Minimum coverage period:
It has been suggested that trading plan should be disclosed to stock exchanges within two days of approval and that trades based on them can be executed in two months between the decision to trade and the actual trade as opposed to the current requirement of twelve months.
This proposed reduction to 2 months period may increase the frequency of trading plans that an insider can submit and will provide the insider with more opportunities to take an exit. This proposal also gives perpetual insiders more flexibility in determining the duration of their trading plan and aligning better with diverse financial needs and market dynamics.
- Black-out period:
There is a black-out period requirement in the current framework, which states that trading on the trading plan cannot take place between the 20th trading day prior to the last date of a financial period for which results must be disclosed and until the 2nd trading day following the disclosure of the results. While it is proposed that the black-out period requirement for trading may be done away with, the flip side of abolishing black-out period is that errant insiders could perhaps use this to manipulate the market.
- Price Limit:
Currently, there is no provision enabling the insider to mention their price limit for the trade, based on their risk appetite, within which they wish to execute the transaction but is only required to mention the nature of trade, number or value of securities, date or intervals for trades to get affected. It is proposed that the insider may have flexibility to provide price limits within +/- 20% of the closing price on the date of submission of the trading plan. The trade will not be carried out if the insider's price limit is exceeded by the security's price at the time of execution. The plan will only become finalized if no price limit is selected.
By proposing the price limits, if the price of the security, during the execution, is outside the price limit set by the insider, the trade shall not be executed, which provides protection against loss due to price fluctuation, there is a need to give an option to the insider to indicate a price limit beyond which they do not prefer to trade. Therefore, it is proposed to prescribe the deadline of 2 days post-approval of a trading plan for more clarity.
- Exemptions from contra-trades:
Current norms in relation to the contra-trades stipulate that restrictions on contra-trade shall not be applicable for trades carried out in accordance with an approved trading plan. It is proposed that the contra-trade provisions shall be applicable on trades executed under trading plan as well.
- Disclosure of Trade Plan:
The regulator has also explored the possibility of masking the details of individuals filing trading plans.
The intention is to let insiders of the company conceal their personal information like name and title when announcing their trading plans to the public. The exchanges would then be the only recipients of full disclosure, achieving a compromise between protecting privacy and averting potential abuse.
The Working Group seems to be aiming to balance rules and practical needs in the financial market, making it simpler and more feasible for market participants. The proposed amendments aim to make it more convenient for insiders to execute stock sales without prolonged waiting periods.
Footnotes
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