Around the world, regulators have been extremely concerned about insider trading, which is the act of trading securities based on an insider-hidden information. It calls into doubt not just the fairness and equality, but also the integrity of the security market.
A person who purchases or sells stock in a publicly listed company with meaningful, non-public knowledge about the stock is said to be engaging in insider trading. The company’s financial performance, impending mergers or acquisitions, regulatory approvals, or other noteworthy events that could have an impact on the stock price are some examples of the information that may be considered as the Unpublished Price Sensitive Information (“UPSI”).
Since insider trading compromises the integrity and fairness of the security markets, it is prohibited. Insiders who possess privileged access to sensitive information i.e. UPSI, such as employees or corporate executives, are granted an unfair advantage over other investors. Insiders may benefit financially from trading on UPSI at the expense of ignorant investors.
Insider Trading Regulations in India are enforced by the Securities and Exchange Board of India (SEBI), which also has the authority to penalize violators such as the Securities and Exchange Board of India (SEBI) Act, 1992, and the SEBI (Prohibition of Insider Trading) Regulations, 2015[1].
Regulation 4 of the SEBI (Prohibition of Insider Trading) Regulations, 2015, specifically set the guidelines for the “Code of Fair Disclosure.” In terms of information disclosure by listed companies, this legislation aims to ensure fairness and transparency. Assuring equitable access to UPSI being a material information is key to preventing insider trading and protecting investors’ interests.
Insider trading can have major consequences for directors, KMPs, and other executives of the public listed companies, whether they engage in it intentionally or unknowingly. If found guilty of insider trading, the directors, KMPs, and other executives if the public listed company may be subject to fines, criminal charges, and civil penalties. Insider trading is tightly regulated by SEBI in order to preserve market integrity and safeguard the interests of investors.
It is also important to keep in mind that insiders who possess UPSI on a permanent basis have very limited opportunities to trade the company’s securities due to the combination of mandatory trading window closures for financial results and notional trading window closures when necessary.
In order to solve the problem above, the SEBI (PIT) Regulations, 2015 introduced an idea of a “Trading Plan,” which permits these perpetual insiders to trade in their company’s stocks in a way that complies with the law.
The requirements pertaining to Trading Plan, however, seemed intricate and onerous in character, especially when it came to deadlines, required execution, and other limitations.
By introducing the SEBI (Prohibition of Insider Trading) (Second Amendment) Regulations, 2024[2] through a notification dated June 25, 2024, SEBI has modified its Insider Trading Regulations promoting the use of Trading Plan with an aim to make it easier and more common for Insiders who always have access to UPSI to trade legally by utilizing Trading Plan. Ninety (90) days following the date of their publication in the official gazette, or September 23, 2024, these amended regulations would take effect, having the following main features:
- No Cool-off Period: There is now only 120 days of cooling-off period instead of the previous 6 month term. It will definitely enable insiders to begin their Trading Plan sooner, following notifying it to the stock exchange.
- No Minimum Trading Plan Period: Insiders now have the freedom to structure their Trading Plan according to their own timelines, as the prior 12 months minimum term requirement has been lifted.
- No Black-out Period: The Trading Plan had previously forbade trading during the blackout time; however, it has since been lifted, giving Insiders greater freedom to execute trades.
- No Specific Trading Dates or Periods: It used to be necessary for the Trading Plan to include information on the quantity of stocks to be exchanged or the amount of the trades to be made, as well as the type of trade and the intervals or dates on which the trades would take place. While other disclosures stay the same, this obligation has been changed to reveal either a specific date or a time period not to exceed five consecutive trading days.
- Price Ceiling: Now, based on the closing price of the day before to the Trading Plan submission, Insiders can set a price ceiling up to 20% of buy or sell trades. Insiders can avoid required execution in the event of unforeseen price fluctuations, which acts as a safety net. Only if the security’s execution price is within this ceiling will the insider execute the trade. Subject to consultation with the Compliance Officer and further notifying to the Stock Exchange, this price ceiling may be changed in the event that corporate actions pertaining to bonus issues and stock splits etc. take place after the Trading Plan has been approved.
- Conditional Trading Plan: If at the time of creating the Trading Plan, any UPSI in possession of an Insider has not become generally available, then the implementation of the Trading Plan shall not proceed.
- Contra Trade Restrictions: Contra trades used to not apply to trades carried out in accordance with Trading Plan in earlier regulation. Insiders are now prohibited from making contra trades while a Trading Plan is being executed, nevertheless, as a result of these restriction on contra trade.
- Approval of Trading Plan: Within two trading days of receiving the Trading Plan, the Compliance Officer must either accept or reject it. On the day of approval, the approved Trading Plan must be reported to the stock exchanges where the securities of the company are listed.
- No Mandatory Execution of Trading Plan: These revised regulations allow the Trading Plan to not be carried out in cases of adverse price movements, permanent incapacity, insolvency, operation of law, or inadequate liquidity in the security, even though the previous Regulations did not contain such provisions. Any such non-execution of the Trading Plan by the Insider shall be reported to the Compliance Officer. The Compliance Officer will next address the matter and make any recommendations to the Audit Committee. The Audit Committee will make the final decision about the legitimacy of this non-implementation and will subsequently notify the stock exchanges of its decision.
CONCLUSION: The purpose of these amended regulations is to guarantee adherence to insider trading restrictions while affording Insiders more flexibility and ease of implementation. With these changes, SEBI has attempted to address the difficulties and strictness associated with insider Trading Plan implementation.
In order to shield Insiders from large losses in the event that the price of the securities changes unexpectedly, it expressly gives them the ability to set price restrictions for trades. Furthermore, the freedom offered for not implementing a Trading Plan is a step in the right direction. This will fortify the foundation for preventing insider trading even more.
SEBI has made Trading Plan a more realistic and appealing option for Insiders who need to manage their trades while in possession of UPSI by shortening the cool-off period, eliminating minimum and black-out period requirements, and permitting price ceilings.
The requirement for clearance from the Compliance Officer and assessment by the Audit Committee is one way that these amendments further emphasize the value of supervision and openness. In general, through these amendments SEBI shows its dedication to modifying regulatory frameworks in accordance with market demands and industry best practices.
The market and industry now need to respond positively to SEBI’s proactive moves by implementing the best practices that the regulators have recommended.
Notes:
[1] https://www.sebi.gov.in/legal/regulations/aug-2021/securities-and-exchange-board-of-india-prohibition-of-insider-trading-regulations-2015-last-amended-on-august-05-2021-_41717.html
[2] https://www.sebi.gov.in/legal/regulations/jun-2024/securities-and-exchange-board-of-india-prohibition-of-insider-trading-second-amendment-regulations-2024_84437.html
****
DISCLAIMER: The information provided in this article is for general informational purposes only. While an author tries to keep the information up-to-date and correct, there are no representations or warranties, express or implied, about the completeness, accuracy, reliability, suitability, or availability of the information. Any views or interpretations described in this article are the author’s personal thoughts and do not constitute legal or other professional advice. You may discover there are other views or interpretations to accomplish the same end result.
Author Bio
