Introduction: The Securities and Exchange Board of India (SEBI) plays a pivotal role in ensuring fair and transparent markets. In its latest move, SEBI has released a comprehensive consultation paper focusing on providing flexibility in provisions relating to ‘Trading Plans’ under the SEBI (Prohibition of Insider Trading) Regulations, 2015. This article aims to provide an in-depth analysis of the background, the constitution of a working group, their recommendations, and the significance of public comments in shaping regulatory amendments.
Detailed Analysis:
1. Background: Insider trading, a prevalent concern in financial markets globally, is strictly regulated in India under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations, 2015). The core premise is the prohibition of trading with Unpublished Price Sensitive Information (UPSI). However, certain insiders, particularly senior management or key managerial personnel (KMP), face unique challenges. Their perpetual possession of UPSI, coupled with mandatory trading window closures, creates a limited window for executing trades. To address this, the PIT Regulations, 2015 introduced the concept of ‘Trading Plans’ (TP). TP allows individuals perpetually in possession of UPSI to trade in securities compliantly.
2. Need for Review: Despite the introduction of Trading Plans in 2015, data and market feedback suggest that the existing regulatory requirements are onerous, leading to a lack of popularity of TP. This necessitates a thorough review of the Trading Plan framework to identify and address challenges faced by insiders.
3. Constitution of Working Group: In response to the need for review, SEBI took a proactive step by constituting a Working Group. This group, comprising officials from SEBI, stock exchanges, and market participants, was tasked with reviewing the provisions related to ‘Trading Plans’ under the PIT Regulations, 2015. The primary objective was to provide flexibility that would facilitate the adoption of trading plans by individuals perpetually in possession of UPSI.
4. Recommendations of the Working Group: The Working Group diligently examined the existing framework and submitted its report to SEBI on September 15, 2023. The recommendations propose certain amendments to the PIT Regulations, 2015, aiming to enhance the usability of Trading Plans. The key recommendations include:
4.1. Cool-off period: Reducing the minimum cool-off period between the disclosure and implementation of TP from six months to four months.
4.2. Minimum Coverage period: Reducing the minimum coverage period requirement from twelve months to two months.
4.3. Black-out period: Eliminating the requirement of a black-out period for trading in TP.
4.4. Price Limit to Protect Insider: Introducing flexibility for insiders to set price limits (upper and lower) during the formulation of TP, within +/-20% of the closing price on the date of submission. Trades outside this limit would not be executed.
4.5. Contra-trade restrictions: Removing the provision exempting trades executed under TP from the applicability of contra-trade restrictions, making these provisions applicable to TP as well.
4.6. Timeline for Disclosure of TP: Proposing a two-day timeline for the disclosure of TP to stock exchanges from the date of TP approval.
4.7. Format for reporting details of TP: Suggesting the specification of a suitable format for reporting TP details in consultation with market participants.
5. Disclosure of Personal Details in TP: One critical aspect of the recommendations involves the disclosure of personal details (Name and Designation) of insiders in the TP. As per Regulation 5(5) of PIT Regulations, the compliance officer is required to notify the TP to stock exchanges upon approval. While this disclosure enables informed decision-making by investors, concerns about privacy and safety for senior management and insiders arise.
The Working Group deliberated on three alternatives:
5.1. Alternative 1: Masking personal details (Name, Designation, PAN) of the insider in the TP.
5.2. Alternative 2: Continuing the existing manner of TP disclosure with personal details (Name, Designation, PAN) of the insider.
5.3. Alternative 3: Introducing a dual disclosure mechanism – a full (confidential) disclosure to stock exchanges and a disclosure without personal details to the public through the stock exchange. This alternative aims to balance the need for transparency with concerns about privacy and safety.
6. Public Comments: Recognizing the importance of stakeholder input in shaping regulatory changes, SEBI has opened the floor for public comments. Stakeholders are encouraged to submit their feedback on the recommendations contained in the report and the proposed alternative by December 15, 2023. The consultation paper emphasizes the need for thoughtful and comprehensive feedback, particularly in the prescribed format.
7. Conclusion: In conclusion, the consultation paper reflects SEBI’s commitment to evolving regulatory frameworks in response to market dynamics. By addressing the challenges faced by insiders in executing trades, the proposed amendments to the PIT Regulations, 2015 aim to enhance the usability and effectiveness of Trading Plans. The public comment period signifies SEBI’s dedication to inclusivity, allowing market participants and stakeholders to actively contribute to the refinement of these regulatory changes. It is an opportune moment for the financial community to engage with SEBI and play a role in shaping the future of insider trading regulations in India. As the deadline for comments approaches, stakeholders are encouraged to actively participate in this critical discourse, ensuring that the final regulatory framework aligns with the needs and realities of the Indian securities market.
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Full Text of the Consultation paper is as follows:-
Securities and Exchange Board of India
Consultation paper on providing flexibility in provisions relating to ‘Trading Plans’ under the SEBI (Prohibition of Insider Trading) Regulations, 2015
Nov 24, 2023 | Reports : Reports for Public Comments
1. Background
1.1. Insider trading i.e. trading when in possession of Unpublished Price Sensitive Information (UPSI) (i.e. information which, if published, could have impacted the price of the securities being traded in the market) is prohibited in India under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations, 2015”). The prohibition on insider trading is based on the premise that trading in a security by a person would be influenced by the UPSI in their possession, which is not accessible to others in the market. However, insiders are allowed to trade, provided they are not in possession of UPSI and subject to compliance with other provisions of PIT Regulations, 2015.
1.2. Amongst the insiders there are certain class of insiders like senior management or key managerial personnel (“KMP”), who have a very small window for carrying out their trades, if required, due to being in possession of UPSI most of the time, coupled with mandatory trading window closures for financial results. However, these insiders may need to trade for purposes such as creeping acquisitions, compliance with minimum public shareholding norms, etc. Also, grant of stock options is often a significant component of KMP compensation and KMPs may wish to dispose of the shares acquired through exercising stock options, but by virtue of perpetually holding UPSI, may find it difficult to do so. Hence, PIT Regulations, 2015 have the concept of ‘Trading Plans’ (hereinafter also referred as ‘TP’) to enable persons, perpetually in possession of UPSI, to trade in securities in a compliant manner.
2. Need for review of Trading Plan framework: 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.
3. Constitution of Working Group: SEBI constituted a Working Group to review provisions relating to ‘Trading Plans’ under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations, 2015”). The Working Group was mandated to review provisions of the trading plan under PIT Regulations, 2015 so as to provide flexibility to facilitate adoption of trading plans by persons who may be perpetually in possession of Unpublished Price Sensitive Information. The Working Group comprised of officials of SEBI, stock exchanges and market participants.
4. Recommendations of the Working Group: The Working Group has submitted its report to SEBI on September 15, 2023 recommending certain amendments to PIT Regulations, 2015 (Annexure A). The summary of the recommendations is as follows:
4.1. Cool-off period: The minimum cool-off period between disclosure of TP and implementation of TP may be reduced to four months from six months.
4.2. Minimum Coverage period: The minimum coverage period requirement may be reduced to two months from twelve months.
4.3. Black-out period: The requirement of black-out period for trading in TP may be done away with.
4.4. Price Limit to Protect Insider from Significant Adverse Price Fluctuation: The insider shall have flexibility, during formulation of TP, to provide price limits i.e. upper price limits for buy trades and lower price limits for sell trades. Such price limit shall be within +/-20% of the closing price on date of submission of TP. If price of the security, during execution, is outside the price limit set by the insider, the trade shall not be executed. If no price limit is opted for, the trade has to be undertaken irrespective of the prevailing price.
4.5. Contra-trade restrictions: The provision exempting trades executed under TP from applicability of contra-trade restrictions to be omitted i.e. contra-trade provisions shall be applicable on trades executed under TP as well.
4.6. Timeline for Disclosure of TP: Disclosure of TP to stock exchanges proposed to be done in two days from the date of approval of TP.
4.7. Format for reporting details of TP: A suitable format may be specified in consultation with market participants.
5. Disclosure of Personal Details of Insider in TP:
5.1. As per Reg 5(5) of PIT Regulations, upon approval of the trading plan, the compliance officer shall notify the TP to the stock exchanges on which the securities of the Company are listed. Such disclosure of TP enables investors in the market at large to take informed decision. While there is no prescribed format for disclosure of the TP, it typically contains the personal details (Name and Designation) of the insider along with the trades planned to be undertaken.
5.2. The Working Group discussed the feasibility of protecting the privacy of insiders by masking their personal details (Name, Designation, PAN) while disclosing the TP to stock exchanges. The alternatives explored by the Working Group were as follows:
5.2.1. Alternative 1: Mask personal details (Name, Designation, PAN) of Insider in the TP
5.2.2. Alternative 2: Continue existing manner of TP disclosure with personal details (Name, Designation, PAN) of Insider
5.3. The Working Group was of the view that existing disclosures with personal details (Name, Designation, PAN) of insider should continue for investors to take informed decision as well as to monitor the execution of TP by the stock exchanges (Para 3.9 of Annexure A).
5.4. The rationale of the Working Group to continue with the practice of disclosing personal details (Name, Designation, PAN) of insider in TP appears to be reasonable. Also, masking the names of insiders in TP by the Company while disclosing the details of TP to stock exchanges may potentially lead to misuse / abuse of TPs by other insiders. For e.g. a TP submitted by insider X may instead be used by insider Y. However, market feedback indicates that full disclosure of personal details in TP may raise privacy and safety concerns for senior management and insiders.
5.5. Accordingly, with a view to balance the problem of potential misuse and privacy and safety concerns, stated at para 5.4 above, a third alternative as detailed below is suggested.
5.5.1. Alternative 3: Make two separate disclosures of TP – (a) full (confidential) disclosure to stock exchange and (b) disclosure without personal details to public through the stock exchange
In this alternative, it is proposed that the insider will make separate filings for the stock exchange (with personal details) and for the public (without personal details). The disclosure of the TP to the stock exchange (with personal details) will remain confidential with stock exchanges and the disclosure without personal details will be made public. To counter any concerns of possible misuse arising from masking of names from the public, a unique identifier viz., a common reference number with time stamp may be put on these filings for reconciliation purposes.
6. Comments from public are invited on the recommendations contained in the aforesaid report (Annexure A) and para 5 of this consultation paper in the prescribed format (link to download format).
7. Comments may be sent by email to pit_isd@sebi.gov.in latest by December 15, 2023 only in the prescribed format. While responding, kindly mention the subject as “Comments on consultation paper on providing flexibility in Provisions relating to ‘Trading Plans’ under the SEBI (Prohibition of Insider Trading) Regulations, 2015”.
Division of Policy-2
Integrated Surveillance Department
Securities and Exchange Board of India
SEBI Bhavan II, Plot No. C-7, “G” Block,
Bandra Kurla Complex Bandra (East), Mumbai -400 051
Issued on: November 24, 2023
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Page Contents
- Report of the Working Group to review provisions relating to ‘Trading Plans’ under the SEBI (Prohibition of Insider Trading) Regulations, 2015
- GLOSSARY
- EXECUTIVE SUMMARY
- 2. Deliberations of the Working Group
- 3. Proposed Amendments to Trading Plans
- 3.1. Minimum Lifespan of a Trading Plan
- 3.2. Cool off Period for Commencement of Trading Plan
- 3.3. Minimum Coverage Period of Trading Plan
- 3.4. Black-out Period
- 3.5. Price Limit to Protect Insider from Adverse Price Fluctuation
- 3.6. Date or Interval during which Trade Execution will take place
- 3.7. Irrevocability of Trading Plan
- 3.8. Exemption from Contra-Trade Provisions
- 3.9. Disclosure of Trading Plan
- Annexure A Proposed Amendments to PIT Regulations
Report of the Working Group to review provisions relating to ‘Trading Plans’ under the SEBI (Prohibition of Insider Trading) Regulations, 2015
September 15, 2023
GLOSSARY
|
TERM |
MEANING |
| BSE | Bombay Stock Exchange |
| FY | Financial Year |
| KMP | Key Managerial Personnel |
| LODR Regulations | SEBI (Listing Obligations and Disclosure Requirements Regulations, 2015 |
| NSE | National Stock Exchange of India |
| PIT Regulations, 2015 | SEBI (Prohibition of Insider Trading) Regulations, 2015 |
| Reg | Regulation reference to PIT Regulations, 2015 unless specified otherwise |
| SEBI | Securities and Exchange Board of India |
| Sodhi Committee | The High Level Committee to Review the SEBI (Prohibition of Insider Trading) Regulations, 1992 under Chairmanship of Former Chief Justice N. K. Sodhi |
| SEC | Securities and Exchange Commission |
| TP | Trading Plan |
| UPSI | Unpublished Price Sensitive Information |
| UPSIOld | UPSI, which is in possession of insider while formulating the Trading Plan |
| UPSINew | UPSI which comes to the possession of insider subsequent to formulation of the Trading Plan |
| VWAP | Volume Weighted Average Price |
| WG | Working Group |
EXECUTIVE SUMMARY
1. Insider trading i.e. trading when in possession of Unpublished Price Sensitive Information (UPSI) is prohibited in India under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations, 2015”). The prohibition on insider trading is based on the premise that trading in a security by an insider may be influenced by the UPSI in their possession, which would be detrimental to the interests of other investors in the market.
2. The insiders are allowed to trade when not in possession of UPSI. However, there is a certain class of insiders like senior management, key managerial personnel etc. who may be perpetually in possession of UPSI as they are involved in most of the decisions taken by the company. To facilitate trading by such perpetual insiders in a compliant manner, the concept of ‘Trading Plans’ (TP) was introduced under PIT Regulations, 2015.
3. The regulatory intent behind provisions of Trading Plan is to facilitate the insider who is perpetually in possession of UPSI to trade while ensuring that UPSI in his possession shall not have any influence on his trading decisions as explained below:
3.1. The cool-off period i.e. gap between formulation and execution of trading plan shall be reasonably long enough to ensure that UPSI, which was in possession of insider while formulating the TP (UPSIOld), has become generally available within such period.
3.2. Any new UPSI (UPSINew), which the insider comes to possess subsequent to formulation of the TP, shall provide no leverage to the insider in their trading decision, as their trades formulated in TP have been pre-decided.
3.3. Provisions also mandate that if UPSIOld has not come to public domain before execution of TP, then the commencement of execution of the TP has to be deferred by the insider.
4. It has been noted that during last five years, on an average around 30 TPs have been submitted annually by the insiders to stock exchanges, which is abysmally low given the large number of listed companies. Therefore, to facilitate and increase adoption of TP by persons who may be perpetually in possession of UPSI, SEBI constituted a Working Group (WG) on July 03, 2023, comprising of officials of SEBI, stock exchanges and market participants to review provisions of TP.
5. As per current provisions, trading plans (i) can be executed only after 6 (six) months from its public disclosure; (ii) are required to cover a period of at least 12 (twelve) months; (iii) must be disclosed to the stock exchanges prior to its implementation (i.e., actual trading); (iv) are irrevocable; and (v) cannot be deviated from, once publicly disclosed.
6. The WG noted that a few of the above provisions, like mandatory execution of plan puts the insiders in an economically disadvantageous position in the event of adverse price movement, thus, rendering trading plans not so attractive. The WG also noted that the insider is not entitled to provide price limits for trades mentioned in TP. Also, given the dynamic and uncertain nature of securities market, the requirement to plan trades for a minimum of 12 (twelve) months in advance tends to make TPs unpopular. This issue is further exacerbated by the requirement of minimum cool-off period of 6 (six) months between the formulation and execution of the trading plans.
7. The WG recommended to amend provisions for Trading Plan under PIT Regulations, 2015 as summarised below: –
7.1. Cool-off period: The minimum cool-off period between disclosure of TP and implementation of TP may be reduced to four months from six months.
7.2. Minimum Coverage period: The minimum coverage period requirement may be reduced to two months from twelve months.
7.3. Black-out period: The requirement of black-out period for trading in TP may be done away with.
7.4. Price Limit to Protect Insider from Adverse Price Fluctuation: The insider shall have flexibility, during formulation of TP, to provide price limits i.e. upper price limits for buy trades and lower price limits for sell trades. If price of the security during execution is below the lower price limit set for sell trade or higher than the upper price limit set for buy trade, then the respective trade shall not be executed.
7.5. Contra-trade restrictions: The provision exempting trades executed under TP from applicability of contra-trade restrictions to be omitted i.e. contra-trade provisions shall be applicable on trades executed under TP as well.
7.6. Timeline for Disclosure of TP: Disclosure of TP to stock exchanges proposed to be done in two days from the date of approval of TP.
7.7. Format for reporting details of TP: A suitable format may be specified in consultation with market participants.
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Background
1.1. Trading Plans in India
1.1.1. Insider trading i.e. trading when in possession of Unpublished Price Sensitive Information (UPSI) (i.e. information which, if published, could have impacted the price of the securities being traded in the market) is prohibited in India under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations, 2015”). The prohibition on insider trading is based on the premise that trading in a security by a person would be influenced by the UPSI in their possession, which is not accessible to others in the market. That is to say, a person in possession of UPSI would try to gain advantage from such information that is not known to the public. Such information asymmetry is detrimental to the interests of other investors in the market. However, the insiders are allowed to trade, provided they are not in possession of UPSI and subject to compliance with other provisions of PIT Regulations, 2015.
1.1.2. Amongst the company insiders who may be aware of UPSI, there are a certain class of insiders like senior management or key managerial personnel who may be perpetually in possession of UPSI as they are involved in most of the decisions taken by the company. Thus, by virtue of being in possession of UPSI most of the time, coupled with mandatory trading window closures for financial results, such perpetual insiders have a very small window for carrying out trades, if required. There may also be instances where insiders may need to trade frequently for purposes such as creeping acquisitions, compliance with minimum public shareholding norms, etc. While certain defences for trading while in possession of UPSI like inter-se transfer, exercise of ESOPs, etc. are provided under PIT Regulations, 2015, such defences are limited.
1.1.3. Thus, the concept of ‘Trading Plans’ (hereinafter also referred as ‘plan(s)’ or ‘TP’) was introduced in PIT Regulations, 2015 to enable persons, perpetually in possession of UPSI, to trade in securities in a compliant manner1. As per current provisions, trading plans (i) can be executed only after 6 (six) months from its public disclosure; (ii) are required to cover a period of at least 12 (twelve) months; (iii) must be disclosed to the stock exchanges prior to its implementation (i.e., actual trading); (iv) are irrevocable; and (v) cannot be deviated from, once publicly disclosed.
1.1.4. A few of the above provisions, like mandatory execution of plan irrespective of market movements puts the insiders in an economically disadvantageous position, thus, rendering trading plans not so attractive. Another issue due to which trading plans remain unpopular is, insider is required to cover the period of at least 12 (twelve) months for any trading plan. Given the dynamic and uncertain nature of securities market, it is difficult to plan trades for a period of 12 (twelve) months in advance. This issue is further exacerbated by the requirement of minimum cool-off period of 6 (six) months between the formulation and execution of the trading plans.
1.2. Adoption of Trading Plans by Insiders
1.2.1. Data on the adoption of trading plans by insiders over the past 5 financial years is given in table below.
Table 1: Year wise data on trading plans disclosed by insiders
|
Stock Exchange |
2018-19 | 2019-20 | 2020-21 | 2021-22 | 2022-23 |
| NSE | 20 | 38 | 23 | 31 | 12 |
| BSE | 17 | 31 | 20 | 24 | 64 |
Source: BSE and NSE
1.2.2. The above data is in stark contrast to the number of listed companies in India and the large number of insiders who deal with UPSI in their respective companies. For instance, the number of listed companies in India in FY 2022-23 stood at 4,680 in BSE and 2,191 in NSE. During the said period, there were a total of 2,56,878 designated persons across both BSE and NSE, and listed companies made 51,010 and 65,470 disclosures under Reg. 30 of LODR Regulations at BSE and NSE respectively.
Table 2: No. of listed companies and disclosures by insiders
|
FY 2022-23 |
||
| Stock Exchange | BSE | NSE |
| Total No. of Listed Companies | 4,680 | 2,191 |
| Total No. of Disclosures under Reg. 30 of LODR Regulations | 51,010 | 65,470 |
| Total No. of Designated Participants (DPs) | 2,56,878 | |
Source: BSE and NSE
1.2.3. Thus, data reveals that despite the vast number of DPs/ insiders, adoption of trading plans by insiders of listed companies disclosed to stock exchanges are abysmally low indicating that trading plans are rarely used.
1.3. Need for Review
1.3.1. The High Level Committee to review the SEBI (Prohibition of Insider Trading) Regulations, 1992 under Former Chief Justice Sodhi (hereinafter “Sodhi Committee”), while introducing trading plans in PIT Regulations, 2015, had stated that, “…upon review of empirical evidence and feedback after the concept is introduced, it would always be open to SEBI to dilute or enhance the regulatory conditions attached to trading plans under the Proposed Regulations.”
1.3.2. 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.
1.3.3. During budget speech for FY 2023-24, the Hon’ble Finance Minister has also emphasized on initiatives towards simplification, ease of doing business and reducing cost of compliance for the companies2.
1.3.4. Recently, SEBI, vide a consultation paper dated May 18, 2023, proposed amendment to the definition of UPSI to include material events as defined under Regulation 30 of the LODR Regulations3. Analysis of data indicates that in the proposed scenario of having to consider all material events as UPSI, the trading window is likely to be closed for a longer period than the existing scenario, which may make it more difficult for insiders in perpetual possession of UPSI to trade in the securities of the company.
1.4. Constitution of the Working Group
1.4.1. Taking into consideration the above, it was decided to review the provisions of trading plans in the PIT Regulations, 2015 under the guidance of a working group comprising of officials of SEBI, stock exchanges and market participants. The Working Group (hereinafter also referred as group or WG) was constituted on July 03, 2023 comprising of the following members:
|
Sl No |
Name | Designation | Organization |
| 1. | Mr. V S Sundaresan | Executive Director & Head of the WG | SEBI |
| 2. | Mr. Avishkar Naik | Head – Listing Compliance | NSE |
| 3. | Mr. Gopal Krishnan Iyer | Head – Listing Compliance | BSE |
| 4. | Ms. Mohini Varshneya | Partner and Head – ESOP & Insider Law Services | Corporate Professionals |
| 5. | Ms. Savithri Parekh | Company Secretary and Compliance Officer | Reliance Industries Limited |
| 6. | Mr. Narayan Shankar | Company Secretary and Compliance Officer | Mahindra & Mahindra Limited |
| 7. | Mr. Pradeep Manohar Gaitonde | Company Secretary and Compliance Officer | Tata Consultancy
Services Limited |
| 8. | Mr. R J Jeyamurugan | CFO, Company Secretary and Compliance Officer | Asian Paints
Limited |
| 9. | Mr. R Vijay | Company Secretary and Compliance Officer | Bajaj Finance
Limited |
| 4. | Mr. Arindam Ghosh | Partner | Khaitan & Co |
| 5. | Mr. Jaimin Bhatt | CFO | Kotak Mahindra Bank |
| 6. | Ms. Prachiti Lalingkar | Company Secretary | ICICI Bank Limited |
| 7. | Mr. Aliasgar S Mithwani | Chief General Manager | SEBI |
| 8. | Mr. Anindya Kumar Das | Chief General Manager | SEBI |
| 9. | Ms. Sudha Rani Thirukonda | Deputy General Manager | SEBI |
| 10. | Mr. Nitesh Bhati | Deputy General Manager | SEBI |
| 11. | Mr. A Vijayan | Deputy General Manager | SEBI |
1.5. Terms of Reference
1.5.1. The terms of reference given to the working group was to review provisions of Trading Plans under PIT Regulations, 2015 so as to facilitate and increase adoption of trading plans by persons who may be perpetually in possession of UPSI.
1.6. Acknowledgements
1.6.1. The working group would like to express its gratitude and appreciation to Ms. Meenakshi Jayant, AGM and Mr. Atul Mittal, AGM of SEBI who have been associated with the Working Group from the very beginning. They were instrumental in the smooth and timely conduct of the proceedings of the group. It would not have been possible to achieve the timely completion of this report without their able support and assistance, the timely provision of data and coordination across all group members. The Working Group would also like to acknowledge the contributions of Mr. Shashank Patil and Ms. Shubhra Wadhawan of Khaitan & Co, in undertaking research and preparing material for deliberations by the Working Group and assisting in drafting of the proposed amendments.
2. Deliberations of the Working Group
2.1. Approach of the Working Group
2.1.1. The WG met virtually on various occasions and endeavoured to exhaustively identify the various issues with the current provisions of trading plans and has attempted to offer the best possible alternatives to overcome the challenges that exist today.
2.1.2. The issues in the current provisions that were identified and discussed are detailed below and the amendments to PIT Regulations, 2015 recommended by the WG are discussed in the following chapter. The proposed draft amendments are placed at Annexure ‘A’.
2.2. Issues in Current Provisions of Trading Plans
2.2.1. Currently, there is a requirement of a minimum cool-off period of 6 (six) months between the day of public disclosure of the trading plan by the insider and commencement of trading under the plan. Thus, insiders have to plan their transactions at least 6 (six) months ahead which may be too onerous for them, as market conditions while implementing the trading plan may be largely different from the time it was formulated. [Reg 5(2)(i)]
2.2.2. Further, there is another requirement that trading plan should cover trades for a period of at least 12 (twelve) months. This requires the insider to consider a significantly longer forward-looking outlook while formulating the TP. [Reg 5(2)(iii)]
2.2.3. Further, a trading plan once approved, becomes irrevocable i.e. the insider has to mandatorily implement the plan without any deviation from it [Reg 5(4)]. Also the insider is not entitled to provide price limits for trades mentioned in the trading plan. This causes trades to be mandatorily executed by the insiders even if they are economically disadvantageous due to drastic movement in market price of the security.
2.2.4. As per Reg 5(2)(ii), TP cannot entail trades for the period between the twentieth trading day prior to the last day of any financial period for which results are required to be announced by the issuer of the securities and the second trading day after the disclosure of such financial results. This period (hereinafter referred as ‘black-out period’) forms a significant portion of the year during which no trade can be undertaken by the insider. That leaves the insider with hardly a few trading days in the entire year to plan their trades.
2.3. Regulatory Intent behind Trading Plan Provisions
2.3.1. As has been discussed in previous chapter, acquisition/ sale by insiders in the secondary market has restrictions under PIT Regulations, 2015 including the prohibition of trading by insiders while in possession of UPSI [Regulation 4(1)]. There will be a few insiders, who may be perpetually in possession of UPSI. Such insiders are rendered incapable of trading throughout the year. The provisions of trading plans are intended to enable such insiders to trade in their company’s securities in a compliant manner.
2.3.2. The regulatory provisions of Trading Plan endeavour that UPSI in possession of insider shall not have any influence on their trading decisions as elaborated below:
2.3.2.1. The cool-off period between formulation and execution of trading plan is kept reasonably long enough to ensure that UPSI, which was in possession of insider while formulating the TP (UPSIOld) is expected to become generally available within such period i.e. before the time of execution of the trade.
2.3.2.2. Any new UPSI (UPSINew), which the insider comes to possess subsequent to formulation of the TP, would provide no leverage to the insider in their trading decision, as their trades formulated in TP have been pre-decided which could not be changed or influenced by UPSINew.
2.3.2.3. Provisions also mandate that if UPSIOld has not come to public domain before execution of TP, then the commencement of execution of the TP has to be deferred by the insider.
3. Proposed Amendments to Trading Plans
3.1. Minimum Lifespan of a Trading Plan
3.1.1. Currently, while formulating a TP the insider has to plan for a period of at least 18 months, consisting of mandatory six (6) months cool-off period prior to execution of the trades and the minimum coverage period of twelve (12) months. Additionally, regulations also require that there shall be no overlap between two (2) trading plans of an insider. If there is any change in the financial needs or economic outlook of the insider, causing plan to become economically unviable, they would not be able to exercise any discretion by deviating or revoking the plan.
3.1.2. The WG deliberated on the issue of the 18 month long lifespan of a TP. Black swan events in the recent past like the COVID pandemic have demonstrated the uncertain and dynamic nature of securities market. Given such potential uncertainties, it was felt that there is a genuine case for reducing the total lifespan of a TP.
3.1.3. A reduced duration of minimum coverage period of TP (coupled with reduced cool-off period) may help in making trading plans viable for insiders, as they would be required to consider a shorter forward outlook while formulating the plan.
3.2. Cool off Period for Commencement of Trading Plan
3.2.1. The current provisions provide that the execution of the TP may commence only after at least six months of disclosure of the TP to public [Regn. 5(2)(i)].
3.2.2. The WG deliberated to determine whether there is a need to do away with the cool-off period or to reduce it.
3.2.3. Given the potential of misuse of TPs without any cool-off, WG decided to identify an appropriate cool-off period lesser than the currently mandated six (6) months but which is still adequate enough for most UPSI to become generally available.
3.2.4. To ascertain by what time UPSI is expected to become generally available, the gestation period of any information is to be considered.
Based on its nature, UPSI can be classified as follows:
3.2.4.1. Short-term UPSI: Information/ event that is expected to fructify over a short time frame and become public would generally constitute short term UPSI. For instance, events like declaration of financial results, dividends, change in KMP, etc.
3.2.4.2. Long-term UPSI: UPSI which is already specific and not generic, and which will have a gestation period of more than the execution period of the TP. E.g.: mergers, de-mergers, acquisitions, delisting, disposals and expansion of business and such other strategic transactions.
3.2.5. Needless to say, any information would be considered short-term or long-term based on the actual time it takes to become generally available. It is possible that at the time of execution of the TP, some long term UPSI existing at the time of approval of the TP has still not become generally available or ceased to exist. For example, an M&A transaction that was expected to be finalized was delayed. In such circumstances, it is expected that the insider, while devising a TP, will reasonably factor for the gestation period of UPSI in their possession.
3.2.6. Reverting to the deliberation on the appropriate duration of cool-off period, the WG discussed that companies are required to declare financial results quarterly and it is seen that most companies do so within a period of around one month from the end of the quarter. Hence, a period of four (4) months would be a sufficiently long period for short term UPSI to become generally available. Other short term UPSI such as dividends, change in KMP, etc. are also expected to generally become available in a four month period. As far as long term UPSI is concerned, there is a possibility that strategic transactions like M&A, expansion of business etc. would not become generally available within four (4) months. That is, there may be a case where an insider possesses some UPSI that is expected to become public only after long duration (e.g. 8 months). The question before the WG then was how to address the issue of such UPSI with long gestation while balancing it with the need to have a shorter cool-off period than the current six (6) months.
3.2.7. Firstly, the WG expects that the insider in possession of UPSI would adequately factor in time for the UPSI to become generally available while devising the TP. Notwithstanding the same, proviso to Reg. 5(4) of PIT Regulations, 2015 prohibits implementation of the TP until the UPSI (which the insider possessed while formulating the TP) ceases to be UPSI. The prohibition ensures that insider cannot take advantage of information asymmetry in circumstances where the UPSI (which they possessed while formulating the TP) continues to remain UPSI even after the cool off period. The WG’s view was that the aforesaid proviso to Reg. 5(4) of PIT Regulations, 2015 sufficiently covers scenarios where UPSI may not have become generally available.
3.2.8. Consequently, the WG proposed that it would be feasible to reduce the cool-off period to four (4) months from the current requirement of six (6) months.
3.2.9. On this issue, the discussion was also guided by the recent introduction of cool off requirement in the insider trading provisions in the USA. Since the introduction of TPs in USA, there was no cool off period for TPs and the insiders could submit a plan for executing trades even on the next day. However, the US SEC in December 2022 stated that over time it was seen that company insiders who traded under 10b5-1 plans4, particularly when those trades were close in time to the adoption of the plan, earned abnormal returns5. Therefore, to address the potential misuse of TPs in the absence of a cool-off period, the SEC has now introduced a cool-off period ranging from 90 days to 120 days for the KMP and 30 days for other insiders6.
3.2.10. Recommendation: In light of the above discussion, the provisions of regulation 5(2)(i) are proposed to be amended as follows:
“(2) Such trading plan shall:–
(i) not entail commencement of trading on behalf of the insider earlier than six four months from the public disclosure of the plan;
NOTE: It is intended that to get the benefit of a trading plan, a cool-off period of six four months is necessary. Taking into account that companies declare their financial results quarterly, and since it is seen that most companies do so within a period of around one month from the end of the quarter, a four month Such a period is considered reasonably long for unpublished price sensitive information that is in possession of the insider when formulating the trading plan, to become generally available. It is also considered to be a reasonable period for a time lag in which new unpublished price sensitive information may come into being without adversely affecting the trading plan formulated earlier. In any case, it should be remembered that this is only a statutory cool-off period and would not grant immunity from action if the insider were to be in possession of the same unpublished price sensitive information both at the time of formulation of the plan and implementation of the same.”
3.3. Minimum Coverage Period of Trading Plan
3.3.1. Feedback suggested requirement of minimum coverage period of twelve (12) months of TP, is too long for an insider to plan as market conditions while formulating the TP may be vastly different by the time it is implemented.
3.3.2. The WG discussed the need to make TPs as flexible as possible in terms of its tenure. It was felt that a minimum coverage period of one month would be too short. Instead, two months will be a reasonable period to plan trading decision as an insider would have to consider reasonable forward outlook. Hence, it was proposed to reduce the minimum tenure of execution period of TP to two months. The insider would be free to choose a longer tenure of execution period considering the UPSI in their possession at the time of formulation of the TP.
3.3.3. Recommendation: In light of the above discussion, the provisions of regulation 5(2)(iii) are proposed to be amended as follows:
“(iii) entail trading for a period of not less than twelve two months;
NOTE: It is intended that it would be undesirable to have frequent announcements of trading plans for short periods of time rendering meaningless the defence of a reasonable time gap between the decision to trade and the actual trade. Hence it is felt that a reasonable time would be twelve months. While it may not be desirable to have frequent announcement of trading plans, the minimum period of trading under a plan is two months in order to enable insiders to effectively plan their trades in advance considering the prevailing market conditions.”
3.4. Black-out Period
3.4.1. As per current provisions, there is a black-out period requirement, wherein, TP shall not entail trading for the period between the twentieth trading day prior to the last date of a financial period for which results are to be announced and until the second trading day after the disclosure of the results [Reg 5(2)(ii)]. Feedback suggests that this black-out period restriction is onerous.
3.4.2. Due to the provision of black-out period, the insider is left with only a few trading days in the entire year to plan their trades. Further, with the reduction of the execution period to a minimum of 2 months, the provision of black-out period will further reduce the trading days left during the execution period for planning the trades for the insider. The WG also noted that an exemption has already been granted to designated persons for effecting trading plans during closure of the trading window, set out in clause 4(3) of Schedule B of the PIT Regulations, 2015. In view of the above, the WG proposed that the requirement for black-out period be done away with. This would provide flexibility to execute trades by insiders through TPs.
3.4.3. The WG also took into account the potential concerns arising from removing the blackout period and the insider taking advantage of UPSI in their possession. It was felt that the above concern is addressed by the fact that there would be a cool-off period before the execution of the trades and that the insider would not be able to alter the TP once approved and disclosed to the public. Another issue could be that some UPSI in possession of insider, while formulating TP, may not become generally available before execution of trade. This issue has already been addressed in para 3.2 earlier.
3.4.4. Recommendation: In light of the above discussion, the provisions of 5(2)(ii) may be deleted
(ii) not entail trading for the period between the twentieth trading day prior to the last day of any financial period for which results are required to be announced by the issuer of the securities and the second trading day after the disclosure of such financial results;
NOTE: Since the trading plan is envisaged to be an exception to the general rule prohibiting trading by insiders when in possession of unpublished price sensitive information, it is important that the trading plan does not entail trading for a reasonable period around the declaration of financial results as that would generate unpublished price sensitive information.
3.5. Price Limit to Protect Insider from Adverse Price Fluctuation
3.5.1. Currently as per Reg 5(2)(v), TP shall set out either the value of trades to be effected or the number of securities to be traded along with the nature of the trade and the intervals at, or dates on which such trades shall be effected. Thus, the insider is allowed to mention nature of trade (acquisition/disposal); No. or value of securities; date or intervals for trades to get effected.
3.5.2. The WG noted that 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.
3.5.3. Given that the insider has to formulate TP well in advance (cool-off period + minimum coverage period), there is always an uncertainty as to what will be the prevailing prices at the time of execution of the trade. This, along with the provision of mandatory execution of TP, exposes the insider to a risk of fluctuation in market price. In case of sell trade, there is a risk that price of security may fall substantially to such a level, where the insider may not prefer to sell or in case of buy trade, prices may rise to such a level that they may not be inclined to buy at such high prices.
3.5.4. The WG further noted that the above factor may be the major deterrent in adoption of TP by insiders as this exposes them to financial risk, beyond their risk appetite. Thus, to provide protection against loss due to price fluctuation, there is a need to give an option to the insider to indicate price limit beyond which they do not prefer to trade.
3.5.5. The WG deliberated whether there is a need for stipulating any regulatory price range within which the insider can indicate their price limit or the insider may be allowed to mention any price limit as per their preference.
3.5.6. As the TPs are disclosed publicly, there is an apprehension that the insider may use these prices to send false signals to the market. e.g. the insider may mention unrealistically high price as limit for their trades to signal to the market participants that the insider expects prices to go up to these levels in future, which is not in the interest of market integrity. Thus, the WG agreed that a price range be stipulated so that the insider may mention price limits within that range.
3.5.7. As the purpose of the price limit is protection against loss caused due to unfavourable movement in market price of the security, the WG considered that the insider may be allowed to mention only upper price limit for buy trade and lower price limit for sell trade. For instance, the insider may mention the following in TP:
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- Sell 10,000 shares of XYZ, provided price ≥ x
- Buy 10,000 shares of XYZ, provided price ≤ y
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3.5.8. In order to arrive at what should be the stipulated price range for permissible values of x and y, various alternatives were explored:
i. High (H)/Low(L) price variation of the stock during last one year
ii. H/L variation of index during last one year
iii. Average of H/L variation of stock price and H/L variation of index
iv. VWAP price of last one year
v. Theoretical future price of the stock
vi. Fixed percentage relative to the current market price of stock
3.5.9. It was discussed that while stipulating norms for permissible range, it should not be so complicated that it becomes tedious to calculate by the insider and to verify by the compliance officer. As the primary purpose of the price limit is just to provide protection against loss due to adverse price fluctuation, the WG proposed that fixed percentage based threshold of 20% of current market price (at the time of formulation of TP) may be kept as the range, which would provide sufficient leeway to the insider to protect their proposed trade from adverse price fluctuation.
3.5.10. The date of submission of TP may be considered as the day of formulation of TP. Thus, if closing price of the stock on the previous day of the formulation of TP is Rs 1,000, then price limit for buy trade can range from Rs. 1,000 to Rs. 1,200 (20% above Rs 1,000) and similarly price limit for sell trade can range from Rs. 1,000 to Rs. 800 (20% below Rs 1,000) depending upon the insider’s preference.
3.5.11. Thus, if the insider chose to set out the lower price limit ‘x’ for sell trade, then trade shall be executed only at price equal to or more than ‘x’. Similarly, if upper price limit ‘y’ for buy trade is set out, then trade shall be executed only at price less than or equal to ‘y’. If the insider wishes that they want to execute the trade even if prices move beyond 20%, then they may choose not to set out any price limit while formulating a TP. In that case they shall have to mandatorily execute the trade irrespective of the prevailing prices.
3.5.12. For clarity, following table depicts the hypothetical example of various scenarios of scrip ‘XYZ’ assuming the market price of Rs. 1,000 at the time of TP formulation.
Table 3: Price Scenarios of XYZ scrip showing whether trades to be executed or not
3.6. Date or Interval during which Trade Execution will take place
3.6.1. While current provisions [Reg 5(2)(v)] enable the insider to mention specific date and interval for trade execution, it is felt that the term ‘interval’ may be misinterpreted as the intervening time or break between two trades. Therefore, it was proposed that the term ‘interval’ may be replaced by the term ‘time period’.
3.6.2. Further, the WG noted that since there is currently no cap on the duration of ‘time period’ (‘interval’), some trading plans specify the entire duration of trading plan as time period for execution of trade e.g. trading plan may mention that sell 10,000 shares during 1-Jan-2024 to 30-Jun-2024.
3.6.3. While this provides greater flexibility for insiders, it may also allow them to misuse any new UPSI and time the market, as they have full flexibility to decide the exact dates on which the trades must be executed during execution period.
3.6.4. In view of the above, the WG recommended that insiders may be required to specify short ‘time periods’ of 5 consecutive trading days within which trading quantity/ value/ price have to be mentioned for execution. For instance, a trading plan may specify that the insider will sell 10,000 shares from 1-Jan-2024 to 5-Jan-2024 and then, insider can split their trade for 10,000 shares across these 5 trading days.
3.6.5. If the insider wishes to split the quantity across more than 5 trading days, then they are entitled to split the quantity across multiple time periods of 5 trading days. e.g. if the insider wishes to sell 20,000 shares across two months (say January-February 2024), they may split the quantity across more than one time period in TP as illustrated below:
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- Sell 4,000 shares during Jan 01 to Jan 05, 2024
- Sell 7,000 shares during Jan 15 to Jan 19, 2024
- Sell 3,000 shares during Feb 05 to Feb 09, 2024
- Sell 6,000 shares during Feb 19 to Feb 23, 2024
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3.6.6. Recommendation: In light of the above discussions (under Para 3.5 and 3.6), the provisions of regulation 5(2)(v) are proposed to be amended as follows:-
(v) set out either the value of trades to be effected or the number of securities to be traded along with the nature of the trade and the intervals at, or dates on which such trades shall be effected; and
set out following parameters for each trade to be executed:
(a) either the value of trade or the number of securities;
(b) nature of the trade;
(c) either specific date or time period not exceeding 5 consecutive trading days;
(d) price limit, that is an upper price limit for a buy trade and a lower price limit for a sell trade, subject to the range as specified below or as may be specified by the Board from time to time:
i. for a buy trade, upper price limit can be between closing price on the day before submission of the trading plan and 20% higher than such closing price;
ii. for a sell trade, lower price limit can be between closing price on the day before submission of the trading plan and 20% lower than such closing price.
Explanation: While the parameters in sub-clause (a), (b) and (c) shall be mandatorily mentioned against each trade, parameter in sub-clause (d) shall be optional. Further, the price limit in sub-clause (d) shall be rounded off to the nearest numeral.
NOTE: It is intended that while regulations should not be too prescriptive and rigid about what a trading plan should entail, they should stipulate certain basic parameters that a trading plan should conform to and within which, the plan may be formulated with full flexibility. The nature of the trades entailed in the trading plan i.e. acquisition or disposal should be set out. The trading plan may set out the value of securities or the number of securities to be invested or divested. Specific dates or specific time intervals period may be set out in the plan. However, there should be an outer limit on the duration of the time period, so that while it allows the insider to split their trades across different dates, the duration should not be so long that it is prone to misuse.
Further, to protect the insider from unexpected price movements, he may at the time of formulation of Trading Plan, provide price limits within the range specified in these Regulations.
3.7. Irrevocability of Trading Plan
3.7.1. As per Reg 5(4), the trading plan once approved shall be irrevocable and the insider shall mandatorily have to implement the plan, without being entitled to either deviate from it or to execute any trade in the securities outside the scope of the trading plan.
Provided that the implementation of the trading plan shall not be commenced if any unpublished price sensitive information in possession of the insider at the time of formulation of the plan has not become generally available at the time of the commencement of implementation and In such event the compliance officer shall confirm that the commencement ought to be deferred until such unpublished price sensitive information becomes generally available information so as to avoid a violation of sub-regulation (1) of regulation 4
3.7.2. As explained earlier, the regulatory provisions for Trading Plan endeavour that possession of UPSI may not provide any advantage to insider for trades formulated in trading plan. To ensure the same, the principle behind regulations should be that insider may have the maximum discretion during the formulation of plan to decide about their trades as there is sufficient cool-off period between formulation and execution of trades, but once the plan is formulated, they may have no discretion to deviate from the plan.
3.7.3. To protect insiders from adverse price fluctuation, amendments to Reg 5(2)(v) have been proposed enabling insiders to provide price limits for trade [refer para 3.6.6]. For this purpose, the WG deliberated on following two alternatives: –
1. Alternative A: if price has moved beyond the price limit set out in TP, insider may have the option either to revoke the trade or go ahead with the trade in spite of price being beyond the limit.
2. Alternative B: if price has moved beyond the limit set out in TP, the insider cannot execute the trade and mandatorily has to revoke the trade
3.7.4. In Alternative A, there is a risk that decision of the insider to revoke or go ahead with the trade can be influenced by UPSINew which might have come into their possession subsequent to the formulation of TP. Therefore, Alternative B is recommended as it will provide no discretion to insider during execution and their decision to revoke or continue with the trade cannot be influenced by UPSINew.
3.7.5. Recommendation: In light of the above discussion, the provisions of regulation 5(4) are proposed to be amended as below:
(4) The trading plan once approved shall be irrevocable and the insider shall mandatorily have to implement the plan, without being entitled to either deviate from it or to execute any trade in the securities outside the scope of the trading plan
Provided that the implementation of the trading plan shall not be commenced if any unpublished price sensitive information in possession of the insider at the time of formulation of the plan has not become generally available at the time of the commencement of implementation and in such event the compliance officer shall confirm that the commencement ought to be deferred until such unpublished price sensitive information becomes generally available information so as to avoid a violation of sub-regulation (1) of regulation 4.
Provided further that if the insider has set a price limit for a trade under sub-clause (d) of clause (v) of sub-regulation 2, then the insider shall execute the trade only if the price of the security is within such limit. If price of the security is outside the price limit set by the insider, the trade shall not be executed.
NOTE: It is intended that since the trading plan is an exception to the general rule that an insider should not trade when in possession of unpublished price sensitive information, changing the plan or trading outside the same would negate the intent behind the exception. Other investors in the market, too, would factor the impact of the trading plan on their own trading decisions and in price discovery. Therefore, it is not fair or desirable to permit the insider to deviate from the trading plan based on which others in the market have assessed their views on the securities.
The first proviso is intended to address the prospect that despite the six four-month gap between the formulation of the trading plan and its commencement, the unpublished price sensitive information in possession of the insider is still not generally available. In such a situation, commencement of the plan would conflict with the overriding principle that trades should not be executed when in possession of such information. If the very same unpublished price sensitive information is still in the insider’s possession, the commencement of execution of the trading plan ought to be deferred.
The second proviso is intended to address the scenario, where the insider has set a price limit for a trade and due to adverse fluctuation in market prices, if the price of the security is outside the price limit set by the insider, the trade shall not be executed. However, if the insider wishes to trade irrespective of the fluctuation in market price, he cannot set any price limit at the time of formulation of the trading plan.
3.8. Exemption from Contra-Trade Provisions
3.8.1. Proviso to Reg 5(3), inter alia, stipulates that restrictions on contra trade shall not be applicable for trades carried out in accordance with an approved trading plan.
3.8.2. Clause 10 of Schedule B of PIT Regulations, 2015 reads as under: The code of conduct shall specify the period, which in any event shall not be less than six months, within which a designated person who is permitted to trade shall not execute a contra trade…
3.8.3. The above restriction of contra-trade on designated persons/ insiders is intended to prevent misuse of UPSI in possession of designated persons/ insider and thereby disallow him to take an opposite view within short span of time. That is why it is stipulated that contra-trades should have minimum gap of six months.
3.8.4. However, trades under trading plan is currently exempted from such contra-trade restrictions, i.e. an insider is permitted to execute opposite trades with a gap of less than six months within a trading plan. The intent behind exempting trading plan from this restriction is as TP is currently being planned at least six months in advance and the execution period has to be for a minimum period of 12 months. Therefore, it is unlikely that insider may take advantage of any new UPSI that may come into their possession.
3.8.5. It was deliberated as to what could be the realistic need of including contra trade transactions under trading plan. Generally, when any person formulates a trading plan for future trades, they would either plan to sell the securities they already possess or they would plan to invest their surplus funds in the securities.
3.8.6. It is difficult to envisage a reasonable and genuine need for any insider to plan in advance two opposite trades with a gap of less than six months from each other. Only in case of personal exigencies, there could be genuine need to reverse the previous trade in short span of time. However, such exigencies cannot be planned in advance through trading plans.
3.8.7. Further, it was also felt that there may be a risk that insider may misuse this exemption for undertaking a contra-position under protection of Trading Plan provisions. Therefore, it is proposed that exemption for trades executed under Trading Plan from applicability of contra-trade restrictions to be omitted i.e. contra-trade restrictions shall also be applicable on trades executed under Trading Plan.
3.8.8. Recommendations: In light of the above discussion, the proviso to Regulation 5(3) are proposed to be amended as under:
Provided further that trading window norms and restrictions on contra trade shall not be applicable for trades carried out in accordance with an approved trading plan
3.9. Disclosure of Trading Plan
3.9.1. As per Reg 5(5), upon approval of the trading plan, the compliance officer shall notify the plan to the stock exchanges on which the securities are listed.
3.9.2. The WG observed that currently, there is provision regarding submission of trading plan to stock exchange for public disclosure. However, there is no deadline prescribed within which to submit the same. The WG proposed to prescribe the deadline of two days’ post approval of trading plan for more clarity.
3.9.3. It was also discussed whether trading plan should continue to be disclosed to public, especially when insider will now have the option to mention price limits in respect of their proposed trades. In this regard, it was proposed that for the sake of transparency, trading plan may continue to be disclosed to public along with price limits. If price limit conditions are masked from the market then it may confuse the market participants as they would not be able to ascertain whether trades are likely to be executed or not, given the prevailing prices of securities during execution time.
3.9.4. It was also discussed whether the name of insider can be masked to protect their privacy and make it more convenient for them to submit a trading plan. As per Reg 7(2), there is already requirement of disclosing all trades done by the promoter/ Designated persons to the Exchanges above specified threshold, within two days of transactions, which comes in public domain. Thus, post execution of significant trades, names are anyway disclosed to public.
3.9.5. However, if any of the details of the insider is required to be masked, the same may pose challenges in monitoring the execution of TP. Therefore, the WG recommends that existing disclosures shall continue.
3.9.6. The WG also noted that currently, there is no uniformity in reporting details of the TP and hence, recommends that a suitable format may be specified in consultation with market participants.
3.9.7. Recommendation: In light of the above discussion, the provisions of regulation 5(5) are proposed to be amended as under:-
(5) Upon approval of the trading plan, the compliance officer shall notify the plan to the stock exchanges on which the securities are listed, within two trading days of approval.
NOTE: It is intended that given the material exception to the prohibitory rule in regulation 4, a trading plan is required to be publicly disseminated. Investors in the market at large would also factor the potential pointers in the trading plan in their own assessment of the securities and price discovery for them on the premise of how the insiders perceive the prospects or approach the securities in their trading plan.
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Annexure A Proposed Amendments to PIT Regulations
SECURITIES AND EXCHANGE BOARD OF INDIA (PROHIBITION OF INSIDER TRADING) REGULATIONS, 2015
Trading Plans.
5. (1) An insider shall be entitled to formulate a trading plan and present it to the compliance officer for approval and public disclosure pursuant to which trades may be carried out on their behalf in accordance with such plan.
NOTE: This provision intends to give an option to persons who may be perpetually in possession of unpublished price sensitive information and enabling them to trade in securities in a compliant manner. This provision would enable the formulation of a trading plan by an insider to enable him to plan for trades to be executed in future. By doing so, the possession of unpublished price sensitive information when a trade under a trading plan is actually executed would not prohibit the execution of such trades that he had pre-decided even before the unpublished price sensitive information came into being.
(2) Such trading plan shall:–
(i) not entail commencement of trading on behalf of the insider earlier than six four months from the public disclosure of the plan;
NOTE: It is intended that to get the benefit of a trading plan, a cool-off period of six four months is necessary. Taking into account that companies declare their results quarterly, and there exists a trading restriction, in terms of PIT Regulations, from quarter end to 2 days after declaration of quarterly result, which, it is seen, is generally a period of around 1 month for most of the companies, four months Such a period is considered reasonably long for unpublished price sensitive information that is in possession of the insider when formulating the trading plan, to become generally available. It is also considered to be a reasonable period for a time lag in which new unpublished price sensitive information may come into being without adversely affecting the trading plan formulated earlier. In any case, it should be remembered that this is only a statutory cool-off period and would not grant immunity from action if the insider were to be in possession of the same unpublished price sensitive information both at the time of formulation of the plan and implementation of the same.”
(ii) not entail trading for the period between the twentieth trading day prior to the last day of any financial period for which results are required to be announced by the issuer of the securities and the second trading day after the disclosure of such financial results;
NOTE: Since the trading plan is envisaged to be an exception to the general rule prohibiting trading by insiders when in possession of unpublished price sensitive information, it is important that the trading plan does not entail trading for a reasonable period around the declaration of financial results as that would generate unpublished price sensitive information.
(iii) entail trading for a period of not less than twelve two months;
NOTE: It is intended that it would be undesirable to have frequent announcements of trading plans for short periods of time rendering meaningless the defence of a reasonable time gap between the decision to trade and the actual trade. Hence it is felt that a reasonable time would be twelve months.While it may not be desirable to have frequent announcement of trading plans, the minimum period of trading under a plan is two months in order to enable insiders to effectively plan their trades in advance considering the prevailing market conditions.”
(iv) not entail overlap of any period for which another trading plan is already in existence;
NOTE: It is intended that it would be undesirable to have multiple trading plans operating during the same time period. Since it would be possible for an insider to time the publication of the unpublished price sensitive information to make it generally available instead of timing the trades, it is important not to have the ability to initiate more than one plan covering the same time period.
(v) set out either the value of trades to be effected or the number of securities to be traded along with the nature of the trade and the intervals at, or dates on which such trades shall be effected; and
set out following parameters for each trade to be executed:
(a) either the value of trade or the number of securities;
(b) nature of the trade;
(c) either specific date or time period not exceeding 5 consecutive trading days;
(d) price limit, that is an upper price limit for a buy trade and a lower price limit for a sell trade, subject to the range as specified below or as may be specified by the Board from time to time:
i. for a buy trade, upper price limit can be between closing price on the day before submission of the trading plan and 20% higher than such closing price;
ii. for a sell trade, lower price limit can be between closing price on the day before submission of the trading plan and 20% lower than such closing price.
Explanation: While the parameters in sub-clause (a), (b) and (c) shall be mandatorily mentioned against each trade, parameter in sub-clause (d) shall be optional. Further, the price limit in sub-clause (d) shall be rounded off to the nearest numeral
NOTE: It is intended that while regulations should not be too prescriptive and rigid about what a trading plan should entail, they should stipulate certain basic parameters that a trading plan should conform to and within which, the plan may be formulated with full flexibility. The nature of the trades entailed in the trading plan i.e. acquisition or disposal should be set out. The trading plan may set out the value of securities or the number of securities to be invested or divested. Specific dates or specific time intervals period may be set out in the plan. However, there should be an outer limit on the duration of the time period, so that while it allows the insider to split their trades across different dates, duration should not be so long that it is prone to misuse.
Further, to protect the insider from unexpected price movements, he may, at the time of formulation of Trading Plan, provide price limits within the range specified in these Regulations.
(vi) not entail trading in securities for market abuse.
NOTE: Trading on the basis of such a trading plan would not grant absolute immunity from bringing proceedings for market abuse. For instance, in the event of manipulative timing of the release of unpublished price sensitive information to ensure that trading under a trading plan becomes lucrative in circumvention of regulation 4 being detected, it would be open to initiate proceedings for alleged breach of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Market) Regulations, 2003.
(3) The compliance officer shall review the trading plan to assess whether the plan would have any potential for violation of these regulations and shall be entitled to seek such express undertakings as may be necessary to enable such assessment and to approve and monitor the implementation of the plan.
[Provided that pre-clearance of trades shall not be required for a trade executed as per an approved trading plan.
Provided further that trading window norms and restrictions on contra trade shall not be applicable for trades carried out in accordance with an approved trading plan.]
NOTE: It is intended that the compliance officer would have to review and approve the plan. For doing so, he may need the insider to declare that he is not in possession of unpublished price sensitive information or that he would ensure that any unpublished price sensitive information in their possession becomes generally available before he commences executing their trades. Once satisfied, he may approve the trading plan, which would then have to be implemented in accordance with these regulations.
(4) The trading plan once approved shall be irrevocable and the insider shall mandatorily have to implement the plan, without being entitled to either deviate from it or to execute any trade in the securities outside the scope of the trading plan.
Provided that the implementation of the trading plan shall not be commenced if any unpublished price sensitive information in possession of the insider at the time of formulation of the plan has not become generally available at the time of the commencement of implementation and in such event the compliance officer shall confirm that the commencement ought to be deferred until such unpublished price sensitive information becomes generally available information so as to avoid a violation of sub-regulation (1) of regulation 4.
Provided further that if the insider has set a price limit for a trade under sub-clause (d) of clause (v) of sub-regulation 2, then the insider shall execute the trade only if the price of the security is within such limit. If price of the security is outside the price limit set by the insider, the trade shall not be executed.
NOTE: It is intended that since the trading plan is an exception to the general rule that an insider should not trade when in possession of unpublished price sensitive information, changing the plan or trading outside the same would negate the intent behind the exception. Other investors in the market, too, would factor the impact of the trading plan on their own trading decisions and in price discovery. Therefore, it is not fair or desirable to permit the insider to deviate from the trading plan based on which others in the market have assessed their views on the securities.
The first proviso is intended to address the prospect that despite the six four-month gap between the formulation of the trading plan and its commencement, the unpublished price sensitive information in possession of the insider is still not generally available. In such a situation, commencement of the plan would conflict with the over-riding principle that trades should not be executed when in possession of such information. If the very same unpublished price sensitive information is still in the insider’s possession, the commencement of execution of the trading plan ought to be deferred.
The second proviso is intended to address the scenario, where the insider has set a price limit for a trade and due to adverse fluctuation in market prices, if the price of the security is outside the price limit set by the insider, the trade shall not be executed. However, if the insider wishes to trade irrespective of the fluctuation in market price, he cannot set any price limit at the time of formulation of the trading plan.
(5) Upon approval of the trading plan, the compliance officer shall notify the plan to the stock exchanges on which the securities are listed, within two trading days of approval.
NOTE: It is intended that given the material exception to the prohibitory rule in regulation 4, a trading plan is required to be publicly disseminated. Investors in the market at large would also factor the potential pointers in the trading plan in their own assessment of the securities and price discovery for them on the premise of how the insiders perceive the prospects or approach the securities in their trading plan.
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Note :
1. Report of the High Level Committee to Review the SEBI (Prohibition of Insider Trading) Regulations, 1992 under Chairmanship of N. K. Sodhi, Former Chief Justice; Page 34
2.Speech of Finance Minister of India for Budget 2023-24; at https://www.indiabudget.gov.in/doc/budget_speech.pdf ; last accessed on September 14, 2023
3. Consultation Paper on proposed review of the definition of UPSI under SEBI (Prohibition of Insider Trading) Regulations, 2015; athttps://taxguru.in/sebi/consultation-paper-proposed-review-insider-trading-regulations-2015.html; last accessed on September 14, 2023
4. Code of Federal Regulations for Securities and Exchange Commission § 240.10b5-1
5. Statement on Final Rule: “Insider Trading Arrangements and Related Disclosures”; at https://www.sec.gov/news/statement/peirce-insider-trading-20221214 ; last accessed on September 14, 2023
6. Code of Federal Regulations for Securities and Exchange Commission § 240.10b5-1
