The latest amendment, released on June 25, 2024, in the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”) has been framed in line with the proposals detailed out in the Consultation Paper released in late November, last year.
The Amendment has been made solely in the infamous Regulation 5 which delves in Trading Plans.
The amended regulations shall be effective on the ninetieth day from the date of publication in the Official Gazette, i.e. September 23, 2024.
What are Trading Plans?
Trading Plans are typically framed by the Insiders, not restricted to Designated Persons, who are perpetually in possession of Unpublished Price Sensitive Information (UPSI). Generally, such Insiders are in receipt of UPSI due to them being in a senior managerial position in the Company.
The onus of approving Trading Plans is on the Compliance Officer of the Company and once approved, the same is required to be intimated with the Stock Exchanges.
Need for Amendment:
The Report of Working Group on Trading Plans highlighted as to how the Trading Plans were unpopular in India and the number of plans submitted with the Exchanges was abysmally low. This was mainly due to the following factors:
- Excruciatingly long wait of 6 months before which Trade can be executed.
- Covering a minimum period of 12 months in the submitted Trading Plan- Disadvantageous due to the prevailing dynamic nature of the Securities market.
- Trading Plans are irrevocable and cannot be withdrawn once publicly disclosed.
Thus, the rigorous regulatory regime has been a major deterrent for designated persons/eligible Insiders of listed entities to not frame their Trading Plans.
This Article presents a comparison between the former and existing amended regulations, with a brief analysis, covering the key changes.
| Regulation No. | Old Regulation | Amended Regulation | Analysis |
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5(2) |
“Such trading plan shall:– (i) not entail commencement of trading on behalf of the insider earlier than six months from the public disclosure of the plan;”
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“(a) the words “six months” shall be substituted by the words “one hundred and twenty calendar days”;” Substitution in Regulation 5, sub-regulation (2).
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As recommended previously, the cool off period of 6 months was burdensome since market conditions largely differ from when formulated and implemented. |
| 5(2) | NOTE: It is intended that to get the benefit of a trading plan, a cool-off period of six months is necessary. 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….”
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“Companies declare their results quarterly and there exists a trading restriction, in terms of these Regulations, from Quarter end to two days after declaration of quarterly result, which, it is seen, is generally a period of around one month for most companies. Thus, one hundred and twenty calendar days”
Note to Regulation 5(2), point no. (i): Omission of the sentence starting from, “Such a….”
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Taking reference from the Insider Trading provisions followed by the US SEC, 4 months was considered to be a reasonable time for UPSI to be made available in the public domain.
Further, the general practice followed by listed entities while declaring quarterly results was taken into consideration. |
| 5(2) | “(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;” | Omission of Regulation 5(2), point no. (ii) and note thereto. | The mandatory black-out period left Insiders with only a few days during which they could actually trade and considering general feedback, the requirement had been proposed to be removed.
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| 5(2) | “(iii) entail trading for a period of not less than twelve months;” | Omission of Regulation 5(2), point no. (iii) and note thereto. | Initially, the period of 12 months was felt to be reasonable.
Since the volatile nature of securities market is ever prevalent, the recommendations suggested reducing it to 2 months. However, the amendment has completely omitted the requirement and now, there is no specific tenure that such Trading Plan is required to encompass.
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| 5(2) | “(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;” | “set out following parameters for each trade to be executed:
(i) either the value of trade to be effected or the number of securities to be traded; (ii) nature of the trade; (iii) either specific date or time period not exceeding five consecutive trading days; (iv) 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: a. for a buy trade: the upper price limit shall be between the closing price on the day before submission of the trading plan and upto twenty per cent higher than such closing price; b. for a sell trade: the lower price limit shall be between the closing price on the day before submission of the trading plan and upto twenty per cent lower than such closing price. Substitution in 5(2), clause (v), point (a).
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The Insiders are now empowered to set out a price limit within which the transaction would be executed. Thus, the Insiders would now be able to indicate a price limit of 20% of current market price, beyond which they were not willing to trade.
In order to avoid confusion amongst Insiders regarding the period for execution of trade, henceforth, they are required to mention the specific date or comply with “time periods” of 5 consecutive trading days within which the trade shall be executed. |
| 5(3) | “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.” | “Provided further that trading window shall not be applicable for trades carried out in accordance with an approved trading plan.”
Omission of the words “contra trade” from Regulation 5(3) – Second proviso. |
It is generally unlikely for Insiders to plan two opposite trades, within a span of less than 6 months, barring exceptional circumstances.
There may also be cases of misuse of the exemption by Insiders and hence, the rationale behind removing the specific exemption.
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| 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.”
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“The trading plan once approved shall be irrevocable and the insider shall mandatorily have to implement the plan, without being entitled to execute any trade in the securities outside the scope of the trading plan or to deviate from it except due to permanent incapacity or bankruptcy or operation of law”, shall be inserted.”
Insertion of specific words in Regulation 5(4) – First proviso.
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While the former regulations was absolutely strict with regards to deviation, the current regulations are wider, encompassing exceptional circumstances. |
| 5(4) | Insertion of the following proviso in Regulation 5(4) after the second proviso,
“Provided further that if the insider has set a price limit for a trade under sub-clause (iv) of clause (v) of sub-regulation 2, the insider shall execute the trade only if the execution 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.”
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Keeping in mind the amendments made w.r.t setting of a price limit, the inserted proviso protects Insiders from random price fluctuations.
The Explanation to the sub regulation however suggests that in case the Insider wishes to trade irrespective of the fluctuations, it would be advisable to not set a price limit altogether since the same has been kept optional by the Market Regulator. |
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| 5(4) | Insertion of Explanation to the above mentioned proviso in Regulation 5(4):
The Explanation details out the Action plan to be followed by an Insider, in the event of non-implementation of the Trading Plan, in part or in full, due to certain reasons. The amended proviso states that the Insider shall intimate the Compliance Officer within 2 trading days from the conclusion of tenure of Trading Plan. The Compliance Officer shall assess the case and submit his recommendations with the Audit Committee- to decide whether such deviation was bona-fide or not. Audit Committee’s decision would be intimated on the same day to the Stock Exchanges and in case of mala-fide deviation, appropriate action as per the Code of Conduct shall be taken by the Compliance Officer.
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The former regulations did not lay out any specific actions to be taken by the listed entity, in case a deviation was observed from the Trading Plan.
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| 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.” | “The compliance officer shall approve or reject the trading plan within two trading days of receipt of the trading plan and notify the approved plan to the stock exchanges on which the securities are listed, on the day of approval.”
Substitution of the entire Regulation 5(5). |
Earlier, there was no deadline for disclosure of Trading Plan with Exchanges and hence, the same has now been specified. |
With the release of the aforementioned amendments, Trading Plans and disclosure thereto have undergone a significant change. Keeping in mind the recommendations of the stakeholders and the Working Group, the ambit of the regulations have been widened. It is only a matter of time, before the amended Regulations are put into practice and hopefully, this change would motivate the Eligible Insiders to abide by the PIT Regulations, in letter and in spirit.
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