S 12A (d) of the SEBI Act, 1992(`ACT’) prohibits insider trading securities in the securities market. S 15 G of the Act lays down penalty to be paid by a person who is engaged in insider trading. R 5 (1) of the SEBI ( Prohibition of Insider Trading ) Regulations,2015 (`REGULATIONS’) defines an ` Insider’ ( R 2(1)(g)) as a person who is: (i) a connected person; or (ii) in possession of or having access to unpublished price sensitive information (`upsi’). An insider is, however, permitted to trade by formulating, `Trading Plans’ and present it to the Compliance Officer (R 2(1)(c ) ) of the company for approval. The Compliance Officer (`CO’) within the meaning of Cl 47(a) of the Listing Agreement shall on receiving permission from the CO can make the trade plan public by public disclosure and trades as per the trade plans may be carried out. R 2 (1) (l) defines `trading’ as subscribing, buying, selling, dealing, or agreeing to subscribe, buy, sell, deal in securities, and “trade” shall be construed accordingly. `Securities’ is defined in S 2(h) of the Securities Contracts (Regulations) Act,1956 to inter alia include shares, debentures, units of mutual funds. Under the Parliamentary mandate, since Ss 12A (e) and 15G of the Act includes the term `dealing in securities,’ it is intended to control activities dependant on upsi which include but is not limited to buying, selling or subscribing, pledging etc. Trading Plans [ R 5(1)] are in practice in the UK and USA and are popular. Such plans on trades to be executed in the future, allow such trades that had been decided before the upsi came into being. The provision provides for option to persons who may be in perpetual possession of upsi and enabling them to trade in securities as per the rules. The provision enables formulation of a trading plan by an insider to enable him to plan for trades to be executed in future. Possession of upsi 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 upsi came into being. Note to R 5 (1) states that the provision intends to give an option to persons who may be perpetually in possession of unpublished price sensitive information and enable them to trade in securities in a compliant manner.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 this, the possession of upsi 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 upsi came into being. R 5 (2) states that trading plan shall :
i) not entail starting of trading on behalf of the insider earlier than six months from the public disclosure; ( R 5(2)(i) ) . It is intended that for the benefit of trading plan, a cool-off period of six months is necessary.
Note to the provision states that It is intended 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 be generally available. It is also considered to be a reasonable period for a time lag in which new upsi 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 cooling –off period and would not grant immunity from action if the insider were to be in possession of the same upsi 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 to announced by the company and the second day after the disclosure of such financial results; ( R 5 (2)(ii) );
Note to the provision states that since the trading plan is exception to the general rule of prohibition of trading by insiders when in possession of upsi, it is significant that the trading plan does not entail trading for a reasonable period around the declaration of financial results as that would generate upsi.
iii) entail trading for a period of not less than twelve months ( R 5 (2) (iii) );
Note to the provision states that It is it would be undesirable to forward announcements of trading plans for short periods rendering meaningless the defence of a reasonable time gap between decision and actual trade. Accordingly, it is felt that reasonable time would be twelve months.
iv) not entail overlap of any period for which another trading plan is already in place ( R 5(2) (iv) );
Note to the provision states that it would be undesirable to have multiple trading plans operating during the same time period. Since it would be possible to time publication of the upsi 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 value of trades or number of securities with nature of trade and intervals, dates on which such trades would be affected; ( R 5 (2) (v) );
Note to the provision states that while the regulations should not be too prescriptive and rigid about what a trading plan should entail, they should state certain basic parameters that a trading plan should conform to and within which, the plan may be formulated with full flexibility. Nature of trades entailed in the trading plan i.e. acquisition or disposal should be set out. Trading Plan may set out value of securities or number of securities to be invested or divested. Specific dates or specific time intervals may be set out in the plan.
vi) not entail trading of securities for market abuse ( R 5 (2) (vi) ).
Note to the provision states that trading as per approved trading plan would not grant absolute immunity from bringing proceedings for market abuse i.e. in the event of manipulative timing of the release of upsi to ensure that trading under a trading plan becomes lucrative in circumvention of R 4 being detected, it would be open to initiate proceedings for alleged breach of the SEBI( Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Market) Regulations,2003.
R 5 (3) states that the CO 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 plan.
Note to the provision states that the CO would have to review and approve the trading plan submitted by the insider. CO may need the insider to declare that he is not in possession of upsi or that he would ensure that any upsi in his possession become generally available before he commences executing trades. Being satisfied the CO approves the trading plan submitted to him which would have to be executed in accordance with the regulations.
As per R 5(4) the trading plan once approved shall be irrevocable and the insider shall mandatorily be required to execute the trading plan without deviation or 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 upsi 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 the implementation and in such event the CO shall confirm that the commencement ought to be deferred until such upsi becomes generally available information so as to avoid violation of sub-regulation (1) of R 4.
Note to the provision states that since trading plan is an exception to the general rule that an insider will not trade when in possession of upsi, changing the plan or trading outside the plan would negate the intent behind the intention. The provisio is intended to address the prospect that despite the six-month gap between the formulation of the trading plan and its commencement, the upsi 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 possession of such information. It 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.
R 5 (5) states that on approval of the trading plan, CO shall notify the plan to the stock exchanges on which the securities are listed.
Note to the provision states that it is intended that given the material exception to the prohibitory rule in R 4, a trading plan is required to be made public. Investors in the securities market would also factor the potential pointers in the trading plan in their own assessment of securities and price discovery for them on the premise of how the insiders perceive the prospects or approach the securities in their trading plan.
Chapter III of the Regulations prescribe disclosures of trading by insiders. Under R 6 (1) , every public disclosure shall be made in the form prescribed. R 6 (2) states that disclosures shall be made by any person shall include those relating to trading by such person’s immediate relative ( R 2 (1) (f) ) which includes spouse of a person, and includes parent, sibling, and child of such person or of the spouse, any of whom is either dependent financially on such person, or consults such person in taking decisions relating to trading in securities.
Note to the provisions states that it is intended that disclosure of trades would need to be of not only those executed by the person concerned but also by the immediate relatives and of other persons for whom the person concerned takes trading decisions. These regulations are primarily aimed at preventing abuse by trading when in possession of unpublished price sensitive information and therefore what matters is whether the person who trades trading decisions is in possession of such information rather than whether the person who has title to the trades is in such possession. R 6(3) states that disclosures of trading in securities shall also include trading in derivatives of securities and the traded value of the derivatives of securities is permitted by any law for the time being in force.
As per R 6 (4) the disclosures made under the Chapter shall be maintained by the company, for a minimum period of five years , in such form that may be prescribed.
Disclosures by certain persons under the Regulations in the prescribed formats
R 7 (1) requires Initial Disclosures which shall be by :
(a) Every promoter ( R 2(1) (h) ) , key managerial personnel and director of every company whose securities are listed on any recognized stock exchange shall disclose his holding of securities of the company as on the date of these regulations taking effect, to the company within thirty days of these regulations taking effect;
(b) Every person on appointment as key managerial personnel or director of the company or upon becoming a promoter shall disclose his holding of securities of the company as on the date of appointment or becoming a promoter, to the company within seven days of such appointment or becoming a promoter.
So the promoter and person who are covered by R 7 (1) (a) & (b) shall have to adhere to the above strictly.
(2 ) The Regulation provides for Continual Disclosures for the following persons:
(a) Every promoter, employee and director of every company shall disclose to the company the number of such securities acquired or disposed of within two trading days of such transaction if the value of the securities is traded, whether in one transaction or a series of transactions over any calendar quarter, aggregates to a traded value in excess of ten lakh rupees or such other value as may be specified.
(b) Every company shall notify the particulars of such trading to the stock exchange on which the securities are listed within two trading days of receipt of the disclosure or from becoming aware of such information.
Explanation – It is clarified for the avoidance of doubts that the disclosure of the incremental transactions after any disclosure under this sub-regulation, shall be made when the transactions effected after the prior disclosure cross the threshold specified in clause (a) of sub-regulation (2).
R 7(2) requires the persons stated above to be vigilant on continued disclosure.
Disclosures by other connected person
R 7(3) states that any company whose securities are listed on a stock exchange may, at its discretion require any other connected person or class of connected persons to make disclosures of holdings and trading in securities of the company in such form and at such frequency as may be determined by the company in order to monitor compliance with these regulations.
As explained in the note to the Regulations, it is an enabling provision for listed companies to seek information from those to whom it has to provide unpublished price sensitive information. CO would have to review and approve trading plan submitted by the insider. CO may need the insider to declare that he is not in possession of upsi or that he would ensure that any upsi in his possession become generally available before he commences executing his trades. Being satisfied he approves of the trading plan which would have to be executed as per the regulations.
Author : CS Saibal Chandra Pal, Advocate
[ Opinion expressed is that of the Author]
Copyright & Publishing Rights with Author.
Securities Law & Financial Sector Regulatory Practice
Edited by : Soubhik Chakraborty, Advocate