Sandeep Parekh

Ever since the inception of financial markets, insider trading has been subject to stringent regulatory oversight. Within this framework of regulation, trading plans emerged as a mechanism designed to facilitate trading by certain classes of insiders like senior management or key managerial personnel of a company who are consistently privy to Unpublished Price Sensitive Information (UPSI). It was recognised that insiders, even when in possession of UPSI, may need to trade for purposes such as creeping acquisitions, compliance with minimum public shareholding norms, exercise of ESOPs, etc. Thus, the concept of trading plans was introduced under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations) to enable such insiders to plan their trades in advance, thereby reducing the risk of trading based on UPSI.

The paper proposes a reduction in the minimum cool-off period between the disclosure and implementation of a trading plan from 6 months to 4 months, along with a decrease in the minimum coverage period requirement from 12 months to 2 months. Under the present framework, insiders formulating a trading plan are bound by a timeline of at least 18 months, encompassing a mandatory 6 month cool-off period before executing trades and a minimum coverage period of 12 months. Thus, presently, a trading plan is to be formulated with the assumption that a segment of the trade will extend into the 18th month which might render the trading plan unviable to an insider since he may not be comfortable planning a trade that would be executed after 18 months at the then prevailing price. With the proposed reduced timelines, insiders can now formulate trading plans that align more closely with shorter-term outlooks.

Notably, the paper proposes to eliminate the black-out period, which presently mandates the closure of the trading window for insiders between the 20th day prior to the last day of any financial period for which results are to be announced and the second day after the disclosure of such results. Results for each quarter are typically disclosed within a month after the quarter concludes, which further prolongs the black-out period, consequently leaving only a few trading days available in the entire year. Further, the PIT Regulations already prohibit the implementation of trading plans until the UPSI, which the insider possessed while formulating the trading plan, ceases to be UPSI. Thus, in the context of trading plans, black-out periods were rendered redundant, given that the existing regulations anyway prohibit insiders from implementing a trading plan even after the cool-off period is over if the information based on which the trading plan was enacted is still privileged.

The paper also suggests introducing a provision regarding price limits within trading plans. Insiders will then have the flexibility to place upper and lower price limits for buy and sell trades, respectively, within +/- 20% of the closing price on the date of submitting the trading plan. Such limits have been adopted in order to ensure that insiders are protected from potential losses resulting from extreme market volatility or adverse conditions since trading plans are enacted well in advance and the execution might occur at an unfavourable price. Further, in cases where the price moves beyond the limit set out in the trading plan, the WG recommended that the insiders should be prohibited from executing the trade and an option to execute the trade at the prevailing price cannot be given as the decision to exercise such an option by the insider may be influenced by new UPSI that didn’t exist at the time of formulating the trading plan. Also, in cases where no price limit is set out in the trading plan by insiders, the trade will be executed irrespective of the prevailing price.

With regard to disclosure of the trading plan, the consultation paper proposes three different alternatives. The first is masking the personal details (such as name, designation, PAN) of insiders, to protect their privacy. However, the WG noted that this measure may raise concerns about potential misuse, as concealed personal details might allow an insider to execute trades using a trading plan that was submitted by another. Moreover, under the PIT Regulations, there is already a requirement to disclose all trades done by the promoters/designated persons above a specified threshold. Thus, names are anyway disclosed to the public post execution of significant trades. The second alternative is continuing the current practice of disclosing all personal details, advocating for complete transparency. The third alternative endeavours to strike a balance between the challenges of potential misuse and the need for privacy. It suggests a dual disclosure method—a full and detailed disclosure of the trading plan to the stock exchanges and a masked disclosure to the public.

The paper further proposes to do away with the exemption from contra-trade restrictions granted to trades executed under a trading plan. Contra-trade provisions restrict designated persons from taking opposing positions or entering into buy/sell trades within 6 months of an earlier sell/buy trade respectively. The WG noted that it is difficult to ascertain the reason for an insider to plan two opposing trades within a period of 6 months. Accordingly, it was recommended that contra-trade restrictions be made applicable to trades carried out in furtherance of a trading plan to restrict an insider from undertaking a contra-position under the protection of trading plan provisions.

The proposals signify the regulator’s attempt to streamline compliance requirements related to trading plans and allow for greater adaptability in accommodating the legitimate interests of insiders who may perpetually be in possession of UPSI. They appear to be more attuned to implementation challenges, without detracting from the regulatory objective of minimising insider trading risk. The consultation paper stands as a testament to the regulator’s proactive approach in ensuring that regulations are framed and altered in view of market feedback and interests of the stakeholders involved. However, the proof of the pie is in the eating. So, the amendments would have achieved their goals if a relatively large number of people sign up for such plans. The authors of the paper advocate a tilt towards privacy of the insiders, while maintaining proper audit trail and also argue against the new restrictions on contra trades, as the purpose of the trading plan is the break the causal chain between inside information and wrongful trades. Once that is achieved, a contra trade in the other direction should be kosher.

(The author is Managing partner, Finsec Law Advisors. With contributions fromShivaang Maheshwari, associate,Finsec Law Advisors.)