The Indian securities market regulator – Securities and Exchange Board of India (SEBI) has revamped and overhauled the regulatory framework for trading plans vide amendments dated June 25, 2024 to the SEBI (Prohibition of Insider Trading) Regulations, 2015 (Insider Trading Regulations). These amendments shall come into force with effect from September 23, 2024.
The concept of ‘trading plans’ was introduced under the Insider Trading Regulations to facilitate trading by
certain class of insiders like senior management, key managerial personnel etc. who may be perpetually in possession of unpublished price sensitive information (UPSI) as they are involved in most of the decisions taken by a listed company. However, due to the rigidities in the regulatory framework governing ‘trading plans’ on an average only around 30 trading plans were submitted annually, over the course of the last 5 years. The shortcomings in the regulatory framework were recognized by SEBI as the primary reason for the abysmally low number of trading plans submitted by insiders in India.
In this backdrop and pursuant to a consultation paper issued by SEBI last year, SEBI has introduced amendments to the Insider Trading Regulations with the objective of facilitating and promoting insiders to utilize the trading plan mechanism (which can be viewed by clicking on this link). The specific changes introduced by SEBI under the Insider Trading Regulations are inter alia as follows:
Cool-off Period for Trading Plans
The PIT Regulations currently provided for a cooling-off period of 6 months to prevent any potential misuse of UPSI, which meant that the insider could only commence trading and execute the trading plan, after a period of 6 months from the public disclosure of the trading plan. This cooling-off period has now been reduced from 6 months to 120 calendar days, keeping in mind the time periods within which short term UPSI such as declaration of financial results, dividends, change in KMP, etc. is expected to fructify and become generally available in the public. SEBI also considered and kept in mind the cooling-off period provided by the Securities and Exchange Commission in USA, which provides for a cool-off period for 90-120 days for KMPs and 30 days for other insiders to address potential misuse of trading plans.
Minimum Coverage Period of a Trading Plan
The Insider Trading Regulations currently mandate that a trading plan needs to cover trades for a minimum period of 12 months, in addition to the cool-off period of 6 months. In order to make the trading plans as flexible as possible in terms of the tenure, SEBI has decided to omit the minimum coverage period requirement with respect to trading plans from the Insider Trading Regulations.
Black-out Period for a Trading Plan
As per the Insider Trading Regulations, a trading plan currently cannot entail trading for the period between the 20th trading day prior to the last date of a financial period for which results are to be announced and until the 2nd trading day after the disclosure of the results (Black-out Period). Given that trades pursuant to a trading plan are already exempt from the trading window closure restrictions under the Insider Trading Regulations, SEBI has decided to also omit the Black-out Period requirement with respect to trading plans from the Insider Trading Regulations.
Price Limits under a Trading Plan
As per the Insider Trading Regulations, a trading plan currently needs to 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. This meant that the insider was currently bound by the value of trades or number of securities mentioned in the trading plan and there was no flexibility to account for the prevailing market price of securities (and any increase or decrease thereto) at the time of the actual trades and execution of the trading plan, which exposes the insider to a risk of fluctuation in market price. This was seen as one of the major deterrents in adoption of trading plan by insiders, as the same exposed them to financial risk, beyond their risk appetite.
Therefore, to address these concerns and safeguard insiders from fluctuations in market price of securities, the Insider Trading Regulations have been amended to provide the insiders with the flexibility of setting upper price limits for buy trades and lower price limits for sell trades, pursuant to a trading plan. These price limits can be within a range of 20% of the closing price of the securities, on the day before submission of the trading plan, can be set by the insiders in their discretion. This change would assist in providing sufficient leeway to the insider to protect their proposed trade from adverse price fluctuation.
Exemption of Trades pursuant to a Trading Plan from Contra Trade Restrictions
Currently, trades carried out pursuant to a trading plan are exempt from the contra trade restrictions provided under the Insider Trading Regulations (i.e., an insider cannot do opposite buy/sell transactions within a period of 6 months). Given the changes made to the cool-off period and the minimum coverage period, and considering the potential risk that an insider may misuse this exemption for undertaking a contra-position under protection of trading plan provisions, SEBI has omitted the exemption provided to trades executed pursuant to a trading plan from contra trade restrictions under the Insider Trading Regulations.
Irrevocability of a Trading Plan
Currently, a trading plan once approved, is irrevocable and cannot be deviated from by the insider. In order to provide flexibility for genuine reasons, the Insider Trading Regulations have been amended to provide the flexibility to an insider to deviate from an approved trading plan in case of their permanent incapacity, bankruptcy or operation of law.
Further, considering the changes made to the price limits with respect to a trading plan, it has also been provided that in case the price of securities goes beyond the limits specified by the insider at the time of the approval of the trading plan, then, the trades will not be executed by the insider. SEBI has clarified that if an insider wants to trade irrespective of the market price of the securities prevailing at the time of the execution of the trading plan, then, such insider should not specify any limits at the time of approval of the trading plan by the compliance officer.
SEBI has also specified the procedure to be followed in case the insider is unable to fully or partially implement the trading plan, in which case such non-implementation shall be intimated to the compliance officer in the first instance and to the audit committee of the listed company for a final decision.
It remains to be seen whether more insiders will now start utilizing the trading plan mechanism to undertake their trades, considering the flexibility provided by SEBI pursuant to the aforesaid amendments made to the Insider Trading Regulations.