To curb insider trading, the Securities and Exchange Board of India (SEBI) has enforced several obligations and limitations on company insiders, including compulsory trade disclosures, trading window shutdowns, and prohibitions on contra-trades. However, these restrictions can be challenging for certain insiders, particularly key managerial personnel (KMP) who constantly have access to Unpublished Price Sensitive Information (UPSI). To address this challenge, the market regulator in 2015, as part of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (the PIT Regulations), introduced the concept of a trading plan. Following this, SEBI established a Working Group to examine the trading plan provisions under the PIT Regulations and to introduce flexibility to encourage their implementation. In November 2023, SEBI issued a consultation paper reviewing the trading plan framework under the PIT Regulations.

This post discusses the trading plan framework, explains the Working Group's proposed changes, and examines the impact on different parties and its possible effectiveness in curbing insider trading.

Understanding the Concept of a Trading Plan

A trading plan is a tool that allows insiders, who consistently have access to UPSI, to carry out trades in a manner that complies with regulations. It offers a systematic method for insiders to conduct securities transactions while meeting regulatory standards. This allows insiders to pre-plan their trades, minimizing the risk of trading based on non-public information.

Despite the introduction of the trading plan, it hasn’t gained much traction among insiders. The reasons for its limited adoption include the existing framework’s lack of flexibility and clarity, the strict restrictions and conditions applied to the trading plans, and the regulator’s insufficient monitoring and enforcement of the trading plans. The Working Group presented its report to SEBI on September 15, 2023, suggesting specific changes to the PIT Regulations, which was followed by the proposed framework outlined in the recent consultation paper.

What is the Proposal?

SEBI’s consultation paper proposes several measures to increase flexibility and ease regulations for insiders.

• Multiple Trading Plans:
  • Insiders allowed to create multiple trading plans.
  • Plans must not overlap, and total trading volume across all plans should not exceed SEBI's set limit.
• Trading Plan Duration:
  • Minimum duration proposed to be reduced from 12 months to 6 months.
  • Insiders can extend or terminate plans before expiration with approval from compliance officers and stock exchanges.
• Cooling-off Period:
  • Proposed reduction of cooling-off period from 6 months to 4 months for insiders.
• Trading Around Financial Results:
  • Insiders may trade around financial result announcements with approval from the audit committee or board of directors.
• Price Limits in Trading Plans:
  • Option for insiders to set price limits during plan formulation.
  • Upper limits for buying and lower limits for selling within +/-20% of closing price on submission date
  • Trades won't execute if security's price during execution falls outside the set limit.
  • If no limit is chosen, trade must be carried out regardless of current price.
• Contra-Trade Restrictions:
  • Proposal to remove exemption for trades under the trading plan from contra-trade restrictions.
• Disclosure Requirements:
  • Emphasis on significant disclosure requirements for insiders.

A contra trade refers to a situation where someone buys or sells a certain number of shares in a company and then, within the next six (6) months, engages in an opposite transaction. An opposite transaction means either selling the shares they previously bought or buying the shares they previously sold. This rule is in place to regulate and monitor trading activities to prevent certain types of potentially manipulative or unfair practices in the stock market.

Proposal Under Consideration

According to Regulation 5(5) of the PIT Regulations, once a trading plan is approved, the compliance officer is required to inform the stock exchanges where the company’s securities are listed. Although there’s no set format for trading plan disclosure, it usually contains the insider’s personal details like name, designation, and PAN. Recognizing the need to protect insiders’ privacy during trading plan disclosures, the Working Group examined three alternatives.

The first alternative involves hiding personal details such as the insider’s name, designation, and PAN in the trading plan disclosed to stock exchanges. The second alternative considered by the Working Group was to continue the current practice of revealing insiders’ personal details in trading plans, which could raise privacy and safety issues for senior management and insiders.

The Working Group suggested an additional alternative to balance the risk of misuse and privacy concerns. In this proposed alternative, insiders would submit two separate trading plan filings. First, insiders would submit a trading plan to the stock exchange, including personal details as before, which would remain confidential with the stock exchanges, ensuring transparency and monitoring of trading plan execution. Second, insiders would file a separate trading plan for public disclosure through the stock exchange, excluding personal details. This public disclosure would allow market participants to access trading plan information while addressing privacy and safety concerns for senior management and insiders.

Moreover, to alleviate concerns about potential misuse resulting from the anonymization of names in public disclosures, the Working Group suggested using a unique identifier—a common reference number with a time stamp—for both the confidential and public trading plan filings. The disclosure of the trading plan to the stock exchanges is proposed to be completed within two days from the date of trading plan approval.

The Challenges

The proposals detailed in the consultation paper, if implemented, would have significant impacts on various stakeholders. For insiders, these proposals would provide more flexibility and ease in trading securities while complying with regulations. They would be able to customize trading plans to suit their personal and financial goals, free from the current stringent and extensive requirements. This would allow insiders to take advantage of market trends and price fluctuations, as they would be permitted to trade under the trading plan even during black-out periods and set price limits for their trades. By revealing their trading plan beforehand, insiders would gain increased certainty and transparency, reducing the likelihood of insider trading accusations. However, insiders would also bear a greater responsibility to strictly adhere to the trading plan and contra-trade restrictions, as any non-compliance or violation could lead to regulatory penalties.

Companies would see a reduction in compliance obligations and administrative expenses. The necessity to oversee and enforce black-out periods for insiders trading under the trading plan would be removed. Companies would need to ensure prompt approval and disclosure of the trading plan, following the prescribed formats and procedures.

Investors would benefit from access to information about insiders’ trading activities disclosed through the trading plan, enabling them to make informed decisions. The structure of the trading plan would safeguard investors from unfair and fraudulent practices by insiders. Regulators would gain access to additional data and evidence to monitor and investigate insider trading activities. The trading plan would offer a clear and objective basis to ascertain the culpability and liability of insiders, enabling regulators to deter and penalize those who violate the trading plan and insider trading regulations.

Parting Thoughts

SEBI's proposed revamp of the trading plan framework holds promise for increased flexibility and market efficiency, but its success hinges on fostering a robust culture of compliance within organizations. Effective training programs that educate employees, particularly insiders, on the intricacies of insider trading regulations are crucial. This includes:

• Clear and concise explanations of relevant laws and regulations.
• Scenario-based exercises and case studies to illustrate the nuances of insider trading.
• Regular refresher courses to keep employees updated on any changes or amendments.
• Open communication channels for employees to raise concerns or report suspected insider trading activities.

By working on these aspects, organizations can ensure responsible trading practices by their employees and mitigate the risks associated with insider trading. This, in turn, can contribute to a fairer and more transparent market environment for all stakeholders.