[Manas Rohilla and Smruti Kulkarni are 3rd year B.A., LL.B. (Hons.) students at the Gujarat National Law University, Gandhinagar]
Regulators impose various restrictions and obligations on insiders of a company, such as mandatory disclosure of trades, trading window closures, contra-trade prohibitions, and the like, to prevent insider trading. However, these restrictions may also pose challenges for some insiders, especially those who are perpetually in possession of unpublished price sensitive information (UPSI), such as key managerial personnel (KMP). To address this issue, the Securities and Exchange Board of India (SEBI) introduced the concept of a trading plan in 2015 under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (the PIT Regulations). Subsequently, SEBI constituted a Working Group to review the provisions relating to trading plan under the PIT Regulations and to provide flexibility to facilitate adoption of trading plans. On 24 November 2023, SEBI released a consultation paper on the review of the framework for trading plans under the PIT Regulations.
The aim of this post is to expound on the existing framework with respect to trading plan, to describe the proposals of the consultation paper based on the recommendations of the Working Group, and to analyse the implications and challenges for various stakeholders.
Trading Plans: The Backdrop
A trading plan is a mechanism that enables insiders, who are perpetually in possession of UPSI, to execute trades in a compliant manner. It provides a structured approach for insiders to trade securities while ensuring adherence to regulatory requirements. They allow insiders to plan their trades in advance, reducing the risk of trading based on unpublished information. A similar model can also be witnessed in United States, as laid down under rule 10b5-1 of the Securities Exchange Act of 1934.
However, since the introduction of trading plan, it has not become very popular among the insiders. Some of the reasons for the low uptake of trading plans are the lack of flexibility and clarity in the existing framework, stringent restrictions and conditions imposed on the trading plans, and the absence of adequate monitoring and enforcement of the trading plans by the regulator. The Working Group submitted its report to SEBI on 15 September 2023, recommending certain amendments to the PIT Regulations, followed by the proposed framework stipulated in the recent consultation paper.
Comprehending the Proposals
The consultation paper released by SEBI includes multiple proposals for enhancing flexibility and easing the norms for insiders. It has been proposed to allow the insiders to formulate multiple trading plans, subject to certain conditions and safeguards by ensuring that the trading plans do not overlap with each other, and that the aggregate trading volume under all the trading plans does not exceed the threshold prescribed by the SEBI.
There is a reduction in the minimum duration of the trading plan from 12 months to 6 months which allows the insiders to either extend or terminate the trading plan before its expiry, subject to the approval of the compliance officer and the stock exchanges. The proposal also includes a reduction in the cooling-off period from 6 months to 4 months, and permits the insiders to trade during the period between the 20th trading day prior to the last day of any financial period for which results are required to be announced and the second trading day after the disclosure of such financial results, subject to the approval of the audit committee or the board of directors of the company.
Additionally, it has been suggested that the insider shall have the flexibility, during the formulation of the trading plan, to provide price limits, i.e., upper price limits for buy trades and lower price limits for sell trades. Such price limit shall be within +/-20% of the closing price on the date of submission of the trading plan. If the price of the security during the execution is outside the price limit set by the insider, the trade shall not be executed. If no price limit is opted for, the trade has to be undertaken irrespective of the prevailing price. The provision exempting trades executed under the trading plan from the applicability of contra-trade restrictions to be omitted, i.e., contra-trade provisions shall be applicable on trades executed under the trading plan as well. A significant emphasis of the paper lies on disclosure requirements for the insiders, which are elucidated in the following section.
Proposed Disclosure Mandate
Regulation 5(5) of the PIT Regulations stipulates that upon approval of a trading plan, the compliance officer must notify the stock exchanges where the company’s securities are listed. While there is no prescribed format for trading plan disclosure, it typically includes personal details of the insider, such as their name, designation, and PAN. The Working Group recognized the importance of protecting the privacy of insiders while disclosing trading plans. They explored three alternatives.
Under the first alternative, personal details such as the insider’s name, designation, and PAN would be concealed in the trading plan disclosed to stock exchanges. In terms of the second alternative, the Working Group considered maintaining the current practice of disclosing personal details of insiders in trading plans. However, these may raise concerns regarding the privacy and safety of senior management and insiders.
The Working Group proposed an additional alternative to strike a balance between the risk of misuse and privacy concerns. Under this proposed alternative, insiders would make two separate trading plan filings. Firstly, insiders would submit a trading plan to the stock exchange, including personal details as before. This disclosure would remain confidential with the stock exchanges, ensuring transparency and monitoring of trading plan execution. Secondly, insiders would make a separate trading plan filing for public disclosure through the stock exchange, omitting personal details. This public disclosure would enable market participants to access trading plan information while addressing privacy and safety concerns for senior management and insiders.
Further, to mitigate concerns regarding potential misuse arising from the masking of names in public disclosures, the Working Group proposed the use of a unique identifier—a common reference number with a time stamp—for both the confidential and public trading plan filings. The disclosure of trading plan to the stock exchanges proposed to be done in two days from the date of approval of the trading plan.
Decoding the Implications and Challenges
The implementation of the proposals outlined in the consultation paper would have far-reaching consequences and implications for various stakeholders. For insiders, the proposals would offer increased flexibility and convenience in trading securities while adhering to regulations. Insiders would have the ability to tailor trading plans to their personal and financial objectives, free from the current rigid and lengthy requirements. It would enable insiders to capitalize on market opportunities and price movements, as they would be allowed to trade under the trading plan even during black-out periods and set price limits for their trades. By disclosing their trading plan in advance, insiders would have enhanced certainty and transparency, reducing the risk of being accused of insider trading. However, insiders would also face a greater responsibility to diligently comply with the trading plan and contra-trade restrictions, as any deviation or violation could result in regulatory action and penalties.
Companies would benefit from reduced compliance burdens and administrative costs. The need to monitor and enforce black-out periods for insiders trading under the trading plan would be eliminated. Enterprises would be required to ensure timely approval and disclosure of trading plan, adhering to prescribed formats and procedure.
Access to information regarding the trading activities of insiders, disclosed through trading plan, would enable investors to make informed decisions. The trading plan structure would protect investors from unfair and fraudulent practices by insiders. Regulators would have access to additional data and evidence to track and investigate insider trading activities. The trading plan would provide a clear and objective basis to determine the culpability and liability of insiders, enabling regulators to deter and penalize those who violate trading plan and insider trading regulations.
While providing flexibility, the paper also highlights several concerns and challenges that require careful consideration and resolution prior to implementing the proposed changes. These concerns include the potential increase in complexity and confusion stemming from the introduction of multiple trading plans. There is a risk of dilution of the defence of the trading plan, as insiders might have the ability to modify or terminate the plan prematurely or engage in trading during restricted periods. Further, there is a need for clearer criteria and guidelines for approving trading plans by the compliance officer, audit committee, or board of directors.
Conclusion
While the consultation paper is a commendable initiative by SEBI to reform and improve the trading plan mechanism, it also requires a careful and comprehensive analysis and deliberation by the stakeholders, to ensure that the proposed changes are balanced and effective, and that they serve the dual objectives of facilitating legitimate and transparent trading by the insiders, and preventing and deterring insider trading by the insiders. SEBI should also consider conducting empirical and comparative studies on the trading plan mechanism, to assess its impact and effectiveness, and to benchmark it with the global standards and practices. SEBI should also ensure that the trading plan mechanism is adequately monitored and enforced, and that any violation or deviation from the trading plan is promptly detected and penalized, to instil confidence and trust in the trading plan mechanism among the insiders and the investors.
– Manas Rohilla & Smruti Kulkarni