Insider Trading Regulations: SEBI’s Proposals at a Glance

On November 24, 2023, the Securities and Exchange Board of India (SEBI) released a consultation paper with proposals to facilitate the adoption of trading plans (TPs) by insiders (such as individuals who are part of senior management or key managerial personnel, etc.) who may be perpetually in possession of Unpublished Price Sensitive Information (UPSI).

The Board considered it necessary to bring in changes to the 2015 Regulations, in light of the submission of a meagre number of TPs (i.e., 30) by insiders to stock exchanges over the last five years. In its report, the Working Group constituted by SEBI has zeroed in on existing provisions that deter insiders from adopting TPs and suggested certain amendments to the SEBI (Prohibition of Insider Trading) Regulations, 2015.

The recommendations contained in the consultation paper are as follows: –

  • Cool-off period to be brought down

Presently, a TP can be executed only after 6 months from the date of its public disclosure. However, market conditions while implementing the TP may be highly distinct from the time it was formulated, therefore, the consultation paper proposes to reduce the cool-off period, i.e., the period between the public disclosure of the TP and its execution, from 6 months to 4 months.

  • Reduction of the minimum coverage period

The consultation paper envisages reducing the minimum period of trading from 12 months to 2 months, as market uncertainty makes it difficult for insiders to plan 12 months in advance.

  • Removal of the black-out period requirement

Another major amendment proposed is the removal of the black-out period requirement. As per Regulation 5(2)(ii) of the 2015 Regulations, a TP should “not entail trading for the period between the twentieth trading day prior to the last day of any financial period for which results are required to be announced by the issuer of the securities and the second trading day after the disclosure of such financial results”. SEBI noted in its consultation paper that such a restriction considerably reduces the number of trading days available in the year for trading using a TP. Accordingly, the consultation paper has proposed that this provision be deleted in order to enable flexibility to execute trades.

  • Insiders can set price limits for trades

As per the draft amendments, an insider would be eligible to set price limits during the formulation of a TP. This is to protect insiders from the adverse effects of fluctuations in the price of securities, which would need to be within +/-20% of the closing price on the date of submission of the TP. In case of price fluctuations beyond the limit, the trade cannot be executed, i.e., an insider with a TP cannot go beyond the limit.

The limits so specified have to be within the stipulated range to ensure that insiders don’t misuse the provision and set unrealistic price limits to influence market participants.

  • Contra-trade restrictions to apply to trades executed under TP

Noting that the necessity to carry out contra-trade within a short period of time arises only on account of personal exigencies which cannot be planned in advance through TPs, it has been proposed to withdraw the exemption granted in this regard.

  • Disclosure of TP

  1. After approval of TP, the compliance officer has to notify the plan to stock exchanges (on which the securities are listed) within 2 days. Currently, there is no time limit in place for the same.
  2. The Working Group has further proposed certain suggestions to protect the privacy of insiders by masking their personal details while disclosing the TP to stock exchanges, as it may potentially lead to misuse or abuse of TPs by other insiders. Three such alternatives have been put forward with respect to the furnishing of personal details of insiders such as name, designation and PAN – a) masking of personal details b) continuing the existing procedure c) making two separate disclosures; one containing the full disclosure to be kept confidential by stock exchanges and the other without personal details to be publicly made available. A common reference number with a time stamp is proposed to be added on filings which will act as a unique identifier to prevent any possible misuse arising from masking of names from the public.
  3. Additionally, it is recommended that a format for reporting details of TP be prepared in consultation with market participants.

Remarks

Overall, the proposals suggested in the consultation paper are broadly positive, since it appears that SEBI has received and appreciated the challenges faced by insiders using trading plans. We will need to wait to see what public comments are received, and whether SEBI implements these proposed changes by notifying amendments to the SEBI (Prohibition of Insider Trading) Regulations soon.

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Photo by uschools on Canva 

As per the draft amendments, an insider would be eligible to set price limits during the formulation of a TP. This is to protect insiders from the adverse effects of fluctuations in the price of securities, which would need to be within +/-20% of the closing price on the date of submission of the TP. In case of price fluctuations beyond the limit, the trade cannot be executed, i.e., an insider with a TP cannot go beyond the limit.

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