Corporate Law Newsletter – SEBI – Enhanced Flexibility For Perpetual Insiders : July 2024

The Securities Exchange Board of India (SEBI) has recently in its notification dated June 25, 2024, bearing reference no SEBI/LAD-NRO/GN/2024/184 dated June 25, 2024 (“Amendment”) announced amendments to the SEBI Prohibition of Insider Trading (PIT) Regulations, 2015. 

Insider trading refers to the buying or selling of any listed company’s shares by individuals who have access to confidential information, known as Unpublished Price Sensitive Information (UPSI). 

These individuals often include senior management, promoters, and key managerial personnel (KMP) of a company (“Insiders”) who possess such insider information because of their roles and responsibilities, their knowledge with respect to critical management decisions and operations of the company. 

Trading with the knowledge of UPSI is prohibited in India under the SEBI (PIT) Regulations. To facilitate compatible trading practices, SEBI has introduced a Trading Plan mechanism. This allows the Insiders to trade in their company’s securities by scheduling their trades through an irrevocable Trading Plan. While the concept of a Trading Plan has been in existence since 2015, the earlier constraints made its implementation challenging. 

Earlier, Insiders had to endure a lengthy six-month cooling-off period before executing trades, potentially causing disparities with the market conditions. Additionally, no Trading Plan was allowed from the twentieth trading day before a financial period’s end until the second trading day after results were disclosed. Each Trading Plan had to last at least twelve months without an overlap, compelling Insiders to adopt long-term perspectives. Once the Trading Plans were disclosed, the Insiders were bound by its terms without the ability to make any alterations, thereby adding inflexibility to their trading decisions. Additionally, blackout periods limited trading activities to a few days per quarter, posing further challenges for the timing and execution of strategies. Before implementation, each Trading Plan required review and approval by the company’s compliance officer, followed by a public disclosure. 

Despite the above-mentioned mechanism, the erstwhile framework on Trading Plans faced criticism for their stringent regulatory requirements, which hindered their widespread adoption.

Changes aimed at simplifying the Trading Plan framework pursuant to the Amendment are listed below: 

• Trading Commencement Period: The trading commencement period for Insiders has been reduced from 6 months to 120 calendar days from the public disclosure of the Trading Plan. This adjustment allows Insiders to initiate their Trading Plans sooner.  

• Elimination of Minimum Trading Period: The Insiders are no longer required to adhere to a minimum trading period of 12 months and can now execute trades as per their preferred time frame.

• Flexibility in Blackout Periods: Trading during the blackout period was previously prohibited under the Trading Plan. However, this restriction has been removed, giving Insiders more flexibility in carrying out trades during these periods

• Simplified Trading Plan Requirements: The recent amendment simplifies the requirements of the Trading Plan. Instead of specifying trade value, number of securities, nature of trade, and specific intervals or dates, the plan now only requires the Insiders to
  
  disclose a maximum time limit. Insiders can split trades over multiple 5-day periods within the same Trading Plan, making compliance easier and enabling adjustments based on preferred time limits and market conditions.

• Price Limitations for Trades: To safeguard against adverse price fluctuations in the market, Insiders can set an upper and a lower price limit for buy and sell trades. For a buy trade, the upper price limit is determined between the closing price on the day before the Trading Plan submission and up to twenty percent higher than that closing price. Conversely, for a sell trade, the lower price limit ranges from the closing price on the previous day to up to twenty percent lower than that closing price.  This provision ensures that trades will proceed only if the execution price remains within these specified limits, preventing execution in cases of unexpected price movements beyond these bounds.

• Contra Trade Restrictions: Contra trade involves executing opposite trades (buying and selling, or vice versa) within a short period, typically 6 months, to profit from short-term market movements. The exemption previously excluded trades executed under Trading Plans from contra-trade. Therefore, these contra-trade restrictions now prohibit Insiders from engaging in conflicting trades while they are executing a Trading Plan.

• Flexibility in Execution: Insiders now have the flexibility to deviate from the mandatory execution of their Trading Plans under specific circumstances, such as adverse price movements, permanent incapacity, bankruptcy, operation of law, or inadequate liquidity in the script. In cases of non-execution, Insiders are required to promptly inform the compliance officer. The compliance officer will then present the matter, along with
  
  recommendations, to the audit committee of the company for evaluation. The audit committee will make the final determination on whether the non-implementation was justified, and this decision must be communicated to the stock exchanges accordingly.

• Adjustments for Corporate Actions: Corporate actions such as bonus issues or stock splits that occur after the submission of the Trading Plan can modify the trading limit. If such corporate actions occur after the Trading Plan’s approval, adjustments must be discussed with the compliance officer and reported to the stock exchange.

• Approval Process: The compliance officer must approve or reject the Trading Plan within two trading days on receipt of the Trading Plan. Upon approval, the Trading Plan must be promptly notified to the stock exchanges where the securities are listed.

These recent amendments aim to streamline execution and enhance the operational flexibility of the Trading Plan by allowing Insiders to adjust their trading strategies seamlessly and enhancing transparency in financial markets.