Shivaang Maheshawari and I have a piece in today's Financial Express on the proposed reforms of 'Trading Plans', a means of achieving trades in advance, so as to protect oneself from charges of insider trading in the future. The full pieces is as below:
Ever since the inception of financial markets, the concept of insider trading has been subject to stringent regulatory oversight. Within this framework of regulating insider trading, trading plans emerged as a mechanism designed to facilitate trading by certain classes of insiders like senior management or key managerial personnel of a company who are consistently privy to Unpublished Price Sensitive Information (UPSI). It was recognized that insiders, even when in possession of UPSI, may need to trade for purposes such as creeping acquisitions, compliance with minimum public shareholding norms, exercise of ESOPs, etc. Thus, the concept of trading plans was introduced under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations) to enable such insiders to plan their trades in advance, thereby reducing the risk of trading based on UPSI.
However,
despite their intended purpose, the adoption of trading plans faced significant
challenges as the current framework imposed stringent restrictions, rendering
the concept less popular among insiders in recent years. Recognizing the
limitations, SEBI, on November 24, 2023, published a consultation paper
outlining proposed measures to provide flexibility in provisions relating to
trading plans with a view to facilitate adoption of such plans by
insiders. The proposals are based on the
recommendations of the Working Group (WG) tasked with reviewing existing
provisions related to trading plans.
The
consultation paper proposes a reduction in the minimum cool-off period between
the disclosure and implementation of a trading plan from 6 months to 4 months,
along with a decrease in the minimum coverage period requirement from 12 months
to 2 months. Under the present framework, insiders formulating a trading plan
are bound by a timeline of at least 18 months, encompassing a mandatory 6 month
cool off period before executing trades and a minimum coverage period of 12
months. Thus presently, a trading plan is to be formulated with the assumption
that a segment of the trade will extend into the 18th month which might render
the trading plan unviable to an insider since he may not be comfortable
planning a trade that would execute after 18 months at the then prevailing
price. With the proposed reduced timelines, insiders can now formulate trading
plans that align more closely with shorter-term outlooks, streamlining their
strategies within a more manageable timeframe.
Notably,
the paper proposes to eliminate the black-out period, which presently mandates
the closure of the trading window for insiders between the 20th day
prior to the last day of any financial period for which results are to be
announced and the second day after the disclosure of such results. It is
important to note that results for each quarter are typically disclosed within
a month after the quarter concludes which further prolongs the black-out period
four months in a year, consequently leaving only a few trading days available
in the entire year. Further, the PIT Regulations already prohibit the
implementation of trading plans until the UPSI, which the insider possessed
while formulating the trading plan, ceases to be UPSI.[1]
Thus, in the context of trading plans, black-out periods were rendered
redundant, given that the existing regulations anyway prohibit insiders from
implementing a trading plan even after the cool off period is over if the
information based on which the trading plan was enacted is still privileged.
The
paper also suggests introducing a provision regarding price limits within
trading plans. According to the proposal, insiders will have the flexibility to
place upper and lower price limits for buy and sell trades, respectively,
within +/- 20% of the closing price on the date of submitting the trading plan.
These flexible price limits have been adopted in order to ensure that insiders
are protected from potential losses resulting from extreme market volatility or
adverse conditions since trading plans are enacted well in advance and the
final trade execution might occur at a price which is unfavourable for
insiders. Further, in cases where the price moves beyond the limit set out in
the trading plan, the WG recommended that the insiders should be prohibited
from executing the trade and an option to execute the trade at the prevailing
price cannot be given as the decision to exercise such an option by the insider
may be influenced by new UPSI which did not exist at the time of formulating
the trading plan. Additionally, in cases where no price limit is set out in the
trading plan by insiders, the trade will be executed irrespective of the
prevailing price.
With
regard to disclosure of the trading plan, the consultation paper proposes three
different alternatives. The first alternative proposes masking the personal
details (such as name, designation, PAN) of insiders within the trading plan,
with a view to protect their privacy. However, it was noted by the WG that this
measure may raise concerns about potential misuse, as concealed personal
details might allow an insider to execute trades using a trading plan that was
submitted by another insider. Moreover, under the PIT Regulations, there is
already a requirement to disclose all trades done by the promoters/designated
persons above a specified threshold.[2]
Thus, names are anyway disclosed to the public post execution of significant
trades. The second alternative proposes to continue the current practice of
disclosing all personal details, advocating for complete transparency through
full disclosures. The third alternative endeavours to strike a balance between
the challenges of potential misuse and the need for privacy. It suggests a dual
disclosure method – a full and detailed disclosure of the trading plan to the
stock exchanges and a masked disclosure to the public, thereby mitigating any
potential misuse whilst safeguarding the privacy of the insider.
The
paper further proposes to do away with the exemption granted to trades executed
under a trading plan from applicability of contra-trade restrictions. Contra trade provisions restrict designated persons
from taking opposing positions or entering into buy/sell trades within 6 months
of an earlier sell/buy trade respectively. The WG noted that it is difficult to
ascertain the reason for an insider to plan two opposing
trades within a period of 6 months. Accordingly, it was recommended that contra
trade restrictions should be made applicable to trades carried out in
furtherance of a trading plan in order to restrict an insider from undertaking
a contra-position under the protection of trading plan provisions.
The proposals signify the regulator’s attempt to streamline
compliance requirements related to trading plans and allows for greater
adaptability in accommodating the legitimate interests of insiders who may
perpetually be in possession of UPSI. By virtue of being framed in response to
market feedback, the proposals appear to be more attuned to implementation
challenges, without detracting from the regulatory objective of minimizing
insider trading risk. The consultation paper published by SEBI stands as a testament
to the regulator’s proactive approach in ensuring that regulations are framed
and altered keeping in view the market feedback and interests of the
stakeholders involved. However, the proof of the pie is in the eating of it.
So, the amendments would have achieved their goals if a relatively large number
of people sign up for such plans, which till now were impractical for reasons
mentioned in the working group. These authors advocate a tilt towards privacy
of the insiders, while maintaining proper audit trail and also argue against
the new restrictions on contra trades, as the purpose of the trading plan is
the break the causal chain between inside information and wrongful trades. Once
that is achieved, a contra trade in the other direction should be kosher.
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