Trading Plan provisions revamped! - MMJC

Securities Exchange Board of India (‘SEBI’) vide its circular dtd June 25,2024 has come up with second amendment to SEBI (Prohibition of Insider Trading) regulations, 2015 (‘SEBI PIT’). The effective date of this amendment is ninetieth day from the date of publication in the Official Gazette which shall be September 23, 2024.

About Trading Plans

Trading plan means plan framed by an insider (and not just designated person) for trades to be executed at a future date. Regulation 2 (g) of SEBI PIT defines insider which means any person who is: (i) a connected person; or (ii) in possession of or having access to unpublished price sensitive information (‘UPSI’). This means insiders are allowed to trade, provided they are not in possession of UPSI and subject to compliance with relevant provisions of trading rules.

Analysis of the changes relating to Trading Plan: The analysis is bifurcated into three parts:

1. Part A that speaks about Approval of trading plan.
2. Part B covers Formulation of trading plan and
3. Part C covers miscellaneous information relating to Trading Plan.

• Part A: Approval of Trading plan:
  • Commencement of trading under Trading Plan (cool-off period): Earlier, trading as proposed under the trading plan could not be commenced until 6 months from the public disclosure of the plan. Now insiders must wait atleast 120 calendar days after publicly disclosing their trading plan before they can start trading. The reason for such coof off period being that the companies report their results quarterly, and there is usually a trading restriction from the end of the quarter until two days after the results are announced, which typically lasts about a month. The 120-day period is considered long enough for any unpublished price-sensitive information the insider had when making the plan to become public. It’s also a sufficient time gap for any new unpublished information to emerge without impacting the trading plan.
  • Clearance of Trading Plan: A time limit of 2 trading days of receipt of the plan has been introduced for the compliance officer to approve or reject the trading plan and the same shall be notified to the stock exchanges on the day of approval.
  • Non-implementation of Trading Plan: SEBI PIT now provides procedure to be followed in case of non-implementation (full/partial) of trading plan. SEBI PIT now states that if an insider doesn’t fully or partially implement their trading plan, they must inform the compliance officer within two trading days after the plan’s tenure ends, providing reasons and supporting documents. The compliance officer will then present this information to the Audit Committee in the next meeting, along with a recommendation to accept or reject the insider’s explanation. The Audit Committee will decide if the non-implementation was genuine, and the compliance officer shall then notify the stock exchange on the same day. If the Audit Committee rejects the insider’s explanation, the compliance officer will take appropriate action according to the code of conduct.
  • Non-execution of trading plan: If the insider who had submitted trading plan on completion of cool-off period is in possession of UPSI then he/she shall not execute trading plan.

• Part B: Formulation of Trading Plan: Under old provisions relating to trading plan, it was allowed to frame trading plan value of trades to be effected or the number of securities to be traded along with the nature of the trade and the intervals at, or dates on which such trades shall be effected. Now under amended provisions relating to trading plan in addition to mentioning the value of trades to be effected/ number of securities to be traded along with nature of the trade, in the trading plan, the following parameters shall also be set out:
  • Specific date or time period for the trade not exceeding 5 consecutive trading days especially when insiders want to trade in large quantities.
  • Price limit in trading plan: Insiders may put upper price limit for a buy trade and lower price limit for a sell trade in the trading plan.
    • The range of the price limit has been mentioned i.e. for a buy trade, the maximum price you can set in the trading plan must be between the closing price of the stock on the day before submitting the plan and up to 20% higher.
    • For a sell trade, the minimum price must be between the closing price on the day before submitting the plan and up to 20% lower. These price limits ensure that trades are made within a reasonable range around the stock’s recent market price. (not required to be mentioned mandatorily). The price limit shall be rounded off to the nearest numeral
  • In case the insider has set a price limit for the trade, the trade shall be executed only if the execution price of the security is within the limit. If it is outside the price limit, the trade shall not be executed.
  • If due to adverse fluctuations in market price, the price of the security is outside the price limit set by the insider, the trade shall not be executed. However, if the insider wishes to trade irrespective of the fluctuation in market price, he may not set any price limit at the time of formulation of the trading plan.

• Part C: Miscellaneous information:
  • Blackout period: Trading during window closure period i.e. restriction on trading 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 has been omitted.
  • Duration of Trading Plan: Restriction of 12 months’ time gap between trading plan is now omitted. However, there should be outer limit on the duration of the time period at the discretion of insider. Split in trades across different dates is allowed subject to mention of outer limit on the duration of time period of trading plan.
  • The provision exempting trades executed under trading plan from contra trade restriction is now removed. That means trades executed under trading plan should not be violating contra trade provisions.
  • Deviation in use of Trading Plan: Deviation is now allowed to insider in trading plan in case of permanent incapacity or bankruptcy or operation of law.
  • Alteration of Trading Plan: The insider may adjust the trading plan, in the number of securities and price limit with the approval of compliance officer in the event of corporate actions related to bonus issue and stock split after approval of trading plan and the same shall be notified on the stock exchanges on which securities are listed.