Will Insiders Tread Trading Plan 2.0?

Insider Trading Regulations amended in line with Consultation Paper

Heta Mehta | Executive | corplaw@vinodkothari.com

The concept of Trading Plan (‘TP’) that existed since May 2015 continued to remain unpopular due to the stringent conditions laid down in the Insider Trading Regulations. The framework was set to be reviewed based on empirical evidence and feedback post introduction and determine if SEBI needs to dilute or increase the regulatory requirement. In order to make it more realistic and captivating, SEBI’s Working Group suggested reforms vide Consultation Paper dated 24th November, 2023^[1] that was approved by SEBI in its board meeting held on  March 15, 2024. SEBI (Prohibition of Insider Trading) (Second Amendment) Regulations, 2024 notified on June 25, 2024 will be effective from September 24, 2024. As a concept, it is not unique to India, globally, both the US and UK have similar TP concepts with some or the other variations when compared to our legislation. This article discusses the amendments, including the rationale provided in the CP, relevant points discussed in the SEBI Board meeting and our analysis on the same.

Limitations under the existing Framework

Some of the salient features of the TP as on date, are that the execution of the TP may commence only at least 6 months after the TP is publicly disclosed. No TP should entail trading for the period between the 20th trading day prior to the last date of a financial period for which results are to be announced and until the 2nd trading day after the disclosure of the results. TPs are required to be in place for at least 12 months, no two TP should overlap and a TP should be reviewed and approved by the compliance officer of the company and then publicly disclosed after which it must be implemented. The TP have been criticized for their strict regulatory requirements, which have limited their widespread adoption. Some of the key limitations of TP include:

1. Prolonged Cooling-off period – Insiders are required to undergo a prolonged cooling off period of 6 months before execution of trade. This can be burdensome, as market conditions at the time of execution may differ significantly from when the plan was originally adopted or approved.
2. Higher minimum coverage period– The requirement that the TP must cover a period of at least twelve months requires the insiders adopt a much longer forward-looking perspective when formulating the TP.
3. Irrevocability– Once disclosed, the insider is not allowed to deviate, revoke or make any modification in his TP.
4. Blackout Period– Restricting trade during the black out period leaves only a few days for execution of trade in a quarter.

Critical analysis of key amendments

1.Shorter Cool-off Period

VKC Comments-

At the time the concept of TP was being discussed in the N K Sodhi Committee Report, it was indicated that this may not find many takers on account of the cooling off period and should be brought down to 90 days. The amended regulations set it to 120 calendar days.

In the US, Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and the associated Rule 10b5-1, the cooling-off period in case of directors and officers for executing trades spans over 90 days from the adoption or modification of the plan, or two business days after the disclosure of the issuer’s financial results for the relevant fiscal quarter, with a maximum limit of 120 days from the plan’s adoption or modification. In other cases, it is 30 days.

While this remains more flexible compared to India’s regulations, which previously required a cooling-off period of six months, the adjustment marks a significant step towards making TP flexible. It is also understood that earlier the cool off period in the US was 120 days, which was recently changed to the aforesaid timelines considering the earlier cooling off period would deter the insider from adopting or modifying the TP. It is seen that both the Indian and the US legislations are moving towards making the TP more adaptable and flexible.

2. Elimination of Minimum Coverage Period for TP

VKC Comments: Now, insiders are not mandated to submit a TP spanning 12 months. However, they are required to mention an outer limit within which their trades will be executed, specifying a particular date or a time interval not exceeding 5 consecutive trading days for each trade. Insiders can split their trades across multiple 5 day periods within the same TP, in case they intend to trade larger quantities. In the US, the TP usually ranges from 6 months to 18 months, it does not expressly provide for a minimum coverage period^[2].

3. Elimination of Blackout period

4. Applicability of Contra-Trade Restrictions

VKC Comments: Making trades executed as per TP liable for contra trade restriction will restrict the insider from executing a opposite trade for a period of 6 months i.e a buy trade cannot be executed if a sell trade is executed in the last 6 months. This amendment, though in the nature of making the provisions stricter, reduces the instances of speculative trading to a large extent and in line with the spirit of the regulations. While Insider Trading regulations in US do not expressly provide for any provision on contra trade restriction in case of TP, it does state that the insider will not be able to take the defense under the rule 10b5-1 if he has entered into or altered a corresponding or hedging transaction or position with respect to the securities in the TP.

5. Inclusion of Price Limit

VKC Comments: SEBI, in one of its Informal Guidance, stated that including a condition in the TP that trades will be executed subject to a maximum price may not comply with Regulation 5(4), which requires that a TP, once formulated, cannot be deviated from. Further, by mentioning the price, the entity is  providing  a hint or inducing the investors on the future pricing of its securities. Therefore, such disclosure of future pricing would entail market abuse and thus it may be construed as not being in the spirit of the regulations.

However, the recent amendment allows for a price limit of ±20% to be included in the TP, thus providing insiders the option to deviate from it only under unfavorable conditions. This change is one of the instances where SEBI has reviewed its own view taken in the past in a similar context.

In the US, there is a similar provision requiring the TP to specify the price, whether it be the market price on a particular date, a limit price, or a specific dollar amount. However, it does not mention an exact price range, such as the +/- 20% provided in the present amendment.

6.Deviations from TP

VKC Comments– Earlier, deviation and revocation of TP was prohibited. The recent amendment permits deviation in case of permanent incapacity, bankruptcy, or operation of law, and inadequate liquidity in the scrip. Further, adjustments in number of securities and price in the TP will be allowed in case of corporate actions like bonus issues or stock splits occurring after the submission of TP,  Insiders can also deviate from their TP if they have specified a price range, between ±20% from the closing price of the stock on the day before the TP submission and the price on the date of execution is outside the price range and adversely affect the Insider. In the US, any modification or change in the parameters of TP is permitted, but it triggers a new cooling-off period, which effectively means no modification is allowed.

The existing bar on trading outside the scope of TP continues to exist, which may continue to limit the popularity of TP. However, trades in terms of Reg. 4 (3) of the Regulations should still be permitted.

6. Process of implementation/ non-implementation 

Figure 1: Process for approval of TP

Figure 2: Process in case of non-implementation of plan

Conclusion

The entire premise of the insider trading regulation revolves around prohibition and regulation of instances of insider trading. TP is one of the structured tools to eliminate the instances of insider trading by those who generally stand at the highest podium of knowing UPSI. While, the recent amendments have attempted to introduce greater flexibility in TP provisions, aiming to enhance their popularity and usability, one of the underlying restrictions that bars an insider from trading outside the scope of TP, may continue to pose a challenge. The insider, upon opting for a TP, will be prohibited from trading for the entire period when TP is active, even if the said insider is not in possession of UPSI. Further, while the cooling-off period has been reduced to 120 calendar days, it still exposes insiders to market risk during this time, complicating the use of the plans for near-term liquidity needs. Will the insiders tread for Trading Plan 2.0, has no clear answer as of now.

Our related resources on the topic:

1. SEBI Consultation Paper (CP) to ease trading plans by company insiders
2. PIT resource centre

^[1]Read our article on https://vinodkothari.com/2023/11/sebi-proposals-ease-tradingplans-companyinsiders/

^[2] https://www.jpmorgan.com/insights/investing/investment-strategy/selling-stock-under-a-10b5-1-plan#:~:text=A%2010b5%2D1%20plan%20is,between%20six%20and%2018%20months