SEBI’s New Insider Trading Regulations
Balancing Flexibility and Compliance
1. Introduction
Insider trading involves buying or selling shares of a company by individuals who have access to confidential information about the company. To ensure fairness and transparency, SEBI has prescribed strict regulations to prevent misuse of this insider information. SEBI recently introduced new amendments to the SEBI (Prohibition of Insider Trading) Regulations, 2015, effective June 25, 2024. The key changes include reducing the waiting period for insiders to start trading from 6 months to 120 days and removing the requirement for a minimum 12-month trading period.
The amendments also set clear price limits for trades and allow the splitting of large trades over a specified period. These changes aim to make trading more flexible for insiders while maintaining strict compliance and transparency. The key amendments are discussed in detail below.
2. Trading Commencement Period for Insiders Reduced to 120 Calendar Days
The concept of a trading plan was introduced for the first time in the SEBI (Prohibition of Insider Trading) Regulations, 2015. This concept allows insiders to trade in compliance with the regulations without violating the prohibitions imposed.
A ‘trading plan ‘refers to a plan framed by an insider for trades to be executed at a future date. It is particularly suitable for individuals within an organization who may, by way of their position, seniority, or any other reason, be in possession of UPSI at all times. Since the PIT Regulations prohibit trading when in possession of UPSI, trading plans serve as an exemption to such prohibition.
Regulation 5(1) of the SEBI (Prohibition of Insider Trading) Regulations, 2015, specifies that an insider can formulate a trading plan and present it to the compliance officer for approval and public disclosure. Based on the approved plan, trades may be carried out on behalf of the insider.
Further, the trading plan must not allow the commencement of trading on behalf of the insider earlier than six months from the public disclosure of the plan.
SEBI has now reduced this period to 120 calendar days. Thus, the trading plan now allows the commencement of trading on behalf of an insider after 120 calendar days from the public disclosure of the plan.
2.1 Meaning of Insider
As per Regulation 2(1)(g) of SEBI (Prohibition of Insider Trading) Regulations, an “insider” means any person who is a connected person or in possession of or has access to unpublished price-sensitive information (UPSI).
Comments
SEBI’s reduction of the trading commencement period from 6 months to 120 calendar days enhances flexibility for insiders to initiate trades sooner after the public disclosure of their trading plans. This change aims to streamline trading activities while ensuring compliance with insider trading norms.
3. Insiders are Now Exempted from Maintaining a 12-month Trading Period
Regulation 5(2)(iii) of the SEBI (Prohibition of Insider Trading) Regulations, 2015, specifies that a trading plan must involve trading for a period of at least 12 months.
However, this requirement has now been removed. Insiders are no longer obligated to maintain a minimum trading period of 12 months and can now conduct trades over shorter durations. This change simplifies compliance for insiders, enabling them to adapt trading plans to shorter durations as per market conditions.
Illustration
Ms. Anjali Kumar, the CFO of Renewable Energy Solutions Ltd., wants to create a 6-month trading plan to sell some of her shares in the company. She holds 50,000 shares, with a current price of Rs 500 per share. Anjali now plans to sell her 12000 shares.
As per the amended norms, Anjali can formulate a trading plan that will be shorter. Accordingly, she can sell shares within six months. She is no longer required to maintain a minimum of 12-month trading period.
4. Parameters Broadened for each ‘Trade Execution’ with Clear Price Limits
Regulation 5(2)(v) of the SEBI (Prohibition of Insider Trading) Regulations, 2015, specifies that the trading plan must outline either the value of trades to be executed or the number of securities to be traded, along with the nature of the trade and the intervals or dates for executing such trades. SEBI has now clearly set out the following parameters for each trade to be executed1 –
(a) Either the value of trade to be executed or the number of securities to be traded;
(b) Nature of the trade
(c) Either a specific date or time period not exceeding five consecutive trading days;
(d) Price limit, i.e. an upper price limit for a buy trade and a lower price limit for a sell trade subject to a specific range:
• For a Buy Trade – the upper price limit must be between the closing price on the day before submission of the trading plan and up to 20% higher than such closing price;
• For a Sell Trade – the lower price limit must be between the closing price on the day before submission of the trading plan and up to 20% lower than such closing price. The price limit must be rounded off to the nearest numeral.
Comments
SEBI’s amendment enhances transparency and compliance in trading practices by clearly defining parameters for each trade, including trade values, nature, and execution timelines, and by introducing price limits. These measures promote fair market operations and aim to boost investor confidence.
1 It is to be noted that the first three parameters are mandatory for each trade while fourth parameter is optional. Further, the insider, may make adjustments, with the approval of compliance officer, in the no. of securities and price limit in the event of corporate actions related to bonus issue and stock spilt occurring after approval of trading plan. The same must be notified on stock exchanges on which securities are listed.
5. SEBI Clarifies Trade Splitting Duration to Prevent Misuse
The note to Regulation 5(2)(v) of the SEBI (Prohibition of Insider Trading) Regulations, 2015 outlines essential parameters for trading plans. It specifies that a trading plan must detail whether it involves acquiring or disposing of securities. Additionally, plans can specify the value and quantity of securities and specific dates or time intervals for executing trades.
SEBI now clarifies that while insiders can split their trades over different dates, there must be an outer limit to this duration to prevent misuse. “Trade splitting” refers to the practice where an insider divides a large transaction involving buying or selling securities into smaller parts that are executed over multiple dates or time intervals.
Further, when formulating the trading plan, an insider may set price limits within the specified range to protect him from unexpected price movements.
Illustration
Ms Priya, a senior manager at TechGen Innovations Ltd., plans to sell 10,000 shares of the company valued at Rs 750 each to diversify her investment portfolio. Instead of executing the entire transaction at once, Priya decided to split her trades over a minimum of 3 months. In the first month, she sells 3000 shares at an average price of Rs 740 per share. In the second month, she sells another 3000 shares at an average price of Rs 760 per share. In the third month, she sells the remaining 4000 shares at an average price of Rs 750 per share.
As per the amendment, while trade splitting is allowed, there must be an outer limit to this duration. This means setting a maximum time frame within which these split trades can be executed. For example, if the maximum limit for trade splitting duration is set up at four months, then it must be completed within that period only.
Comments
SEBI’s clarification on the duration for splitting trades aims to enhance transparency and prevent potential misuse by insiders. By imposing an outer limit on the duration allowed for trade splits, SEBI ensures adherence to regulatory guidelines. Also, allowing insiders to set price limits within specified ranges aims to safeguard them from unforeseen price fluctuations, promoting fair trading practices.
6. Deviations from ‘Trading Plan’ are Allowed Only in Exceptional Cases
Currently, under the SEBI (PIT) Regulations2, once a trading plan is approved, it must be irrevocable, and insiders must implement the plan without deviating from it or executing trades in the securities outside its scope.
However, as per the amended norms, insiders are now required to adhere to their trading plans without deviation or trading outside the plan, except in cases of permanent incapacity, bankruptcy, or operation of law.
Comments
This amendment allows insiders to strictly follow their trading plans, except in cases of permanent incapacity, bankruptcy or operation of law, thereby ensuring clarity and fairness in trading practices. It provides greater flexibility for insiders facing unforeseen circumstances while strictly adhering to the trading plan under normal conditions.
7. Insiders Must Execute Trades Only Within Set Price Limits
With the introduction of the second proviso to Regulation 5(4), SEBI now stipulates that if an insider sets a price limit for a trade, the trade must be executed only if the security’s execution price falls within this limit; otherwise, the trade must not be executed.
Further, in cases of non-implementation (full/partial) of the trading plan or failure to execute trades due to inadequate liquidity in the scrip, the following procedure must be adopted3:
(a) The insider must inform the compliance officer of the non-implementation (full/partial) within two trading days of the end of the tenure of the trading plan, providing reasons and supporting documents.
(b) Upon receipt, the compliance officer must present the insider’s information and recommendations to the Audit Committee for a decision on the genuineness of the non-implementation.
(c) The Audit Committee’s decision must be promptly communicated by the compliance officer on the same day to the stock exchanges where the securities are listed.
2 Regulation 5(4) of SEBI (Prohibition of Insider Trading) Regulations, 2015
3 Explanation to proviso to Regulation 5(4) of SEBI (Prohibition of Insider Trading) Regulations, 2015
(d) If the Audit Committee does not accept the insider’s submissions, the compliance officer must take action as per the Code of Conduct.
Comments
This amendment ensures greater accountability and transparency in the execution of trading plans. By mandating prompt reporting of non-implementation of trading plans and requiring Audit Committee oversight, SEBI aims to prevent misuse and uphold market integrity.
Illustration
Ms. Neha, a senior executive at GlobalTech Innovations Ltd., intends to purchase 8000 shares of the company to boost her investment portfolio. The current market price of the company’s shares is Rs 1,500 per share. Neha set a price limit of Rs 1,550 per share for her purchase.
As per the amended norms, trade can only be executed if the security’s execution price falls within this limit. Accordingly, the broker completes the transaction when the market price reaches Rs 1,540 per share, which is within the specified limit of Rs 1,550 per share. Thus, Neha buys 8,000 shares within her defined price limit.
8. Mandates Compliance Officer to Approve/ Reject Trading Plan within 2 Trading Days
Regulation 5(5) of the SEBI (Prohibition of Insider Trading) Regulations, 2015, requires the compliance officer to notify the stock exchanges of the approved trading plan. Under the amended norms, the compliance officer must approve or reject the plan within two trading days of receipt.
Comments
With the amendment, the compliance officer must decide whether to approve or reject the trading plan within two trading days of receiving it. This change aims to streamline the approval process, ensuring faster responses to trading plans and quicker notification to stock exchanges upon approval.
9. Conclusion
SEBI’s recent amendments to insider trading regulations aim to enhance operational flexibility and compliance. By reducing the trading commencement period to 120 days and eliminating the mandatory 12-month trading requirement, SEBI enables insiders to adapt their trading strategies more swiftly. Further, SEBI’s measures on trade splitting durations and allowing deviations under exceptional circumstances strengthen and promote transparency in financial markets.
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