[Opinion] Will Insiders Tread Trading Plan 2.0?

Heta Mehta – [2024] 164 taxmann.com 97 (Article)

Insider Trading Regulations amended in line with Consultation Paper

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 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. TP are required to be in place for at least 12 months, no two TPs 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.

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