Trading plans which are pre-approved demonstrate that the decision to trade was made in advance and independent of any potential UPSI exposure.
Regulations Governing Trading Plans:
Regulators such as the Securities and Exchange Board of India (SEBI) have implemented rules to carve out exceptions for trading plans pre-submitted by Designated Persons as an exception to normal Insider Trading prohibitions under the SEBI (Prohibition of Insider Trading) Regulations, 2015. These regulations lay down provisions regarding insider trading and establish guidelines for the establishment and execution of trading plans by insiders.
Pre-Approval Requirements may include requiring Designated Persons to obtain pre-approval from the company’s compliance officer before initiating a trading plan. Designated Persons are generally obligated to disclose their trading activity, including transactions executed under a trading plan, in compliance with regulatory filing requirements. This fosters transparency and market confidence, the ultimate end-goal.
Challenges in the Present Framework:
Despite the existence of trading plans since 2015, their popularity remains limited. Over the past half-decade or so, only 30 trading plans have been submitted annually by insiders. Juxtapose this against the staggering number of designated persons among listed companies (more than 250000 for the FY 2022-23) highlight the lack of adoption. Restrictive conditions imposed on trading plans (for example, the need to stick to such the plan during unfavourable market conditions or the mandatory cool-off period of six months) though understandable from the regulatory perspective, contribute to their limited adoption.
SEBI’s Proposed Reforms:
To address the challenges faced by trading plans, SEBI has proposed several amendments to the existing framework:
Reduced Cool-off Period: SEBI proposes to reduce the cooling-off period from 6 months to 4 months.
Minimum Coverage Period: SEBI may reduce the minimum coverage period from 12 months to 2 months to reduce commitment periods.
Eliminating Black-out Periods: SEBI proposes to omit black-out periods to provide insiders with more trading opportunities.
Introducing Price Limits: SEBI suggests introducing price limits to enables trades to be conducted within reasonable parameters.
Easing Irrevocability: SEBI proposes to allow for flexibility in certain circumstances, permitting deviations from the plan under specific conditions.
Enhanced Disclosure Requirements: SEBI suggests refining the disclosure requirements for trading plans to enhance transparency and accountability.
SEBI’s proposed amendments to trading plan regulations represent a significant step towards enhancing transparency, flexibility, and effectiveness in insider trading practices in India. By addressing key challenges and introducing more practical guidelines, these amendments aim to promote compliance while facilitating legitimate trading activities by insiders.
The proposed easements for Designated Persons may increase adoption but give rise to another problem. The verification of compliance with such Trading Plans will increase challenges for Compliance Officers. Think about verifying the trades within flexible price bands, varying commitment periods, variable cool-off periods. Further, think about the challenges of integrating flexibility within these. Now think about the difficulties in automating such verification and the need for hyper-intelligent solutions like Affinis becomes extremely critical to minimize the risk of non-compliance. As regulatory requirements evolve in line with individual investments in capital markets, tools like Affinis will be critical to bridge the gap between regulatory and individual needs to uphold the integrity of Indian financial markets.
