Trading Plan under SEBI (Prohibition of Insider Trading) Regulations, 2015

The concept of trading plan has been introduced in India by the SEBI (Prohibition of Insider Trading) Regulations, 2015 (the PIT Regulations). In every company there are persons holding key managerial positions or promoters who may be perpetually in possession of Unpublished Price Sensitive Information (UPSI). For such persons it is impossible to trade in the securities of the Company. These persons are always involved in decision making and thus have access to UPSI. Trading plans provide such persons opportunity to trade in the securities of the company without compromising the prohibitions imposed under the PIT Regulations. It is a mechanism which facilitates monetizing of securities by insiders on a regular basis who may otherwise be unable to trade in securities of the company.

When an insider formulates a trading plan, he may be in possession of certain UPSI which would become generally available to the public by the time the cooling off period is over and the insider trades on the basis of the trading plan. Under the circumstances, impact of such UPSI gets factored in the price of the security at the time of trading. In another situation, at the time of trading the insider may be in possession of certain UPSI which was not existent at the time of formulation of the trading plan. Existence of such UPSI does not matter because it had not influenced the insider’s decision to trade. The decision to trade had already been taken before this UPSI came into existence. This is the basic principle on which the concept of trading plan has been developed.

Trading plans enable compliant trading by insiders without compromising the prohibitions imposed in the PIT Regulations. However, the possibility of abuse of the trading plans cannot be ruled out. Though, the trades may be predetermined but the publishing of UPSI may be so timed as to profit the insider from the predetermined trades. Such instances were reported in the United States where the concept of trading plans was introduced way back in the year 2000. Thus the trading plan does not provide absolute immunity from investigations into trading under a pre-determined trading plan because there may be instances of manipulation of timing of making UPSI generally available to suit the trading plans of insiders.

Trading plans provide an affirmative defence against accusations of insider trading. Where the insider is aware of UPSI on the date of trading he can raise a defence that the trade was made as per the terms of a trading plan drawn as per the requirements of the PIT Regulations. Affirmative defence allows a defendant to raise a defence but does not guarantee a win on the defence. The defendant who has done a wrongful act may prove that there exist circumstances which under the law either justify or excuse his otherwise wrongful actions. Another illustration of an affirmative defence in criminal cases is action taken in ‘self defence’.

To curb the abuse of the Trading Plans, certain safeguards have been built in the provisions of PIT Regulations, which are:

1. cooling off period of six months;
2. no trading during specified periods;
3. trading plan to cover a period of at least 12 months;
4. no overlapping of trading period in two trading plans;
5. approval of trading plan;
6. public dissemination of trading plan;
7. mandatory implementation of trading plan;
8. trading plan to be deferred in case UPSI at the time of formulation of the trading plan is not generally available at the time of execution of trades.

Regulation 5 of PIT Regulations contains provisions relating to trading plans. These provisions are discussed in the following paragraphs.

Regulation 5(1) provides for formulation of a trading plan by an insider and reads as under:

“An insider shall be entitled to formulate a trading plan and present it to the compliance officer for approval and public disclosure pursuant to which trades may be carried out on his behalf in accordance with such plan.”

As per the above provisions an insider is entitled to formulate a trading plan to trade in securities of the company in a compliant manner. The plan is to be submitted to the compliance officer for approval and its disclosure to the public. The public disclosure is done by disclosing the trading plan to the stock exchanges where the securities of the company are listed. Thereafter, after complying with other requirements of the PIT Regulations trades can be carried out by or on behalf of the insider in accordance with the trading plan. Legislative note appended to this sub-regulation explaining the legislative intent and purpose of this provision states as under:

“This provision intends to give an option to persons who may be perpetually in possession of unpublished price sensitive information and enabling them to trade in securities in a compliant manner. This provision would enable the formulation of a trading plan by an insider to enable him to plan for trades to be executed in future. By doing so, the possession of unpublished price sensitive information when a trade under a trading plan is actually executed would not prohibit the execution of such trades that he had pre-decided even before the unpublished price sensitive information came into being.”

Regulation 5(2) of PIT Regulations lays down the requirements for a trading plan. It provides as under:

“Such trading plan shall:

i. not entail commencement of trading on behalf of the insider earlier than  six months from the public disclosure of the plan;

This provision requires a cool-off period of six months for executing trades from the date of public disclosure of the trading plan. As per the legislative note appended to this provision the six months cool-off period is considered reasonably long for UPSI that is in possession of the insider when formulating the trading plan, to become generally available. However, this cool-off period would not grant immunity from action if the insider were to be in possession of the same unpublished price sensitive information both at the time of formulation of the plan and implementationof the same. To cope with such circumstances, Proviso to regulation 5(4) provides for deferment of trading plan.

ii. not entail trading for the period 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;

Around the time of declaration of financial results a lot of unpublished price sensitive information is generated. The process of preparation of financial results usually starts before the close of the financial period and continues till the results are made public. The results are required to be declared on a quarterly basis. To curb any misuse of the exception granted for trading by the insiders pursuant to a trading plan, the regulations prohibit trading during the specified periods. For each quarter, the trading plan formulated should not allow trading during the period, starting from the twentieth trading day prior to the last day of the quarter and ending on the second trading day after the disclosure of such financial results.

The term “trading day” has been defined in Regulation 2(m) of the PIT Regulations as “Trading day means a day on which the recognised stock exchanges are open for trading.” In a calendar month there are around 20 trading days. In view of the above, virtually the non-trading period under a trading plan may extend upto two and a half months in each quarter. Two and half months period comprise of one month before the close of the quarter and maximum one and half month for declaration of results after close of the quarter (maximum two months in case of last quarter). Thus, effective number of trading days in each quarter will be very few. These may differ for each company depending on the date of declaration of financial results. In case, the annual accounts closing of the company is on 31st March, there may be situations when no trading day is available for trading during the period 1st March to 15 August. Therefore, while formulating the trading plan this need to be kept in mind and non-trading periods should also be specified in the trading plan.

iii. entail trading for a period of not less than twelve months;

This provision requires a trading plan to cover at least a period of twelve months. Legislative note appended to this clause explaining the legislative intent and purpose of this provision states as under:

“It is intended that it would be undesirable to have frequent announcements of trading plans for short periods of time rendering meaningless the defence of a reasonable time gap between the decision to trade and the actual trade. Hence it is felt that a reasonable time would be twelve months.”

iv. not entail overlap of any period for which another trading plan is already in existence;

To curb the abuse of timing of disclosure of UPSI to suit the trading requirements of the insider or to have multiple trading plans to circumvent the provisions of PIT Regulations, it has been provided that multiple trading plans covering the same period would not be allowed. In this regard legislative note to this clause states as under:

“It is intended that it would be undesirable to have multiple trading plans operating during the same time period. Since it would be possible for an insider to time the publication of the unpublished price sensitive information to make it generally available instead of timing the trade, it is important not to have the ability to initiate more than one plan covering the same time period.”

v. set out either the value of trades to be effected or the number of securities to be traded along with the nature of trade and the intervals at, or dates on which such trades shall be effected; and

The trading plan should specify the nature of trade i.e., whether acquisition or disposal. It should also specify the number of shares to be traded or the value of trades to be executed. The date and time interval of undertaking trades may also be set out in the plan.

vi. not entail trading in securities for market abuse.

The trading under a trading plan does not provide absolute immunity against action for market abuse. It provides only an affirmative defence. Legislative note to this clause states as under:

“Trading on the basis of such a trading plan would not grant absolute immunity from bringing proceedings for market abuse. For instance, in the event of manipulative timings of the release of unpublished price sensitive information to ensure that trading under a trading plan becomes lucrative in circumstances of regulation 4 being detected, it would be open to initiate proceedings for alleged breach of SEBI (Prohibition of Fraudulent and Unfair Trad Practices Relating to Securities Markets) Regulations, 2003.”

Regulation 5(3) provides for review, approval and monitoring of trading plan by the compliance officer. It states as under:

“The compliance officer shall review the trading plan to assess whether the plan would have any potential for violation of these regulations and shall be entitled to seek such express undertakings as may be necessary to enable such assessment and to approve and monitor the implementation of the plan.”

Review and approval of trading plan by the compliance officer is required with a view to assess whether the proposed trading as per the plan has any potential for violation of these regulations. The compliance officer may require the insider to furnish undertaking to the effect that he is not in possession of UPSI or he would ensure that any UPSI in his possession becomes generally available before he commences executing his trades.

Regulation 5(4) provides as under:

“The trading plan once approved shall be irrevocable and the insider shall mandatorily have to implement the plan, without being entitled to either deviate from it or to execute any trade in the securities outside the scope of the trading plan.

Provided that the implementation of the trading plan shall not be commenced if any unpublished price sensitive information in possession of the insider at the time of formulation of the plan has not become generally available at the time of the commencement of implementation and in such event the compliance officer shall confirm that the commencement ought to be deferred until such unpublished price sensitive information becomes generally available information so as to avoid a violation of sub-regulation (1) of regulation 4.”

In terms of this provision, an approved trading plan cannot be cancelled or amended. It is required to be executed without any exception or deviation. The rationale behind such prohibition is that when a trading plan is approved and disclosed to the public the other investors would factor the impact of the trading plan on their own trading decisions and in price discovery. If deviations from approved and disclosed trading plans are permitted then it would not be fair for those investors who have factored in the proposed trades by the insider while taking their trading decisions for the scrip. Proviso to the sub-regulation has been inserted to deal with a situation where on completion of the cooling period of six months, the UPSI which was in possession of the insider, at the time of formulation of the trading plan, has not become generally available and is still a UPSI. It has been provided that under such circumstances, the commencement of the trading plan would be deferred, until such UPSI becomes generally available information.

Regulation 5(5) provides as under:

“Upon approval of the trading plan, the compliance officer shall notify the plan to the stock exchanges on which the securities are listed.”

Public dissemination of trading plan is mandatory. After approval the compliance officer is required to disclose the trading plan to the stock exchanges where the securities of the company are listed for dissemination to the public. Legislative note to this provision is reproduced below to bring out the legislative intent:

“It is intended that given the material exception to the prohibitory rule in regulation 4, a trading plan is required to be publicly disseminated. Investors in the market at large would also factor the potential pointers in the trading plan in their own assessment of the securities and price discovery for them on the premise of how the insiders perceive the prospects or approach the securities in their trading plan.”

SPECIMEN OF TRADING PLAN

To

The Compliance Officer,

................ Limited

Gurgaon

Dear Sir,

Sub: Trading Plan under Regulation 5 of the SEBI (Prohibition of Insider Trading) Regulations, 2015

In terms of provisions of Regulation 5 of the SEBI (Prohibition of Insider Trading) Regulations, 2015 and Clause ............ of the Code of Internal Procedures and Conduct for Regulating, Monitoring and Reporting of Trading by Insiders adopted by the Company, I, .................... hereby give my trading plan / trading plan of my immediate relatives to buy /sell / buy and sell the equity shares of the Company as per details furnished hereunder:

Details of Trades to be executed (by the insider and / or his immediate relatives):

I hereby undertake that:

I /my immediate relative(s) will not trade during the cool off period  of six months.

I / my immediate relatives will not trade during the no-trading periods specified herein above.

I/my immediate relatives will not trade in the securities of the company for market abuse.

I hereby confirm that I am not in possession of any unpublished price sensitive information OR

I am in possession of certain unpublished price sensitive information at the time of formulation of this trading plan and I /my immediate relatives will not trade pursuant to this trading plan until such unpublished price sensitive information becomes generally available information.

Signature

Date

Place

For office use only

The above trading plan is approved / rejected

In case of rejection the reasons for rejection are as follows:

For ............ Limited

Compliance Officer

Date:

CS  Swatantra Sethi 
FCS, ACMA 
Contact: swatsethics@gmail.com or cssolutionsindia@yahoo.in

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