[Analysis] SEBI’s New Insider Trading Regulations | Key Changes and Implications

SEBI's new insider trading regulations, effective from June 25, 2024, introduce several amendments to enhance flexibility, transparency, and compliance. Firstly, the waiting period for insiders to commence trading has been reduced from 6 months to 120 calendar days after the public disclosure of the trading plan. Additionally, the requirement to maintain a minimum 12-month trading period has been eliminated, allowing insiders to conduct trades over shorter durations.
The amendments also set clear price limits for trades, specifying an upper price limit for buy trades and a lower price limit for sell trades. To prevent misuse, SEBI has clarified the duration for splitting large trades, introducing an outer limit for such transactions. Furthermore, deviations from trading plans are now allowed only in exceptional cases, such as permanent incapacity, bankruptcy, or operation of law. These changes aim to streamline trading activities for insiders while maintaining strict compliance and promoting fair market operations.

Table of Contents

1. Introduction
2. Trading Commencement Period for Insiders Reduced to 120 Calendar Days
3. Insiders are Now Exempted from Maintaining a 12-month Trading Period
4. Parameters Broadened for each ‘Trade Execution’ with Clear Price Limits
5. SEBI Clarifies Trade Splitting Duration to Prevent Misuse
6. Deviations from ‘Trading Plan’ are Allowed Only in Exceptional Cases
7. Insiders Must Execute Trades Only Within Set Price Limits
8. Mandates Compliance Officer to Approve/Reject Trading Plan within 2 Trading Days
9. Conclusion

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).

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.

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 executed[1] –

• Either the value of trade to be executed or the number of securities to be traded;
• Nature of the trade
• Either a specific date or time period not exceeding five consecutive trading days;
• 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:

1. 1. 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;
   2. 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.

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.

6. Deviations from ‘Trading Plan’ are Allowed Only in Exceptional Cases

Currently, under the SEBI (PIT) Regulations[2], 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.

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 adopted[3]:

• 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.
• 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.
• 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.
• If the Audit Committee does not accept the insider’s submissions, the compliance officer must take action as per the Code of Conduct.

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.

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.

[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.

[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