Company insiders cold to Sebi's trading plans

Trading plans were introduced on an experimental basis whereby every insider is entitled to execute trades in pursuance of pre-determined and pre-disclosed plan

 

Almost a year after the Securities and Exchange Board of India introduced trading plans to enable promoters and other persons holding possible insider information to trade, hardly any companies have stepped forward to formulate these plans.

Trading plans were introduced on an experimental basis whereby every insider is entitled to execute trades in pursuance of a pre-determined and pre-disclosed plan. The idea was to encourage compliant trading by promoters and key managerial persons, similar to Rule 10b5-1 plans in the US.

These plans cover all connected persons, defined as any person who has a connection with the company that is expected to put him in possession of unpublished price sensitive information. At present, most companies follow the model code of conduct for prevention of insider trading, which has to be formulated by every listed company.  

There are several guidelines that have made these plans unpopular. For instance, the trading plan has to cover a period of at least 12 months and cannot be altered once disclosed. “The condition that disallows any deviation from the trading plan once announced could lead to a scenario where the insider will be forced to trade even if he incurs loss on a particular trade,” said Sudhir Bassi, executive director, Khaitan & Co.

Adds Vaneesa Agrawal, a securities lawyer: “Since these plans are irrevocable, their commercial viability is marred.”

The trading plan has to be disclosed upfront to the exchanges. This could impact the price movement of the company’s stock as investors privy to the publicly disclosed plan could take a directional call on trading in the scrip, said experts. Say, a promoter makes a plan to buy 500,000 shares six months on. Since the plan is irrevocable, persons aware of this information can buy shares ahead of the promoter’s purchase.

“In the US, trading plans have been misused as company executives can retain the option to cancel the plans at a later date based on their discretion. So in the Indian market, the regulator has decided to proceed cautiously and be more conservative in its approach,” said a Sebi official on the condition of anonymity.

He added the main problem in India was promoters did not want to disclose the nature of the trade as they felt the information could be misused by others. “The trade of the promoter itself can become an ‘insider’ information that can be used for front running,” said the official.

There is a mandatory cooling off period of six months, which means that trading can begin only after six months from the date of public disclosure. Even after this, an insider can’t trade if the information is still deemed to be unpublished price sensitive.

“This defeats the purpose of the plan to some extent since even the insiders who do not opt for trading plans can trade in the absence of their being in possession of unpublished price sensitive information and by following the code of conduct formulated by the listed company,” said Tejesh Chitlangi, partner, IC Legal.

Under the plans, connected persons cannot trade for the period between the 20th trading day prior to the last day of any financial period for which results are to be announced by the company and the second day after the disclosure of such financial results.

“This effectively means that for almost 300 days an insider cannot execute a trade even under the trading plan. The normal black-out period in which insiders cannot trade is much shorter for most of the listed companies,” said Bassi.

There is also ambiguity regarding the term "person perpetually in possession of UPSI", which has not been defined under the new regulations.

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WHAT ARE THESE PLANS?

• Trading plans were introduced under Sebi’s new Prohibition of Insider Trading Regulations that came into effect from May 15, 2015
   
• The plans are meant to encourage compliant trading for promoters, key managerial persons and connected persons
   
• Modelled on the Rule 10b5-1 trading plans in the US, but are irrevocable in nature
   
• In the US, trading plans have been misused as company executives can retain the option to cancel the plans at a later date based on their discretion
   
• Upfront disclosure of trading plans to the exchanges can impact price movement of the company’s stock
   
• Insiders cannot trade even after six months of cooling-off period, if the information is deemed to be unpublished price-sensitive data