SEBI’s Consultation Paper – Disclosures wrt Trading Plans

Ms. Ira Srivastava is a 4^th year student at National Law University Delhi

What are trading plans?

The law acknowledges that there are some “insiders” of public listed entities who are in perpetual possession of unpublished price sensitive information (UPSI). This is explicitly given under the note to Regulation 5(1) of the Prohibition of Insider Trading Regulations 2015 (“Insider Trading Regulations”). Per the principle of market egalitarianism and following the “parity of information” approach, they will not be allowed to trade in the securities of the listed entity at all. However, there may some limited circumstances in which such trading may be allowed.

These circumstances are codified under Regulation 5 of the Insider Trading Regulations in the form of “trading plans”. Trading plans are essentially a formulation of the concrete steps that an insider wants to take vis-à-vis trading securities in the listed entity. They are subject to certain procedures. For instance, a trading plan has to be approved by the compliance officer and once approved, has to be publicly disclosed. After approval, a cooling-off period of 6 months has to be given. This operates with the assumption that 6 months is a reasonable period for the UPSI, known to the insider at the time of formulating the trading plan, to become generally available information and putting the insider at par with the public, thus maintaining “parity of information”. However, if such information has not become generally available, the insider would have to wait for such period as may be required for the information to become generally available. Therefore, the actual cooling period beyond 6 months depends on when the information becomes public. The trading plan has to have a trading period of at least 12 months. Once submitted and approved, an insider cannot go back on such a trading plan and has to necessarily follow through on the trading plan. It is considered “irrevocable”, and the insider cannot deviate from the trading plan, as stipulated in Reg. 5(4).

The need for Reforms

SEBI has taken note of the fact that trading plans have not been very popular in India because of the onerous requirements. This comes directly from the regulatory requirements. Therefore, it constituted a Working Group to review the provisions on trading plans under the Insider Trading Regulations. This Working Group submitted its Report in September 2023. Pursuant to its recommendations, SEBI released a “Consultation Paper” in November 2023 titled “providing flexibility in Provisions relating to ‘Trading Plans’ under the SEBI (Prohibition of Insider Trading) Regulations, 2015”.

The Working Group recommended a series of changes, including bringing down the cool-off period and minimum coverage period. It recommended that the black-out period, during which insiders cannot execute trades including those pursuant to a trading plan, may be done away with. Significantly, it recommended that the trading plans contain a price limit in order to protect the insiders from “Significant Adverse Price Fluctuation”. On the issue of disclosure of trading plans, the Working Group discussed and proposed the following:

Disclosure of the trading plan to be made to the Stock Exchange within 2 trading days of approval (currently the timeline is not specified).
On the issue of public disclosure, the Working Group noted that considering potential challenges in implementation of the trading plans and the requirement under Reg. 7(2) to disclose trades by promoters and Designated Persons above a particular threshold to be disclosed to the Stock Exchanges within 2 days of such transactions thus coming into public domain, the existing disclosures must continue.
It further noted that a trading plan has no standardised format and recommended the specification of a “suitable format”.

SEBI’s Consultation Paper

The main issue SEBI seeks to address through its November 2023 Consultation Paper is that of the disclosure of personal details of the insider through their trading plans.

None of the other points discussed in the Report of the Working Group have been addressed. However, it must be noted that in the case of introducing amendments to SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (“LODR Regulations”), SEBI had released a series of consultation papers before proposing amendments and the same can be reasonably expected over a period of some time.

Although there is no standardised format or framework for disclosing the trading plan, a trading plan typically includes the name and designation of the insider along with their PAN number in addition to the scheme of trading they plan to execute. In this discussion, personal details will refer to these three – name, designation, PAN.

SEBI discusses the three alternatives for disclosure of personal details of the insider as follows:

Masking of personal details,
Continue the existing manner of disclosures – as accepted by the Working Group,
Two sets of disclosures to be made – SEBI proposal.

The third alternative, as proposed by SEBI, intends to have two separate disclosures – one confidential and one public disclosure. The confidential disclosure will contain all such personal details and will be submitted to the Stock Exchange only while the second disclosure will not have the person details of the insider and will be disclosed to the public through the Stock Exchange.

Overall Comments

First, it must be noted that the right to privacy is established as Fundamental Right in India, subject to “reasonable restrictions”. The question that then arises is that whether the disclosure requirements and their notification to the public at large as required by the Insider Trading Regulations are reasonable as restrictions. Now, it must be noted that the Working Group consisting of Compliance Officers, KMPs and experienced professionals have put forth that they believe it is necessary for the disclosures to be made publicly. This is significant because the industry appears to accept the necessity of what may appear to be an onerous or invasive requirement.

Second, it must be noted that the securities market is sensitive to reputation. Hypothetically, there is an insider X in the listed entity ABC Co. Pvt. Ltd., who is a CXO and considered a doyen of the industry with a sterling reputation and is widely trusted. There is also an insider Y in the same listed entity ABC, who does not have a good reputation in the market, is known for taking erratic decisions and so on. There is a third insider Z in the listed entity ABC who handles the books of account and so would be covered but may not necessarily be a prominent public figure. Now, the securities market will react differently to X disclosing their trading plans as compared to Y or Z disclosing their trading plans. Therefore, the name and designation of the insiders becomes important to disclose in order to maintain transparency and free flow of information.

Third, the Working Group has already pointed out that Reg. 7(2) requires the disclosure of all trades done by the promoters, designated persons and director, above INR 10 lakh, thus putting this out in the public domain. This is a post-facto measure, and it must be noted that any market reaction would take place twice – once at the time of the trading plan becoming public and once post the trade has taken place. There is also a policy decision that has been taken on what would be a significant transaction (INR 10 lakh). Thus, it appears that masking the personal details of the insiders would reduce some price volatility by letting the market react only once – after the trade. However, it must also be noted that the amended LODR Regulations require top listed entities to confirm, deny or clarify market rumours reported in mainstream media. If news breaks that a certain trading plan corresponds to a given insider, which is very likely to happen in the digital age we live in, the listed entity will be required to address the rumour, thus defeating the purpose of confidentiality.

In the US, equivalent requirements are laid down in Title 17 of the Code of Federal Regulations. Particularly, S. 229.408 (Item 408) (c) stipulates that the disclosure of a trading arrangement (equivalent of a trading plan) utilization under Rule 10b5-1 (of the Securities and Exchange Act 1934) is a mandatory quarterly disclosure. This is a recent addition. Earlier, disclosure upon utilization was not mandatory but was followed by some companies as a best practice. There is no explicit requirement for the trading arrangement to have the name, designation or personal details of the insider. Until recently, there was also no requirement for the disclosure of putting such trading arrangements into action either. In India, there are two key differences – first, there is already a requirement of disclosure (upon execution / utilization of the trading plan) above a certain monetary threshold and second, there is already a requirement for the disclosure of the trading plan itself once at the time of formulation and then at the time of execution. Therefore, it must be noted that the principal regulatory requirements are fundamentally different in the two jurisdictions. On the basis of this discussion, the next part of this article will aim to address the situation in India.

Proposed framework & Conclusion

An alternative to address the concerns raised in the above discussion can be as follows:

. Firstly, a standardised format must be introduced by SEBI for the submission of trading plans by insiders. Secondly, the standardised format must have requirements for providing the name and designation of the insider. From the above discussion it becomes clear that the name and designation of the insider will be important for a number of reasons including market sensitivity. Thirdly, the PAN details of the insider must not be disclosed. If the PAN details are required for statutory purposes, they can be submitted separately to the Stock Exchange. In times when cyber fraud is on the rise, misuse of PAN information is always a possibility. Fourthly, a limited exception can be created for not disclosing the name and designation of an insider in case the trades are made for reasons of personal exigencies or financial difficulties. Monitoring the implementation of such exception may be a challenge because of the checks and balances that will have to be employed for prohibiting its misuse. However, this can also been in the form of a declaration in the standard format accompanied by an affidavit.

In conclusion, it must be noted that trading plans are a necessity in order to balance the rights of insiders with the rights of the trading public at large. However, their implementation must be calculated and nuanced to be able to have the intended impact. In my opinion, the proposed framework details the position already taken by the Working Group and will help in effective operation of trading plans.