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  • Garima Agrawal

Viability of Flexible Trading Plans under the PIT Regulations: Hit or Miss?

[Garima is a student at Hidayatullah National Law University.]

Insider trading, interestingly undefined in the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations 2015 (PIT Regulations), is understood as the trading in securities of a listed or a proposed to be listed company by a person possessing unpublished price sensitive information (UPSI). As a norm, insider trading is illegal subject to trading being undertaken in a compliant manner i.e., under the proviso to Regulation 4(1) of the PIT Regulations which includes trades pursuant to trading plans (TPs) detailed further under Regulation 5 of the PIT Regulations. The concept of TP was introduced in India pursuant to the NK Sodhi Committee Report which recommended its adoption as a mechanism for trading in securities by “compliance-conscious insiders”, who are perpetually in possession of UPSI such as key managerial personnel and senior management, inspired by Rule 10b5-1 under the Securities Exchange Act 1934. However, TPs remain unpopular amongst insiders evident from, for example, the number of TPs submitted to NSE and BSE in the year 2022-23 being a mere 76 as opposed to over 6,000 listed companies in those stock exchanges. Therefore, SEBI has proposed a revamp of the current TP framework vide its consultation paper on “Providing Flexibility in provisions relating to ‘Trading Plans’ under the SEBI (Prohibition of Insider Trading) Regulations 2015” (Consultation Paper) as suggested by the working group constituted for the review (Working Group).

Reduction in Minimum Lifespan of a TP

The Consultation Paper seeks to slash off the minimum lifespan of a TP from 18 months, including the minimum temporal requirements of the cooling-off period and the minimum coverage period, to 6 months as discussed hereunder.

Cooling-off Period

As per Regulation 5(2)(i) of the PIT Regulations, the minimum time gap currently mandated between formulation and implementation of a TP is 6 months based on the rationale that it is a reasonable time lag for UPSI to become generally available and for the TP to remain unaffected by any new UPSI. However, the working group considers that the gestation period for a short-term UPSI, such as quarterly declaration of financial results, would adequately be covered in 4 months. Long-term UPSI including mergers, acquisitions and other strategic transactions are already covered under the proviso to Regulation 5(4) of the PIT Regulations that requires the implementation of a TP to be deferred until the UPSI in question becomes generally available regardless of whether the minimum cool-off period has elapsed. Therefore, the Consultation Paper recommends that the cooling-off period be reduced from 6 months to 4 months, drawing inference from the 2022 Amendment in Rule 10b5-1 under the Securities Exchange Act 1934 that introduced cooling-off period in the US Securities and Exchange Commission (SEC). Explaining this Amendment, the SEC Commissioner stated, “an unnecessarily long period may discourage insiders from relying on 10b5-1 plans because of their need for more immediate liquidity”, and similar rationale is reflected in the working group’s suggestions also.

Minimum Coverage Period

Presently, a TP is required to entail trading for minimum duration of 12 months under Regulation 5(2)(iii) of the PIT Regulations. The Consultation Paper suggests a reduction of this minimum coverage period to 2 months, maintaining that 12 months is too long a duration for an insider to reasonably make advanced planning given the fluctuating market conditions and black swan events such as the COVID-19 pandemic.

However, the author herein argues that such a stark reduction in the minimum coverage period might be defeating of the present rationale of a 12-month coverage i.e., to avoid frequent announcements of TPs that might enable insiders to time disclosure of UPSI so as to ensure the success of the trades.

Inclusion of Details of Trade Execution

Regulation 5(2)(v) of the PIT Regulations currently does not envisage the disclosure of price limits to effect trades as well as the specific dates within the TP on which trading would be done. The Consultation Paper seeks to amend this position.

Price Limits

Given that TPs are irrevocable once approved, sometimes insiders are disadvantaged in mandatorily having to implement the TP despite adverse price fluctuations. The working group, therefore, recommends setting a fixed-percentage-based threshold of 20% of the prevailing market price as the range of upper and lower limits for buy trades and sell trades respectively. Notably, the exercise of this provision is suggested to be at the discretion of the insider basis their risk appetite.

Time Period of Execution

The present language of the TP framework does not explicitly suggest the disclosure of the exact trading dates leading to many TPs specifying the entire coverage period as the trading period, such as the TPs submitted by designated persons of PNB Gilts Limited, Birlasoft Limited, Nila Spaces Limited, etc. This lacuna provides scope for misuse of the TP framework to undertake insider trading at specific times to benefit off market trends. Therefore, the working group suggests the inclusion of the details of the exact time period of TP execution spelled out at the time of its submission. 

Recently, the US Department of Justice in United States v. Terren S. Peizer charged the former Ontrak Inc. CEO and Chairman for insider trading via Rule 10b5-1 TP while in possession of material non-public information (MNPI) of the company losing contract with one of its major customers. Peizer had timed the trading of his shares in two sets in a short span of time within the trading period without cooling-off period so as to sell off his shares profitably before the MNPI becomes public and saving himself of losses worth approximately USD 12.5 million. The case, therefore, reinforces the need for conditions including determination of specific trading period at the onset and cooling-off period in the Indian TP framework to avoid such evasive trading.

Removal of the Black-out Period

Regulation 5(2)(ii) of the PIT Regulations provides that there shall be no trading in the designated period, between the 20th trading day prior to the last day of the financial period awaiting financial results and the 2nd trading day after the disclosure of such results, known as the “black-out period”. This is reasoned on the fact that this time period is sensitive due to the generation of UPSI. However, it is noted by the working group that this concern is already addressed by the cooling-off period that creates a buffer period before implementation of the TP, hence ruling out the probability of misusing UPSI. It is also pointed out that Clause 4(3), Schedule B of the PIT Regulations already exempts designated persons from the prohibition on trading during closure of trading window. Therefore, the removal of the black-out period is recommended as an extension of the same principle.

Non-exemption from Contra Trade Provisions

Clause 10 of Schedule B of the PIT Regulations mandates a minimum break of 6 months before a contra trade. However, the proviso to Regulation 5(3) exempts this prohibition on contra trade carried as per a TP. The Consultation Paper seeks to do away with this exemption basing it upon the fact that by the prevailing framework, planning is done for a duration of 18 months in advance, and it seems unlikely that an insider would plan a converse trade within 6 months after such execution. However, given that this minimum lifespan is sought to be reduced to 6 months now, the revocation of the contra trade prohibition shortly after the actual trade may be necessary. The undue advantage of such an exemption to contra trade basis TP could be seen in the ongoing case of Rakshit Mahendrabhai Shah, In re wherein the promoter of the concerned company sought to sell his shares to repay debt and purchase them back as per his TP to retain shareholding as promoter/director.

Revocability of TPs

TPs are irrevocable and ought to be implemented without alteration subject to the UPSI not becoming generally available at the time of execution as per Regulation 5(4) of the PIT Regulations. The working group factors in how such mandatory implementation may handicap insiders in the face of market fluctuations. It is, therefore, recommended that the insiders be given the choice to revoke a TP if the prevailing prices move beyond the price limits specified in the TP as suggested under Regulation 5(2)(v). However, if the insider wishes to go ahead with the trade despite such price movements, the price limits shall not be set out in the TP. This is suggested to protect investor decisions that base their expectations as per TPs while also preserving the insiders’ interests.

Disclosure of TP

Regulation 5(5) of the PIT Regulations requires the notification of TPs to stock exchanges. A deadline of 2 days for doing so has been prescribed in the Consultation Paper. To balance the privacy concerns in full disclosure of the TP to the public and misuse concerns in concealing the personal details of the insider, the Consultation Paper recommends making separate filings for the stock exchange and the public with unique identifier assigned. 


Although the Consultation Paper paves path towards ease of doing business for designated persons, the merit of the recommendations needs to be weighed in using empirical analysis of the deterrence factor of adoption that the present TP framework sets in. Changes basis American experience might be undesirable without going into the root cause of the unpopularity of TPs. Further, stark reductions in timeline may be defeating of the objective of the PIT Regulations, and an amendment needs to be thoroughly thought out before making striking changes in the framework to avoid instability.

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