Stock trading gets easier for company insiders in India: Here is how

This new rule helps company insiders trade their own company stock more easily and transparently, as long as they're not using insider information (UPSI) to make unfair profits.

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India's stock market regulator, Sebi, has made it easier for company insiders to trade their own company's stock. This comes after a consultation paper issued in November 2023 to streamline the process.

Why the change?

Company insiders, typically senior management or Key Managerial Personnel (KMP), often have valuable, unpublished information about the company (Unpublished Price Sensitive Information or UPSI). This information could give them an unfair advantage when trading the company's stock.

However, insiders sometimes need to trade their own shares for legitimate reasons, like:

• Gradually acquiring more shares in the company (creeping acquisitions)
• Meeting minimum public shareholding requirements
• Selling shares acquired through stock options
   

The New "Trading Plans" Framework

SEBI's new rules introduce a "Trading Plans" framework to make insider trading more transparent and compliant. Here's how it works:

• Planning Ahead: Insiders can create a detailed plan outlining their intended stock trades.
• Approval Process: The trading plan needs to be approved by a compliance officer within the company.
• Transparency for Everyone: The stock exchange will be notified of the plan, including the intended price range for the trades (within +/- 20% of the current price).
• Changes to the Plan? If the insider can't complete the trades due to a lack of available shares, they must explain why.
• Double Check: A committee within the company will review the explanation to ensure it's legitimate.
• Taking Action: If the committee rejects the reason for not following the plan, they can take disciplinary action.

Key Points:

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• The minimum waiting period between disclosing the plan and executing the trades has been reduced from six months to four months. It means trading plans can be executed only after 6 months from its public disclosure.
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• Price limits set by the insider will prevent trades from happening outside a reasonable range.
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• This new framework aims to balance transparency and fairness in insider trading while allowing legitimate transactions.

The regulator said that the insider will have flexibility, during formulation of TP, to provide price limits -- upper price limits for buy trades and lower price limits for sell trades. Such price limit will be within +/-20 per cent of the closing price on date of submission of TP. If the price of the security is outside the price limit set by the insider, the trade will not be executed, it added.

"With this change SEBI also brings in flexibility in implementing trading plans under exceptional circumstances, thereby offering relief for KMPs and CXOs holding stock options. It is an employee-centric initiative aimed at making trading plans more corporate-friendly. Additionally it will facilitate ease of doing business.

The prohibition of Insider Trading Regulations had previously hindered employees' ability to create wealth through ESOPs. This move will ease out  burden, making it easier to exercise stock options and trade while remaining compliant with these regulations," said Makarand M. Joshi, founder, MMJC and Associates – A Corporate Compliance firm.