Relaxations in Insider Trading

November 25, 2023

GS Paper III Indian Economy

Context:

Recently, the Securities and Exchange Board of India (SEBI) proposed relaxations to enable company insiders to trade in securities, who are in possession of unpublished price-sensitive information.

SEBI Proposes Easing Trading Plans for Company Insiders

Facilitating Adoption of Trading Plans: It recommended reducing the minimum cooling-off period between the disclosure and implementation of the trading plan from six months to four months.

Trading Plan Framework:

It refers to predetermined trading initiatives that an insider can formulate to trade legally.
Sebi prohibits insider trading but allows senior management personnel to trade in the shares of their companies under the trading plan framework, introduced in 2015.
While formulating a trading plan, the insider has to plan for at least 18 months consisting of:
- Mandatory 6 month cool-off period.
- A minimum coverage period of 12 months before the execution of trades.
However, trading plans are not very popular as the regulatory requirements are difficult.

Doing Away with the Blackout Period: A blackout period is a time when certain people are prevented from buying or selling shares in their company.
Reducing the Minimum Coverage Period: SEBI has proposed reducing the minimum coverage period requirement to two months from twelve months.
Personal Details Disclosure: The insider should make separate filings for the stock exchange (with personal details) and for the public (without personal details).
Other Recommendations:
- Increase flexibility during trading plan formulation.
- Include disclosure of the trading plans to stock exchanges to be done in two days from the date of approval.
- Applicability of contra-trade provisions on trades executed under the trading plan

What is Insider Trading?

Insider Trading: It involves trading in a public company’s stock or other securities by someone with non-public, material information about the company.
Insider: She/He is a person who is a part of the company whose stocks they are trading.
- They may or may not possess confidential non-public knowledge regarding the firm.
Non-Public Material Information: An information that could substantially impact an investor’s decision to buy or sell a security that has not been made available to the public.
Preventing Insider Trading: To promote fair trading, SEBI has prohibited the firms to purchase their own shares from the secondary market.