What is the best time for Mukesh Ambani to acquire more stake in Reliance Industries? Wouldn’t he have some unpublished price-sensitive information (UPSI) that will always put him at an advantage when he buys or sells his own stock?

For the longest time, stock market regulators have grappled with insider trading, or those who trade with UPSI, and have sought to corner them by imposing onerous restrictions. Insider trading also attracts the highest penalties that often involve disgorgement of unfair profits and a ban on those involved in such trading from the capital markets.

Some of the biggest corporations in the country, from Hindustan Lever to Reliance, have faced insider trading charges in the last two decades. Yet, last Friday, India’s market regulator sought to ease some of the norms that prevent insider trading, making it easier for top corporate executives to trade in the stock market. Before we get into that, let’s understand why it needed to do so in the first place.

UPSI and trading plans: First, what is unpublished price-sensitive information? Say, you work at a company that is about to receive a massive funding or merge with another company or announce layoffs and you, as a key part of the management, are aware of this before it has been made public. This information, when made public, could significantly impact the company’s shares. And you stand to gain because you had it and acted on it—bought or sold the stock before the price fluctuated in the open market. Now, UPSI can be any information—financial results, dividends, restructuring or reorganization of the company, change in capital structure or delisting plans.

The Securities and Exchange Board of India, ideally, wants to prevent any such insider trading from taking place to protect the interest of general investors, who are not privy to the same information and thus stand to lose in comparison. Through the SEBI Act, 1992 and the SEBI (Prohibition of Insider Trading) Regulations, 1992, it has put in regulations to prevent those in possession of UPSI from gaining an undue advantage.

However, SEBI must also protect the interests of those who hold stocks and are always privy to UPSI, intentionally or otherwise. So it introduced the concept of a trading plan under the SEBI (Prohibition of Insider Trading) Regulations in 2015. The rationale was that there will always be those in a company who will be in possession of some form of UPSI (like Ambani), rendering them almost incapable of trading in securities. So a systematic trading plan allows insiders to execute their trades at specific times or periods in the future without compromising on SEBI’s rules. In simple terms, a trading plan is similar to an automatic recurring payment option that you opt for when purchasing subscriptions—it allows for debit of amounts at a pre-set time to execute trades, in a way nullifying the effect of the executive’s possession of UPSI on the timing.

Now, the rules for how this time frame for trading is calculated are extremely detailed and specific. For example, the minimum cool-off period between the public disclosure of trading plans and their implementation is six months; also the minimum coverage period—the least amount of time that the trading plan must be effective for—is one year.

With such rigid norms, trading plans have not really taken off the way the market regulator had hoped. According to a report by the working group on trading plans, during the last five years, only 30 trading plans were submitted on an average annually by the insiders to stock exchanges. This is abysmally low when we compare it to the number of listed companies and the number of insiders who deal with UPSI in their respective companies. In 2022-23, for instance, there were 76 disclosures on trading plans received out of over 2.5 lakh designated participants listed on both BSE and NSE.

So last week, SEBI put out a consultation paper—based on recommendations by the same working group—proposing tweaks to the trading plan norms in a bid to make them more appealing and to push more insiders to opt for them.

Changes proposed: Now, SEBI wants to reduce the cool-off period to four months from the current six and cut the minimum coverage period to two months from 1 year at present.

Significantly, the proposal also aims at omitting a black-out period. According to SEBI’s regulations, trading plan trades cannot be executed a specific number of days before a company’s financial results are due. This period—between the 20th trading day before the last day of a quarter for which results are to be announced and the 2nd trading day after the they are announced—means insiders lose out on several days to carry out their trades. According to the working group’s report, the cool-off period and the condition on non-alteration of the trading plan already takes care of insider trading concerns.

Another change proposed is for management personnel to set upper and lower price limits for the execution of trades so that they are not adversely hit by price volatility. Such price limits can be +/- 20% of the closing price as on the date of submission of the trading plan. If at the time of trade execution, the price of the security is outside the limit proposed, the trade will not be executed.

The working group has also recommended that disclosure of trading plans to stock exchanges should be done two days from the day they are approved (by a compliance officer).

Apart from that, SEBI also wants to allow individuals to mask their personal details when disclosing the trading plan to protect their privacy.

Now, the question remains if SEBI’s proposed amendments are a good sign for corporate India and other investors or will they fail to rein in insider trading?

Mixed feelings: For the most part, SEBI’s changes seem to be targeted towards pushing more top executives to opt for the trading plans, which does take care of any potential abuse of UPSI. By making it more flexible, the regulator is aiming at a more flexible way for executives to trade their stock options.

“Finally, a breather is proposed for all CXOs possessing wealth but unable to unlock it due to stringent norms under PIT (prohibition of insider trading) regulations. This will encourage CXOs to participate in companies’ ESOP schemes, as there are currently many restrictions on share selling,” Makarand M Joshi, founder of MMJC & Associates, told Business Standard:

However, some experts are not convinced by all the changes. They believe that increased flexibility also opens up greater chances of misuse by insiders.

“The recommendation to abolish the black-out period is not healthy, as unpublished price-sensitive information at the end of each quarter is vital, and mere approval of the trading plan by the compliance officer and its notification on the exchange does not make it any less vulnerable for the public at large to be adversely affected by planned insider trading,” Rajiv Sharma, partner, Singhania & Co, told The Hindu BusinessLine.

The changes are in line with SEBI chairperson Madhabi Puri Buch’s remarks a few days ago, where she acknowledged, “Humara regulation hi galat hai” on trading plans. “We operate on fundamental principles and data, and so again we had a consultation paper on reforming the ‘trading plan’,” she added.

The market regulator has invited comments on the consultation paper till 15 December.