Introduction
The Securities and Exchange Board of India (‘SEBI’) enacted the Securities and Exchange Board of India (Prohibition of Insider Trading) (Second Amendment) Regulations, 2024 (‘Second Amendment’)[i], which came into force on 25.06.2024. These amendments are authorised under s. 30 in conjunction with s. 12A(d) and (e) of the Securities and Exchange Board of India Act, 1992, aim to refine and strengthen the existing framework of the SEBI (Prohibition of Insider Trading) Regulations, 2015. This initiative addresses the evolving market conditions and is designed to enhance the regulatory oversight of insider trading practices in India.
The primary objective of this amendment is to bridge the gaps identified in the existing framework, integrating measures that mirror the current market dynamics. These modifications are crafted to ensure that the regulations remain practical, relevant, and robust, thereby more effectively deterring insider trading and protecting investor interests.
Background of the SEBI (Prohibition of Insider Trading) Regulations, 2015
The SEBI (Prohibition of Insider Trading) Regulations, 2015, was initially enacted to curb insider trading by establishing a clear framework. Over the years, several amendments have been made to address evolving market conditions and regulatory needs. These regulations have been instrumental in maintaining market integrity by preventing unfair practices.
Key Changes in the Second Amendment of 2024
The Second Amendment introduces several key changes to the existing regulations. These changes primarily focus on refining the provisions related to trading plans and compliance requirements and enhancing transparency. The Second Amendment provides more detailed guidance on trading parameters, price limits, and the role of compliance officers. The key changes are briefly discussed below:
One of the significant changes in reg. 5 is the adjustment of the trading plan duration from ‘six months’ to ‘one hundred and twenty calendar days,’ aligning the period with most companies' quarterly results cycle.
·The amendment introduces new parameters for the trading plan, requiring insiders to set out the value, nature, specific date, or time period (not exceeding five consecutive trading days), and price limit(s) for trades. Thus, the amendment enhances clarity and prevents misuse.
To streamline the regulations, several clauses in reg. 5 have been omitted, including (ii) and (iii), along with their respective notes. Therefore, the focus on the most critical aspects of insider trading regulation is shifted.
The Second Amendment brings flexibility and new restrictions to the trading plan. Thus, careful planning and adherence to the new parameters are required to avoid violations while providing more precise guidelines for insiders.
The Compliance officers are now mandated to either approve or reject the trading plan within two trading days of its receipt and to notify the stock exchange of the approved plan on the day of its approval. They ensure prompt compliance and transparency.
By virtue of the Second Amendment, it is now optional to disclose the upper price limit for a buy trade and the lower price limit for a sell trade. However, such limits are to be 20% of the closing price on the day prior to the submission of the trading plan.
If the trading plan is not implemented, the insider must report the non-implementation to the compliance officer within two trading days of the end of its tenure. Thereafter, the compliance officer shall present the aforementioned information to the audit committee to determine whether the non-implementation was bona fide.
The Second Amendment provides guidance on handling market price fluctuations outside set limits. Although the amendment stipulates that trades outside these limits will not be executed, insiders may choose not to set any price limit, allowing trades regardless of market fluctuations.
The Second Amendment emphasises transparency, with compliance officers required to notify the stock exchanges about the approved trading plan on the day of the approval itself. This has enhanced market transparency, and participants are made aware of the insider trading plan.
The listed company must adjust their trading plan to comply with the new regulations, thus ensuring that the insiders adhere to the revised duration and detailed trading parameters to avoid regulatory penalties.
Conclusion
The Second Amendment significantly enhances the existing regulatory framework by addressing previously identified gaps and providing a more detailed structure for trading plans, responsibilities of compliance officers, and price limits. These enhancements are crucial for several reasons:
The amendments align the regulations with contemporary market conditions, ensuring their effectiveness and relevance.
The amendments aim to prevent the potential misuse of trading plans by introducing detailed trading parameters and price limits, thus enhancing market integrity.
The amendments mandate prompt compliance and transparency, protecting investors' interests and contributing to a fair-trading environment.
Overall, the regulation enhances oversight and implements robust mechanisms to prevent unfair trading practices, fostering a more transparent and equitable market.
These elements collectively strengthen the regulatory framework, making it more adaptable to dynamic market conditions and better equipped to protect market participants.
End Note
[i] No. SEBI/LAD-NRO/GN/2024/184 dated 25.06.2024.
Authored by Pranav Dabas, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.