3.1 Trading Plans
Regulation 5 provides a safe harbour for trading pursuant to a pre-approved trading plan. This mechanism allows insiders who frequently possess UPSI to participate in the market without risking insider trading allegations.
Requirements for Valid Trading Plan
- Minimum Duration: Plan must cover minimum 12 months (increased from 6 months in 2019)
- Cool-off Period: 6 months between approval and first trade under the plan
- No Overlap: Cannot overlap with an existing trading plan
- Compliance Officer Approval: Must be approved by designated Compliance Officer
- Public Disclosure: Must be disclosed to stock exchanges upon approval
- Irrevocability: Plan must be irrevocable once approved
A trading plan cannot be commenced if the insider is in possession of UPSI at the time of formulation. The Compliance Officer must verify that no UPSI exists before approving the plan.
Contents of Trading Plan
- Security Details: Specific securities to be traded
- Trade Parameters: Nature of trades (buy/sell), quantity or value limits
- Time Parameters: Specific dates or time intervals for execution
- Price Parameters: Limit prices or market orders specification
- Execution Mechanism: Broker arrangements, execution method
Trading plans are rarely used in practice due to their inflexibility and the long cool-off period. Most insiders prefer to trade during open trading windows when not in possession of UPSI.
3.2 Off-Market Inter-se Transfers
Regulation 4(3)(a) provides an exemption for off-market transfers between insiders who possess the same UPSI. This recognizes that when both parties have equal information, the information asymmetry concern does not arise.
Requirements for Valid Inter-se Transfer
| Requirement | Description | Evidence Needed |
|---|---|---|
| Off-Market | Not through stock exchange mechanism | Share transfer form, demat records |
| Both Insiders | Both parties must be insiders | Connected person status, UPSI access records |
| Same UPSI | Both must possess identical UPSI | Digital database entries, communication records |
| No Breach of Reg. 3 | UPSI was legitimately communicated | Legitimate purpose documentation |
| Conscious Decision | Informed trade decision by both parties | Board resolutions, written acknowledgments |
Common Scenarios
- Promoter Group Transfers: Restructuring within promoter family
- Employee Transfers: Transfer among designated persons in same department
- M&A Transactions: Transfers between parties to same transaction
- Estate Planning: Transfers for succession planning among family insiders
The exemption requires "same" UPSI, not just "similar" UPSI. If one party has additional material information, the exemption may not apply. Document the specific UPSI known to each party.
3.3 Legitimate Purposes - Due Diligence
The legitimate purposes exception under Regulation 3 allows sharing of UPSI for bona fide corporate activities. Due diligence in M&A transactions is the most common application of this exception.
Due Diligence Framework
- Board Approval: Board resolution authorizing UPSI sharing for the specific transaction
- Confidentiality Agreement: Recipient executes NDA with insider trading restrictions
- Need-to-Know Basis: UPSI shared only to extent necessary for due diligence
- Digital Database Entry: All recipients recorded with nature of UPSI shared
- Standstill Undertaking: Recipient agrees not to trade until UPSI is public
Structure due diligence in phases. Share non-UPSI information in early phases and progressively sensitive UPSI only after key commercial terms are agreed. This minimizes the universe of persons with UPSI access.
Other Legitimate Purposes
- Credit Rating: Sharing with rating agencies for credit assessment
- Legal Advice: Sharing with lawyers for legal opinions
- Audit: Sharing with statutory and internal auditors
- Regulatory Compliance: Disclosures required by law
- Investor Relations: Within permitted guidelines (note: selective disclosure is prohibited)
Sharing UPSI with select investors or analysts is NOT a legitimate purpose and violates Regulation 3. All material information must be disclosed through proper channels to all investors simultaneously.
3.4 Institutional Mechanisms
The 2019 amendments introduced mandatory institutional mechanisms to prevent insider trading. Companies with robust mechanisms can demonstrate good faith compliance, which may mitigate penalties.
Required Institutional Framework
| Mechanism | Requirement | Purpose |
|---|---|---|
| Compliance Officer | Designated senior management person | Oversee compliance, approve trades, maintain records |
| Code of Conduct | Mandatory for listed companies | Define rules for designated persons |
| Digital Database | Structured database with audit trail | Record UPSI sharing, prevent tampering |
| Trading Window | Closure mechanism | Prevent trading during sensitive periods |
| Pre-clearance | Approval before trading | Verify no UPSI possession |
| Whistleblower Mechanism | Protected reporting channel | Enable violation reporting |
Digital Database Requirements
The structured digital database must contain:
- Name and designation of person with whom UPSI is shared
- Nature of UPSI shared
- Date and time of sharing
- Purpose of sharing
- Contact details of recipient
- PAN or other identifier of recipient
The database must have adequate internal controls and audit trail to ensure that no entry is modified after it is created. Blockchain or immutable logging systems are recommended for compliance.
3.5 Disclosure Requirements
Timely and accurate disclosure is both a compliance obligation and a defence mechanism. Proper disclosure demonstrates good faith and can convert potential UPSI into generally available information.
Disclosure Obligations
| Who | What | When | To Whom |
|---|---|---|---|
| Designated Persons | Trades above threshold | Within 2 trading days | Company Compliance Officer |
| Company | Trades by designated persons | Within 2 trading days of receipt | Stock Exchanges |
| Promoters/Directors | Initial and continual holdings | As per LODR Regulations | Stock Exchanges |
| Company | Trading plans | Within 2 trading days of approval | Stock Exchanges |
Disclosure Thresholds
- Promoter/Director Trades: All trades regardless of value
- Designated Persons: Trades exceeding Rs. 10 lakh in a calendar quarter
- Connected Persons: As determined by company policy
Maintain a disclosure calendar with automatic reminders. Delayed disclosure, even by a few days, can attract penalty. Systems should be designed to flag trades approaching thresholds.
"Disclosure is the cornerstone of securities regulation. Timely and accurate disclosure not only ensures compliance but also provides the best defence against allegations of insider trading."SEBI Discussion Paper, 2018
Key Takeaways
- Trading plans require 12-month minimum duration and 6-month cool-off period
- Inter-se transfers exempt only when both parties have identical UPSI
- Due diligence sharing requires board approval, NDAs, and digital database entry
- Institutional mechanisms (Compliance Officer, digital database, trading window) are mandatory
- Disclosure within 2 trading days is critical for compliance
- Robust compliance framework can mitigate penalties even if violation occurs