Insider Trading: Trading Plans, Window Closure and Penalties

In one line

No insider may trade while in possession of unpublished price sensitive information, and if he does his trades are presumed to have been motivated by it, subject to six defences; a trading plan approved by the compliance officer and disclosed publicly, with a cool-off of one hundred and twenty days, is the lawful way for a permanent insider to deal; designated persons may not trade when the trading window is closed; and contravention is met by penalty and prosecution under the SEBI Act.

In exam wording: regulation 4 is the prohibition on trading, regulation 5 the trading plan, regulation 8 and Schedule A the Code of Fair Disclosure, regulation 9 and Schedule B the Code of Conduct and the trading window.

Why the law has this at all

The definitions in the previous chapter identify the wrong. This chapter is about proving it and about living with it, and the two problems are different.

Proving it is hard, because the state of a trader's mind is invisible. If the regulator had to show that a man traded because of what he knew, almost no case would succeed. So regulation 4(1) reverses the difficulty: prove possession and a trade, and motive is presumed. The Note says so in terms: the reasons for which he trades and the purposes to which he applies the proceeds are not intended to be relevant.

But a presumption that strong would be unjust without a way out, so the proviso lists six circumstances in which the insider may demonstrate his innocence, and regulation 4(2) allocates the burden: on a connected person to show he was not in possession, and on the Board in other cases.

Living with it is the second problem. Some people are permanently in possession: a finance director always knows something. If the prohibition were absolute they could never sell a share. Regulation 5 solves that with the trading plan: decide now, publicly, what you will do later, and the decision cannot have been influenced by information that did not yet exist.

And for everybody else there is the trading window, closed by the compliance officer when designated persons can reasonably be expected to have such information, which converts a legal test into an administrable rule.

Some words this chapter uses

A designated person is one covered by the company's code of conduct, specified by the board in consultation with the compliance officer. A compliance officer is defined in regulation 2(1)(c). Pre-clearance is prior approval of a proposed trade. A block deal window is a stock exchange mechanism for large negotiated trades. An informant is defined in Chapter III A.