Insider Trading: Trading Plans, Window Closure and Penalties

The prohibition: regulation 4(1)

No insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information.

The Explanation: the presumption. When a person who has traded in securities has been in possession of unpublished price sensitive information, his trades would be presumed to have been motivated by the knowledge and awareness of such information in his possession.

The Note explains what that means for a charge. The reasons for which he trades, or the purposes to which he applies the proceeds, are not relevant; that he traded when in possession is what must be demonstrated at the outset, and once that is established it is open to the insider to prove his innocence by the circumstances in the proviso, failing which he has violated the prohibition.

The six defences in the proviso

• (i) An off-market inter-se transfer between insiders who were in possession of the same unpublished price sensitive information without being in breach of regulation 3, and both of whom made a conscious and informed trade decision; provided the information was not obtained under regulation 3(3), and provided the trades are reported by the insiders to the company within two working days, the company notifying the stock exchange within two trading days of receipt or of becoming aware.
• (ii) A transaction through the block deal window mechanism between persons in possession of the same information without being in breach of regulation 3, both making a conscious and informed decision, and the information not obtained under regulation 3(3).
• (iii) A transaction carried out pursuant to a statutory or regulatory obligation to carry out a bona fide transaction.
• (iv) A transaction undertaken pursuant to the exercise of stock options whose exercise price was pre-determined in compliance with applicable regulations.
• (v) For non-individual insiders, that (a) the individuals in possession were different from the individuals taking the trading decision, and those deciding were not in possession when they decided; and (b) appropriate and adequate arrangements were in place to ensure the regulations are not violated and that no such information was communicated by the possessors to the deciders, with no evidence of a breach of those arrangements.
• (vi) That the trades were pursuant to a trading plan set up in accordance with regulation 5.

Defence (v) is what firms call a Chinese wall, and note that it requires two things: separation of the individuals and arrangements adequate to keep them separate.

Regulation 4(2): the onus. In the case of connected persons the onus of establishing that they were not in possession of unpublished price sensitive information shall be on such connected persons, and in other cases the onus would be on the Board.

That single sentence is worth memorising, because it is the practical difference between being a connected person and being an insider only by possession.

Regulation 4(3). The Board may specify such standards and requirements as it deems necessary.

The trading plan: regulation 5

Regulation 5(1). An insider shall be entitled to formulate a trading plan and present it to the compliance officer for approval and public disclosure, pursuant to which trades may be carried out on his behalf in accordance with the plan.

The Note explains the purpose: to give an option to persons who may be perpetually in possession of such information, so that possession at the time a planned trade is executed does not prohibit the execution of trades pre-decided before the information came into being.

What the plan must satisfy: regulation 5(2)

• (i) it shall not entail commencement of trading earlier than one hundred and twenty calendar days from the public disclosure of the plan;
• (iv) it shall not entail overlap of any period for which another trading plan is already in existence;
• (v) it shall set out, for each trade, (a) either the value of the trade or the number of securities; (b) the nature of the trade; (c) either a specific date or a time period not exceeding five consecutive trading days; and (d) optionally a price limit, being an upper limit for a buy trade between the closing price on the day before submission and up to twenty per cent above it, and a lower limit for a sell trade between that closing price and up to twenty per cent below it; and
• (vi) it shall not entail trading in securities for market abuse.

Note what has gone. Clauses (ii) and (iii), which required the plan to avoid trading in a blackout around the declaration of results and to run for not less than twelve months, were omitted. The cool-off was raised to one hundred and twenty calendar days, and the reason is given in the Note: companies declare results quarterly and a trading restriction already runs from quarter end to two days after the declaration, so one hundred and twenty days is long enough for the information held when the plan was made to become generally available.

And the Explanation to clause (v) makes the first three parameters mandatory and the price limit optional, allows the figures to be rounded off, and lets the insider adjust the number of securities and the price limit, with the compliance officer's approval, on a bonus issue or stock split, the adjustment being notified to the stock exchanges.

The Note to clause (vi) is a warning. Trading under a plan gives no absolute immunity from proceedings for market abuse; manipulative timing of the release of information to make planned trades lucrative may be proceeded against under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Market) Regulations, 2003.

Approval and effect: regulation 5(3) and (4)

The compliance officer shall review the plan, may require undertakings to enable his assessment, and shall approve and monitor its implementation.

Two provisos: pre-clearance of trades is not required for a trade executed under an approved plan, and trading window norms do not apply to trades carried out under one.

Regulation 5(4): the plan is irrevocable. Once approved it shall be irrevocable, and the insider must implement it, without being entitled to execute any trade outside its scope or to deviate from it except due to permanent incapacity, bankruptcy or operation of law.

Proviso: implementation shall not commence if any unpublished price sensitive information in the insider's possession at the time of formulating the plan has not become generally available at the time of commencement.

So the plan cuts both ways. It protects the insider from the presumption, and it binds him to trades he may by then wish he had not planned.

The codes: regulations 8 and 9

Regulation 8 and Schedule A: the Code of Fair Disclosure and Conduct. The board of a listed company must formulate and publish a code of practices and procedures for fair disclosure of unpublished price sensitive information, which includes prompt public disclosure of such information that gets disclosed selectively, uniform and universal dissemination, a chief investor relations officer, prompt dissemination of information disclosed to analysts, and a policy determining "legitimate purposes" under regulation 3(2A).

Regulation 9 and Schedule B: the Code of Conduct. The board of a listed company shall formulate a code of conduct to regulate, monitor and report trading by its designated persons and their immediate relatives, and appoint a compliance officer to administer it.

The trading window: Schedule B, clause 4

Clause 4(1). A notional trading window shall be used as an instrument of monitoring trading by designated persons. The window shall be closed when the compliance officer determines that a designated person or class of designated persons can reasonably be expected to have possession of unpublished price sensitive information, the closure being in relation to the securities to which the information relates; and designated persons and their immediate relatives shall not trade when the window is closed.

Proviso, inserted in 2025: for information not emanating from within the listed company, the window may not be closed.

Clause 4(2). A trading restriction period shall apply from the end of every quarter till forty-eight hours after the declaration of financial results, the gap between clearance of accounts by the audit committee and the board meeting to be as narrow as possible and preferably on the same day.

Clause 4(3): what the window restrictions do not touch. The transactions in clauses (i) to (iv) and (vi) of the proviso to regulation 4(1), and a pledge of shares for a bona fide purpose such as raising funds, subject to pre-clearance; and transactions under other SEBI regulations such as conversion of warrants or debentures, subscribing to a rights issue, a further public issue, a preferential allotment, or tendering shares in a buy-back, open offer or delisting offer.

Clause 5: reopening. The timing is determined by the compliance officer, taking into account the information becoming generally available and being capable of assimilation by the market, and in any event not earlier than forty-eight hours after the information becomes generally available.

Clause 6: pre-clearance. When the window is open, trading by designated persons is subject to pre-clearance by the compliance officer if the value of the proposed trades is above such thresholds as the board may stipulate.

Informants: Chapter III A

The Regulations contain a whistleblower scheme. An "informant" is an individual who voluntarily submits to the Board a Voluntary Information Disclosure Form relating to an alleged violation of insider trading laws that has occurred, is occurring, or which he reasonably believes is about to occur, whether or not he qualifies for a reward.

"Insider trading laws" are defined, for this purpose, as section 15G of the SEBI Act, 1992, regulations 3, 4, 5 and 5A to 5G of these Regulations, and regulations 9 and 9A so far as they relate to trading or communication of such information.

Rewards are paid out of the Investor Protection and Education Fund created under section 11 of the Act, on the recommendation of an Informant Incentive Committee; and irrelevant, vexatious and frivolous information is defined so that it can be rejected.

The consequences

Under the SEBI Act, 1992. Section 12A(d) and (e) prohibit dealing in securities while in possession of material non-public information and communicating it. Section 15G provides the penalty for insider trading, adjudicated by an adjudicating officer, and section 24 provides for prosecution. This book does not state the rupee figures in section 15G, because the Act's text could not be obtained while this chapter was written; read the current section before quoting an amount, and note that the penalty provisions of that Act have been amended more than once.

Under the Regulations themselves. A contravention of regulation 3, 4, 5 or 9 is a contravention of insider trading laws as defined in Chapter III A, and the Board's powers under sections 11, 11B and 11D of the SEBI Act, 1992 to issue directions, disgorge unlawful gains and debar persons from the securities market are exercisable.

Under the Companies Act. Nothing. Sections 194 and 195 were omitted on 9 February 2018.

A worked example

Mrs Iyer is the Chief Financial Officer of Nerul Pharma Limited, a listed company. She is a connected person and, in the nature of her office, is almost always in possession of something.

An ordinary sale. On 12 August she sells four thousand shares to pay for her daughter's education. On 20 August the company announces disappointing results.

The charge. The Board need show only that she traded while in possession; her trades are then presumed to have been motivated by that knowledge, and the fact that she sold to pay school fees is irrelevant, the Note saying that the reasons for trading and the use of the proceeds are not intended to be relevant.

Her burden. She is a connected person, so under regulation 4(2) the onus of establishing that she was not in possession is on her. Had she been an insider only by possession, and not connected, the onus would have been on the Board.

Her defences. She may bring herself within the proviso: an off-market inter-se transfer between insiders with the same information; a block deal window transaction on the same footing; a transaction pursuant to a statutory or regulatory obligation; the exercise of stock options at a pre-determined exercise price; the separation of possessors and deciders in a non-individual insider; or a trading plan under regulation 5. A sale on the market to pay school fees is none of them.

The right way to do it. She should have formulated a trading plan. She presents it to the compliance officer, who reviews it, may require undertakings, approves it and monitors it, and it is publicly disclosed. Trading under it may not commence earlier than one hundred and twenty calendar days from that public disclosure. For each trade the plan states the value or the number of securities, the nature of the trade, and a specific date or a period of not more than five consecutive trading days, and may add a price limit within twenty per cent of the closing price on the day before submission.

Its effect. Once approved the plan is irrevocable; she must implement it and may not trade outside it or deviate from it, except on permanent incapacity, bankruptcy or operation of law. Pre-clearance is not required for trades under it, and the trading window norms do not apply to them. But implementation may not commence if information she held when she formulated the plan has still not become generally available.

And the plan is not a licence. If she times the release of the information so that the planned trades become lucrative, proceedings may be brought under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Market) Regulations, 2003.

The window. Nerul Pharma's compliance officer closes the trading window when he determines that designated persons can reasonably be expected to have possession of the results information, and it stays closed from the end of the quarter until forty-eight hours after the declaration. Designated persons and their immediate relatives may not trade while it is closed. It reopens when he determines that the information has become generally available and capable of assimilation, and in no event earlier than forty-eight hours after it becomes generally available. When it is open, trades above the board's threshold need pre-clearance.

What the window does not stop. A pledge of shares for a bona fide purpose such as raising funds, with pre-clearance; and transactions under other SEBI regulations, such as conversion of debentures, a rights issue, a preferential allotment, or tendering shares in a buy-back, open offer or delisting offer.

A junior officer who reports her. He may become an informant under Chapter III A by submitting a Voluntary Information Disclosure Form to the Board about an alleged violation of insider trading laws, and may be rewarded out of the Investor Protection and Education Fund on the recommendation of the Informant Incentive Committee.

A firm on the other side. A broking house holds the same information in its investment banking arm while its trading desk sells the shares. It may rely on defence (v), but only if the individuals in possession were different from those deciding, those deciding were not in possession, and adequate arrangements were in place and not breached.

The consequences. If the defence fails, the Board may act under sections 11, 11B and 11D of the SEBI Act, 1992 to direct, disgorge and debar, a penalty may be imposed under section 15G, and prosecution may follow under section 24. The Companies Act supplies nothing, sections 194 and 195 having been omitted.

Distinctions that carry marks

What this does NOT mean

It does not mean the regulator must prove motive. Once possession and a trade are shown, motive is presumed, and the reasons for trading and the use of the proceeds are irrelevant.

It does not mean the presumption is conclusive. The six circumstances in the proviso allow the insider to prove his innocence.

It does not mean the onus is always on the insider. It is on connected persons; in other cases it is on the Board.

It does not mean a trading plan may be abandoned. It is irrevocable, and deviation is permitted only on permanent incapacity, bankruptcy or operation of law.

It does not mean a trading plan protects against everything. It gives no immunity from proceedings for market abuse.

It does not mean the window closes for every piece of information. Since 2025, where the information does not emanate from within the listed company, the window may not be closed.

It does not mean the Companies Act punishes insider trading. Sections 194 and 195 were omitted with effect from 9 February 2018; the penalty is under section 15G of the SEBI Act, 1992.

Quick revision

• Regulation 4(1): no insider shall trade in listed or to-be-listed securities when in possession of unpublished price sensitive information; his trades are presumed motivated by it, his reasons and the use of the proceeds being irrelevant.
• The six defences: an off-market inter-se transfer between insiders with the same information, reported to the company in two working days and by it to the exchange in two trading days; a block deal window transaction on the same footing; a transaction under a statutory or regulatory obligation; the exercise of stock options at a pre-determined price; for a non-individual, separation of possessors from deciders with adequate arrangements not breached; and trades under a regulation 5 trading plan.
• Regulation 4(2): the onus is on connected persons to show they were not in possession; otherwise on the Board.
• Regulation 5: a plan presented to the compliance officer for approval and public disclosure; no trading earlier than one hundred and twenty calendar days from disclosure; no overlap with an existing plan; parameters of value or number, nature, and a date or a period not exceeding five consecutive trading days, with an optional price limit within twenty per cent of the previous closing price, adjustable on a bonus issue or stock split with the compliance officer's approval; no trading for market abuse; irrevocable once approved, with no trading outside it and deviation only on permanent incapacity, bankruptcy or operation of law; no pre-clearance and no window norms for its trades; and no commencement while information held at formulation remains unpublished.
• Regulations 8 and 9 with Schedules A and B: a Code of Fair Disclosure requiring prompt, uniform and universal dissemination, a chief investor relations officer and a legitimate purposes policy; and a Code of Conduct for designated persons and their immediate relatives, administered by a compliance officer, with the notional trading window closed when possession can reasonably be expected, a restriction period from quarter end to forty-eight hours after results, reopening not earlier than forty-eight hours after the information becomes generally available, pre-clearance above thresholds, and exemptions for the regulation 4 proviso transactions, a bona fide pledge and specified corporate actions.
• Chapter III A: an informant may submit a Voluntary Information Disclosure Form about a violation of insider trading laws, defined as section 15G of the SEBI Act, 1992 and regulations 3, 4, 5, 5A to 5G, 9 and 9A, with rewards from the Investor Protection and Education Fund on the recommendation of the Informant Incentive Committee.
• Consequences: the Board's powers under sections 11, 11B and 11D, penalty under section 15G and prosecution under section 24 of the SEBI Act, 1992; and nothing under the Companies Act, sections 194 and 195 having been omitted.

Test yourself

1. What must be proved to establish a contravention of regulation 4(1)? That the person traded in securities while in possession of unpublished price sensitive information. His trades are then presumed to have been motivated by the knowledge and awareness of that information, and the reasons for which he traded and the purposes to which he applied the proceeds are not relevant.

2. Name four circumstances in which an insider may prove his innocence. Any four of: an off-market inter-se transfer between insiders in possession of the same information without breach of regulation 3, both making a conscious and informed decision; a transaction through the block deal window mechanism on the same footing; a transaction pursuant to a statutory or regulatory obligation to carry out a bona fide transaction; the exercise of stock options at a pre-determined exercise price; for a non-individual insider, that the individuals in possession were different from those deciding and that adequate arrangements existed and were not breached; and trades pursuant to a trading plan under regulation 5.

3. On whom does the onus lie? On connected persons, to establish that they were not in possession of unpublished price sensitive information; in other cases the onus is on the Board: regulation 4(2).

4. State the main requirements of a trading plan. It must be presented to the compliance officer for approval and public disclosure; must not commence trading earlier than one hundred and twenty calendar days from that disclosure; must not overlap with an existing plan; must set out for each trade the value or number of securities, the nature of the trade and either a specific date or a period not exceeding five consecutive trading days, with an optional price limit within twenty per cent of the closing price on the day before submission; and must not entail trading for market abuse: regulation 5(2).

5. When is the trading window closed, and when may it reopen? It is closed when the compliance officer determines that a designated person or class of designated persons can reasonably be expected to have possession of unpublished price sensitive information, and a restriction period applies from the end of every quarter till forty-eight hours after the declaration of financial results. It reopens as the compliance officer determines, taking into account the information becoming generally available and capable of assimilation by the market, and in no event earlier than forty-eight hours after it becomes generally available: Schedule B, clauses 4 and 5.

6. What are the consequences of insider trading? The Board may act under sections 11, 11B and 11D of the Securities and Exchange Board of India Act, 1992 to give directions, disgorge unlawful gains and debar; a penalty may be imposed under section 15G; and prosecution may follow under section 24. The Companies Act provides nothing, sections 194 and 195 having been omitted with effect from 9 February 2018.