A stop sign is displayed on the barrier of a railway crossing as a train travels past near Chunabhatti railway station in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Insider Trading: A Stricter Diktat On Trading Window

A recent circular from the stock exchanges mandating the period during which the trading window will have to be shut has perturbed market participants.

The market regulator’s rules on insider trading say that designated persons of a company cannot trade in its securities when, as per the compliance officer, they can be reasonably expected to be in possession of unpublished price sensitive information.

The exchanges have now stated that the trading restriction period is required to commence not later than end of every quarter till 48 hours after the declaration of financial results. Experts say that while they appreciate the intent of the circular, it will give designated persons only a limited window to deal in securities of the company, and that it should’ve been issued by the Securities and Exchange Board of India, and not the exchanges, as an amendment to its regulations.

Trading Window: Companies’ Discretion Taken Away

Listed companies are required to follow the minimum standards to regulate, monitor and report trading by designated persons, which include promoters, chief executive officer, intermediary, fiduciary, employees of the listed company and its material subsidiaries, support staff. etc who are likely to have access to unpublished price sensitive information or UPSI.

These entities are barred from executing trades during the trading window which, as per the regulations, shall be closed when the compliance officer determines that designated persons can reasonably be expected to have possession of UPSI. Effective April this year, SEBI amended the regulations to say:

“Trading restriction period can be made applicable from the end of every quarter till 48 hours after the declaration of financial results.”

The exchanges issued a circular stating that based on their discussion with SEBI, this would mean that the trading restriction period has to start at least from the end of quarter till 48 hours after the declaration of financial results.

So far, the compliance officers used their own judgment to determine the period for which the trading window must be closed; that discretion has now been taken away, Bharat Vasani, partner at Cyril Amarchand Mangaldas, pointed out. Earlier it was a principle-based legislation and it was left to the companies; now they’ve made it rule-based, he said.

A lot of companies used to close the trading window only three or four days before the board meeting on approval of the financial results. And there was misuse of it since by the third week of quarter ending, key designated persons have a fair bit of visibility on the company’s profitability. The mischief on account of this has been addressed.
Bharat Vasani, Partner, Cyril Amarchand Mangaldas

But it doesn’t mean that the trading window can’t be closed before that—if the compliance officer believes that designated persons may have access to UPSI even before the end of quarter, they will have to shut the trading window, he added.

Trading Window Restriction: Impact

Experts BloombergQuint spoke with pointed out that while SEBI’s regulations give the compliance officer discretion, the circular—issued by the exchanges—has taken it away. This because the regulations say: trading restriction period can be made applicable from the end of every quarter till 48 hours after the declaration of financial results. Instead of the exchanges, SEBI should’ve given this direction, Vasani said.

The implication of this direction will be that effectively for 190 days in a year, the trading window can be shut for designated persons simply on account of financial results, Sumit Agrawal, founder of RegStreet Law Advisors and a former SEBI official, said.

This would impact exercise of ESOPs even though their  conversion price is pre-determined. And it will impact not just the designated persons but their immediate relatives as well. Further, let’s say a company is in difficulty, it’s unable to announce its results for six months due to, for instance, an ongoing forensic audit or labour unrest—even in such situations, trading window has to be shut from the end of the quarter till 48 days after the announcement of financial results
Sumit Agrawal, Founder, RegStreet Law Advisors

Other transactions involving the promoters of the company such as rights issue, inter-se promoter transfer, etc will also be impacted as a result of this restriction, Vasani said.