Trading plans — regulation 5

Some people are permanently insiders. A chief investment officer or a promoter is in possession of something price sensitive for most of the year, so the ordinary answer — do not trade while you hold UPSI — means never sell anything, which is not a workable rule for a person's own finances.

Regulation 5 offers a way out. The insider writes down, well in advance, exactly what they will trade and when. The plan is disclosed publicly, then sits untouched for four months before the first trade. By the time it executes, whatever the insider knew when they wrote it has had time to become generally available — and, crucially, they can no longer change their mind.

An insider formulates a trading plan and presents it to the compliance officer for approval and public disclosure. The plan must:

• not entail commencement of trading earlier than 120 calendar days from the public disclosure of the plan;
• not overlap any period for which another trading plan is already in existence;
• set out, for each trade: either the value to be effected or the number of securities to be traded; the nature of the trade; either a specific date or a time period not exceeding five consecutive trading days; and a price limit — an upper limit for a buy, a lower limit for a sell; and
• not entail trading in securities for market abuse.

The price limit has a defined range. For a buy, the upper price limit must lie between the closing price on the day before submission of the plan and up to 20% higher than that close. For a sell, the lower price limit must lie between that same close and up to 20% lower.

What approval buys. The compliance officer reviews the plan for any potential violation, may seek express undertakings, and must approve or reject it within two trading days of receipt, notifying the approved plan to the stock exchanges on which the securities are listed on the day of approval. Thereafter, pre-clearance is not required for trades executed under the plan, and trading window norms do not apply to them.

What approval costs. Once approved the plan is irrevocable. The insider must implement it, may not trade outside its scope, and may not deviate from it except due to permanent incapacity, bankruptcy or operation of law. Two brakes remain: implementation shall not commence if UPSI in the insider's possession at the time of formulation has not become generally available by the time of commencement; and if the execution price falls outside the price limit set, the trade shall not be executed.

A trade carried out pursuant to a Regulation 5 plan is one of the listed exonerating circumstances under Regulation 4.

Mr Anand Krishnan, Chief Investment Officer of a listed asset manager, wants to sell shares to fund a house purchase. He submits a trading plan on 3 March. The closing price on 2 March — the day before submission — is Rs 640.

The compliance officer approves on 5 March, within two trading days, and notifies the exchanges the same day. The plan is publicly disclosed on 5 March, so the earliest trading date is 120 calendar days later — 3 July. His September window is comfortably beyond it.

Come September, two things could still stop him.

Price. On 14–18 September the stock trades between Rs 498 and Rs 512, below his Rs 520 floor. No trade is executed. He does not get to lower the limit — the plan is irrevocable — and he may not sell outside it. He raises the money elsewhere.

Unfinished UPSI. Suppose that on 3 March, when he wrote the plan, he knew of a large acquisition still unannounced in September. Implementation cannot commence at all, whatever the price, because UPSI in his possession at formulation had not become generally available at commencement.

Had he instead set the floor at Rs 600 — only 6.25% below the Rs 640 close — the plan would still be valid, but a plan with a tight limit is a plan that frequently does not execute. The 20% band is a maximum distance, not a target.

Chapter 7 sets out Regulation 5 in full, immediately after the exonerating circumstances in Regulation 4 — the connection matters, because a plan trade is itself an exoneration.

Every number in the regulation is examinable: 120 calendar days before trading may commence, five consecutive trading days as the maximum period for a trade, 20% as the price-limit band on either side of the previous close, and two trading days for the compliance officer to approve or reject. So is the pair of consequences: no pre-clearance and no trading window on one side, irrevocable and mandatory on the other.

• 120 calendar days, not 120 trading days, and it runs from public disclosure of the plan, not from submission or approval.
• Two trading days is the compliance officer's deadline to decide — do not confuse it with the 120-day cooling period or with the two-business-day reporting deadline for mutual fund unit transactions.
• The plan is irrevocable. Permanent incapacity, bankruptcy or operation of law are the only escapes. A change of mind, a better price or a family emergency are not.
• The 20% band is measured from the closing price on the day before submission, not the day of submission, approval or execution.
• Trading window norms and pre-clearance fall away only for trades under the approved plan. Any other trade by the same insider remains fully subject to both.
• If the price is outside the limit, the trade simply does not happen. The insider cannot substitute a market order, and cannot make the trade up later — plans may not overlap.