Trading Plan, Closed Window and UPSI: The NovaBio CFO Sale

The CFO’s sale is not protected by the trading plan. A trading plan under the PIT Regulations must satisfy several conditions: it must be disclosed, it must be for a minimum period of twelve months, and the first trade under it cannot be executed earlier than six months from the date of public disclosure of the plan. Here the plan was disclosed on 5 April and the sale occurred on 15 May - barely five weeks later. The six-month cooling-off period is not satisfied, and the plan is also not framed for the minimum twelve-month duration. The plan is therefore invalid as a defence.

Independently, the CFO possessed unpublished price-sensitive information from 12 May: the USFDA Form 483 observations were material and not yet public. The trading window was also closed from 1 April until 48 hours after the Q4 results. Selling while in possession of UPSI and during a closed window violates the PIT Regulations and the company’s code. The CFO’s claim that “the plan had been approved” does not cure either defect; compliance officer approval of a non-compliant plan is not a statutory safe harbour. The sale should be treated as a violation, investigated, and reported through the company’s internal mechanism. The CFO’s profits and the circumstances should be examined for disgorgement and other action.

The purchase on 22 May is also problematic. The USFDA observations were disclosed on 20 May, so by 22 May that particular information was public. But the trading window remained closed until 48 hours after the Q4 results, which were due on 25 May. On the company’s own code, the window would not reopen until 27 May. The director therefore traded during a closed window.

A closed window is a prohibition on trading by designated persons, subject only to the exceptions recognized by the PIT Regulations and the company’s code. The director should have sought pre-clearance if the director was a designated person, and should have confirmed that no UPSI - including Q4 results - was in his possession. The fact that the USFDA information had become public does not reopen the window. The compliance officer should examine whether the director had any other UPSI, whether pre-clearance was sought, and whether a contra-trade restriction applies from an earlier opposite trade. The purchase should not be regularized after the fact merely because the price was small.

The eight-day gap between receipt of the Form 483 on 12 May and disclosure on 20 May is difficult to justify under the SEBI (LODR) Regulations, 2015. A USFDA inspection observation at the main plant is capable of affecting the company’s operations and reputation and is likely to be material. Regulation 30 requires disclosure promptly and, for events specified in the relevant para, not later than 24 hours from the occurrence of the event. The company should have made a preliminary disclosure once it assessed the observations as material, even if the full management response was still being prepared. The company should also correct the record if its earlier disclosure suggested that the observations were received only on 20 May.

Remedial steps: conduct an internal investigation with independent oversight; preserve the CFO’s trading records and the trading-plan file; report the suspected PIT violations to SEBI as required; review the code of conduct, pre-clearance process and trading-plan approval checklist; train designated persons and directors; and disclose the investigation and its outcome in accordance with LODR and the company’s whistle-blower policy. The audit committee should oversee the process, and the company should avoid any step that looks like ratifying the CFO’s conduct.