According to the business dictionary, this is the time period between the finalizing of the balance sheet and the company’s announcement to the public of the results.
The time period is typically two months preceding an announcement at which time insiders are not allowed to repeat or report the company’s shares- the time between the preparation of a company’s balance sheet and its announcement to the public.
The closed period usually lasts about two months, during which the SEC rules prohibit insiders from buying or selling the company’s shares in any way.
Let’s look at other markets
In the United Kingdom, Under Article 19(11) of the Market Abuse Regulation (MAR), the period of 30 calendar days before the announcement of an interim financial report or a year-end report, that an issuer is obliged to make public according to the rules of the trading venue where the issuer’s shares are admitted to trading or national law. During this period, a person discharging managerial responsibilities (PDMR) of an issuer is prohibited from conducting any transactions on its own account, or for the account of a third party, directly or indirectly. This relates to the shares or debt instruments of the issuer or to derivatives or other financial instruments linked to them.
A period of time before the earnings release of a public company during which its directors and specific employees deemed insiders cannot trade the company’s stock.
If I go by the definition above, for a company whose financial year ends 31st December 2019, the closed period is effectively 30 days before 31st December 2019 and 60 days after 31st December 2019. I would go as far as saying that the closed period extends not just 60 days after the end of the period, but the closed period rule applies till your results have been publicly disclosed on the floor of the stock exchange
What does the rule book of the NSE say?
Rule 17.17: Closed Period
(a) No Director, person discharging managerial responsibility and Adviser of the Issuer and their connected persons shall deal in the securities of the Issuer when the trading window is closed. Any period during which trading is restricted shall be termed as a closed period.
(b) The closed period shall be at the time of:
(1) Declaration of Financial results (quarterly, half-yearly and annual);
(2) Declaration of dividends (interim and final);
(3) Issue of securities by way of public offer or rights or bonus, etc;
(4) Any major expansion plans or winning of bid or execution of new projects e.g. Amalgamation, mergers, takeovers and buy-back;
(5) Disposal of the whole, or a substantial part of the undertaking;
(6) Any changes in policies, plans or operations of the company that are likely to materially affect the prices of the securities of the Company;
(7) Disruption of operations due to natural calamities;
(8) Litigation/dispute with a material impact;
(9) Any information which, if disclosed, in the opinion of the person disclosing the same is likely to materially affect the prices of the securities of the Company.
Rule 17.18: Period of Closure
(a) The period of closure shall be effective from fifteen (15) days prior to the date of any meeting of the Board of Directors proposed to be held to consider any of the matters referred to above or the date of circulation of agenda papers pertaining to any of the matters referred to above, whichever is earlier, up to twenty-four (24) hours after the price-sensitive information is submitted to The Exchange. The trading window shall thereafter be opened.
(b) Every Issuer shall notify The Exchange in advance of the commencement of each closed period.
The rule around the period of closure on the NSE is something that I believe would need to be revisited and have more stringent rules getting applied. We have seen a flurry of corporate disclosures where insiders are actively trading shares in what should be a closed period if we are holding ourselves to the gold bar or standard of what a closed period should be. It has become a cause of concern for many investors especially with the flurry of calls I am receiving on the matter.
The Optics of it just doesn’t look right.
The NSE rules above technically allow insiders to trade their shares in what we all know as a closed period. Even where rules are not perfect, we believe certain corporates should hold themselves to a higher standard of corporate governance internally- something that should be upheld by the compliance department within these organisation.
We have a few cases in the market where a corporate declared closed period to review its result on the 31st of December 2019 and we have insiders selling come January 2020. What is worrying mostly is that these insiders have come in contact with insider information, because they have a view of what the FY results is. Whether the quantum of shares traded is material or not, insiders should refrain from trading shares within a closed period. It is a material breach.
With an insider selling shares, is that a sign that I should be advising all my clients to be dumping the shares of the company?
This is because that is the implied read-across, given the volumes that are trading in the market. We are not a banana republic.