Module: | Statutory Audit, NFRA & ICAI Standards
Q61: Consider the following statements regarding the "Trading Window Closure" norms for Designated Persons under the SEBI (Prohibition of Insider Trading) Regulations:
1. The trading window must be closed from the end of every quarter till 48 hours after the declaration of financial results to prevent insider trading.
2. Designated Persons are completely prohibited from exercising Employee Stock Options (ESOPs) while the trading window is closed.
3. The restrictions on trading during the window closure period also apply to the immediate relatives of the Designated Persons.
Which of the above statements is/are incorrect?
2. Designated Persons are completely prohibited from exercising Employee Stock Options (ESOPs) while the trading window is closed.
3. The restrictions on trading during the window closure period also apply to the immediate relatives of the Designated Persons.
Which of the above statements is/are incorrect?
✅ Correct Answer: B
🎯 Quick Answer:
B. Only 2 is incorrect.Structural Breakdown: Statement 1 is correct; the closure period (end of quarter to 48 hours post-results) is a strict statutory baseline.
Statement 2 is incorrect; SEBI explicitly clarifies that the exercise of ESOPs is permitted during the trading window closure.
The prohibition applies to the trading (selling) of the shares acquired through those ESOPs on the open market.
Statement 3 is correct; to prevent proxy trading, the rules strictly extend to immediate relatives (spouses, dependent children/parents). Historical/Related Context: SEBI institutionalized the quarter-end closure rule because historical data showed massive, unexplained spikes in executive stock sales right before companies announced terrible quarterly earnings.
Causal Reasoning: Exercising an ESOP is a transaction directly between the employee and the company based on a pre-determined contract price.
It does not involve the open market and therefore does not disadvantage an uninformed public retail investor, which is why it is permitted during closure.