The Securities and Exchange Board of India (SEBI) has proposed expanding the definition of connected persons under the Prohibition of Insider Trading Regulations (PIT) to prevent insider trading and ensure market integrity. It has released a consultation paper in this regard seeking public input on amendments by August 18, 2024.
An insider means any person who is either a connected person or someone in possession of or having access to Unpublished Price Sensitive Information (‘UPSI’). A ‘connected person’ is someone who has a connection with the company that is expected to give him access to UPSI.
What Are Proposed Changes?
According to the consultation paper, Sebi considers aligning the definition of 'relative' with the Income Tax Act of 1961 to include lineal ascendants and descendants. Currently, under PIT regulations, immediate relatives include the spouse of that person or any parent, brother, sister, or child of the person or the spouse. Under the Income Tax Act—Section 2 (41), a spouse’s brother and his wife or sister and her husband (Kaka, Kaki, Mama, Mami, Masi, etc.), Grand father-in-law (GFIL) and Grand mother-in-law (GMIL), etc., will be covered.
“It has been observed that certain categories of persons who are not covered in the scope of the definition of ‘connected persons’ as per existing regulations, may also be in a position to have access to UPSI from ‘connected persons’ to a company. Such deemed connected persons, owing to their proximity and close relationship with the connected persons, are considered to be in such a position where they can potentially indulge in insider trading,” the paper said.
Also, the expanded definition of connected persons would encompass firm partners and employees where a connected person is also a partner, as well as individuals who share a household or have a significant financial relationship with a connected person. The proposal also includes Hindu Undivided Families (HUF) where the Karta or a member is a connected person.
To ensure that there is no increase in compliance requirements, the definition of “Immediate relative” under regulation 2(1)(f) is proposed to be retained in the PIT Regulations, the paper said.
However, stakeholders have voiced criticism that Sebi should prioritize enhancing its investigative tools rather than resorting to legal manoeuvres to make its job easier. According to them, the new proposals will give the market regulator disproportionate power. When a charge is levied under regulation 4(1) of the PIT Regulations on such deemed connected persons, the onus will be on such persons to prove that they did not have UPSI.
