Introduction
The Securities and Exchange Board of India (‘SEBI’) on 29.07.2024[i] released a consultation paper proposing amendments to the SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’). The major focus of the amendment is to rationalise the term ‘connected person’ scope while ensuring that the regulatory compliance requirements of market participants are not increased. SEBI has called for public feedback on these proposed changes, which are expected to provide greater clarity.
Background on the PIT Regulations
The PIT Regulations were enacted to curb insider trading and protect the integrity of the securities market in India. The regulations define key terms such as ‘insider’, ‘connected person’, and ‘unpublished price-sensitive information’ (‘UPSI’) and lay the framework for preventing and penalising insider trading activities. Over the years, through the PIT Regulations, the SEBI has aimed to maintain fair market practices by regulating how information is disseminated and traded within the securities market.
The definition of a ‘connected person’ is particularly important as it determines who may be in possession of UPSI, thereby subjecting them to specific compliance and disclosure requirements. The need for precision in defining a ‘connected person’ has been recognised to avoid ambiguity and ensure that the regulations are applied consistently.
Key Amendments Proposed
The Consultation Paper proposes several amendments aimed at refining the definition of a ‘connected person’ to make it more specific and aligned with other legal frameworks, such as the Companies Act, 2013 (‘CA 2013’) and the Income Tax Act, 1961 (‘IT Act’). The key amendments include:
1. Rationalization of the ‘Connected Person’ Definition:
The term ‘connected person’ currently refers to any individual connected to a company which gives them access to UPSI. The proposed amendments seek to rationalise this definition by drawing from the ‘related party’ definition under s. 2(76) of the CA 2013 and incorporating practical experience. New categories of individuals will be deemed ‘connected persons.’ These include:
Relatives: The term ‘immediate relative’ will be replaced with ‘relative’, aligning it with the IT Act. This expands the scope to include a broader range of family members.
Associates and Employees: Individuals associated with a connected person, such as partners or employees of firms where the connected person is a partner, will be included.
Advisors and Directors: Those who influence or control a connected person’s actions, such as advisors or directors accustomed to acting on a connected person’s instructions, will also be captured.
Co-Residents: Individuals who share a household or a residence with a connected person.
Financial Relationships: Persons with material financial relationships, such as employment or financial dependency, or frequent financial transactions with a connected person will be included.
Hindu Undivided Family (‘HUF’): An HUF in which the Karta or any member is a connected person or a relative of a connected person will also fall under this definition.
For those deemed connected persons, the burden of proof will be on them to demonstrate that they were not in possession of UPSI, which is in line with reg. 4(2) of the PIT Regulations.
2. Rationalization of the Definition of ‘Relative’
The definition of ‘relative’ will be rationalised in line with the definition under the IT Act, providing consistency across laws and ensuring that a broader spectrum of familial connections is captured. The Note in the definition of ‘immediate relative’ will be removed, as it becomes redundant with the proposed changes. The term ‘immediate relative’ will still be retained in the PIT Regulations for the purpose of disclosure requirements.
3. Impact on Compliance
The amendments have been carefully drafted to ensure companies' compliance requirements do not increase. The term ‘immediate relative’ will still be relevant for disclosure purposes under the PIT Regulations, ensuring the ease of doing business is maintained.
Our Analysis
By refining the definition of ‘connected person’ and aligning it with other legal frameworks, the SEBI ensures that the regulations are more specific and applicable to those who genuinely pose a risk of insider trading. This approach will likely prevent over-compliance and reduce ambiguity, making the regulations more effective in maintaining market integrity. The alignment with other legal definitions, such as those in the IT Act, is a positive step toward reducing legal inconsistencies and simplifying compliance for market participants. By retaining the existing compliance framework without introducing new requirements, the SEBI aims to balance regulatory oversight with practical implementation, ensuring that the regulations remain relevant and manageable.
End Note
Authored by Muskaan Jain, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.
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