On July 29th, 2024, the Securities and Exchange Board of India (SEBI) released a consultation paper suggesting amendments to the SEBI (Prohibition of Insider Trading) Regulations, 2015. These proposed changes aim to refine the definition of ‘connected person’ to enhance the regulation’s scope without increasing compliance burdens. This paper details significant adjustments, such as replacing ‘immediate relative’ with ‘relative’—defined under the Income Tax Act, 1961—and broadening the categories deemed connected persons. These amendments are intended to fortify insider trading regulations by encompassing a broader range of potential links to unpublished price-sensitive information[1] (UPSI).
Under regulation 2(1)(g) of the PIT Regulations, an insider is defined as any person who is either:
Additionally, regulation 2(1)(d) describes a ‘connected person’ as someone linked to a company in a manner that likely places them in possession of, or grants them access to, UPSI. This includes individuals who may not hold any official company position but are regularly in contact with company officers and the company itself.
SEBI has noted instances where individuals not explicitly defined as ‘connected persons’ access UPSI through close associations with those who are. This accessibility could potentially lead to insider trading, prompting SEBI to consider amending the definition under the PIT Norms to cover such instances.
SEBI plans to replace ‘immediate relative’ with ‘relative’ as per the Income Tax Act, 1961, within the ‘connected person’ definition under regulation 2(1)(d)(ii)(a). For PIT Regulations, ‘relative’ is proposed to be defined as:
The proposed changes to the definition of “connected person” seek to broaden its scope and improve clarity. The revision involves replacing the term “immediate relative” with “relative”, as defined by the Income Tax Act 1961. Furthermore, the expanded definition now includes additional categories: partners and employees of firms where a connected person is also a partner; individuals who act upon the advice, directions, or instructions of a connected person; corporate entities directed by a board of directors, managing director, or manager who act on the advice, directions, or instructions of a connected person; persons who share a household or residence with a connected person; and persons engaged in significant financial relationships with a connected person due to employment, financial dependency, or frequent financial transactions. Hindu Undivided Families (HUFs) are now included when the Karta or any member/coparcener is a connected person or a relative of such a connected person.
This extensive revision aims to provide a more comprehensive and precise understanding of the term “connected person,” thereby enhancing regulatory oversight and clarity.
The definition of “immediate relative” as outlined in regulation 2(1)(f) of the PIT Regulations will remain unchanged. This ensures that disclosures regarding trades by promoters, directors, and designated persons will continue to reference the “immediate relative” of these individuals, thereby maintaining ease of doing business. The term “relative” is redefined solely to regulate insider trading.
The modifications proposed by SEBI to the definition of “connected person” aim to include a broader array of individuals and entities potentially privy to unpublished price-sensitive information (UPSI), thereby mitigating risks and enhancing the prevention of insider trading. The alignment of this definition with the one used in the Income Tax Act 1961 facilitates easier compliance by corporations by using a uniform definition of “relative.” Additionally, maintaining the term “immediate relative” for disclosure purposes supports ease of doing business while ensuring transparent reporting.
The amendments proposed by SEBI to redefine the term “connected person” under the PIT Regulations represent a significant enhancement of the regulatory framework designed to combat insider trading. By widening the definition to encompass a larger group of individuals and entities with potential access to unpublished price-sensitive information (UPSI), SEBI aims to close existing regulatory loopholes and strengthen enforcement measures. Aligning with the definitions in the Income Tax Act 1961 aids in reducing regulatory discrepancies and simplifying compliance. These adjustments are intended to fortify insider trading regulations, effectively balancing improved regulatory oversight with practical considerations for business operations.
[1] UPSI means any information relating to a company or its securities, directly or indirectly, that is not generally available which, upon becoming generally available, is likely to materially affect the price of the securities.
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