The Securities and Exchange Board of India (“SEBI”) has recently issued the SEBI (Prohibition of Insider Trading) (Third Amendment) Regulations, 2024 (“Amended Regulations” or “Amendment”), on December 4, 2024, redefining the scope of “connected person” and “deemed connected persons”.
- Meaning of the term “Connected Person”
As per the SEBI (Prohibition of Insider Trading) Regulations 2015 (“PIT Regulations”), a “connected person” is someone who has had an association with a company in the six months before a particular event. This could be because of their job, relationship, or role in the company. For example, it could include employees, board members, family members, or even business partners of the company.
This includes individuals in roles that give them access to Unpublished Price Sensitive Information (“UPSI”) or those likely to have such access. The definition also extends to certain categories of persons who are deemed to be connected persons, such as immediate relative, holding companies, subsidiaries, intermediaries, and more. Under the PIT Regulations, it is presumed that “connected persons” are likely to have access to confidential, material information that could influence the price of securities, even if no direct evidence is available to establish the actual possession of UPSI. Therefore, the law presumes that “connected persons” possess UPSI, relieving SEBI of the burden to prove that such information was explicitly communicated to them.
The Amendment expands the scope of the definition of “connected person” under the PIT Regulations, encompassing a broader category of relatives within its ambit.
- “Relative” and “Immediate Relative”
Under the Amended Regulations, the term “immediate relative” has been replaced with “relative,” significantly expanding the criteria for identifying “deemed connected person”. Previously, only immediate relatives—such as parents, siblings, or children—qualified as “deemed connected persons” if they were financially dependent on or sought trading advice from a “connected persons”. The Amendment now explicitly includes a spouse, parent (including spouse’s parent), sibling (including spouse’s sibling), child (including spouse’s child), and their spouses as “deemed connected persons”.
So, for instance, if Ms. A, a senior executive at XYZ Limited, possesses UPSI about an upcoming merger, relatives such as her spouse, parents-in-law, her spouse’s siblings, her own siblings and their spouses, as well as her children and their spouses, are all “deemed connected persons”. This means that if any of them trades in the securities of XYZ Limited, they could be presumed to be liable for insider trading, even if Ms. A did not directly share the information with them. The law presumes that a “deemed connected person” possesses UPSI, eliminating the need for SEBI to prove that the information was communicated to them. Such relatives will now qualify as “deemed connected persons” irrespective of financial dependency or consultation on trading matters.
- Firm, Partner, or Employee Associated with a "Connected Person"
Through this Amendment, SEBI has also broadened the ambit of “deemed connected persons”. Firms, along with their partners and employees, will now be classified as “deemed connected persons” if a “connected person” is a partner in the firm. For instance, consider a firm where one of the partners serves as a director to a publicly listed company. Since the partner, in their role as a director, is considered a connected person, the entire firm—including its other partners and employees—will now be classified as “deemed connected persons”. This classification presumes they have access to the company’s UPSI.
- Individual Sharing Household or Residence with a "Connected Person"
Additionally, individuals residing with or sharing a household with a “connected person” will also fall under the category of “deemed connected persons”. This expansion may result in individuals being classified as “deemed connected persons” even if they have no direct involvement in or knowledge of sensitive information. For example, someone sharing an apartment with a company officer who has access to UPSI, but who is neither a relative nor professionally associated with them, would still be a “deemed connected person” under the Amended Regulations.
Our view
The Amended Regulations redefine relative to encompass a broader range of family members, including parents, siblings, spouses, in-laws, and others. This expansion significantly widens the scope, extending to individuals who may not reasonably be expected to possess UPSI based solely on their familial relationship with a connected person. Notably, the inclusion of spouse’s siblings and parents—who are typically part of a separate family unit and often trade independently—raises concerns. These second-degree relatives, who neither depend financially on the connected person nor consult them regarding trading decisions, are now “deemed connected person”. This imposes an unnecessary burden of proof on such individuals, despite their lack of direct involvement in trading or access to sensitive information.
The Amended Regulations broaden the rebuttable presumption under the PIT Regulations, significantly expanding the categories and scope of individuals deemed to have access to UPSI without requiring SEBI to establish such access conclusively. Additionally, the inclusion of open-ended criteria, such as sharing a household or residence, within the definition of a “connected person” risks granting discretionary powers to authorities, potentially leading to arbitrary application.
You can mail us your queries or comments at Pranjal Kinjawadekar.
