SEBI’s bold move to redefine “connected person” under the Insider Trading Regulations

The term “relative” is arguably one of the most critical aspects of the Indian legal framework and solely governs the pivotal requirements under business transactions and relevant disclosures for the maintenance of transparency and accountability in corporate dealings. Now the question that arises is, who or what shall the term “relative” comprise?

In layman terms, “relative” comprises up to third-degree relatives in the bloodline of a natural person. However, this term often leads to varied interpretations and related challenges while examining its ambit and scope.

Thus, amid the shifting market dynamics and heightened need for stringent insider trading norms, the Securities and Exchange Board of India (SEBI) vide its Consultation Paper dated 29th July, 2024 has proposed amendments to its SEBI (Prohibition of Insider Trading) Regulations, 2015 (Regulations) in order to expand the definition of “connected person” by incorporating a wider range of persons and including the term “relative” within its regulatory scope.

Vide this proposal, the SEBI intends to revise the existing scope of “connected person” prescribed under Section 2 (d) of the Regulations with the introduction of the term “relative” as a replacement for the existing term “immediate relative” to further expand the ambit of “connected person” by reconstructing its meaning in consonance with the definition of “relative” and “related party” provided under the Income Tax Act, 1961 and the Companies Act, 2013 respectively.

Upon perusing the proposed amendments and weighing them against the prevailing framework, it is observed that the proposed amendments are not meagre regulatory tweaks, but rather they represent a significant shift in how SEBI is considering its plans towards controlling and curbing insider trading practices in the securities market. 

Upon implementation, this proposal would deepen the meaning of “connected persons” by further encompassing persons sharing household; individuals with financial/ employment ties; HUFs with any connected person as a member; firms and their partners or employees, where a connected person is a partner; individuals or entities that the connected person is obligated to follow, such as board of directors, managing directors, or managers (integration of these components are reflections from the Companies Act).

The definition of “immediate relatives” under the Regulations are to be retained for existing disclosure and code of conduct compliances for avoidance of any additional compliances.

The term “relative” is proposed to replace “immediate relative” within the definition of “connected persons” to address the potential gaps and widen its scope to include individuals who, due to their close relationships with connected persons, might have access to Unpublished Price Sensitive Information (UPSI) but are currently outside the scope of existing regulations.

The term “relative” is proposed to be defined as relatives of “connected person” including spouses, siblings, and siblings of spouses, siblings of parents, any lineal ascendants or descendants and spouses of these relatives which are further proposed to be included within the ambit of connected person (integration of these components are reflections from the Income Tax Act). In contrast and as the name suggests, the definition of “immediate relative” in the Regulations narrows down to focusing on first-degree relatives of the connected person including spouses, parents, siblings, and children who are financially dependent and/ or consult for trading decisions.

Thus, while the proposed definition of “relative” covers a wider range of relationships, “immediate relative” emphasizes on relations involving financial dependency and consultative roles for trading decisions.

The proposed changes can prove to be a much required step in the securities market. The inclusion of a wider term “relative” is bound to expand the regulatory reach by putting it in line with the Companies Act and the Income Tax Act, thus ensuring a more comprehensive oversight in tracking and curbing the leakage of UPSI.

However, as the age-old adage goes “there are two sides to every coin.” Given the broad scope of the proposed changes, it can impose significant practical challenges for corporates and other stakeholders in monitoring the trading activities of connected persons. Moreover, the incorporation of “persons sharing household or residence with a connected person” is a grey area as it does not identify the scope of, who all shall be included within its ambit?

Furthermore, “persons having material financial relationship with a connected person specified in clause (i) including for reasons of employment or financial dependency or frequent financial transactions” is not an exhaustive provision which may lead to ambiguities in its interpretation.

About the authors: Amit Verma is a Partner Designate and Kushagra Verma is an Associate at Hammurabi & Solomon Partners.