New Definition of “Connected Person” in Insider Trading Expands the Scope

Introduction
In the realm of Indian financial markets, the Securities and Exchange Board of India (SEBI) has been dedicated to enhancing market integrity and ensuring fair information dissemination. Recently, SEBI introduced the Securities and Exchange Board of India (Prohibition of Insider Trading) (Third Amendment) Regulations, 2024, effective from 6-12-2024. One of the pivotal changes in this Amendment pertains to the broadening of the term “connected person,” a fundamental concept in regulating insider trading.
The revised framework presents a substantial expansion in determining who may be presumed to have access to unpublished price sensitive information (UPSI). Noteworthy alterations include modifications in the definition of “relative” and the imposition of a rebuttable presumption against a wider range of individuals. The main goal behind this expansion is to address enforcement gaps brought to light by judicial review and evolving market dynamics. While this reform aims to strengthen regulatory oversight, it also raises concerns about potential regulatory overreach, escalated compliance obligations, and the potential dilution of the standard of proof in insider trading probes.
This paper delves into a critical examination of the expanded definition of “connected person,” delving into the legislative intent, enforcement hurdles, and broader implications for market participants. Additionally, it assesses the compatibility of these changes with established legal norms and international best practices. Ultimately, this paper presents recommendations aimed at finding a harmonious balance, ensuring effective regulation without unjustly burdening lawful actors in the securities market.
Expansion of the Definition of “Connected Person”
In accordance with the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations), the role of a “connected person” is pivotal in the identification of individuals likely to have access to UPSI. Regulation 2(1)(g) of the PIT Regulations defines an “insider” as either a connected person or an individual possessing or having access to UPSI. In a Consultation Paper issued on 29-7-2024, SEBI proposed a significant revamp to the insider trading framework, leading to the introduction of the Securities and Exchange Board of India (Prohibition of Insider Trading) (Third Amendment) Regulations, 2024.
A key reform introduced in the Amendment is the broadened definition of “connected person.” By aligning this definition with that of a “related party” as outlined in the Companies Act, 2013, and incorporating the comprehensive “relative” definition from the Income-tax Act, 1961, SEBI aims to close loopholes that previously facilitated indirect disclosures of UPSI.
Revisions to the Definitions of “Connected Person” and “Relative” Under the SEBI (Prohibition of Insider Trading) Regulations, 2015
(1) Regulation 2(1)(d)(i)
The amended Regulation 2(1)(d)(i) seeks to enhance the clarity and precision of the language while staying true to its original purpose. It now encompasses any individual currently affiliated with a company or having been associated in any capacity within the preceding six months before the relevant transaction, whether through contracts, fiduciary roles, employment, or any other means, directly or indirectly. This connection could stem from regular communication with the company’s officers, holding a position enabling access to UPSI, or through any professional or business relationship reasonably expected to provide such access.
(2) Regulation 2(1)(d)(ii)
A significant aspect of the amendment is the expanded definition of “deemed connected persons” as detailed in Regulation 2(1)(d)(ii). Two new categories have been introduced:
(i) Regulation 2(1)(d)(ii)(k)
This adjustment eliminates the ownership threshold, addressing loopholes that previously allowed for the misuse of UPSI via professional connections.
(ii) Regulation 2(1)(d)(ii)(l)
This provision broadens the regulatory framework to cover individuals residing in the same household as a connected person, irrespective of familial ties, acknowledging that close physical proximity and frequent interaction could facilitate inadvertent or informal sharing of UPSI.
(3) “Immediate Relative” Substituted with “Relative”
The substitution of “immediate relative” with “relative” in Regulation 2(1)(f) eliminates the need for financial dependence and involvement in trading decisions. The newly defined “relative” includes a broader scope of individuals related by marriage or blood.
(4) Shift in Burden of Proof
The revised note specifies that the family members of a “connected person” are also considered connected persons under these regulations, altering the burden of proof in insider trading cases.