Sebi proposes to widen scope of ‘Connected Person’ in Insider Trading regulation

Mumbai: India's capital markets regulator has floated a consultation paper proposing to include more people in the ambit of its insider trading regulations, including those who may be unofficially connected to company officials in possession of price-sensitive information.

Connected persons are deemed to have access to unpublished price-sensitive information (UPSI). They are associated with a company during six months before the commissioning of an insider trading act either directly or indirectly in any capacity.

The securities and exchange board of India (Sebi) reasoned that certain categories of persons who are not covered under the definition of connected persons may still be in a position to have access to UPSI due to their close relationship with such connected persons.

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As such, the paper proposes to rationalise the definition of relative in line with the definition of relative under the Income Tax Act, to include spouse, sibling, sibling of spouse, sibling of parent, or lineal ascendant or descendant.

“Such deemed connected persons, owing to their proximity and close relationship with the connected persons, are considered to be in such a position where they can potentially indulge in insider trading,” the paper said. 

Sebi has invited public comments on the consultation paper by 18 August.

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The paper proposes to introduce the following categories: 

• Relative of connected person; partner or employee where connected person is partner; 
• Person on whose advice connected person is accustomed to act; 
• Body corporate whose management is accustomed to act on advice of connected person; 
• Person having material financial relationship with connected person including for reasons of employment / financial dependency / frequent financial transactions;
• Hindu Undivided Family (HUF) where karta or any member is a connected person or relative of connected person.

The consultation paper said that when a charge is levelled on such deemed connected persons, onus will be on such persons to prove that they did not have UPSI. 

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To be sure, to ensure there is no increase in compliance requirements, the definition of ‘immediate relative’ is retained in the Sebi (Prohibition of Insider Trading) Regulations, said the paper released today.

Sebi clarified that the requirement of promoters/directors/designated persons to disclose trades of the ‘immediate relative’ under PIT Regulations will continue as is.

“Subsequent to the proposed changes to the regulations, the relevance of the term ‘immediate relative’ would be limited to disclosures and Code of Conduct under PIT Regulations and no additional requirements for disclosures are being introduced under PIT Regulations,” the paper stated.

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