[Priyanshi Jain is a 5th year student at Institute of Law, Nirma University and Akhand Singh is a 3rd year student at Institute of Law, Nirma University]
The Securities and Exchange Board of India [“SEBI”] on December 4, 2024 notified an amendment to the SEBI (Prohibition of Insider Trading) Regulation, 2015 [“PIT Regulations, 2015”] by way of the SEBI (Prohibition of Insider Trading) (Third Amendment) Regulation, 2024 [“2024 Amendment”], which has expanded the definition of “connected person” prescribed under regulation 2(d) of the PIT Regulations, 2015. Predominantly, the amended definition has been broadened to include, firstly, firms (including their partners or employees) where the connected person is a partner; and secondly, individuals who share the same household with the connected person. Furthermore, the 2024 Amendment substitutes the term “immediate relative” with “relative”.
The authors of this argue that the 2024 Amendment is not merely a regulatory tweak but represent a significant shift in the regulatory mindset towards curbing and controlling insider trading practices in the securities market. However, on the flip side, while the direct impact on companies may be limited, the extended scope of “connected persons” and “relative” creates additional compliance for individuals now included in this expanded category. This post aims to: firstly, critically analyse the expanded definition; secondly, examine implications for compliance; and thirdly, draw a comparison with the market in the United States [“US”].
Decoding SEBI’s Expanded Definition
The PIT Regulations, 2015 introduced significant changes to the definition of “connected person” under regulation 2(1)(d). The amendments address gaps in enforcement by including additional categories of individuals and entities. For instance, regulations 2(1)(d)(ii)(k) and (ii)(n) now encompass partners or employees of firms in which a connected person is a partner, as well as individuals sharing a household or residence with a connected person. By broadening the scope, SEBI aims to regulate the indirect avenues through which unpublished price sensitive information [“UPSI”] is transmitted.
Additionally, the term “immediate relative” in regulation 2(1)(f) has been replaced with the broader term “relative,” now defined in regulation 2(1)(hc). This expanded definition includes siblings, parents, children, and their spouses, thereby covering a wider range of familial relationships. While this inclusion enhances clarity and aligns with broader interpretations, it simultaneously places individuals with limited relevance to trading activities under scrutiny. In the earlier framework, particularly under regulation 2(1)(f), “immediate relatives” were only included if they were financially dependent on the connected person or consulted them in trading decisions, thereby limiting the scope to those with a genuine likelihood of benefiting from insider information. However, the amended definition removes these criteria, and the revised framework does not require financial dependency or direct involvement in trading decisions for a person to be classified as a connected individual.
Moreover, under regulation 4(2), the burden of proof has shifted to individuals deemed connected, requiring them to establish that they were not in possession of UPSI while engaging in trading activities. While it simplifies SEBI’s enforcement process, it potentially complicates the defence for individuals with incidental ties to connected persons. This broadened definition, combined with a presumptive approach, increases the compliance burden, raising concerns about whether these changes strike a balance between fairness and regulatory efficacy.
The authors believe that although the intent behind these amendments is clear and aimed at addressing existing regulatory gaps, they raise questions about proportionality in enforcement. For example, regulation 2(1)(d)(ii)(n) lacks specificity regarding the nature or duration of shared living arrangements. Furthermore, by casting a wider net, the regulations risk creating unnecessary compliance burdens for firms and individuals with only tangential connections to UPSI. Introducing clear tests for materiality, such as requiring documentary evidence of financial dependence or substantive ties would help ensure that enforcement remains focused and proportionate.
From Theory to Practice: Compliance under SEBI’s 2024 Amendment
The Supreme Court has consistently clarified the scope of “connected persons” under the PIT Regulations, 2015. Notably, in Balram Garg v. Securities and Exchange Board of India, the Court held that the appellants did not qualify as “connected persons” or “immediate relatives” as defined under the Regulations. It was further observed that the mere existence of a relationship between the parties cannot, by itself, lead to the conclusion that they were “in possession of or had access to UPSI” while trading in the company’s shares. Such an inference, without substantive evidence, was deemed legally unsustainable.
Regulation 2(1)(f) of the PIT Regulations, 2015 defines “immediate relative” by establishing two essential criteria. The first requires that the individual share a specified familial relationship under the provision, while the second mandates financial dependency or involvement in securities trading decisions. In Balram Garg, the regulator contended that the familial relationship between the appellants (being the son and daughter-in-law of Balram Garg’s brother) inherently facilitated the sharing of UPSI. However, the Supreme Court rejected this argument, emphasizing that SEBI failed to produce substantive evidence to satisfy the dual criteria outlined in the Regulations. Notably, the 2024 Amendment has significantly altered this framework by removing the requirement for financial dependency or involvement in trading decisions. Under the amended definition, a “relative” is deemed a connected person solely by virtue of their familial relationship, as listed in the provision.
The authors argue that the recent amendment, while aiming to simplify disclosure requirements, may inadvertently increase compliance burdens. By broadening the definition of “connected person” to include a wider range of individuals and limiting the definition of “relative” solely to identifying a connected person, the amendment removes contextual criteria such as financial dependency or trading involvement. The categorical inclusion based solely on familial ties expands the scope of disclosures and compliance, potentially leading to over-regulation and practical challenges for entities and individuals.
Drawing Parallels: SEBI’s Approach vs. The US Market
SEBI’s approach has been to expand the definition to include firms related to partners and the dependents of individuals. When compared with the definition of “connected person” as provided by regulatory bodies in the US, such as the Securities and Exchange Commission [“SEC”] under the Securities Exchange Act of 1934, notable differences emerge. The US approach to insider and affiliated persons is broader. For companies, it includes executives, employees, shareholders, and directors who may have access to material non-public information [“MNPI”]. In contrast, SEBI’s definition does not include shareholders. This suggests that SEBI’s focus is on entities and individuals with control over the company, while the SEC’s focus extends to insiders who might possess MNPI.
Regarding the family members of connected persons, the US approach goes beyond spouses and children to also include the business partners of connected persons. This implies that, in the US, a person can be classified as a connected person even without holding a formal position, as the focus is more on specific ownership or relationships rather than mere informal control. SEBI, however, appears to adopt a narrower view, emphasizing formal connections and control.
Nevertheless, the 2024 Amendment, particularly the expanded definition of a connected person, aligns with global standards. Both SEBI and the SEC share the objective of increasing fairness in securities markets and mitigating insider trading. However, SEBI focuses more on individuals with control over the company, while the US approach emphasizes reporting and pre-empting trading based on confidential information.
Conclusion
In conclusion, SEBI’s expanded definitions of “connected person” and “relative” represent a significant step toward curbing insider trading by addressing regulatory gaps and aligning with global standards. However, these changes raise concerns about proportionality and increased compliance burdens for individuals and firms with minimal relevance to UPSI. A periodic review mechanism and clear materiality tests could help ensure the amendments achieve their intended objectives without causing unnecessary regulatory challenges.
– Priyanshi Jain & Akhand Singh