SEBI has recently, by way of notification dated 4th December 2024, amended the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“SEBI PIT Regulations”). The notification has amended the definition of the ‘connected person”. In this article, we will discuss the impact of the recent amendments on the definition of the connected person.

Concept of ‘Connected Person’?

The concept of a "Connected Person" under the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (SEBI (PIT) Regulations) plays a crucial role in identifying individuals or entities likely to possess unpublished price-sensitive information (UPSI). This term is essential to ensure fair trading practices and curb Insider Trading.

Also, the definition of the connected person is important in the context of the definition of the term ‘Insider’. As per the SEBI PIT Regulations, Insider means a person who is either a connected person or in possession of or having access to unpublished price sensitive information.

The existing definition of ‘connected person’ under SEBI PIT Regulations is divided in the following two parts:

1. Individuals and entities in a relationship with the company

   The first part considers any person who is or has been, during the six months prior to the concerned act, associated with a company, in any capacity, directly or indirectly, including by reason of-

   1. frequent communication with its officers or
   2. by being in any contractual, fiduciary or employment relationship or
   3. by being a director, officer or an employee of the company or
   4. by holding any position including a professional or business relationship, whether temporary or permanent, with the company,

   and who by virtue of any of the associations laid above has, directly or indirectly, access to Unpublished Price-Sensitive Information (“UPSI”) or is reasonably expected to allow such access as a connected person.

   Basically, all persons who are associated with a company in a manner that allows them access to UPSI will be treated as connected persons. This will primarily include all directors, Designated Persons, auditors, consultants etc.

• Extended scope of the term Connected Person

  The second part outlines a list of persons who shall be deemed to be connected person unless the said person(s) is able to rebut the said assumption. The responsibility to establish that the said person is not a connected person within the meaning of SEBI PIT Regulations rests on the said person.

Amendments in the definition of Connected Person

1. Insertion of the term “Relative”

   As per the recent notification, both the first and second parts, as discussed above, have been amended, the amendments in the first part appear more grammatical in nature but the amendments in the second part needs deliberation one by one.

   So, before the amendment in the said definition, Regulation 2(d)(ii)(a) was read and interpreted as follows: immediate relatives of persons identified in the first part of the definition of the ‘connected person’ shall be deemed to be connected persons unless successfully rebutted by them.

   As per the SEBI PIT Regulations, “immediate relative” means a spouse of a person, and includes parent, sibling, and child of such person or of the spouse, any of whom is either dependent financially on such person or consults such person in taking decisions relating to trading in securities.

   Now, via the third amendment, the words ““immediate relative” has been substituted and read as “a relative”, (wherever appearing in the second part of definition of connected person as well as note to this definition and of immediate relative) leading to the inclusion two additional relationships:

   • Spouse of a sibling
   • Spouse of a child.

   Hence, after considering the said amendment, the new definition of “relative” when read in relation to the definition of Connected Person, will be as follows:

   1.  spouse of the person;
   2.  parent of the person and parent of its spouse;
   3. sibling of the person and sibling of its spouse;
   4. child of the person and child of its spouse;
   5. spouse of the person listed at sub-clause (iii); and
   6. spouse of the person listed at sub-clause (iv)

   Lastly, the impact of said amendment is on Regulation 2(d)(ii)(j), whereby any concern, firm, trust, Hindu undivided family, company, or association of persons wherein a director of a company or his relative has more than 10% of the holding or interest will be deemed to be a connected person. Earlier shareholding or interest of only the immediate relatives of the director of a company was considered. This will further expand the entities which can be covered under this clause.

   Analysis

   By understanding the need and objective of such amendment, we can say that certain categories of persons who are not financially dependent or consult in trading decisions with the connected person, may also be in a position to have access to UPSI, by virtue of their proximity and close relationship with ‘connected persons’ and hence, can indulge in insider trading and present enforcement challenges.

   Thus, price sensitive information can also be transferred to such relatives for reasons such as natural love and affection without them being financially dependent and they can potentially indulge in insider trading.

   Therefore, the definition of relative is being introduced only for the limited purpose of establishing insider trading during the course of investigation and no additional requirements of disclosures are prescribed through the proposed amendments.

   Accordingly, the connected person shall now have to ensure that their relatives’ trading decisions are not influenced by UPSI. In many cases, relatives may trade of their own volition, and an onus may fall on them to establish that they don’t possess UPSI at the time of the trade. The connected person shall now have to be mindful that any information with is UPSI in nature, related to the company or its securities is not discussed casually or shared with anyone.

   Note: The definition of “immediate relative” is still in force when read (for compliance and disclosure purposes) with the term “Designated Persons” of the company and the current requirement for disclosures of trades of ‘immediate relative’ by promoters/ directors/ designated persons under PIT Regulations will continue as it is.

2. Insertion of new clause in the second part of the definition of Connected Person

In addition to the aforesaid amendment, the notification has added two new categories [as sub-clause (j) and (k) to regulation 2(d)(ii)]under the list of deemed connected persons in the second part of the definition of ‘connected persons’:

 (j) Employees and partners: firm or its partner or its employee in which a connected person is partner.

Analysis

To rationalize the scope of the expression “connected person”, amendments to the regulation 2(1)(d)(ii) dealing with persons who are deemed to be connected persons, drawing reference from the definition of “related party” as per section 2(76) of the Companies Act, 2013 as well as the experience gained while enforcing the regulations

Therefore, this proposal is not introducing new obligations but rather aligning with existing standards to ensure uniformity. Also, investigations are event-driven and focus on relevant individuals and not on all employees of the firm.

(k) Household members: a person sharing a household or residence with a connected person.

Analysis

The proposed inclusion of household or residence-sharing individuals aims to cover those who, due to close relationships or co-habitation with connected persons, may access price-sensitive information and engage in insider trading. A careful reading of the consultation paper issued by SEBI in this regard, will lead to a conclusion that  concerns about the definition or duration of residence, including rental arrangements, will be immaterial and focus will be on individuals’ access to UPSI at the time of the event.

Obligation of Connected Persons

Connected persons being Insiders, will continue to comply with the following compliance requirements–

1. Regulation 3, inter alia, strictly prohibits an insider to communicate, provide or allow access to any UPSI relating to a company or securities listed or proposed to be listed to any person including other insiders except where such communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations.
2. Regulation 4 provides that insiders are prohibited to trade in the securities of the company when in possession of UPSI. However, if they undertake an off-market trade inter se (between insiders), they must inform the company within 2 working days, and the company has to inform the stock exchange within 2 trading days of receiving it.
3. Regulation 5 allows insiders to formulate a trading plan for trades to be executed in future. This implies that now persons getting covered under relatives of a connected person are allowed to submit a trading plan for the consideration and approval of compliance officer.

Impact on Listed Entities:

Listed entities need not do anything much apart from reiterating the importance of the manner in which the connected person shall deal with UPSI. With the expanded scope of definition, a connected person needs to be more than careful because in case of an allegation of violation of regulation 4 (1) of SEBI PIT Regulations, onus is on them to prove that they were not in possession of UPSI.

It is important to note that the existing obligations with respect to seeking pre-clearance and making necessary disclosures lie only on the designated person and his/her immediate relatives and not relatives.

While SEBI PIT Regulations empower listed entities to require a connected person or class of connected persons to make disclosures of holdings and trading in securities of the company in such form and at such frequency as they made determine but considering the wide scope of the definition, such action shall be taken after taking into account into all associated factors. As a precautionary measure, if required, listed entities can obtain the PAN of relatives just to oversee their trading activities.

What’s in there for SEBI:

SEBI, by expanding the scope of ‘connected persons’, has tried to hit two eyes with an arrow. The expanded scope will not only deter the connected persons from circumventing trading restrictions by undertaking trades through third parties, but it will give SEBI access to a much larger pool of persons to investigate in case of insider trading related cases.