SEBI proposes to expand the definition of 'connected persons' in insider trading
Mumbai: Capital markets regulator Securities and Exchange Board of India (SEBI) has issued a consultation paper proposing to expand the scope of insider trading regulations to include more individuals, even those who may have unofficial connections with company officials who possess price-sensitive information, media reports said.
"Connected persons" are those deemed to have access to unpublished price-sensitive information (UPSI). They are associated with a company within six months prior to the act of insider trading, either directly or indirectly, in any capacity.
The Securities and Exchange Board of India (SEBI) explained that certain categories of people not currently classified as "connected persons" may still have access to UPSI due to their close relationships with such individuals.
The paper proposes updating the definition of "relative" to align with the Income Tax Act, including spouses, siblings, siblings of spouses, siblings of parents, and lineal ascendants or descendants.
“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 requested public comments on the consultation paper by August 18.
The paper introduces the following categories:
- Relatives of connected persons
- Partners or employees where the connected person is a partner
- Individuals whose advice a connected person regularly follows
- Corporations whose management acts on the advice of a connected person
- Individuals with a significant financial relationship with a connected person, including due to employment, financial dependency, or frequent financial transactions
- Hindu Undivided Families (HUF) where the head (karta) or any member is a connected person or relative of a connected person
The consultation paper states that when charges are brought against these deemed connected persons, the burden of proof will be on them to show they did not possess UPSI.
To ensure there is no increase in compliance requirements, the definition of "immediate relative" will remain unchanged in the SEBI (Prohibition of Insider Trading) Regulations, as mentioned in the paper released today.
SEBI also clarified that the obligation for promoters, directors, and designated persons to disclose trades by "immediate relatives" under the PIT Regulations will continue unchanged.
“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.
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