Balancing Compliance And Coverage: SEBI’s Consulting Paper Proposed Amendments To SEBI (PIT) Regulations

Posted On - 29 August, 2024 • By - Akash Pingley

Introduction

The Securities and Exchange Board of India (SEBI) has recently released a consultation paper on proposed amendments to the SEBI (Prohibition of Insider Trading) Regulations, 2015 (SEBI (PIT) Regulations).[1] The paper proposes significant amendments to the definition of “connected person” to expand the regulatory scope and enhance market integrity. The primary objective is to identify a broader range of individuals who could potentially possess or access unpublished price-sensitive information (UPSI). By aligning the definition of “connected person” with the Companies Act, 2013, and introducing new categories of connected persons, SEBI seeks to create a more robust framework for preventing insider trading.

This article will elaborate upon the Consultation Paper in the following manner:

  • Objective
  • Proposed Amendments to the Definition of ‘Connected Persons’
  • Rationalizing the Definition of ‘Relative’
  • Proposed Amendments to SEBI (PIT) Regulations, 2015
  • Public Comments Sought

Objective

The primary objective of the proposed amendments is to expand the regulatory scope of the PIT Regulations by redefining ‘connected person’. This will be achieved by:

  • Broadening the definition of ‘connected person’: SEBI intends to align the definition of ‘connected person’ under the PIT Regulations with the definition of ‘related party’ under the Companies Act, 2013, while incorporating practical experience.
  • Modifying the definition of ‘relative’: The definition of ‘relative’ will be aligned with the Income Tax Act, 1961, and the ‘Note’ under the definition of ‘immediate relative’ will be removed.
  • Maintaining compliance requirements: To ensure no increase in compliance burden, the definition of ‘immediate relative’ will be retained. However, its application will be limited to disclosures and the Code of Conduct under the PIT Regulations (except for mutual funds).

Essentially, SEBI aims to cast a wider net in identifying individuals who could potentially be in possession of or have access to unpublished price-sensitive information (UPSI) without imposing additional compliance obligations on regulated entities.

Proposed Amendment to the Definition of ‘Connected Persons’

Current Definition

A “connected person” is someone who has a connection with a company that could grant them access to Unpublished Price Sensitive Information (UPSI). Existing regulations define specific categories of individuals considered “deemed connected persons” even without holding official positions within the company.

Rationale for Change

  • SEBI has observed that certain individuals not currently classified as “connected persons” may still gain access to UPSI through their close relationship with existing “connected persons.”
  • The proposed amendments aim to “rationalize” the definition, expanding the scope to capture these individuals and potentially prevent insider trading.

Proposed Changes

The amendments draw reference from the definition of “related party” under the Companies Act, 2013, and practical experience. The key changes are as follows:

  • Existing Regulation 2(1)(d)(ii)(a): The existing definition of “relative of a connected person” will be modified to replace “immediate relative” with “relative,” aligning with the Income Tax Act, 1961.
  • New category under 2(1)(d)(ii)(k): Firms, partners, or employees where a connected person is also a partner will be considered deemed connected persons. This change is based on the “related party” definition in the Companies Act, 2013 (Section 2(76)).
  • New category under 2(1)(d)(ii)(l): Individuals whose advice is followed by a connected person will be considered deemed connected persons.
  • New category under 2(1)(d)(ii)(m): Body corporates whose board of directors or managers follow the advice of a connected person will be considered deemed connected persons.
  • New category under 2(1)(d)(ii)(n): Persons sharing a household or residence with a connected person will be considered deemed connected persons.
  • New category under 2(1)(d)(ii)(o): Individuals having a material financial relationship with a connected person, including through employment, financial dependency, or frequent transactions, will be considered deemed connected persons.
  • New category under 2(1)(d)(ii)(p): Hindu Undivided Families (HUFs) where the Karta or any member is a connected person or their relative will be considered deemed connected persons.

Burden of Proof and Additional Considerations

  • If charged with insider trading under these amendments, the onus will be on the “deemed connected person” to prove they did not possess UPSI.
  • Minor amendments are proposed to the definition of “connected person” under regulation 2(1)(d)(i).

Rationalizing the Definition of ‘Relative’

  • Alignment with Income Tax Act: The definition of “relative” will be aligned with the definition under the Income Tax Act, 1961, through a new regulation 2(1)(hc) in the PIT Regulations.
  • Removal of “Immediate Relative” Note: As the term “immediate relative” will be replaced with “relative” in the definition of “connected person,” the existing note under the definition of “immediate relative” in regulation 2(1)(f) becomes redundant and will be removed.
  • Retention of “Immediate Relative” for Compliance: To avoid increasing compliance burdens, the definition of “immediate relative” will be retained in regulation 2(1)(f).
  • Continued Disclosure Requirements: Disclosure requirements for trades of immediate relatives by promoters, directors, and designated persons will remain unchanged, ensuring ease of doing business.
  • Purpose of Rationalization: The primary goal of rationalizing the definition of “relative” is to enhance the effectiveness of identifying insider trading, not to introduce additional compliance obligations.

Proposed Amendments to SEBI (PIT) Regulations, 2015

Amendment to Regulation 2(1)(d) – Definition of “Connected Person”

Key Changes

The amended definition of “connected person” under Regulation 2(1)(d) of the SEBI (Prohibition of Insider Trading) Regulations, 2015, significantly expands the scope of individuals who may be considered insiders.

Broadening the Definition

  • Inclusion of Relatives: The most notable change is the inclusion of “relatives” as deemed connected persons. This significantly expands the potential pool of individuals who could be subject to insider trading regulations.
  • Expanded Categories: Several new categories of individuals have been added, including:
    • Persons with close business relationships with the company
    • Individuals who can influence the decision-making of a connected person
    • Persons sharing a household or residence with a connected person
    • Individuals with material financial relationships with a connected person
    • Hindu Undivided Families with a connected person as a member

Removal of Redundancies

The reference to “Hindu undivided family” and “immediate relative” has been removed from the definition as they are now covered under other provisions.

Intent and Purpose

The amended definition aims to cast a wider net in identifying potential insiders. The intent is to prevent misuse of unpublished price-sensitive information (UPSI) by individuals who may have access to such information due to their relationship with the company or a connected person.

Amendment to Regulation 2(1)(hc) – Definition of “Relative”

  • New Definition: A new definition of “relative” is introduced, aligning with the definition under the Income Tax Act, 1961. This includes spouses, siblings, parents, children, and their respective spouses.
  • Clarification of Intent: The note clarifies that relatives of connected persons are also considered connected persons for the purpose of these regulations.

Amendment to Regulation 2(1)(f) – Definition of “Immediate Relative”

  • Removal of Note: The existing note under the definition of “immediate relative” is removed as it becomes redundant with the introduction of the new definition of “relative.”
  • No Change to Definition: The definition of “immediate relative” itself remains unchanged.

Public Comments Sought

  • Proposed Amendment to “Connected Person”: SEBI seeks feedback on the expanded definition of “connected person,” including the addition of relatives and other categories of individuals. Stakeholders should consider the potential impact on businesses and the effectiveness of the amendment in preventing insider trading.
  • Proposed Definition of “Relative”: SEBI invites comments on the newly proposed definition of “relative” aligning with the Income Tax Act. Stakeholders should assess the clarity and comprehensiveness of the definition.
  • Removal of Note from “Immediate Relative”: SEBI seeks views on removing the note from the definition of “immediate relative.” Stakeholders should consider the impact of this removal on the overall understanding of the regulations.

Conclusion and The Way Forward

SEBI’s proposed amendments aim to bolster insider trading regulations by significantly expanding the definition of ‘connected person’. This move is intended to capture a wider range of individuals who may possess or have access to unpublished price-sensitive information (UPSI). While the broader definition enhances regulatory coverage, it also raises concerns about increased compliance burdens for companies. Striking a balance between effective regulation and practical implementation will be crucial. The success of these changes hinges on careful stakeholder feedback and a clear implementation framework.

[1] https://www.sebi.gov.in/reports-and-statistics/reports/jul-2024/consultation-paper-on-proposed-amendments-to-the-sebi-prohibition-of-insider-trading-regulations-2015-to-rationalize-the-scope-of-the-expression-connected-person-while-not-increasing-compliance-_85249.html.

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