In its recent board meeting, SEBI proposed amendments to the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015. These changes aim to rationalize the definition of “connected person” by aligning it with the “related party” definition under the Companies Act, 2013. The amendments also introduce a new definition of “relative,” modeled after the Income Tax Act, 1961, replacing the current “immediate relative” concept. These modifications expand the scope of those considered to have access to Unpublished Price Sensitive Information (UPSI), including those with material financial relationships or who share a household with connected persons. The goal is to address enforcement challenges by covering a broader range of individuals who may have access to insider information. SEBI also published a consultation paper to gather public feedback on these proposals, which received mixed responses. While some supported the amendments, concerns were raised about the potential subjectivity in defining material financial relationships and the burden placed on firms and individuals. SEBI acknowledged these concerns and agreed to adjust the proposals where necessary, aiming to ensure uniformity and minimize the compliance burden while enhancing insider trading regulation enforcement.
Securities and Exchange Board of India
Monday 30th September – SEBI Board Meeting
Proposed amendments to the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 to rationalize the scope of the expression ‘connected person’ and introduce definition of ‘relative’
1. Objective:
1.1 This memorandum seeks approval of the Board on the proposed amendments to the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 with the objective to:
1.1.1. Rationalize the scope of the expression “connected person” under regulation 2(1)(d) of the PIT Regulations drawing reference from the definition of “related party” under section 2(76) of the Companies Act, 2013 and experience gained while enforcing the regulations;
1.1.2. Introduce definition of “relative” as new regulation 2(1)(hc) in line with the definition of relative under Income Tax Act, 1961 and consequently do away with the “Note” from the existing definition of “immediate relative” in regulation 2(1)(f) of PIT Regulations.
2. Background:
2.1 The securities market plays a vital role in shaping a country’s economic landscape. It provides investors with opportunities to participate in the growth of companies and the economy at large. However, the market’s integrity can be compromised when insiders of the company, possessing privileged information, engage in trading activities that give them an unfair advantage. To combat such practices and to ensure a level playing field, the Securities and Exchange Board of India (SEBI) framed the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992. To ensure that the regulatory framework dealing with insider trading in India is further strengthened, SEBI reviewed the extant Insider Trading regulatory regime through a committee under Chairmanship of Hon’ble Justice N. K. Sodhi. The Committee made a range of recommendations to the legal framework for prohibition of insider trading in India while focusing on making the regulation more predictable, precise and clear by suggesting a combination of principles-based regulations and rules that are backed by principles.
2.2 Based on the recommendations of the said committee, Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 were repealed on January 15, 2015 and substituted with the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (hereinafter referred as ‘PIT Regulations’) which have been further refined over time to address emerging challenges and to ensure greater transparency.
2.3 The PIT Regulations currently define the terms “insider”, “connected person” and “immediate relative”, which are briefly defined below:
2.3.1 An insider, as defined in regulation 2(1)(g) of PIT Regulations, means any person who is i) a connected person; or ii) in possession of or having access to Unpublished Price Sensitive Information (UPSI).
2.3.2 A ‘connected person’ in terms of regulation 2(1)(d)(i) of the PIT Regulations is a person who has an association with the company during the six months prior to the concerned act that allows such person, directly or indirectly, access to unpublished price sensitive information (UPSI) or is reasonably expected to allow such access.
The categories of persons that are deemed to be connected persons in terms of regulation 2(1)(d)(ii) of the PIT Regulations are such persons who may not seemingly occupy any position in a company but are in regular touch with the company and its officers and are involved in the know of the company’s operations. It is intended to bring within the ambit of ‘connected persons” those who would have access to or could access UPSI about the company by virtue of any connection that would put them in possession of UPSI.
2.3.3 “Immediate relative” in terms of regulation 2(1)(f) of the PIT Regulations means 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. It is intended that the immediate relatives of a “connected person” too become connected persons for purposes of these regulations even though this is a rebuttable presumption.
3. Issues for consideration and proposals
Deemed Connected Person
3.1 As per the existing regulation 4(2) of PIT Regulations, when an allegation of violation of regulation 4 (1) of PIT Regulations is levelled on connected persons, onus is cast on such persons to prove that they were not in possession of UPSI. It has been observed that certain categories of persons who are not deemed to be connected persons as per the existing regulations, 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.
3.2 Therefore, 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, are proposed as follows:
Table 1
| Regulation | Proposed changes | Reference |
| 2(1)(d)(ii)(k) (new) | a firm or its partner or its employee in which a ‘connected person’ is also a partner; | Reference is drawn to the definition of “related party” in section |
| 2(1)(d)(ii)(l) (new) | any person on whose advice, directions or instructions a ‘connected person’ is accustomed to act; |
|
| 2(1)(d)(ii(m) (new) | a body corporate whose board of directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a ‘connected person’; | 2(76) of the Companies Act, 2013. |
| 2(1)(d)(ii)(n) (new) | persons sharing household or residence with a ‘connected person’; | Based on the experience gained while enforcing the regulations. |
| 2(1)(d)(ii)(o) (new) | persons having material financial relationship with a ‘connected person’ including for reasons of employment or financial dependency or frequent financial transactions; | |
| 2(1)(d)(ii)(p) (new) | a Hindu Undivided Family (HUF) where Karta or any of the member/coparcener is a ‘connected person’ or a relative of ‘connected person’. |
Relative
3.3 Further, the existing definition of “immediate relative” of a person means spouse/ parent/ sibling/ child of such person or of the spouse, who is dependent financially on such person, or consults such person in taking decisions relating to trading in securities. However, the communication of UPSI to a related person does not necessarily depend on whether the relative is financially dependent or consults in trading decisions. In this regard, reference may be drawn to the definition of “relative” under Section 56 of the Income Tax Act, 1961 wherein “relative” is defined in the context for providing exemptions from income tax for gift received from specified relatives. Relatives covered in that definition are those to whom one would give gift on account of natural love and affection. Similarly, 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.
3.4 In order to bring such persons into the regulatory ambit and to rationalize the scope of relatives, it is proposed to introduce a new definition of “relative” vide regulation 2(1)(hc) of PIT Regulations, in line with the definition of relative under Explanation to Section 56 (2) (v) of the Income Tax Act, 1961. The proposed definition of “relative” is as follows:
“relative” shall mean the following:
(i) spouse; or
(ii) sibling(s); or
(iii) sibling(s) of spouse; or
(iv) siblings of parents; or
(v) any lineal ascendant or descendant of the individual or spouse; or
(vi) spouse of the person referred to in sub –regulation (ii) to (v) above
Note: It is intended that the relatives of a “connected person” too become connected persons for the purpose of these regulations. It is a rebuttable presumption that a connected person had UPSI.
3.5 Accordingly, it is proposed to use the term “relative” instead of the term “immediate relative” in the regulation 2(1)(d)(ii)(a), that deals with categories of persons that are deemed to be connected persons and consequently, define “relative” as set out in para 3.4 above. 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.
3.6 Consequently, the “Note” to the definition of ‘immediate relative’ at regulation 2(1)(f) becomes redundant since the “Note” was intended for the rebuttable presumption that the immediate relatives of a “connected person” are also deemed to be connected persons. Accordingly, it is proposed to do away with the “Note” from the definition of ‘immediate relative’ at regulation 2(1)(f) of PIT Regulations and incorporate the “Note” under the proposed definition of “relative” (as brought out at para 3.4 above).
3.7 In order to ensure that there is no increase in compliance requirements, no change in the definition of “immediate relative” under regulation 2(1)(f) of PIT Regulations is proposed. Consequently, the current requirement for disclosures of trades of ‘immediate relative’ by promoters/ directors/ designated persons under PIT Regulations will continue as it is.
4. Public Consultation
4.1 In order to seek public comments on the proposed amendments to PIT Regulations as detailed at para 3.2, 3.4, 3.5 and 3.6 above, SEBI published a consultation paper (Annexure 1) on its website on July 29, 2024. Comments on the proposed amendments have been received from various stakeholders including listed entities, legal firms, market participants, general public etc. and the feedback on the proposals is summarized below.
4.2 Proposal 1 – Rationalizing the scope of the definition of “connected person”
Table 2: Summary of feedback on Proposal
| Proposal Description | Total no. of comments received
|
No. of comments agreeing to the proposal (Strongly Agree + Agree + Partially Agree)
|
No. of comments disagreeing to the proposal (Strongly Disagree + Disagree) |
| Whether you agree with the proposed amendment to the definition of ‘connected person’? |
49 | 27 | 22 (5*) |
*The number of comments in disagreement includes the number of comments (given in brackets) where no comments / rationale for disagreement were provided.
4.3 Analysis of the public comments
4.3.1. The summary of public feedback and our analysis thereon are detailed in Annexure 2. The major comments for disagreement and our analysis of the same are summarized below.
Table 3
| S. No. | Public Comments and SEBI’s views |
| 4.3.1.1 | Public Comments:
With respect to the proposed inclusion of an additional category of deemed connected persons viz. those who are “having material financial relationship with a ‘connected person’ including for reasons of employment or financial dependency or frequent financial SEBI’s views: The PIT Regulations provide a specific definition of ‘material |
| 4.3.1.2 | Public Comments:
With respect to the proposed addition to include the firm, its |
| 4.3.1.3 | Public Comments: With respect to additional category of “persons sharing household or residence with a connected person”, it is not clear as to what “residence” means and the regulation is silent on the time-period for which the person needs to share residence with the connected person. Also, queries were raised as to whether persons sharing the residence on rental basis with the connected person will be considered as connected persons.
SEBI’s views The primary objective for the proposed inclusion of household or residence-sharing individuals is to cover those who, by virtue of their close relationship or co-habitation with the connected person, could come into possession of price sensitive information and indulge in insider trading. Regarding concerns about the meaning of residence, duration of residence or the inclusion of individuals sharing a residence on a rental basis, it is important to emphasize that investigations are event-driven based on attendant facts and circumstances. The focus of any investigation will be on the circumstances at the time of the event in question. The intent is to cover relevant individuals during the process of investigation based on their accessibility to UPSI, rather than limiting it by time frames or residential arrangements. |
| 4.3.1.4 | Public Comments:
It was suggested that the definition of ‘connected person’ be utilized solely for the purpose of investigations into insider trading and companies should not be expected to maintain or provide data on connected persons. SEBI’s views: The existing SEBI (PIT) Regulations do not mandate disclosures by deemed connected persons to the Stock Exchanges. Consequently, the concerns raised appear to be unfounded and not supported by the actual provisions of the regulations. |
4.4 Recommendation
4.4.1. In view of the above, the following categories of persons are proposed to be included in regulation 2(1)(d)(ii) of the PIT Regulations as “deemed to be connected persons”
(k) a firm, its partner or its employee in which a connected person specified in clause (i) is also a partner; or
(l) any person on whose advice, directions or instructions, a connected person specified in clause (i) is accustomed to act; or
(m) a body corporate whose board of directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a connected person specified in clause (i); or
(n) persons sharing household or residence with a connected person specified in clause (i); or
(o) persons having material financial relationship with a connected person specified in clause (i); or
(p) a Hindu Undivided Family (HUF) where Karta or any of the member/coparcener is a connected person specified in clause (i) or a relative of connected persons specified in clause (i).
4.5 Proposal 2 – Introducing the definition of “relative” as a new regulation 2(1)(hc)
Table 4: Summary of feedback on Proposal
| Proposal Description | Total no. of comments received | No. of comments agreeing to the proposal (Strongly Agree + Agree + Partially Agree) | No. of comments disagreeing to the proposal (Strongly Disagree + Disagree) |
| Whether you agree with the proposed definition of ‘relative’ | 44 | 11 | 33 (10*) |
*The number of comments in disagreement includes the number of comments (given in brackets) where no comments / rationale for disagreement were provided or comments provided were irrelevant to the proposal.
4.6 Analysis of the public comments
4.6.1. The summary of public feedback and our analysis thereon are detailed in Annexure 2. These concerns primarily relate to the expanded definition of relatives and their inclusion as deemed connected persons could place a significant burden on individuals to prove that they do not have access to UPSI. Other concerns include a potential increase in compliance burdens for companies, designated persons, and relatives. The major comments for disagreement and our analysis of the same are summarized below.
Table 5
| S. No. | Public Comments and SEBI’s views |
| 4.6.1.1 | Public Comments:
The term “relative” has been incorporated to meet certain objectives under the IT Act for reasons such as, inter alia, calculating total tax payable, availing deductions, etc., and this construct may not align with the regulatory objectives of the PIT Regulations. SEBI’s views Under section 56 of the Income Tax (IT) Act, 1961, “relative” is defined in the context for providing exemptions from income tax for gift received from specified relatives. Relatives covered in that definition are those to whom one would give gift on account of natural love and affection. Similarly, price sensitive information can also be transferred to such relatives for reasons such as natural love and affection and they can potentially indulge in insider trading. The intent behind the proposed amendment is to bring certain categories of persons who are not deemed to be connected persons as per existing regulations, but may also be in a position to have access to UPSI from ‘connected persons’, by virtue of their proximity and close relationship with such ‘connected persons’.. Hence, the suggestion may not be accepted. |
| 4.6.1.2
|
Public Comments:
Definition of Relative as mentioned in the consultation paper should be restricted to cover spouse and other relatives (only if they are financially dependent on the individual and have material financial relationship with the individual). It may also be clarified if it is the responsibility of listed entity to monitor and ensure compliances for relatives of the connected persons as well? SEBI’s views The communication of UPSI to a related person does not necessarily depend on whether the relative is financially dependent or consults in trading decisions. The price sensitive information can also be transferred to such relatives for reasons such as natural love & affection or for other reasons such as usage of mule accounts. As regards to responsibility of listed entity to monitor and ensure compliances for relatives of the connected persons, no such additional requirements are prescribed through the proposed amendments. Hence, the suggestion may not be accepted. |
| 4.6.1.3 | Public Comments:
Relatives would not be aware of the existence of UPSI and details of closure of trading window. Further, it would not be advisable or practically feasible for a designated person to inform all relatives of the closure of trading window communicating about not trading in securities due to existence of UPSI. SEBI’s views The definition of relative is being introduced only for the limited purpose of establishing insider trading during the course of |
4.7 Recommendation
4.7.1. In view of the above, it is proposed to:
4.7.1.1. substitute the term “relative” instead of the term “immediate relative” in the regulation 2(1)(d)(ii)(a); and
4.7.1.2. introduce the definition of “relative” as new regulation 2(1)(hc) in line with the definition of relative under Income Tax Act, 1961.
4.8 Proposal 3 – Removal of the “Note” from the existing definition of “immediate relative” in regulation 2(1)(f)
Table 6: Summary of feedback on Proposal
| Proposal Description | Total no. of comments received | No. of comments agreeing to the proposal (Strongly Agree + Agree + Partially Agree) | No. of comments disagreeing to the proposal (Strongly Disagree + Disagree) |
| Whether you agree with the proposed removal of ‘NOTE’ to the definition of ‘immediate relative’ |
28 | 15 | 13 (6*) |
*The number of comments in disagreement includes the number of comments (given in brackets) where no comments / rationale for disagreement were provided.
4.9 Analysis of the public comments
4.9.1. The summary of public feedback and our analysis thereon are detailed in Annexure 2. The major comments for disagreement and our analysis of the same are summarized below.
Table 7
| S. No. | Public Comments and SEBI’s views |
| 4.9.1.1 | Public Comments:
SEBI is requested to reinstate the “Note” to the definition of ‘immediate relative’ as it is prudent to only cover the immediate relatives of connected persons for the purpose of this Regulations. Any assumption of being connected via relatives is indeed a rebuttable presumption. A default assumption here will be unfair where the persons are not even in touch or have nothing to do with each other’s investment decisions. SEBI’s views The ‘note’ to definition of ‘immediate relative’, becomes redundant due to following: i. Currently, the expression ‘immediate relative’ is one of the categories of the deemed connected persons under regulation 2(1)(d)(ii)(a). ii. The ‘note’ to the ‘immediate relative’ was intended for the rebuttable presumption that the immediate relatives of a “connected person” are also connected persons. iii. It is now being proposed to replace ‘immediate relative’ with expression ‘relative’ under regulation 2(1)(d)(ii)(a). iv. In view of the same, the ‘note’ to the ‘immediate relative’ now loses its relevance and is proposed to be included under the definition of ‘relative’. |
4.10 Recommendation
4.10.1. In view of the above, it is proposed to remove the “Note” from the existing definition of “immediate relative” in regulation 2(1)(f) of PIT Regulations and incorporate it after the definition of relative under regulation 2(1)(hc) .
4.11 Apart from the aforementioned changes, for better clarity, minor editorial changes are also proposed in the definition of ‘connected person’ under regulation 2(1)(d)(i) and in the “Note” to regulation 2(1)(g) dealing with the definition of ‘insider’.
5. Proposed amendments to SEBI (PIT) Regulations, 2015 for approval
5.1 The proposed amendments to SEBI (PIT) Regulations, 2015 are placed at Annexure 3.
6. Proposal
6.1 The Board is requested to:
6.1.1. consider and approve the recommendations for amendments to PIT Regulations as follows:
6.1.1.1. Rationalization of the scope of the expression “connected person” under regulation 2(1)(d)(ii), as detailed under para 4.4.1 above.
6.1.1.2. Introduction of the definition of “relative” as new regulation 2(1)(hc) and substitution of the term “relative” instead of the term “immediate relative” in the regulation 2(1)(d)(ii)(a), as detailed under para 4.7.1 above.
6.1.1.3. Removal of the “Note” from the existing definition of “immediate relative” in regulation 2(1)(f) and incorporating it after the definition of relative under regulation 2(1)(hc), as detailed under para 4.10.1 above.
6.1.1.4. Minor editorial changes in the definition of ‘connected person’ under regulation 2(1)(d)(i) and in the “Note” to regulation 2(1)(g) dealing with the definition of ‘insider’, as detailed under para 4.11 above.
6.1.2. consider and approve the consequent draft amendment notification placed at Annexure 4.
6.1.3. authorize the Chairperson to make consequential and incidental changes and take necessary steps to give effect to the decisions of the Board.
*****
Annexure 1
Consultation paper is available on SEBI website.
Annexure 2
This has been excised for reasons of confidentiality.
Annexure 3
This shall be notified at a later date.
Annexure 4
This shall be notified at a later date
