Introduction
On 04.12.2024, the Securities and Exchange Board of India (‘SEBI’) *vide *notification no. SEBI/LAD-NRO/GN/2024/215 (‘Notification’) exercised the powers conferred by s. 30 read with ss. 11(2) and 12A of the Securities and Exchange Board of India Act, 1992 (‘Act’), to amend the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (‘Regulations’). This amendment is called the Securities and Exchange Board of India (Prohibition of Insider Trading) (Third Amendment) Regulation, 2024 (‘Amended Regulations’).
1. Amendments in the Regulations
The Amended Regulations have broadened the scope of insider trading provisions and enhanced regulatory clarity. The amendments have been made to the definitions contained in r. 2(1) of the Regulations. The key amendments are discussed below:
A. Connected Person (Clause d)
a. Substitution of Sub-clause (i): Changes have been made to the definition of ‘connected person’ provided in r. 2(1)(d)(i). The definition of a ‘connected person’ has been expanded. Now, anyone associated with a company in the six months prior to the relevant act, either directly or indirectly, is included. This includes:
Frequent communication with officers.
Contractual, fiduciary, or employment relationships (temporary or permanent).
Professional or business relationships allowing access to unpublished price-sensitive information (‘UPSI’).
Erstwhile provision: Earlier, the period was not explicitly mentioned, and the definition was narrower in terms of direct association and capacity.
b. Changes to Sub-clause (ii):
Item (a): The phrase ‘an immediate’ has been replaced with ‘a,’ widening the scope beyond immediate relationships.
Item (j): The term ‘immediate’ has been removed, simplifying references to relationships such as directors’ holdings and interests.
New inclusions under sub-clause (ii):
(k): A firm or its partner/employee, where a connected person is also a partner.
(l): A person sharing a household or residence with a connected person.
B. Relatives and Immediate Relatives: The term ‘immediate relatives’ is now replaced with ‘relatives,’ broadening its scope. The amended note clarifies that relatives of a ‘connected person’ are presumed to be also connected persons. This presumption is rebuttable, meaning it can be challenged with evidence.
C. Definition of ‘Generally Available Information’ (Clause g): The note accompanying this clause is revised for clarity:
Anyone with access to or possessing UPSI is considered an insider, regardless of how the information was obtained.
The burden of proof lies on the accuser to show possession or access to UPSI. Once established, the accused must prove:
They did not possess UPSI.
They did not trade or were unable to access the UPSI.
Their trades fall within exceptions.
D. Definition of ‘Relative’ (Clause hc): A new clause (hc) introduces a comprehensive definition of ‘relative’:
Spouse.
Parents and parents-in-law.
Siblings and siblings-in-law.
Children and children-in-law.
Spouses of the above-listed individuals.
The relatives of a connected person are presumed to have UPSI, but this is rebuttable.
2. Broader Impact of the Amendments
Expanded Scope of Connected Persons: Including temporary, professional, or business relationships and a retrospective six-month period widens the net for identifying insiders.
Household Inclusion: By adding persons sharing a residence with connected persons, the regulations address potential loopholes in UPSI sharing.
Clarification on Insider Trading: The revised notes provide greater clarity on applying insider trading laws, emphasizing the responsibilities of both the accuser and the accused.
Alignment with Global Standards: These changes align SEBI’s insider trading regulations with international best practices, ensuring comprehensive coverage of all potential avenues for misuse of UPSI.
3. Key Changes from Erstwhile Provisions: Earlier, the regulations narrowly defined connected persons and immediate relatives. The amendments have broadened the definitions to include household members and professional relationships, clarified the rebuttable presumption for relatives of connected persons and specified a retrospective period of six months for determining connected persons. The focus of these amendments is to ensure that no individual with access to UPSI escapes the ambit of the regulations.
4. Implications for Companies and Individuals: Companies must ensure robust internal controls to monitor relationships that could give rise to connected persons. Further, individuals, especially those in households with connected persons, need to exercise caution in trading activities. Legal practitioners and compliance teams must update policies to reflect these expanded definitions and responsibilities.
Authored by Kushagra Gahlot, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.
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