Sebi expands insider trading net
December 11, 2024
Sebi has changed 'immediate relative' to 'relative,' which now includes spouse, parents (including in-laws), brothers and sisters (and their spouses), and children (and their spouses) of the person involved.
The Securities and Exchange Board of India (Sebi) has notified the expansion of the definition of “connected persons”, who have access to price-sensitive information, with effect from December 5.
Bringing in more people under the scanner, the regulator has included relatives, related firms or partners and people living in the same household or residence as the person involved, to be a part of ‘deemed connected persons.’
Sebi has changed ‘immediate relative’ to ‘relative,’ which now includes spouse, parents (including in-laws), brothers and sisters (and their spouses), and children (and their spouses) of the person involved.
The regulator aims to close any regulatory loopholes and prevent potential violations. If accused of insider trading, these deemed connected persons would need to prove that they did not possess any unpublished price sensitive information (UPSI).
However, experts caution that shifting the burden of proof to the accused could lead to widespread misconceptions and wrongful suspicions, potentially implicating innocent individuals and distant relatives, while actual insider trading offenders could still avoid detection.
KC Jacob, counsel at Economic Laws Practice said, “This shift not only heightens the risk of unjust accusations, but also allows individuals to be unfairly branded as ‘connected person’ without cogent evidence while facing the serious charge of insider trading.”
To avoid the risk of these deemed connected persons falling under Sebi’s scrutiny and overshooting coverage, there needs to be an additional qualifier to avoid the overshooting coverage, said Arindam Ghosh, partner at Khaitan & Co.
However, the new rules are an improvement over Sebi’s initial proposals ― to include persons having a material financial relationship through dependency or frequent transactions, and a Hindu Undivided Family (HUF) where the ‘karta’ is related to the person involved, among others.
This follows dissent by industry participants regarding the increased compliance burden on listed companies and key managerial persons to keep a tab on their relatives and other company partners, according to public comments received by Sebi on its draft paper.
“The proposed alignment of UPSI definitions with ‘material events’ and the expansion of ‘connected persons’ could significantly heighten compliance burdens for investors and companies,” Ghosh said.
Queries were also raised on the definition of ‘residence’ and ‘material financial relationship’, with majority of responses being against the expansion of scope of “relatives” and “connected persons.”
[The Financial Express]
