Effective December 6, 2024, the Securities and Exchange Board of India (Prohibition of Insider Trading) (Third Amendment) Regulations, 2024 (“December 2024 Amendments”) have expanded the scope of individuals considered ‘connected persons’ and, by extension, ‘insiders’ under the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (the “PIT Regulations”):
- Key Changes
- Expanded Definition of Connected Persons:
- Relatives: Prior to the December 2024 Amendments, only ‘immediate relatives’ of connected persons were deemed to be connected persons. However, after these Amendment, certain specified relatives of a connected person (including spouses, parents, parents-in-law, siblings, spouse’s siblings, children and spouse’s children, children’s spouse(s), siblings’ spouses, as well as spouse’s siblings’ spouses (“Identified Relatives”)) are also deemed to be connected persons.
- Household Members: Further, individuals sharing a household or residence with a connected person are now deemed to be connected persons.
- Former Employees: Until the December 2024 Amendments, ‘connected persons’ included immediate relatives of former employees. This has now been broadened to include Identified Relatives of former employees. Notably, former employees and Identified Relatives of former employees would only qualify as connected persons/insiders for a period extending to 6 months prior to the relevant act/event of insider trading (effectively, this would mean that the relevant act/event happens within 6 months from the date of cessation of the employee’s employment/association with the company).
- The SEBI has also sought to clarify through an explanatory note that it is a rebuttable presumption that a ‘connected persons’ has unpublished price sensitive information (“UPSI”), requiring such persons to rebut the presumption.
- Expanded Definition of Connected Persons:
- Effects of the Amendments
- Enforcement Actions:
- The presumption that relatives of connected persons are also connected unless proven otherwise could lead to more enforcement actions under the PIT Regulations by SEBI. Since the burden of proving innocence will be on the party accused of insider trading and given that the presumption extends to assuming that all connected persons and deemed connected persons possess UPSI, there is a risk that otherwise innocent individuals will be embroiled in protracted legal battles.
- Compliance Challenges for Companies:
- Companies may need to adapt their compliance frameworks to include the expanded categories of connected persons. This could involve collecting and retaining information pertaining to a wider range of individuals.
- In terms of Regulation 7(3) of the PIT Regulations, companies already had the discretion to procure the trading and holding information of any category of connected persons. Companies may, thus, evaluate whether this should be extended to Identified Relatives of former employees who now qualify as connected persons.
- Enforcement Actions:
This update is for information purposes only. For further insights please reach out to us at contact@appartners.in