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The Securities and Exchange Board of India (SEBI) on Monday floated a consultation paper to broaden the scope of connected persons under the Prohibition of Insider Trading Regulations.
An insider is a connected person or someone in possession of Unpublished Price Sensitive Information (‘UPSI’). A ‘connected person’ has a connection with the company that is expected to give him access to UPSI.
The definition of ‘relative’ under PIT Regulations would be brought in line with the definition of ‘relative’ under Income Tax Act, 1961. Immediate relatives under PIT currently include spouse of that person, or any parent, brother, sister or child of the person or of the spouse. Under the IT Act, relative also includes any lineal ascendant or descendant of the individual.
Expanding scope
“It has been observed that certain categories of persons who are not covered in the scope of the definition of ‘connected persons’ as per existing regulations, may also be in a position to have access to UPSI from ‘connected persons’ to a company. Such deemed connected persons, owing to their proximity and close relationship with the connected persons, are considered to be in such a position where they can potentially indulge in insider trading,” the paper said.
The broader definition will include a firm, its partner or its employee in which a connected person is also a partner; a body corporate whose board of directors, managing director or manager acts in accordance with the advice of a connected person; persons sharing household or residence with a connected person; persons having material financial relationship with a connected person and a Hindu Undivided Family (HUF) where Karta or any of the member/coparcener is a connected person.
“Any expansion of connected person is dangerous as it gives SEBI immense power to hold someone guilty of insider trading without requiring it to prove that there was any communication of UPSI. Insider trading is a grave offence and the regulator should not be granted with such wide powers that just requires it to prove that someone is a connected person and has traded during the existence of UPSI,” said Anil Choudhary, Partner, Finsec Law Advisors.
The regulator should focus more on its investigating tools rather than using legal manoeuvres to make its job easy, added Choudhary.
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