In a bid to fortify the integrity of India’s securities market and protect investors, the Securities and Exchange Board of India (SEBI) has unveiled a consultation paper proposing a sweeping overhaul of the regulations governing ‘Connected Persons’.

The existing definition of connected persons has been criticised for its broad scope, leading to potential ambiguity and challenges in implementation.

Who are connected persons

At its core, a connected person refers to an individual or entity that has a direct or indirect influence over the decision-making process of a listed company or is in a position to impact its financial affairs.

The current definition of connected persons under SEBI’s encompasses a wide range of relationships, including family members, business associates, and entities with shared financial interests.

SEBI proposes a more nuanced definition of connected persons, focusing on those with a substantial influence or control over a listed company’s affairs. This would involve considering factors such as shareholding patterns, management control, and contractual relationships.

The consultation paper suggests expanding the list of transactions that require disclosure and approval when involving connected persons. This is aimed at capturing a wider range of potential conflict-of-interest scenarios.

SEBI proposes making the disclosure requirements more stringent for transactions involving connected persons. This would include detailed information on the nature of the relationship, the terms of the transaction, and the rationale behind it.

The regulator is also considering introducing stricter penalties for non-compliance with connected person regulations. This is intended to deter potential violations and ensure greater adherence to the rules.

Investor impact

The proposed changes, if implemented, would have far-reaching implications for both listed companies and investors, reshaping the landscape of related party transactions and insider trading regulations.

Listed companies would face increased scrutiny of their transactions with connected persons, necessitating greater diligence and caution. This would require companies to establish robust internal controls and compliance mechanisms to ensure adherence to the stricter regulatory framework.

The expanded list of transactions subject to disclosure and approval, coupled with the more stringent disclosure requirements, would undoubtedly increase the compliance burden on listed companies. This could be particularly challenging for smaller companies with limited resources.

Further, the need for pre-approval of certain transactions involving connected persons could lead to potential delays and disruptions in business operations, impacting the company’s agility and decision-making processes.

For investors, the proposed changes aim to improve transparency by requiring more detailed and timely disclosures of transactions involving connected persons. This would empower investors with better information, enabling them to make more informed investment decisions.

By reducing information asymmetry between insiders and the general public, the new regulations would help level the playing field and foster a fairer market environment. The stricter regulations and enhanced penalties for non-compliance would act as a deterrent against insider trading and other market abuses, providing greater protection to investors.

SEBI has invited public comments on the consultation paper, and the feedback received will play a crucial role in shaping the final regulations.

SEBI’s consultation paper on connected persons marks a significant step towards strengthening the regulatory framework for related party transactions. The proposed changes, if implemented effectively, have the potential to enhance transparency, curb conflicts of interest, and foster a more fair and equitable market environment.

However, careful consideration of potential challenges and concerns is essential to ensure that the new regulations to achieve their intended objectives without stifling market growth and innovation.

Saravanan is a professor of finance and accounting at IIM Tiruchirappalli and Williams is the Head of India at Sernova Financial

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