Sebi recently proposed amendments to the Sebi (Prohibition of Insider Trading) Regulations 2015. Under PIT regulations, an ‘insider’ is someone who has access to unpublished price-sensitive information (UPSI) or is a ‘connected person’. The proposal expands the current law, which criminalises certain conduct by creating a presumption, effectively overturning the ‘innocent until proven guilty’ principle. The proposed changes pose risks not to wrongdoers but to innocent people.
PIT regulations identify specific categories of individuals presumed or deemed to be connected persons to the insider, including immediate dependent relatives (parents, siblings, children, etc) and certain corporate entities, based on their connection and presumed access to such information.
Sebi’s proposal aims to broaden this definition by adding new categories of deemed connected persons and replacing ‘immediate relatives’ with the broader term ‘relative’, aligning it with the I-T Act. It also propose to include six new categories of individuals as connected persons, referencing the definition of ‘related party’ under the Companies Act 2013. The expansion includes ‘material financial relationship… for reasons of… frequent financial transactions’. This could literally be thousands of vendors of a single public company.
The consultation paper, however, fails to explain the need for such changes. Definition of relatives in the I-T Act is used for providing benefits to taxpayers, not to criminalise them. Inclusion of ‘immediate relatives’ in PIT regulations was a deliberate choice, made to address specific nuances of insider trading, which even in its limited scope often inverts justice.
Under the current framework, connected persons are presumed to possess UPSI unless they can prove otherwise. This creates a rebuttable presumption, placing the burden of proof on the accused to demonstrate their innocence. While this may be logical for individuals reasonably assumed to have access to UPSI, expanding the definition of connected persons significantly increases the number of people unjustly burdened by this presumption.
The proposed changes would require individuals who may only be related to someone with UPSI to prove a negative – that they did not have access to or acted upon insider information. This shift in the burden of proof is unfair and creates a potential for significant injustice, as it effectively presumes guilt rather than innocence. While one may argue that the presumption is rebuttable, proving innocence under these circumstances is nearly impossible without a camera on everyone’s head recording every breath.
How does one prove that a distant relative did not pass on information? Under the current framework, a financially independent relative who lives separately and does not seek advice on trading decisions would not be classified as a deemed connected person. However, with the proposed change to ‘relative’, such second-degree relatives would be included solely due to their familial connection, regardless of financial independence or involvement in trading decisions.
In the Balram Garg case, Sebi accused a person of insider trading because the two stayed in the same residential complex. Also, even the pattern of insider trading was the opposite of what was logical (sale before good news).
Yet, Sebi charged the person with insider trading. It took the Supreme Court to say, ‘It is only through producing cogent materials (letters, emails, witnesses, etc) that the said communication of UPSI could be proved, and not by deeming the communication to have happened owing to the alleged proximity between the parties.’ With the proposed law, the parties could be deemed criminals, and it would be more difficult for even the top court to defend the innocent.
Instead of expanding the definition and increasing the burden on individuals, Sebi should focus on enhancing its investigative capabilities. This would enable it to build more robust cases based on actual evidence rather than relying on presumptions that may not hold true.
The proposed regulatory changes indicates a tendency to shift the burden of proof on to the accused rather than carrying it themselves. While improving Sebi’s investigative capacity is crucial, granting the regulator unchecked power to label individuals as ‘connected persons’ without concrete evidence risks regulatory overreach. The proposal should be abandoned, and even the current law on presumption needs to be rationalised.
(Parekh is managing partner, and Dhagat and Kinjawadekar are associates, Finsec Law Advisors, Mumbai.)
