Ambiguities in SEBI’s Insider Trading Amendment: A Closer Look at ‘Sharing Household or Residence’
Introduction
On 4 December 2024, the Securities and Exchange Board of India (“SEBI”) has issued the third amendment to the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (“PIT Regulations”). This amendment, based on a resolution passed in SEBI’s 207th board meeting, broadens the scope of ‘connected person’ under the PIT Regulations. The amended definition of ‘connected person’ now includes within its ambit a person “sharing household or residence with a connected person”.
It seems that this amendment is SEBI’s way of addressing the gap highlighted in 2022 in the case of Balram Garg & Ors. v. Securities and Exchange Board of India (“Balram Garg Judgment”). In short, the Balram Garg Judgment dealt with the following:
- The petitioners (i.e., Balram Garg & Ors.) were a part of their family business. However, in 2011, as part of a family arrangement, they parted ways from the business but continued to reside together in separate buildings on the same plot of land. In 2020, the petitioners were held liable for executing trades while in possession of unpublished price sensitive information (“UPSI”). However, these findings failed to place on record any material evidence and were based on circumstantial evidence, such as same residential address, close proximity between the parties, trading patterns, etc.
- The petitioners challenged this order before the Securities Appellate Tribunal (“SAT”), which dismissed the appeal on the grounds that there existed a close relationship amongst the petitioners and therefore they were in possession of UPSI while executing the trades. The petitioners, being aggrieved by the judgment of SAT, preferred an appeal to the Supreme Court.
- The Supreme Court, while dismissing the judgment of SAT held that an allegation for insider trading under the PIT Regulations can only be proved based on material evidence like letters, emails, witnesses, etc. and not mere circumstantial evidence.
Following the Balram Garg Judgement, SEBI in consultation paper dated 29 July 2024, stated that certain categories of persons, previously not included in the definition of ‘connected person’, are in a position to have access to UPSI due to their close relationship with ‘connected persons’ and therefore could potentially indulge in insider trading in contravention of the PIT Regulations.
Our Thoughts
The inclusion of ‘sharing household or residence with a connected person’ in the definition of ‘connected person’ leaves significant gaps, as highlighted in the Balram Garg Judgment. This amendment introduces further ambiguity, potentially categorizing tenants sharing households with their landlords as connected persons. Such ambiguity could pose practical challenges for SEBI, traders, and investors alike.
Moreover, the Supreme Court’s ruling in the Balram Garg Judgment emphasizes that circumstantial evidence alone is insufficient to prove possession of UPSI; substantial proof of communication is required. Establishing that individuals sharing a household have traded based on UPSI is challenging, as most communications are likely verbal due to their proximity, unless trading patterns and stock price movements suggest otherwise. Therefore, while the amendment aims to broaden the scope of ‘connected person’, it fails to achieve its intended purpose. For SEBI to effectively prosecute such infringements, it must enhance its market surveillance systems to prevent manipulations by a few insiders.
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