Deemed connected persons
Also written Deemed to be connected persons · Deemed connected person
Categories of people the insider trading rules treat as connected automatically — relatives, group companies, trustees, bankers, auditors — unless the person proves the contrary.
In plain language
Proving that somebody had a route to inside information is hard. So the SEBI (Prohibition of Insider Trading) Regulations, 2015 do not always make SEBI prove it.
A connected person is someone whose association with the company gave them access to unpublished price sensitive information. On top of that, the regulations list categories of people who are deemed to be connected persons unless the contrary is established. The burden flips: the regulator does not have to show the link, the person has to show there wasn't one.
The workbook calls this a "deeming legal fiction", and stresses that it is rebuttable — a presumption, not a conviction.
How it works
For a listed company, twelve categories are deemed connected: a relative of a connected person; a holding, associate or subsidiary company; an intermediary specified in section 12 of the SEBI Act or its employee or director; an investment company, trustee company or asset management company or its employee or director; an official of a stock exchange, clearing house or corporation; a member of the board of trustees of a mutual fund or of the board of directors of the AMC of a mutual fund, or an employee of either; a member of the board or an employee of a public financial institution as defined in section 2(72) of the Companies Act, 2013; an official or employee of an SRO recognised or authorised by SEBI; a banker of the company; a concern, firm, trust, HUF, company or association of persons in which a director of the company, his relative, or a banker of the company has more than 10% of the holding or interest; a firm, partner or employee in which a connected person is also a partner; and a person sharing household or residence with a connected person.
For units of a mutual fund the list is different, and this is III-C's distinctive material. Chapter II A, inserted in November 2022, applies the regulations to dealing in mutual fund units. There, a connected person is someone associated with the mutual fund, AMC or trustees during the two months prior to the act — against six months for a listed company — and the deemed list is:
- an immediate relative of a connected person;
- the sponsor, or a holding, associate or subsidiary company of the sponsor, AMC or trustees;
- the board of directors and key management personnel of the sponsor;
- directors or employees of the registrar and share transfer agents, custodians or valuation agencies of the fund;
- an official of a stock exchange for dissemination of information;
- directors or employees of the auditor, legal advisor or consultants of the fund or AMC;
- a banker of the mutual fund or AMC;
- a concern, firm, trust, HUF, company or association of persons in which a director of the AMC or trustees, his immediate relative, or a banker of the company has more than 10% of the holding or interest.
A worked example
Meridian Mutual Fund decides on 4 August to create a segregated portfolio in Meridian Short Duration Fund after an issuer default. That decision is unpublished price sensitive information for the scheme.
On 1 August, three people redeem units of the scheme:
| Person | Status | Position |
|---|---|---|
| Mr Rao, dealer at Meridian AMC | Insider — designated person | Clearly caught |
| Ms Fernandes, senior manager at Meridian's fund accountant and RTA | Deemed connected — employee of the registrar and share transfer agent | Must rebut |
| Mr Iyer, partner at the firm that audits the AMC | Deemed connected — employee or director of the auditor | Must rebut |
Ms Fernandes redeems Rs 18 lakh and Mr Iyer Rs 7 lakh, three days before the segregation is announced. Neither is accused of having been told anything. Under the deeming provision that does not matter at the first step: both are presumed connected, and it is for them to establish the contrary — Ms Fernandes, for instance, by showing her role is confined to a different fund house's mandate with no access to Meridian's portfolio systems, and by producing a redemption request submitted before the default was known.
Note the date arithmetic. Ms Fernandes left the RTA on 15 June. For a listed company's securities the look-back is six months, so she would still be inside it. For mutual fund units the window is two months, and 15 June is inside 1 August by six weeks — she is still caught. Had she left on 20 May, she would fall outside the two-month window for units, though not outside the six-month window that applies to a company's shares.
Why NISM asks about it
Chapter 7 sets out the twelve deemed categories for a company, and section 14.15 of Chapter 14 sets out the mutual fund version under Chapter II A of the PIT Regulations. The paper tests both, and the discriminating question is the one that pits them against each other.
Expect: which of the following is deemed to be a connected person (a list including a banker, a person sharing residence, a 10%-plus concern), is the presumption conclusive (no — it is a rebuttable deeming legal fiction), and what is the look-back period (six months for a company, two months for a mutual fund).
Common exam traps
- Two months for mutual fund units, six months for a listed company's securities. This is the single most examinable contrast in the fund half of the paper, and the workbook states both figures in different chapters.
- The presumption is rebuttable. Being deemed connected is not a finding of insider trading; it shifts the burden of proof, nothing more.
- "More than ten per cent" here, "ten per cent or more" elsewhere. The deemed-connection threshold for a concern or firm is more than 10%; the mutual fund cross-shareholding norm bites at 10% or more. Read the preposition.
- The mutual fund list names service providers the company list does not — RTAs, custodians, valuation agencies, fund accountants, auditors, legal advisors and bankers of the fund. A scheme's UPSI travels through its vendors, not its shop floor.
- A person sharing household or residence with a connected person is deemed connected under the company list — flatmates, not only family.
- Deemed connection makes someone a connected person, which makes them an insider. It does not by itself prove possession of UPSI.
Where this is taught
Free preparation for NISM Series III-CRelated terms
- Connected personA person whose association with a company in the six months before the act put them, or could reasonably be expected to put them, in a position to access unpublished price sensitive information.
- InsiderAnyone who is a connected person, or who simply possesses or has access to unpublished price sensitive information — possession alone is enough, with no relationship to the company required.
- Unpublished price sensitive informationInformation about a company or its securities that is not generally available and that would, on becoming available, be likely to materially affect the price of the security.
- Designated personsThe people a listed company, intermediary or fiduciary formally names as subject to its insider trading code of conduct, chosen by the access their role gives to price sensitive information.
- Generally available informationInformation accessible to the public on a non-discriminatory basis — the opposite pole of unpublished price sensitive information, and expressly not including unverified media reports.
- Immediate relativeA spouse, plus any parent, sibling or child of the person or of the spouse who is either financially dependent on them or consults them on securities trading decisions.
- Structured digital databaseThe tamper-evident internal register every handler of unpublished price sensitive information must maintain, recording the nature of the information and the PAN of everyone who shared it and received it.
- Obligations of trusteesThe duties SEBI places on a mutual fund's trustees: hold scheme property in trust, review every AMC-associate transaction quarterly, and certify to SEBI half-yearly that nothing improper happened.
- Trading plans — regulation 5A pre-announced, irrevocable schedule of trades an insider files with the compliance officer, which may not begin for 120 calendar days and then executes without pre-clearance or trading window limits.
- InformantAn individual who voluntarily files a Voluntary Information Disclosure Form with SEBI about an alleged insider trading violation — protected from retaliation, and an informant whether or not any reward follows.