Immediate relative
Also written Immediate relatives
A 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.
In plain language
Insider trading rules would be trivially easy to defeat if the account had to be in the insider's own name. So the regulations define a small circle of family whose trades are treated as the insider's own business.
Regulation 2(f) of the SEBI (Prohibition of Insider Trading) Regulations, 2015 defines an immediate relative as a spouse of a person, and includes a parent, sibling and child of such person or of the spouse, any of whom is either dependent financially on such person or consults such person in taking decisions relating to trading in securities.
The structure of that sentence is the whole point, and it is where marks are lost.
How it works
Read the definition in two halves.
The spouse is unconditional. A spouse is an immediate relative, full stop — no test of dependence, no test of consultation.
Everyone else is conditional. Parent, sibling and child — of the person or of the spouse, so in-laws are included — qualify only if one of two tests is met: financial dependence, or consulting the person when taking securities trading decisions. Either is enough; neither is presumed.
So an independently wealthy adult son who runs his own portfolio and never asks his father anything is not an immediate relative of his father, however close they are. A financially dependent mother-in-law is.
What follows from the label. On the fund side, the code of conduct that the CEO or managing director of every AMC must formulate regulates, monitors and reports dealings in mutual fund units by designated persons and their immediate relatives. Two obligations attach:
- AMCs must disclose, on the platform of the stock exchanges, holdings in units of their own schemes held on an aggregated basis by designated persons of the AMC, trustees, and their immediate relatives.
- Every transaction in units of their own mutual funds by designated persons, trustees and their immediate relatives must be reported by the person concerned to the compliance officer of the AMC within two business days.
An immediate relative is also the first of the categories deemed to be connected persons in the mutual fund list.
A worked example
Ms Kavita Desai is Chief Risk Officer at Meridian AMC and therefore a designated person. Her family:
| Person | Immediate relative? | Why |
|---|---|---|
| Her husband | Yes | Spouse — unconditional |
| Her daughter, 19, at university, supported by her | Yes | Child, financially dependent |
| Her brother, a practising surgeon who never discusses investments with her | No | Sibling, but neither dependent nor consulting |
| Her father-in-law, retired, who calls her before every mutual fund purchase | Yes | Parent of the spouse, and consults her |
| Her son, 27, salaried, who asks her which debt fund to buy | Yes | Child — consults her on trading decisions, even though not dependent |
On Tuesday 12 August her father-in-law buys Rs 3,50,000 of units of Meridian Balanced Advantage Fund. He must tell her, and Ms Desai must report the transaction to the AMC's compliance officer by Thursday 14 August — within two business days. The holding then feeds the aggregated disclosure the AMC makes on the exchange platform.
Her brother's purchase of Rs 9,00,000 of the same scheme the same week is reportable by nobody. He is outside the definition, so the transaction never enters Meridian's monitoring at all. The size of the trade is irrelevant; the relationship test is what decides.
Why NISM asks about it
Chapter 7 gives the Regulation 2(f) definition verbatim, and section 14.15 of Chapter 14 shows what it does on the fund side — the AMC code of conduct, the aggregated exchange disclosure, and the two business day reporting of transactions by designated persons, trustees and their immediate relatives.
The classic question gives a family member and asks whether they are an immediate relative. The answer is almost always "it depends on dependence or consultation" — except for the spouse, who always is. The reporting deadline of two business days is the other standard question.
Common exam traps
- Only the spouse is automatic. Parent, sibling and child qualify only on financial dependence or consultation on trading decisions.
- "Or of the spouse" pulls in in-laws. A father-in-law or sister-in-law can be an immediate relative; a candidate who reads only "parent, sibling and child" will get the in-law questions wrong.
- The two tests are alternatives, not cumulative. Financial dependence alone is enough. Consultation alone is enough.
- Immediate relative is not the same as "relative" under the Companies Act or the Income-tax Act. Those lists are longer and have no dependence test. Use the PIT definition in a PIT question.
- Two business days for reporting to the compliance officer, and the exchange disclosure of holdings is aggregated, not name by name. Candidates often reverse these.
- An immediate relative is deemed connected, which makes them an insider if they are in possession of UPSI — but the deeming is rebuttable.
Check yourself
1.Who is an "immediate relative" under the PIT Regulations?
- a)A spouse, and a parent, sibling or child of the person or of the spouse, any of whom is either financially dependent on the person or consults the person in taking decisions relating to trading in securities
- b)Only the spouse
- c)Every blood relative, without condition
- d)Only those living in the same household
Show the answer
Answer: (a) A spouse, and a parent, sibling or child of the person or of the spouse, any of whom is either financially dependent on the person or consults the person in taking decisions relating to trading in securities
Regulation 2(f) defines the term "immediate relative" as a spouse of a person and includes parent, sibling, and child of such person or of the spouse, any of whom is either dependent financially on such person or consults such person in taking decisions relating to trading in securities.
The spouse is included unconditionally. The parent, sibling and child — of the person or of the spouse — are included only where one of two conditions holds: financial dependence, or consulting the person on trading decisions.
Which is why option C is wrong — a financially independent brother who never discusses investments is not an immediate relative.
Why the definition matters. Designated persons and their immediate relatives shall not trade in securities when the trading window is closed. The code of conduct regulates trading by its designated persons and immediate relatives of designated persons. And designated persons shall be required to disclose names and Permanent Account Number... of... immediate relatives... to the company on an annual basis and as and when the information changes.
A separate but related concept is the material financial relationship, which shall mean a relationship in which one person is a recipient of any kind of payment such as by way of a loan or gift from a designated person during the immediately preceding twelve months, equivalent to at least 25% of the annual income of such designated person but shall exclude relationships in which the payment is based on arm's length transactions.
And note that a "relative of connected persons" is separately a deemed connected person under the twelve categories, as is a person sharing household or residence with a connected person.
In the Palred matter SEBI held that members of the Khwaja family by virtue of their relationship with Ameen Khwaja squarely fall with the definition of "deemed connected".
2.When does the quarterly trading restriction period end, and how soon may the trading window re-open after information becomes generally available?
- a)The restriction runs from the end of every quarter till 48 hours after the declaration of financial results; and re-opening shall not be earlier than forty-eight hours after the information becomes generally available
- b)Till the day of the results; and immediately after publication
- c)Till one week after results; and 24 hours after publication
- d)Till the annual general meeting; and seven days after publication
Show the answer
Answer: (a) The restriction runs from the end of every quarter till 48 hours after the declaration of financial results; and re-opening shall not be earlier than forty-eight hours after the information becomes generally available
Trading restriction period shall be made applicable from the end of every quarter till 48 hours after the declaration of financial results. And on re-opening: the timing for re-opening of the trading window shall be determined by the compliance officer taking into account various factors including the unpublished price sensitive information in question becoming generally available and being capable of assimilation by the market, which in any event shall not be earlier than forty-eight hours after the information becomes generally available.
Forty-eight hours in both places. The market needs time not merely to receive the information but to absorb it — being capable of assimilation by the market.
Schedule B also warns against a gap: the gap between clearance of accounts by the audit committee and board meeting should be as narrow as possible and preferably on the same day to avoid leakage of material information.
Closure is otherwise triggered by judgment: the trading window shall be closed when the compliance officer determines that a designated person or class of designated persons can reasonably be expected to have possession of UPSI. Such closure shall be imposed in relation to such securities to which such UPSI relates.
And while it is closed: designated persons and their immediate relatives shall not trade in securities when the trading window is closed.
Certain transactions are outside the restriction — the regulation 4 exempt transactions, a pledge of shares for a bonafide purpose such as raising of funds, subject to pre-clearance by the compliance officer, and corporate actions such as acquisition by conversion of warrants or debentures, subscribing to rights issue, further public issue, preferential allotment or tendering of shares in a buy-back offer, open offer, delisting offer.
In the Piramal matter the window was never closed at all, and SAT held the company, not merely the compliance officer, responsible for fixing the trigger.
3.Where the sponsor of a REIT is an individual, which of the following is NOT included in the sponsor group?
- a)The wife of the sponsor's brother-in-law
- b)Entities controlled by the individual
- c)A parent of the individual
- d)A child of the spouse
Show the answer
Answer: (a) The wife of the sponsor's brother-in-law
Where the sponsor is an individual, the sponsor group covers a. an immediate relative of such individual (i.e., any spouse of that person, or any parent, brother, sister or child of the person or of the spouse); and b. entities or person(s) which are controlled by such individual.
The list of relatives is closed — spouse, parent, brother, sister, child, of the person or of the spouse. A brother-in-law's wife is outside it.
Options B, C and D are all inside. Entities or person(s) which are controlled by such individual appear in limb (b); a parent and a child... of the spouse appear in limb (a).
Where the sponsor is a body corporate, the group instead covers a. entities or person(s) which are controlled by such body corporate; b. entities or person(s) who control such body corporate; c. entities or person(s) which are controlled by person(s) as referred at clause b.
Why the group matters. It carries the sponsor's obligations. The sponsor(s) and sponsor group(s) shall collectively hold not less than the tapering percentages — fifteen percent... for three years, then five, three, two and one per cent — and the sponsor(s) and sponsor group(s) would be responsible for all acts, omissions and representations/covenants of the REIT and the sale or transfer of assets or holdco or SPV to the REIT.
Group membership also affects the public offer. Any units offered to sponsor or the manager or their related parties or their associates shall not be counted towards units offered to the public, and the minimum number of unit holders other than sponsor(s), its related parties and its associates forming part of public shall be not less than two hundred.
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.
- Compliance OfficerThe separately appointed officer of a merchant banker, listed company or intermediary who monitors compliance with securities law, handles investor grievances, and reports non-compliance to SEBI independently.
- Deemed connected personsCategories of people the insider trading rules treat as connected automatically — relatives, group companies, trustees, bankers, auditors — unless the person proves the contrary.
- 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.
- 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.