Material financial relationship

Insider trading rules watch the people who have access to sensitive information. But information can travel through money as easily as through conversation. If an employee has lent a large sum to a friend, that friend's trading is worth knowing about.

The insider trading code captures this through the idea of a material financial relationship. A designated person must disclose, every year, the people with whom they share such a relationship.

The test is objective. It is not about friendship or family; it is about how much money has flowed from the designated person to someone else over the last year, measured against the designated person's own income.

The definition (Chapter 12, section 12.2, clause 12 explanation). A material financial relationship is one in which a 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 that designated person. It excludes relationships in which the payment is based on arm's length transactions.

Three parts must all be present:

What it triggers. Designated persons must disclose to the intermediary or fiduciary — on an annual basis and as and when the information changes — the name and PAN (or other identifier authorised by law) of:

• their immediate relatives;
• persons with whom they share a material financial relationship;
• the phone, mobile and cell numbers used by them.

In addition, the names of educational institutions they graduated from and their past employers are disclosed on a one-time basis.

The purpose is monitoring. The compliance function can only see who might receive information if it knows who is financially tied to the people who hold it.

Material if: payments to the person in the last 12 months ≥ 25% × designated person's annual income, and the payments were not at arm's length.

Illustrative names and amounts; the 25% test and the 12-month window are the workbook's.

Arjun is a designated person at a portfolio manager. His annual income is ₹40,00,000, so the threshold is:

25% × ₹40,00,000 = ₹10,00,000

Over the immediately preceding twelve months:

Arjun must disclose Karan's name and PAN in his annual declaration, and update it when the information changes. Neha is not captured by this test — but if she is an immediate relative, she is disclosed under that separate head anyway.

Had the loan to Karan been ₹9,50,000, it would fall short of the ₹10 lakh threshold, and the relationship would not be material under the definition.

The definition appears in Chapter 12 (Regulatory, Governance and Ethical Aspects of Portfolio Managers), within the Schedule C code of conduct under the SEBI (Prohibition of Insider Trading) Regulations, 2015. It is a precise, number-bearing definition, which makes it a natural exam item: 25%, twelve months, the designated person's income as the base, and the arm's length exclusion. It sits next to pre-clearance, the restricted list and contra trade rules in the same section.

• The 25% is of the designated person's income, not the recipient's.
• The payment flows from the designated person to the other person. The recipient is the one disclosed.
• "At least 25%" — exactly 25% qualifies.
• The window is the immediately preceding twelve months, not the financial year.
• Arm's length transactions are excluded, however large.
• Disclosure is annual and whenever information changes. Educational institutions and past employers are disclosed only once.
• Loans and gifts are examples, not a closed list — the definition says "any kind of payment".