Who is an 'Insider'? — Category Analysis & Deemed Insider

Topic 58 — PIT Regulation 2(1)(g) & 2(1)(d): All Categories, Deemed Insiders, Defences & Case Law | SEBI Law Officer

The 'insider' concept in the PIT Regulations 2015 is broader than in any preceding Indian securities regulation. It encompasses two categories — 'connected persons' and 'persons in possession of UPSI' — and within each category, there are deemed and actual insiders. Understanding the precise scope of each category, the six-month look-back rule, the concept of 'deemed connected persons', and the available defences is essential for SEBI Law Officer and Judiciary aspirants.

1. Two Categories of 'Insider' — Regulation 2(1)(g)

INSIDER = Connected Person [Reg 2(1)(d)] OR Any Person in Possession of UPSI [Reg 2(1)(g)(ii)]

Category	Who is covered	Does actual UPSI possession matter?
Category 1: Connected Person	Any person who is or was (within 6 months) connected with the company in any capacity	NOT required — connected persons are DEEMED to have access to UPSI by virtue of their connection
Category 2: Possessor of UPSI	Any person — insider or outsider — who is in possession of or has access to UPSI	YES — actual possession of UPSI is required for this category

2. Category 1 — Connected Persons in Detail

The connected person definition (Regulation 2(1)(d)) captures all persons associated with the company:

2.1 Actual Connected Persons

Directors — executive and non-executive, independent directors.
Key Managerial Personnel (KMP) — CEO, MD, CS, CFO, WTD.
All employees — any person employed by the company, regardless of seniority.
Auditors — statutory auditors, internal auditors, cost auditors.
Legal counsel — company's panel lawyers, transaction advisers.
Investment bankers — merchant bankers advising on capital market transactions.
Consultants — management consultants, IT consultants with company access.
Bankers — lead banker/lender with access to company's financial information.
Persons with frequent communication — journalists, analysts who have regular direct access to company officers.

2.2 Deemed Connected Persons — Regulation 2(1)(d) Proviso

The following persons are DEEMED to be connected persons — irrespective of actual information access:

Deemed Connected Person	Basis
Promoters of the company	Deemed always connected regardless of board representation
Immediate relatives of directors/KMP/promoters	Parents, siblings, spouse, children of connected persons — deemed connected
Related parties of the company	As defined under LODR/Companies Act — entities with substantial business relationship
Any person who was connected within 6 months	Former directors, KMP, employees, advisers — six-month look-back period

3. Six-Month Look-Back Rule

Regulation 2(1)(d) contains the critical six-month look-back provision: a person who WAS a connected person within the 6 months preceding the 'concerned act' remains a connected person for PIT purposes.

Practical implications:

A CFO who resigned 3 months ago and trades in the company's shares remains a 'connected person' — and therefore an 'insider' — for PIT purposes.
A legal adviser whose engagement ended 4 months ago remains connected.
A merger adviser who completed a deal 5 months ago remains connected.
After 6 months from termination of connection, the person is no longer deemed a connected person (though may still be an insider if they possess UPSI received during their connection).

4. Category 2 — Outsiders in Possession of UPSI

Any person who is NOT a connected person but comes into possession of UPSI is also an 'insider' under Regulation 2(1)(g)(ii). Examples:

Analyst who receives UPSI: An equity research analyst who is tipped off about upcoming quarterly results before exchange filing — becomes an insider the moment they receive the UPSI.
Tippee: Person who receives UPSI from a connected person (tipper) — becomes an insider upon receipt of UPSI, even if they did not seek it.
Professional service provider: A printer who inadvertently sees the draft annual report containing non-public financial data before its release — technically in possession of UPSI.
Spouse of insider: A company director's spouse who overhears a board discussion — becomes an insider upon receiving UPSI.

5. Defences Available to an Insider

The 2015 Regulations provide certain defences to persons charged with insider trading:

Defence	Regulation / Basis	Details
Trading plan defence	Regulation 5	A pre-disclosed, SEBI-approved irrevocable trading plan executed as planned is a defence — the decision to trade was made without UPSI possession.
Off-market transactions at no profit	Regulation 4 Exception	Transactions that are not motivated by UPSI; where the trader can demonstrate no profit was made from UPSI.
Receipt of UPSI in fiduciary capacity	Regulation 3(3)	If UPSI was received for a legitimate purpose (e.g., legal adviser advising on the transaction) — the mere receipt is not a violation; only trading on it is prohibited.
Price unaffected by UPSI	Case-by-case	If the trade was at a market price unaffected by the UPSI — difficult to establish but theoretically available.

6. Reversal of Burden of Proof

The 2015 Regulations contain a significant reversal of the burden of proof:

Explanation to Regulation 4(1): For the purposes of this regulation, it is clarified that a connected person in possession of unpublished price-sensitive information shall be deemed to have traded on the basis of such information unless the contrary is demonstrated.

This deeming provision reverses the burden of proof:

In normal evidence law: SEBI must prove that the insider TRADED ON THE BASIS OF UPSI.
Under the Regulation 4(1) Explanation: if a connected person is in possession of UPSI and trades, they are DEEMED to have traded on the basis of UPSI — unless THEY prove the contrary.
This is a significant prosecutorial advantage for SEBI — it shifts the burden to the accused connected person.

7. Landmark Cases

📖 SEBI v. Samir Arora SAT Order, 2004

Facts: Samir Arora (fund manager at Alliance Capital Mutual Fund) was alleged to have sold fund holdings ahead of negative news about several portfolio companies, using alleged UPSI about those companies.

Held: SAT set aside SEBI's order — SEBI could not establish that the information used was UPSI (not generally available) and that the trades were made 'on the basis of' UPSI rather than independent investment analysis. The case highlighted the evidentiary difficulties in insider trading prosecution.

Ratio: Insider trading must be proved by showing: (i) the information was UPSI (not GAI); (ii) the accused was in possession of that UPSI; and (iii) the trade was made on the basis of UPSI. Each element must be established. This case was decided under 1992 Regulations but its principles apply under 2015.

8. Model Examination Questions

Q1. Who is an 'insider' under the PIT Regulations, 2015? Discuss the six-month look-back rule and the reversal of burden of proof.

Who is an Insider — Regulation 2(1)(g) PIT 2015

Model Answer — 'Insider' (Regulation 2(1)(g)) means: (i) a connected person; OR (ii) any person in possession of or having access to UPSI. The definition is wide and captures both formal insiders (directors, employees) and informal outsiders who receive UPSI. CONNECTED PERSON (Regulation 2(1)(d)): Any person who is or was (within 6 months) associated with the company in any capacity — director, KMP, employee, auditor, lawyer, investment banker, consultant, banker, or person with frequent communication with company officers. The SIX-MONTH LOOK-BACK means former directors/advisers/employees remain 'connected persons' for 6 months after termination of connection. CATEGORY 2 (Outsider in possession of UPSI): Any person — even unconnected — who receives UPSI (from whatever source) becomes an 'insider' from the moment of receipt. Tippees, analysts receiving selective disclosures, spouses overhearing board discussions — all captured. REVERSAL OF BURDEN OF PROOF (Explanation to Regulation 4(1)): A connected person in possession of UPSI who trades is DEEMED to have traded on the basis of UPSI — they must prove the contrary. This shifts burden to the accused. Defences: trading plan (Regulation 5); no-profit trades; receipt for legitimate purpose. In SEBI v. Samir Arora (SAT 2004), SAT held that each element — UPSI, possession, trading on the basis of UPSI — must be established even under the deeming provision.

🎯 EXAM POINTERS — Topic 58: Who is an Insider?

Insider = Connected Person (Reg 2(1)(d)) OR Any person in POSSESSION of UPSI (Reg 2(1)(g)(ii)).
SIX-MONTH LOOK-BACK: former director/employee/adviser = still connected person for 6 months after termination.
Connected persons are DEEMED to have access to UPSI — actual possession NOT separately required for Category 1.
Outsiders who receive UPSI = insiders (Category 2) — tippees, analysts, spouses, printers who see UPSI.
Deemed connected persons: promoters; immediate relatives of KMP/directors; related parties.
Reversal of burden: connected person in possession of UPSI + trades → DEEMED to have traded on basis of UPSI. They must prove contrary.
Defences: trading plan (Regulation 5); receipt for legitimate purpose (Regulation 3(3)); no profit from UPSI.
'In possession of' UPSI = broader than 'knowing' — even having a document containing UPSI without reading it may suffice.
SEBI v. Samir Arora (SAT 2004): each element (UPSI, possession, trading on basis) must be established.
HUL v. SEBI (SAT 1998): under 1992 Regs merger info was not UPSI — expressly closed by PIT 2015.

← Topic 57: PIT Definitions — UPSI, Insider, Connected Person | Next → Topic 59: UPSI — What Qualifies & What Does Not

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