A SEBI WTM order dated November 22 has held the directors of Bank of Rajasthan Limited (BoR) and certain connected entities to be liable for insider trading in the scrip of BoR while in possession of unpublished price sensitive information (UPSI) in relation to a merger with ICICI Bank Limited. One of the issues addressed by SEBI was whether the brother-in law (Noticee) of a director could be an “insider” for the purposes of the SEBI (Prohibition of Insider Trading) Regulations, 1992.

Regulation 2(1)(e)(1) of Insider Trading Regulations defines insiders as: (i) a connected / deemed to be connected person; and (ii) a person having access to UPSI. Regulation 2(1)(h) provides a list of persons who are deemed to be connected and includes relatives of the directors, amongst others. The Noticee fell outside the definition of a “relative” under Section 6 of the Companies Act and hence was not deemed to be a connected person. However, the Noticee was found to be an “insider” based on his access to UPSI. The nature of the Noticee’s relationship with his sister (the director’s wife) and changes in his trading pattern were key factors considered while imposing liability for insider trading. SEBI considered that the Noticee had cordial relations with his sister, that historically he had only traded in mutual funds and not in equity markets, that he was not a regular trader, and that based on his trading pattern the possibility of trading on the basis of UPSI out-weighed the chances of genuine trading. Thus, SEBI concluded that the director and his wife had communicated UPSI to the Noticee who then traded based on the said UPSI to earn unlawful gains.

The definition of an “insider” under Indian insider trading laws has long been criticized for being exceptionally vague. In addition to persons expressly considered as connected or deemed to be connected, there is a subjective test based on access to UPSI which can potentially include any person within the definition of an insider. Determining access to UPSI is a complicated factual enquiry and the present case throws some light on the factors considered relevant by the Regulator.