Imagine you are drafting a bullish initiation report on a mid-cap logistics firm. During your due diligence, you discover that the CEO’s brother is a senior executive at one of the firm’s largest vendors, and your analysis reveals that the vendor has been granted an exclusive, high-margin contract. You immediately wonder if this relationship constitutes a conflict or provides access to Unpublished Price Sensitive Information (UPSI). Under SEBI (Prohibition of Insider Trading) Regulations, this is where the concept of ‘deemed connected persons’ becomes a vital filter for your professional conduct.
A connected person is someone who has a connection with the company that allows them access to UPSI. However, SEBI recognizes that mapping every direct relationship is insufficient because influence often operates through networks rather than direct employment. Therefore, the regulations ‘deem’ certain individuals and entities—such as partners, bankers, stock exchanges, or even immediate relatives—to be connected persons. This is a rebuttable presumption, meaning the law assumes they possess sensitive information unless they can prove otherwise through robust internal compliance.
For a research analyst, this classification serves as a crucial red flag for your information-gathering process. If you receive ‘insider-like’ insights—such as future contract wins or margin trends—from someone falling under this ‘deemed’ category, you are effectively sitting on UPSI. Utilizing this information to adjust your valuation models or provide a ‘buy’ recommendation to clients would be a direct violation of the PIT regulations. Your credibility depends on maintaining a strictly public information trail; relying on deemed connected persons invites both regulatory action and reputational ruin.
Consider a case where you are analyzing a company preparing for a complex merger. You obtain a tip from a close relative of a key manager at the company’s investment bank. Even though this relative is not an employee of the company itself, they are a ‘deemed connected person’ due to their association with the entity facilitating the deal. If you act on this tip, you are not merely doing ‘scrappy research’; you are facilitating insider trading.
As an analyst, your mandate is to maintain the integrity of the Chinese Wall, ensuring that your conclusions are drawn from legitimate, non-privileged disclosures rather than the shadow network of deemed connections.
Nuance
Check Your Understanding
Under the SEBI (PIT) Regulations, which of the following is most accurately described as a ‘deemed connected person’ who is presumed to have access to UPSI?
If an analyst is provided with information by a ‘deemed connected person’, which action aligns with regulatory compliance?
This is a companion read for Section 14.2 — Important regulations in Indian Securities Market from PASS Research Analyst Certification Examination by Akhilesh Gururani, available on Amazon Kindle.
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