PASS Securities Operations and Risk Management Examination Difficulty: Beginner 2 Questions   5 min read
📌 Chapter 2.5 — REGULATORS

Consider a quiet Tuesday afternoon in the back office, where you are processing a flurry of new KYC documents for a high-net-worth client. You notice that the client is a director at a prominent software company, and their immediate family members are also opening trading accounts simultaneously. Under the SEBI (Prohibition of Insider Trading) Regulations, your responsibility goes beyond simple data entry. You are now the first line of defense in identifying ‘deemed to be connected’ persons, as these individuals carry an automatic regulatory presumption of proximity to price-sensitive information.

In the Indian securities landscape, the ‘deemed to be connected’ category is a critical regulatory net. It captures individuals who, by virtue of their relationship with the company, are assumed to possess unpublished price-sensitive information (UPSI). This isn’t just about company directors; it includes holding company associates, partners of firms, or even bankers who are involved in the company’s financial dealings. When you perform a risk screening, you are not just checking names against a sanctions list.

You are mapping professional and personal linkages that could trigger a trade monitor alert if any of these individuals start building a large position in the company’s stock right before a merger or earnings announcement.

Think about the operational risk here. If you fail to flag these accounts, the firm’s surveillance software might miss a pattern of circular trading or front-running that could lead to severe penalties from SEBI. For instance, if an analyst at your firm shares a research draft with a ‘deemed to be connected’ client, the firm becomes vulnerable to a massive insider trading investigation.

The audit trail you maintain—linking client accounts, KYC data, and trade patterns—becomes the primary evidence of whether your firm exercised ‘due diligence’ or merely acted as a conduit for market abuse.

Ultimately, the regulatory goal is to maintain market integrity by ensuring that those with an unfair information advantage cannot monetize it. When you treat these ‘deemed’ connections with the same caution as formal insiders, you are protecting the firm from catastrophic reputational damage. Remember that in the eyes of the regulator, proximity to a company’s inner circle is effectively the same as having the information itself, regardless of whether a formal contract exists.

Nuance

⚠️ Nuance
A common pitfall is the belief that ‘deemed to be connected’ implies a permanent, active status that requires daily reporting. In reality, this status triggers specific obligations only when the individual is in possession of or has access to UPSI, but the regulatory presumption makes the burden of proof extremely difficult to rebut. Candidates often mistake ‘deemed to be connected’ for a status based solely on shareholding percentages, ignoring the fact that it is fundamentally about the nature of the relationship and the potential access to information.

Check Your Understanding

Practice Question 1

Which of the following persons is ‘deemed to be connected’ to a company under the SEBI (PIT) Regulations, provided they have had a connection with the company in the six months prior to a trade?

Practice Question 2

An associate company of a listed entity is involved in a potential insider trading case. Under the PIT Regulations, why is an ‘associate’ automatically categorized as a ‘deemed to be connected’ person?

This is a companion read for Section 2.5 — REGULATORS from PASS Securities Operations and Risk Management Examination by Akhilesh Gururani, available on Amazon Kindle.

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