EXCLUSIVE: SEBI board to discuss tougher regulation to tackle market manipulation

To address the risk of insider trading, front running, and other suspicious trading activities, the Securities and Exchange Board of India (SEBI) is taking to the board a new regulatory proposal for approval. Under the proposed regulation, people involved in suspicious trading activities will have to prove that they have done nothing wrong. According to sources, “The Prohibition of Unspecified Suspicious Activities Act is part of the board’s agenda; the board can take a call based on the response.” This regulation is specifically designed to deal with suspicious trading activities. The SEBI board meets on December 18. This proposed regulation is in addition to the Prohibition of Fraudulent and Unfair Trading Practices (PFUTP) and the Prevention of Insider Trading (PIT) regulations.

The proposed rule defines an action based on unusual trading patterns as repetitive trading patterns by an individual or group of connected individuals, a significant change in risk taking, unusual gains, or the avoidance of unusual losses. It will also include material non-public information (MNPI), which will include information that is not generally available or close advice or an insider’s recommendation that could have a material impact on the value of the company’s securities.

SEBI floated this discussion paper last year and sought views on the regulation aimed at curbing front running, use of mule accounts, pump and dump, and misuse of influencers. However, this proposal was not taken to the board due to various complaints. It is believed that after solving some problems, the proposal is forwarded to the board.

“PUSTA, if it works, will be a regressive law. This law will transfer the burden of proof to the person charged with the crime. Any law that thinks he is guilty should be opposed because that person should be considered innocent unless the evidence is approved by a government agency. Being guilty or any unusual, unusual profit in the securities market , can now be asked by SEBI and if the profiteer can prove to SEBI that he does not have sensitive information about the price SEBI can get that Anil Choudhary, Partner, Finsec Law Advisors.

Why is there such a strict rule?

SEBI says that with the advent of technology, novel methods are being adopted by market participants to carry out fraudulent/abusive activities in the securities market while concealing the identity, communication, and relationship between entities engaged in such activities. These operations often involve evasion/hiding techniques such as using mule accounts, placing funds through a complex web of organizations, and communicating via encrypted social media such as FaceTime, WhatsApp and BOTIM, making for common sources of evidence collection such as phone data records and bank records. ineffective in determining the value of opportunities.

Surveillance alerts there but it’s hard to gather evidence

Despite SEBI’s monitoring systems repeatedly detecting such cases of insider trading and forward working, the use of new, disappearing, and encrypted private communications, and complex and untraceable financing systems make it impossible to establish probability considerations. These methods present significant challenges in gathering conclusive evidence and proving the occurrence of such fraudulent activities.

SEBI says that certain activities, which initially appear to harm the interests of investors in the securities market, require a strong regulatory framework. This is especially important when it is difficult to find direct evidence due to the use of complex technologies and complex modus operandi by such companies.

What would be considered an unusual trading pattern?

An unusual trading pattern (UTP) shall mean and include such repetitive patterns of trading activity by a person or group of connected persons that involve a significant change in the risk taken on one or more securities in a short period of time that results in unusual profits or avoids unusual losses. Repeated transactions with an unusual interest in a security or group of securities regarding the existence of important non-public information will be considered a violation of securities laws unless they can effectively rebut the said presumption.

UTPs will deal with an unusual trading pattern displayed by an individual or group of connected individuals. There have been cases where the trading pattern of an individual or group of individuals may appear normal in isolation, but exhibit UTP-like characteristics when analyzed holistically. Such trading activity will also be considered as UTP.

What would be a suspicious trading activity?

A person or group of connected persons who display UTPs on a security or securities, accompanied by important non-public information, will be deemed to have engaged in a suspicious trading activity (STA).

What if suspicious trading activity is found?

A person or group of connected persons who are called to explain the suspicious trading activity they have demonstrated and who cannot successfully refuse or provide an explanation will also be considered to be involved in unexplained suspicious trading activity (USTA).

The SEBI Board may, at any time by order in writing, require a specific investigation under the Act if it has reasonable grounds to suspect that any person or group of connected persons has engaged in suspicious trading activity.

What will the defendant be expected to prove?

SEBI will give opportunity to suspicious traders to prove their innocence. The proposed regulation states that individuals, in proceedings brought against them, may rebut the allegations by showing that the trading activities were not suspicious. They must ensure that the information does not meet the Material Nonpublic Information (MNPI) test. Additionally, they will have to ensure that the trade was not based on material information and that the trade was not based on information that was not in the public domain before/at the time the trade was executed. They will also have to prove that the trading pattern is not repetitive and does not show a significant change in the risk taken and that the period during which the trade is made, cannot be classified as short term. Besides, they will also have to prove that the trading activity did not bring unusual profits or avoid unusual losses. The person or group of persons connected shall submit detailed documentary evidence to substantiate any claim they have made in relation to the above.

The proposed SEBI regulation also imposes responsibility on exchanges and trading. It states that it shall be the duty of every stock exchange recognized by the Board and every broker registered with it to immediately report any suspicious trading activity seen or brought to their attention, while conducting their business.

Some traders have expressed concern about how algo trading will be taken care of by this regulation. Also, another source added: “The concept of presumption exists under the Income Tax Act where SEBI has borrowed this concept but it is not there in the SEBI Act. So if the proposal is approved in its current form it may need to be amended in the SEBI Act as well. . “

“This will create a revolution in the way SEBI builds cases, collects and uses evidence. Many times people get away with lack of evidence beyond reasonable doubt. With PUSTA rules, rebuttable presumptions will likely lead to protection of minors. Investors who do not understand the impact of tangible or intangible information but prices are affected but enforcement and implementation will be key,” said Suhas Tuljapurkar, Founder and Managing Partner, the Legasis. Colleagues.

“This legal regime is between ‘reasonable doubt’ and ‘exceeding opportunity’. With proper implementation of PUSTA Regulations SEBI can expect a successful outcome in its enforcement actions especially where transactions are suspicious,” said Tuljapurkar.

Zee Business has written to SEBI, seeking comments on the proposed rules. At the time of going to press, a response from SEBI was awaited.