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To deal with the menace of insider trading, front running and other suspicious trading activities, the Securities and Exchange Board of India (SEBI) is taking a new regulatory proposal to the board for approval. Under the proposed regulation, those involved in questionable trading activities would have to prove they have done nothing wrong. According to sources, “Regulation of prohibition of unexplained suspicious trading activities is part of the board’s agenda; The board can take a decision based on the feedback.” This regulation is specifically designed to deal with suspicious trading activities. The SEBI board meeting is scheduled to be held on December 18. The proposed regulation is in addition to the existing Prohibition of Fraudulent and Unfair Trading Practices (PFUTP) and Prohibition of Insider Trading (PIT) regulations.
The proposed regulation prescribes action based on unusual trading patterns such as repeated patterns of trading by a person or group of connected people, substantial change in risk, abnormal profits or avoidance of abnormal losses. It will also include material non-public information (MNPI), which would include information that is not generally available or advice or recommendation given by an influential person that could have a material impact on the price of a company’s securities .
SEBI had issued this consultation paper last year and sought views on regulation aimed at curbing front-running, mule accounts, use of pump and dump and abuse by influential people. But then the proposal could not be taken to the board due to various concerns. It is believed that after addressing some concerns, the proposal is being taken to the board.
Why such strict regulation?
SEBI says that with the advent of technology, new methods are being adopted by market participants to carry out fraudulent/violating activities in the securities market, while concealing the identity, connections and relationships between the entities involved in such activities. Is. These activities often involve dodging/concealment strategies such as using mule accounts, transferring funds through a complex web of entities and communicating through encrypted electronic media such as FaceTime, WhatsApp and BotTime, resulting in Traditional sources of evidence collection such as call data records and bank records become ineffective in establishing preponderance of probability.
There is surveillance alert but difficulty gathering evidence
Despite repeated detection of such cases of insider trading and front running by SEBI’s surveillance system, the preponderance of the possibility remains established due to the use of innovative, disappearing and encrypted methods of private communication as well as complex and untraceable funding arrangements. It becomes impossible to do. 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 stronger regulatory framework. This is especially important when direct evidence is difficult to obtain due to the sophisticated technology and complex methodology used by such institutions.
What would be considered an unusual trading pattern?
Unusual Trading Pattern (UTP) shall mean and include such repetitive patterns of trading activity by a person or group of connected persons, which involves a substantial change in the risk taken in one or more securities over a short period of time, resulting in Abnormal profit is made or abnormal loss is avoided. Repeated abnormally profitable transactions in a security or group of securities will be considered a violation of securities laws surrounding the presence of material non-public information, unless they are able to effectively rebut the presumption. Be.
UTPs will deal with unusual trading patterns displayed by an individual or group of connected individuals. There are instances where the trading patterns of a single individual or group of individuals may appear normal when viewed in isolation, but exhibit UTP-like elements when analyzed as a whole. Such trading activity will also be considered as UTP.
What would be suspicious trading activity?
A person or a group of persons associated with him displaying UTP in a security or securities, which matches with the Non-Public Information, will be considered to be engaged in Suspicious Trading Activity (STA).
What if suspicious trading activity is found?
An individual or a group of individuals associated with them are asked to explain any suspicious trading activity they have demonstrated, and if they cannot effectively deny or explain it, they may also be charged with Unexplained Suspicious Trading Activity (USTA). Will be considered involved.
The SEBI Board may, by order in writing, at any time, demand a direct investigation under the Act, if it has reasonable grounds to suspect that any person or group of persons associated with him is engaged in suspicious trading activity.
What will the accused be expected to prove?
SEBI will give suspected traders a chance to prove their innocence. The proposed regulation states that individuals may, in proceedings initiated against them, refute the allegations by demonstrating that the trading activities were not suspicious. They must prove that the information does not meet the Material Non-Public Information (MNPI) test. Additionally, they must prove that the trades were not based on information that was material and that the trades were not based on information that was not available in the public domain before/around the time of the trading activity. They must also prove that the trading pattern is not repetitive and does not reflect any major change in risk and the period for which the trading was carried out cannot be classified as short term. In addition, they must also prove that the trading activity did not generate abnormal profits or avoid abnormal losses. The individual or group of associated individuals shall submit detailed documentary evidence to substantiate any claim made by them in respect of the above.
SEBI’s proposed regulation also puts the onus on exchanges and brokers. It states that it shall be the duty of every stock exchange recognized by the Board and every intermediary registered with it to immediately report any suspicious trading activity in the course of its business or which is brought to its notice.
Some traders raised concerns about how this regulation would look after algo trades. Also, a source said: “The concept of presumption is under the Income Tax Act, from where SEBI has borrowed the idea, but it is not in the SEBI Act. Therefore, if the proposal is approved in its present form, there may be a need for amendment in the SEBI Act also.”