Cracking the whip: Stricter rules against suspicious trading on cards

The Securities and Exchange Board of India (Sebi) has proposed new regulations to deal with suspicious trading activities—a move that will empower the market watchdog to go after entities making unusual profits without any fundamental basis.

The regulator has issued a discussion paper, inviting feedback on the draft of the Sebi (Prohibition of Unexplained Suspicious Trading Activities in the Securities Market) Regulations, 2023, which are aimed at curbing front-running, use of mule accounts, pump and dump schemes, and misuse of social media influencers.

Currently, Sebi’s Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) and Prohibition of Insider Trading (PIT) Regulations deal with such activities. However, the regulator has found it challenging to establish violations under the existing regulatory framework with the advent of new technology such as vanishing messages.

Under the proposed regulation, those indulging in suspicious trading activities or making abnormal gains will be deemed to be violating the securities laws unless they are able to effectively prove otherwise. “A new regulatory framework is required to be conceptualised wherein a person or group of connected persons exhibiting an unexplained suspicious trading pattern i.e. repetitive abnormal gainful dealings in a security or a set of securities, around the presence of material non-public information, would be deemed to be violating the securities laws, unless they are able to effectively rebut the said presumption,” Sebi said. 

The proposed framework prescribes action based on unusual trading patterns like repetitive patterns of trades by a person or a group of connected people, substantial change in risk taken, abnormal gains or averting abnormal losses. It will also include material non-public information (MNPI), which will cover information that is generally not available or an impending advice or recommendation by an influencer which can have a reasonable impact on the price of the securities of a company.

The proposal to charge an individual or a group making abnormal gains is on the lines of that used by the income-tax department. Sebi has proposed that the alleged wrongdoers will have to prove their trades are not based on MNPI. Further, they will have to submit detailed documentary evidence to substantiate their claims. A failure in providing effective explanation by the person or the connected person will result in a regulatory action by Sebi.

In the paper, Sebi noted that in 60 per cent of the cases involving suspicious activity, it is unable to proceed with adjudication due to non-availability of adequate evidence in respect of communication of information.

Further, in the remaining cases, establishing the communication of price-sensitive information was difficult as there are different case laws requiring different levels of evidence.

The market regulator has sought comments from stakeholders by June 2.

Cracking the whip

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  Suspicious trading activity (STA) will be when unusual pattern coincides with material non-public information (MNPI)
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  It can involve substantial change in trading behaviour over short periods of time; or abnormal gains or aversion of huge losses
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  Individuals involved in such activity would be deemed to be violating securities laws
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  They will have to prove trades not based on MNPI
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  Will also have to submit detailed documentary evidence to substantiate claims
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  Unexplained STA will attract penal action