The Securities and Exchange Board of India (SEBI) appointed a Committee on Fair Market Conduct in 2017, chaired by Shri T.K. Viswanathan. This committee presented their report in August 2018, outlining several key recommendations aimed at bolstering market integrity and investor protection against market abuse.
The Committee’s Mandate
The committee’s primary objective was to scrutinize the existing legal framework dealing with market abuse, assessing its effectiveness in promoting fair conduct within the securities market. In addition, the committee set out to evaluate the surveillance, investigation, and enforcement mechanisms executed by SEBI, to improve their efficiency in safeguarding the market integrity and investors’ interests against market abuse.
Key Recommendations
One pivotal recommendation proposed by the committee is that rather than utilizing provisions from the Companies Act, the SEBI Act should be amended, allowing SEBI to prosecute entities involved in account manipulation. This development is significant given that SEBI has proven itself as a more active regulator than the Ministry of Corporate Affairs.
Expansion of Fraudulent Trades Definition
Also noteworthy is the proposed expansion of fraudulent trades under the Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets (PFUTP) regulations. The new definition would encompass front-running, orchestrated trades, circular trading, and benchmark fixing.
Strengthening Whistle-blower Protection Mechanisms
Recognizing the crucial role whistle-blowers play in exposing regulatory malpractice, the report suggests empowering SEBI, rather than the Central Government, with the authority to grant immunity to whistle-blowers.
Maintaining Electronic Records
To make detection of insider trading cases easier, the committee also advised companies to keep electronic records of all price-sensitive information shared externally and lists of those connected to insiders.
Potential Overreach and Regulatory Concerns
However, two proposals from the committee are seen as potentially concerning because of its potential for regulatory overreach. These include characterizing trading in excess of market players’ ‘verifiable financial resources’ as fraud, and granting SEBI the power to intercept calls.
Background: The Need for Review
SEBI is mandated with protecting investors’ interests in securities, promoting market development, and regulating the securities market in India. Despite this, the conduct of market players has been less than ideal, with instances of scams, frauds, and accounting manipulations being all too common. Additionally, technological advances have introduced new cyber threats capable of manipulating markets. This evolving landscape underscores the necessity to revisit the securities law dealing with market abuse, and the methods deployed for detecting, investigating, and enforcing against such abuses.
