Sebi Considers New Rules On Suspicious Trading Activities

SEBI Board to Discuss New Regulation on Suspicious Trading Activities

The Securities and Exchange Board of India (SEBI) board is set to meet today in Mumbai to deliberate on a proposed regulation that would empower the regulator to initiate formal investigations based on suspicious trading activities or the presumption of fraudulent actions. This proposed rule marks a shift from the current regulatory framework, which mandates sufficient evidence before launching a formal investigation.

Need for Stringent Regulations

The proposal, titled SEBI (Prohibition of Unexplained Suspicious Trading Activities in the Securities Market) Regulations, was first introduced last year through a consultation paper. It highlighted how advanced tools and technology allow market wrongdoers to obscure their tracks, making it challenging for traditional investigation methods to gather conclusive evidence.

“With the advent of technology, novel methods are being adopted by market participants to carry out fraudulent activities while concealing identities and connections,” SEBI stated in its discussion paper released in May last year.

Challenges in Addressing Fraudulent Activities

The SEBI paper emphasized that current surveillance systems often detect insider trading and front-running activities, but innovative tactics like mule accounts, complex funding layers, and communication via encrypted platforms like WhatsApp and FaceTime make it difficult to establish guilt.

The proposed regulation aims to address issues such as:

  • Unusual trading patterns linked to material non-public information (MNPI).
  • Use of advanced and encrypted communication tools.
  • Complex funding arrangements that evade traditional evidence collection methods.

Resistance to the Proposed Regulation

The draft regulation has faced resistance from some stakeholders, who argue that it violates the principle of natural justice. Critics point out that the proposal shifts the burden of proof to the individual or entity under suspicion, which deviates from the traditional “innocent until proven guilty” approach.

However, SEBI countered this argument by citing parallels in existing legal frameworks. For instance:

  • Income Tax Act, 1961 (India): Section 68 presumes income based on unexplained cash credits unless the taxpayer provides a satisfactory explanation.
  • Securities Act, 1933 (USA): Allows presumptions for certain violations, subject to refutation by the accused.

“These legal provisions demonstrate that presumptions are permissible under the law, provided the accused can refute them through satisfactory explanations,” the SEBI paper noted.

Global and Historical Context

SEBI’s move aligns with global practices aimed at combating financial malpractices. The regulation would grant the regulator more agility in addressing market violations, especially in cases where traditional methods fall short.

In past SEBI board meetings, significant reforms in insider trading rules, SME listings, and digital platform regulations have been discussed, underscoring SEBI’s commitment to strengthening market integrity.

What’s Next?

If approved, the proposed regulation will be a landmark step in ensuring that fraudulent activities, even those concealed through modern technology, can be investigated effectively. This would also align India’s securities market regulations with global standards, enhancing investor confidence and market fairness.

The SEBI board’s decision is keenly awaited as it could set a new precedent in the regulator’s approach to tackling unexplained suspicious trading activities.

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