Sebi Moots Regulatory Framework To Deal With Unexplained Suspicious Trading Pattern

Sebi on Thursday proposed a regulatory framework to deal with unexplained suspicious trading pattern around the presence of material non-public information and also suggested to regulate social media influencer.

The proposed framework would deal with malpractices by market participants, who use new-age technologies by way of encrypted or vanishing messages, and modus operandi to evade the law.

Sebi said that its surveillance systems repeatedly detect instances of insider trading and front running, although the use of innovative, vanishing, and encrypted methods of private communication, as well as complex and untraceable funding arrangements in several cases, makes it impossible to establish the preponderance of probability.

Further, these methods pose significant challenges in gathering conclusive evidence and proving the occurrence of such fraudulent activities, the regulator said in its consultation paper.

To deal with such malpractices, Sebi proposed a new regulatory framework, wherein a person or group of connected persons exhibiting an unexplained suspicious trading pattern -- 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.

With regard to material non public information, Sebi suggested that any information about an impending recommendation in a security by an influencer, to the public and which when became generally available to such public reasonably impacted the price of that security.

Influencer means any person who is deemed to be in a position to influence the investment decision, in securities, of a reasonably large number of persons by virtue of his or her statements or representations, Sebi said.

Under the proposed (Prohibition of Unexplained Suspicious Trading Activities) rules, Sebi suggested that no person would engage in such activity and any person engaged in such activity would be liable for action.

The Securities and Exchange Board of India (Sebi) has sought comments from public till June 2 on the proposals.

Sebi noted that in case of insider trading, where the tipper conveys the Unpublished Price Sensitive Information (UPSI) to the tippee by way of encrypted and vanishing messages, it becomes impossible to establish communication between the two.

Further, Sebi observed that front running, mule accounts (with their own source of funds) are used to earn "White Profits", while their "Black Profits" are sent to the person providing the information for front running in foreign jurisdictions via Hawala route. In such a case, establishing a funding connection between the two becomes extremely difficult or impossible.

The regulator said that although trading pattern of entities were suspicious in several such front running and insider trading cases, it is challenging for Sebi to establish that the trading was in violation of the existing regulatory framework.

This difficulty arises mainly due to lack of evidence regarding communication of material non-public information or the failure in establishing the connection between the suspected entities that would withstand legal scrutiny, Sebi noted.