Report on Fair Market Conduct | 14 Aug 2018

Securities and Exchange Board of India (SEBI) constituted a Committee on Fair Market Conduct in 2017 under the Chairmanship of Shri T.K. Viswanathan. The committee submitted its report in August 2018. The Committee was mandated to review:

• The existing legal framework that deals with market abuse to ensure fair conduct in the securities market.
• Review the surveillance, investigation and enforcement mechanisms being undertaken by SEBI to make them more effective in protecting market integrity and the interest of investors from market abuse.

Key Proposals

• Rather than relying on the provisions of Companies Act, the committee has recommended that the SEBI Act should be amended to allow SEBI to prosecute entities that manipulate their accounts.
  
  • Till now, SEBI had to invoke its insider trading laws to press charges against perpetrators.
  • This is a good move considering that SEBI has been a more proactive regulator than the Ministry of Corporate Affairs.
• The definition of fraudulent trades under the Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets (PFUTP) rules has been widened to include front-running, orchestrated trades, circular trading and benchmark fixing.

• Whistle-blowers play a key role in alerting regulators to malpractice and the report recommends that SEBI, rather than the Central Government, be empowered to grant immunity to whistle-blowers.
• The panel has suggested that companies maintain electronic records of all price-sensitive information shared with outsiders and lists of those related to insiders as this can help in detecting cases of insider trading.
• However, a couple of recommendations could be considered as a drawback as they could result in regulatory overreach. 
  • One is the suggestion to characterise trading by market players in excess of their ‘verifiable financial resources’ as the fraud.
  • The other is to grant SEBI powers to intercept calls.

Background

• In India, the Securities and Exchanges Board of India (SEBI) is mandated to protect the interests of investors in securities and to promote the development of and to regulate the securities market.
• However, this has had little effect on the conduct of market players, with scams, frauds and accounting manipulations cropping up all too frequently.
• Also, developments in technology have led to increasing cyber threats that could lead to the manipulation of markets.
• These changes have led to the need to review the securities law dealing with market abuse and the methods used for detecting, investigating and carrying out enforcement against market abuse.