Against the backdrop of the recent leakage of crucial financial numbers over WhatsApp and increasing instances of insider trading and financial frauds in the securities market, the T. K. Viswanathan Committee (“Committee”) submitted its report on ‘Fair Market Conduct’ on August 09, 2018 (“Report”) suggesting amendments to the SEBI (Prevention of Insider Trading) Regulations, 2015 (“PIT Regulations”)and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (“PFUTP Regulations”). The Report is divided into four parts. Some of the recommendations are as follows:
Market Manipulation and Fraud:
The major proposals focus on Regulation 4(2), which provides for various kinds of dealings that are deemed to be fraudulent. The recommendations are essentially incremental to the existing framework but fail to address the poorly defined description of fraud. This leaves what constitutes fraud as inchoate and unclear.
Considering the concerns surrounding SEBI’s powers to look into manipulation of books of accounts and siphoning of funds in listed entities, the Committee has sought to bring fraud relating to financial statements and misutilization of issue proceeds specifically within the purview of the PFUTP Regulations. Nevertheless, such an inclusion may result in a jurisdictional conflict between SEBI and the Serious Fraud Investigation Office, which would have to be resolved.
Insider Trading:
Considering that all material events which are required to be disclosed as per the Listing Regulations need not necessarily be price sensitive, the Committee has recommended the removal of the phrase “material events in accordance with the listing agreement” from the deeming provision for price sensitive information. Further, the Committee recommends that the requirement of pre-clearance and application of contra-trade related restrictions should not be made applicable to trades in accordance with the trading plans. It seems that the Committee’s approach is a legalistic analysis of the existing regulatory framework with little reference to corresponding international practices, IOSCO principles, and the effectiveness of SEBI in addressing past violations. In addition, on a bigger canvas, the committee misses a golden opportunity to redefine insider trading so as to catch only dis-honest conduct. The current wording of the prohibition includes all kinds of honest trades and even due diligence as not being fully kosher. A clear definition excluding honest conduct through special safe harbor rules would have been very helpful.
Code of Conduct under the PIT Regulations:
The Committee has recommended that there should be a separate code of conduct for listed entities and intermediaries, as was present in the erstwhile PIT Regulations of 1992. Further, the Report provides for inclusion of a broad definition of ‘designated person’, instead of leaving it to the discretion of the listed entities. Although providing an indicative list is a welcome move, however to implement such changes, the definitions of certain terms will need to be reconsidered, for instance, the term ‘promoter’ includes ‘promoter group’; however, all members of promoter group should not be considered as designated persons.
Surveillance, Investigation, and Enforcement:
One of the recommendations under this chapter is to expand the existing powers of SEBI from seeking call records to intercepting conversations. In the light of recent judgment of the Supreme Court holding ‘Right to Privacy’ as a fundamental right and the pending Personal Data Protection Bill of 2018, it will be interesting to see as to whether this recommendation will see the light of the day. We believe, this power should not be given to SEBI, as it would cause insurmountable privacy problems.
