A man walks by an electronic ticker board that indicates stock figures at the Bombay Stock Exchange in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

SEBI Widens Its Definition Of Fraud In Stock Market Trading

What qualifies as fraud in the securities market and who can be held liable for it has been expanded, thanks to market regulator’s decision on Tuesday.

The SEBI Board has approved changes to its regulations on Prohibition of Fraudulent and Unfair Trade Practices. The regulator has expanded the scope of what qualifies as “dealing in securities” to include employees and agents of intermediaries. Currently, the definition only includes a person acting as a principal, agent or intermediary.

Existing Definition: “dealing in securities” includes an act of buying, selling or subscribing pursuant to any issue of any security or agreeing to buy, sell or subscribe to any issue of any security or otherwise transacting in any way in any security by any person as principal, agent or intermediary….”

Under the existing definition, it’s arguable whether an intermediary’s agent is covered or not; the amendment will put to rest any argument on this front, Sumit Agrawal, a securities lawyer and founding partner at RegStreet Law Advisors, told BloombergQuint.

The regulator has also strengthened the provisions relating to fraud under the unfair trade practices regulations. Now, fraud will also include activities such as misleading information on digital media, front-running by non-intermediaries, misselling of securities and services related to securities, misutilisation of client account and diversion of client funds, manipulating benchmark price of securities, among others.

The Supreme Court, in Kanaiyalal Patel’s case last year, had ruled non-intermediary front-running as an unfair trade practise. The regulator has now incorporated this outcome in its regulations, Agrawal said.

The attempt could also be to cover information sharing over digital media, like WhatsApp, by non-intermediaries but persons involved in the market, Abhimanyu Bhattacharya, a partner at law firm Khaitan & Co., said.

Also read: SEBI Allows Settlement Of Fraud Cases, But With Riders

Changes To Insider Trading Regulations

Currently, SEBI’s insider trading regulations prohibits communication and procurement of unpublished price-sensitive information, unless it’s for legitimate purposes, performance of duties or discharge of legal obligations. But what qualifies as a legitimate purpose is unclear. And so, SEBI has amended the regulations to clarify this. The details are yet to be notified but the regulator’s press release cites due diligence as an example of legitimate purpose.

There could also be instances where an investor, who has nominated a director on a board could expect information to be shared with him which may be problematic from a UPSI perspective, Bhattacharya pointed out. The amended regulations, subject to the language that SEBI notifies, may allow for some flexibility on this account, he added.

SEBI has also added some defences that can be used if trading is done based on UPSI. It also added the requirement to create a database of persons with whom the unpublished information is shared and formulation of a code of conduct to ensure internal controls by companies.