SEBI Preparing Affordability Index To Ensure Investors Trade Within Verifiable Means
India’s market regulator is preparing a so-called affordability index to gauge if an investment is backed by the investor’s financial resources to ensure stock prices are not manipulated by trading through mule accounts.
The Securities and Exchange Board of India is drafting the index that will be based on income and net worth of investors, according to the agenda papers of its Sept. 18 board meeting uploaded on its website on Oct. 16. “This will establish the affordability of the transaction,” it said.
That’s based on the suggestions of a panel led by TK Viswanathan on fair market trade, aimed at curbing benami or illegal proxy investments.
Investors’ exposure to equity markets will not be capped based on their verifiable financial sources and the information will be used solely for surveillance purposes, according to SEBI.
The regulator first mooted the proposal on limiting equity exposure beyond an investor’s net worth in June this year. SEBI put the onus on brokers, who said they were ill-equipped to calculate the index. The market participants called it “regulatory overreach”.
The regulator will now provide a framework to calculate the affordability of an investor. And the brokers will use information from documents of income and net worth given by a client.
The objective is to enhance due diligence by market intermediaries in case of trading beyond specified limits to prevent the use of “mule accounts” for carrying out fraudulent transactions or insider trading, according to SEBI’s agenda papers aid. The suspicion of the so-called “mule accounts” would be for investigation inputs and not a conclusive factor, the regulator said. Such accounts would need to be flagged to the regulator by brokers.
As a second level of check, SEBI will also look at the intent behind trading beyond the “affordability index”. The objective would be to find out if an investment above verifiable financial sources was with an “intention to deal in fraudulent or unfair manner, apart from manipulation of price and volume of securities”.
Poor Track Record
SEBI’s track record in getting a conviction in cases of insider trading has been poor. In the past three years, the regulator acted in 40 cases of violation of Prohibition of Insider Trading Regulations. Ill-gotten gains were impounded in just 12. The remaining were disclosure violations, according to its agenda papers.
In the 12 cases, criminal prosecution was initiated but the matter hasn’t even reached the stage where evidence is presented, let alone conviction.
“For a serious offence like insider trading, SEBI has not been able to successfully pursue criminal prosecution due to lack of conclusive evidence,” the regulator said. “There is need to have powers for call interception, subject to adequate safeguards and due diligence to address concerns related to privacy.”
SEBI, based on the Viswanthan panel suggestion, has sent a proposal to the government to grant it powers to intercept phone calls and emails.
Code Of Conduct For Exchanges
The regulator proposed that like listed companies, exchanges and clearing corporations need to draft a code of conduct for all the employees who handle price-sensitive information of listed companies.