The SEBI-appointed TK Viswanathan committee on fair market conduct recently released its report.
Granting more powers to Securities and Exchange Board of India (SEBI) has given way to many concerns.
What was the committee on?
The regulation of securities markets has evolved, since the setting up of the SEBI.
However it is still a work in progress as mischievous practices continue to exist.
The committee was aimed at addressing the illegal practices and ensuring fair conduct among investors.
What are the key recommendations?
Malpractices - The committee said Benami trading should also be deemed fraudulent if it leads to manipulation.
Also, SEBI may consider any trading by players beyond their known ‘financial resources’ as fraud.
The committee has suggested changes to existing regulations to better prosecute malpractices as these.
It said the scope of regulations on fraud should not just cover intermediaries.
It should also cover employees and agents of these intermediaries who often escape after indulging in fraudulent activity.
It is also suggested that SEBI be given the power to grant immunity to whistle-blowers who help uncover illegal activities.
Insider trading - It is a practice wherein investment decisions are made by having access to otherwise non public information.
Among a number of recommendations on insider trading, is the creation of two separate codes of conduct.
One would set minimum standards on dealing with insider information by listed companies.
The other would set standards for market intermediaries and others who are handling price-sensitive information.
Information - Companies should maintain details of
immediate relatives of designated persons who might deal with sensitive information
people with whom the designated person might share a material financial relationship or who share the same address for a year
Such information may be maintained by the company in a searchable electronic format.
It may also be shared with the SEBI when sought on a case-to-case basis.
Calls - Currently, SEBI has the power to only ask for call records including numbers and durations.
The committee has recommended direct power for SEBI to tap telephones and other electronic communication devices.
This is to check insider trading and other frauds.
However, proper checks and balances over this power are to be ensured by necessary amendment in the relevant laws.
Front entities - Front entities are that which lent their names or trading accounts to others.
The committee has recommended the inclusion of a new sub-section within the SEBI Act, 1992 in this regard.
This would specifically prohibit devices, schemes or artifices employed for manipulating the books of accounts or financial statements of a listed company.
What are the benefits?
A strong regulator serves as a good deterrent to fraudulent practices in the market.
Greater executive powers can help the regulator take swifter action against offenders.
They do not, instead, have to rely on government bodies such as the Ministry of Corporate Affairs.
This could also free SEBI from various manifestations of political influence.
As SEBI can better understand the complex nuances that financial market fraud entails, it may be better placed to enforce the law.
What are the contentions?
Calls - Powers such as tapping phone calls are already vested in the police and investigating agencies. E.g. CBI
So it might be extreme and tyrannical if extended to financial regulators as well.
This gains significance in the backdrop of the increasing importance for privacy in recent times.
Frauds - SEBI is set to be granted the power to act directly against “perpetrators of financial statements fraud”.
In essence, this means SEBI can act not only against listed entities under its extant powers.
Rather, it could also act against those who aid or abet financial fraud, including the accountants and auditors.
Too much of deterrence could possibly discourage and drive away the genuine investors.
