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Sebi forms panel to review norms on insider trading, unfair trade practices

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Sebi says the committee will suggest short-term and medium-term measures for improved surveillance of the markets as well as issues of high-frequency trades

Mumbai: The Securities and Exchange Board of India (Sebi) has formed a committee to review norms pertaining to Prevention of Insider Trading (PIT) 2015, and Prevention of Fraud and Unfair Trade Practices (PFUTP) 2003.

The committee on fair market conduct, headed by T.K. Viswanathan, former secretary general of the Lok Sabha and former law secretary, will suggest norms to align insider trading with the recently amended Companies Act and will also for the first time address the manipulation and surveillance issues arising out of high-frequency or algorithmic trades.

“The committee will suggest short-term and medium-term measures for improved surveillance of the markets as well as issues of high-frequency trades, harnessing of technology and analytics in surveillance,” Sebi said in a press release.

Interestingly, the review of insider trading regulations comes within two years of a similar exercise in 2015 which replaced the 1992 norms.

PIT 2015 had drawn flak from market participants due to grey areas in terms of the dos and don’ts on price-sensitive information.

“Both these things are highly desirable, particularly insider trading, which is poorly drafted and caused heartburn amongst honest people,” said Sandeep Parekh, founder, Finsec Law Advisors.

In addition, PIT 2015 required companies to adopt a “need to know strategy”, which according to lawyers led to a lockdown on legitimate communication.

“New insider trading regulations have brought to the fore new problems such as when can anyone communicate legitimately. Hope the committee delves in detail from the aspect of market development, ease of doing business and encourages voluntary (sharing of) information with the regulator of any violation by a market participant,” said Sumit Agrawal, founder, Suvan Law Advisors.

Another reason to review PIT norms is the Insolvency and Bankruptcy Code. A restructuring plan under the code needs to be approved by the committee of creditors and could fall into the “need to know” realm.

“A fresh look in the backdrop of recent amendments to the Companies Act, 2013, and Insolvency and Bankruptcy Code as well as the new Benami Transactions (Prohibition) Amendment Act, 2016, will align the regulation of the financial market,” said Agrawal.

On 28 July, the Companies Act was amended to align it with Sebi insider trading rules by removing the provision from the Act, as insider trading pertains to only listed firms.

On the other hand, PFUTP regulations are being reviewed after 12 years.

According to Agrawal, PFUTP has some obsolete and vague provisions and newer aspects of market abuse are not covered under it.

According to Parekh, “As far as the definition of fraud goes, it is high time that this is reviewed…as currently the definition includes all manner of non-fraudulent activities in its scope.”

The committee is required to submit its report to the regulator within four months and will suggest what constitutes permissible evidence in antifraud enforcement.