Earlier in 2023, the SEBI introduced the SEBI (Prohibition of Unexplained Suspicious Trading Activities in the Securities Market) Regulations in the form of a consultation paper.
The board of the markets regulator, the Securities and Exchange Board of India (SEBI) is scheduled to meet today in Mumbai. The board is likely to announce a new regulation which seeks to curb fraudulent or suspicious trading activities, Moneycontrol reported. The new regulation will enable the market regulator to launch a formal investigation on the basis of suspicious trading activities or the presumption that a fraudulent action has taken place.
Currently, the market's regulator can only launch a formal investigation only after it has found proof that an entity has engaged in unfair or fraudulent activities. Earlier in 2023, the SEBI introduced the SEBI (Prohibition of Unexplained Suspicious Trading Activities in the Securities Market) Regulations in the form of a consultation paper.
The regulator stated in the paper that wrongdoers conceal the trail of their alleged malpractices using advanced tools and technology which necessitates the need for such a regulation.
“With the advent of technology, novel methods are being adopted by the market participants to carry out fraudulent/violative in the securities market while concealing the identities, connections and relationships between the entities engaged in such activities,” SEBI said in the paper.
The regulator also said that the use of technologies such as mule accounts and communication through encrypted electronic media render traditional methods of evidence gathering ineffective.
“These activities often involve evasive/camouflaging tactics like using mule accounts, layering funds through a complex web of entities and communicating through encrypted electronic media such as FaceTime, WhatsApp, BOTIM, etc., consequently rendering traditional sources of evidence collection like Call Data Records and Bank records ineffective, in establishing the preponderance of probability,” it added.
The markets regulator said that the proposed regulation can be enforced in cases where unusual trading patterns are observed around the presence of material non-public information (MNPI).
The proposed regulation was met with a lot of resistance during initial discussions according to a report by Moneycontrol which cited people familiar with the matter. The resistance around the proposed regulation is based on the belief that it violates the principles of natural justice which state that an entity is innocent until proven guilty. However, the SEBI has backed the proposed regulation earlier by stating that presumptions are allowed in certain instances under Indian law.
“… section 68 of the Income Tax Act, 1961, provides a presumption as to the income of an assessee, if the assessee offers no explanation about the source and nature of the cash credits found in the books of the assessee or the explanation offered by the assessee, in the opinion of the Assessing Officer, is not found satisfactory. In such cases, the unexplained cash credits may be charged to the income of the assessee for that year,” the SEBI discussion paper stated.
The discussion paper also cited the Securities Act, 1933 of the US Constitution which has a similar provision.
“These legal provisions indicate that the law allows to bring about charges on people, based on a certain amount of presumption; which may however be refuted by those people through a satisfactory explanation,” SEBI said in the discussion paper.