Recently, a 22-member committee headed by TK Viswanathan, ex-Secretary General, Lok Sabha, and ex-Law Secretary, submitted its report to market regulator SEBI. The committee was mandated to review the existing legal framework to deal with market abuse to ensure fair market conduct in the securities market and to review the surveillance, investigation and enforcement mechanisms being undertaken by SEBI to make laws more effective in protecting market integrity and investor interest.

Verifiable source

While a proposal on cubing trading exposures by retail investors based on their net worth caught traditional and social media attention, the committee has made several interesting proposals that went unnoticed. Among these, one important recommendation is on ‘excessive’ trading. The panel has recommended that trading done by an entity in excess of its ‘verifiable financial sources’ should be deemed to be fraudulent, if such trading leads to any manipulation in the price or volume of the security.

“There was considerable deliberation on the issue of what verifiable financial sources are and what would be included in the same.

“It was decided that SEBI would separately issue a circular prescribing the method for calculating verifiable financial sources and would specify the intermediary who would be monitoring trading in excess of the verifiable financial sources, after due consultation with market participants.”

To check deceptive orders using high-frequency trade and algorithms, the panel has mooted allotment of a Unique Identification Number to each approved algorithm, which should reflect in the orders generated by it. “This would help in identifying algorithms which generate potentially manipulative trades.”

The committee observed that orders are placed fleetingly, either to gauge order book (to get an idea of the market for the scrip at that point in time) or create an impression of order flow, and then are quickly cancelled. Another important proposal by the committee is a two-tier approach for investigation and enforcement, wherein sensitive cases/new types of manipulation/ cases involving large-cap companies are proposed to be handled by designated SEBI officials in a fast-track manner, while regular cases are handled by other SEBI officials in the normal course.

To make the investigation process in insider trading cases easy, the panel has also recommended mandating disclosures by designated persons of names of immediate relatives, persons with whom such designated person(s) share a material financial relationship, and persons residing at the same address for more than one year. “Such information may be maintained by the company in a searchable electronic format and may be shared with SEBI when sought on a case-to-case basis.”

Besides, the panel has also recommended several other proposals with regard to manipulation, insider trading and surveillance, investigation and enforcement and sought public comments by August 27.

Though one has to wait for SEBI’s procedural clarifications on this, it is very difficult for some of the proposals to be implemented as they need coordination of various government departments and full cooperation from intermediaries, including exchanges and broking houses, besides technical expertise on certain proposals.