India’s market regulator SEBI proposed new rules that put the burden of proof on the accused in some cases of insider trading, front running and similar violations, as use of encrypted or disappearing communication and untraceable funding arrangements impede the watchdog’s ability to make and win cases.
An unusual trading pattern — involving substantial change in risk or abnormal profits — that coincides with material non-public information on a security will amount to suspicious activity unless the alleged violator can rebut with evidence, the SEBI said in a consultation paper on Thursday.
Cases of abnormal trading
SEBI cited 97 instances of abnormal trading, such as repeated, concentrated, positions taken by an entity ahead of news events at a company, but said no cases could be established partly due to lack of communication evidence.
The proposed regulation is a useful device to overcome judicial pronouncements that require more persuasive evidence, said Shruti Rajan, partner at Mumbai-based law firm Trilegal. But many legitimate traders will have to go through the motions of explaining their trades to SEBI, and with no proposed time limits or limitation periods for investigations, the process itself may often feel interminable, she said.
Deeming provisions are not new. SEBI in its paper pointed to similar provisions in income tax law on unexplained cash credits as well as to US securities law.
Globalized money trails and tech innovations have prompted more lawmakers and regulators to make such moves, said Amit Desai, a criminal defense lawyer.
“When burden of proof shifts, it needs more clear, objective standards to function as safeguards,” Desai said.