Cleaning up markets

India has evolved a complex labyrinth of securities laws to prevent sharp operators from taking public investors for a ride. The Securities Exchange Board of India (SEBI) has also been anointed with sweeping powers to haul up offenders. But this has clearly failed to have a deterrent effect on the conduct of market players, with scams, frauds and accounting manipulations cropping up all too frequently at India Inc. A SEBI-appointed expert panel on fair market conduct chaired by TK Viswanathan has done a commendable job of reviewing the key securities market laws in light of recent cases and contemporary practices, to suggest changes that can make them watertight.

While the draft report offered for public comments cuts a wide swath across SEBI’s Prevention of Unfair Trade Practices (PFUTP) and Prohibition of Insider Trading (PIT), four key proposals are worth mentioning. One, the committee seeks to empower SEBI to act directly against a listed company, its directors and auditors where its books of accounts are falsified. Rather than rely on provisions of the Companies Act, the committee has sensibly recommended that the SEBI Act be amended to allow SEBI to prosecute entities manipulating accounts. This is a good move given that SEBI has proved a far more proactive regulator than the Ministry of Corporate Affairs. Thus far, SEBI was forced to invoke its insider trading laws to press charges against perpetrators even in cases of blatant accounting fraud such as Satyam Computers. Two, the definition of fraudulent trades under the PFUTP rules has been widened to include front-running, orchestrated trades, circular trading and benchmark fixing which are today pervasive forms of manipulation. Whistle-blowers play a key role in alerting regulators to malpractice and the report recommends that SEBI, rather than the Central Government, be empowered to grant immunity to whistle-blowers. Three, it suggests that companies maintain electronic records of all price-sensitive information shared with outsiders and lists of those related to insiders, so that investigators needn’t hunt for a needle in a haystack in insider-trading cases. Four, recognising that staffing constraints at SEBI often lead to long delays in enforcement actions, the committee suggests a special fast-track process for cases involving marquee names.

While these are in order, a couple of recommendations could result in regulatory overreach. One is the suggestion to characterise trading by market players in excess of their ‘verifiable financial resources’ as fraud. The other is granting SEBI powers to intercept calls. Overall though, most of the committee’s recommendations are worth taking forward and, if implemented, can significantly raise the bar on the conduct of market players. But the sheer number of gaps flagged in this report also highlights the need for an ongoing review and updates to securities market laws at more frequent intervals. After all, ensuring fair conduct in the country’s capital markets cannot be a one-off spring-cleaning exercise.

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