Introducing Regulatory Weapon By SEBI: An Attempt To Counter Illicit Trading.
In the case of substantial non-public information, SEBI stated that any kind of knowledge about an imminent recommendation in a security given to the public by an influencer and which, when made openly accessible to such public, reasonably influenced the price of such security.
The SEBI recently recommended a regulatory weapon to tackle unexplained, unusual trading patterns, including the availability of critical non-public data to provide safety to investors. It has asked that social media influencers be regulated as well. Yes, you read that right. So if you are a finfluencer, this should bother you. The suggested framework would address market players who employ new-age technology, like encrypted or disappearing messages and other methods to skirt the law.
This is a description of the capital market regulator’s recent consultation paper on ‘Prohibition of Unexplained Suspicious Trading Activities in the Securities Market Regulations, 2023,’ delving into its underlying factors, scrutinising its applicability and implications, and emphasising the importance of a streamlined regulatory structure.
The regulatory sword by SEBI.
Since 2017, it has been reported that instant messaging networks like WhatsApp are being utilised to disseminate unpublished price-sensitive information (UPSI) about certain corporations ahead of their formal announcements. The securities tribunal found that corporate insiders leaked financial information over WhatsApp, greatly influencing share pricing.
During the research, it was learned that proving such kinds of events is quite tricky due to the complex security protocols, like encryption and temporary communications, provided by these platforms. As a result, SEBI is putting in place a comprehensive plan to combat such malpractices. The purpose of this consultation paper is to introduce the concept of material non-public information (MNPI).
As per the definition, MNPI broadens the scope of UPSI by embracing any occurrences or facts that were not in the public domain but, when widely disseminated, significantly impacted the value of shares.
To address these events, the market regulator has established the concept of unusual trading patterns (UTP). UTP refers to repeated trading activity that displays a meaningful change in the extent of risk accepted by a person or a network of associated folks over a short time, resulting in unusual gains or avoiding unexpected losses. If a person or collective entity acts in UTP that is consistent with the presence of MNPI, SEBI will define such behaviour to be a suspicious trading activity or STA.
In the case of substantial non-public information, SEBI stated that any kind of knowledge about an imminent recommendation in a security given to the public by an influencer and which, when made openly accessible to such public, reasonably influenced the price of such security. SEBI will initiate a probe against the persons involved if an STA is suspected. Legal action will be taken unless the accused parties successfully challenge the assumption of breach.
Implementation problems.
Despite being a major step forward by SEBI, the plan has problems. One source of concern is the ambiguity of the UTP definition. SEBI may find complications in pursuing action against someone who use UTPs, contributing to market players’ confusion and ambiguity. Because the phrases “repetitive,” “substantial change,” and “short periods of time” are susceptible to interpretation, more clarification is necessary.
The phrase “repetitive” may apply to the repeated practise of acquiring and selling stocks by the same or related companies to create a false appearance of demand, also called “wash trading.” The word “short periods of time” emerges to limit its application. This approach may not adequately catch events of “wash trading” that occur over long periods of time, as opposed to those that occur in short bursts. When determining a UTP, the regulator is responsible for painstakingly evaluating chronological factors. This needs a comprehensive study of “short periods of time.”
According to SEBI, an influencer is defined as “any person deemed to be in a position to influence the investment decision in securities of a reasonably large number of people by his or her statements or representations.” SEBI highlighted that in insider trading, contact between the two becomes impossible when the tipper transmits Unpublished Price Sensitive Information (UPSI) to the tippee through encrypted and disappearing transmissions.
What is mandated?
Although the regulatory structure presents a detailed definition of MNPI, it does not provide the criteria for determining the accuracy of the effect on stock prices. A more precise description of what is and is not “material” is necessary. Ambiguous interpretation without explicit norms might lead to unjust treatment or false charges against persons.
Furthermore, the framework does not consider the constraints of executing and adhering to the prescribed regulations. The framework’s usefulness may be hampered by a myriad of issues, like data availability, technical restrictions, and resource constraints. These considerations may make the framework’s implementation and enforcement difficult.
Conclusion.
Despite these misgivings, the suggested framework is a fantastic concept. It is a welcoming step to protect investors and nourish the Indian stock market‘s reputation. Although the views on this topic can be personalised individually, a collective effort to create discipline would be a justified step.
