The Securities and Exchange Board of India (SEBI) invited comments on the draft SEBI (Prohibition of Suspicious Trading Activities in the Securities Market) Regulations, 2023.
SEBI observed that technology has enabled market participants to commit fraudulent activities while concealing the identities and connections between entities engaged in such activities. In such cases, it becomes difficult to collect evidence to prove the exchange of unpublished price sensitive information between the parties. To deal with such cases of unexplained suspicious trading pattern, SEBI has proposed a new regulatory framework.
Key features include:
▪ Unexplained suspicious trading activities: The draft regulations prohibit any person from engaging in unexplained suspicious trading activity. Suspicious trading activity includes any trading activity which exhibits an unusual trading pattern in a security or a group of securities. Unusual trading pattern would include repetitive trading pattern by a person or group of connected persons which: (i) involves a substantial change in risk taken in one or more securities over short periods of time, and (ii) delivers abnormal profits or averts abnormal losses. Such trading pattern should involve use of material non-public information related to a security. Material nonpublic information includes information about a company/security which was not generally available. Once such information became generally available, it has a reasonable impact on the price of securities of the company. Unexplained suspicious trading activity refers to suspicious trading activity for which no reasonable explanation could be provided.
▪ Duties of stock exchanges: Stock exchanges and other intermediaries must inform SEBI of any suspicious trading activity noticed by them.
▪ Investigation by SEBI: SEBI can initiate investigation into suspicious trading activity if it has reasonable grounds to suspect that any person or group of connected persons have engaged in such activity. The persons charged with such activity will be given an opportunity to provide their rebuttal. If SEBI is not satisfied with such rebuttal, it can take action under SEBI Act, 1992.
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