The Securities and Exchange Board of India (Sebi) is set to intensify its drive against individuals who misuse unpublished price-sensitive information (UPSI) to make illicit gains from the stock market.
Trading based on UPSI is among the most serious offences in the stock market. Sebi has stepped up on improving its surveillance mechanism after prescient messages, related to the financial results of several blue-chip companies, including Axis Bank, HDFC Bank and Tata Motors, were being circulated on WhatsApp.
The regulator is working on a framework to tackle this menace. “It is proposed to introduce measures to address the issue of major announcements by listed companies so as to reduce the element of uncertainty in the market and to dis-incentivise misuse of UPSI by insiders,” said Sebi in a memorandum to its board on policy proposals for 2018-19.
Strengthening of rules governing insider trading is among the key proposals in the agenda set by Sebi for 2018-19, along with making improvement to the Prohibition of Insider Trading Regulations (PIT) and Prohibition of Fraudulent and Unfair Trade Practices (FUTP) regulations.
According to sources, Sebi is planning to use analytical and statistical tools, such as artificial intelligence, to establish the link between those passing sensitive information and the ones trading based on it.
Sebi is considering making changes in the legal framework to mandate market intermediaries, such as stock exchanges and brokers, to carry out necessary surveillance of client trading activity.
Sources said that brokers could also be asked to ascertain the exposure of big clients prior to and after big corporate announcements.
The market regulator is working on formalising information sharing with other enforcement agencies armed with advanced technologies.
Early this year, Sebi had constituted a committee to suggest measures to improve surveillance and help prevent insider trading activities.
The committee, led by former law secretary T K Vishwanathan, is working on important aspects, particularly the trading plan, handling of UPSI during takeovers and alignment of insider trading rules with the Companies Act provisions.
The committee has suggested some short- and medium-term measures for improved surveillance of the market, as well as issues of high frequency trades, harnessing of technology and use of analytics in surveillance.
Sources said that the committee is in the advance stages of finalising the recommendations and a report would be soon be submitted to the Sebi board.
Expert said innovative practices were essential as the violators were often intelligent to not leave any trace on formal channels. Although the regulator is aware of several such manipulations, establishing a connection with some insiders becomes a challenge.
“There will always be times when a handful of people have superior information as the said information needs to be processed before it can be released in the public domain. Financial numbers must be compiled, checked and audited before they can be disclosed,” said Sandeep Parekh, founder, Finsec Law Advisors.
The regulator is also building techniques to scan social media platforms and nab those benefitting from the stock market by trading based on insider tip-offs.
The issue of the handling of UPSI has gained prominence after an investigative story by Reuters in November 2017 revealed prescient messages being posted in private chat groups. Sebi has conducted massive search and seizure operations on persons directly or indirectly connected to these companies whose earnings were leaked. Besides, it had also put out advisory and asked companies involved to conduct an internal enquiry against people in possession of the information.