Sebi proposals to deal with suspicious trading will curb fraud: Experts

Sebi's proposed regulatory framework to deal with unexplained suspicious trading patterns will help in detecting activities involving evasive tactics, experts said

Markets watchdog Sebi's proposed regulatory framework to deal with unexplained suspicious trading patterns will help in detecting activities involving evasive tactics like the use of mule accounts, complex entity structures, and encrypted communication, experts said on Monday.

The proposed framework would be a major step in bringing the perpetrators under the law and will help protect the interest of investors at large against such practices, Shrey Jain, Founder and CEO of SAS Online, said.

Last week, Sebi proposed a new regulatory framework, wherein a person or group of connected persons exhibiting an unexplained suspicious trading pattern -- repetitive abnormal gainful dealings in a security or a set of securities, around the presence of material non-public information -- would be deemed to be violating the securities laws, unless they are able to effectively rebut the said presumption.

According to Sebi's consultation paper, a repetitive pattern of trading activity by a person or a group of connected persons that involves a substantial change in risk taken in securities over short periods and consequently delivered abnormal profits or averted abnormal losses, would be considered an unusual trading pattern.

The proposed framework would deal with malpractices by market participants, who use new age technologies by way of encrypted or vanishing messages, and modus operandi to evade the law.

"With advancements in technology, new methods are being adopted by certain market participants to carry out fraudulent and unfair practices in markets like insider trading, front-running, and pump and dump. This sometimes makes it difficult for the regulator to prove these wrongdoings under current Indian securities law due to a lack of circumstantial evidence," Jain said.

Feroze Azeez, Deputy CEO, Anand Rathi Wealth Ltd, said Sebi is particularly focused on uncovering insider trading possibilities. Further, the discussion paper is a step in the direction where they are laying down a process to use sophisticated technology to detect suspicious insider trading activities.

"This effort by Sebi instills confidence in investors regarding the regulation and transparency of the overall market," Azeez said.

Sebi's surveillance systems repeatedly detect instances of insider trading and front running. However, the use of innovative, vanishing, and encrypted methods of private communication, as well as complex and untraceable funding arrangements in several cases, makes it impossible to establish the pre-ponderance of probability.

In 2022, around 5,000 alerts were generated by Sebi's alert generation model against 3,588 unique entities.

Out of this, 97 entities appeared repetitively for 5 or more times, in the alerts. However, no action could be taken against most of the entities which appeared in such alerts although their trading pattern were repetitive and suspicious, reason being that connections/ communications could not be established, Sebi said.