Fraudulent Trading Rules: SEBI's Tiny But Powerful Tweak
With addition of a few words in its unfair trade practices regulations, the market regulator hopes to curb the increasing instances of speculative stock tips on social media.
This week, the Securities and Exchange Board of India amended its Prohibition of Fraudulent and Unfair Trade Practices Regulations. One of the most significant change has to do with what qualifies as manipulative, fraudulent or an unfair trade practice.
So far, this applied to dissemination of information or advice through any media—physical or digital—which the disseminator knows to be false, misleading. And when such information is designed or likely to influence the decision of investors dealing in securities.
Experts BloombergQuint spoke with pointed out that SEBI routinely met with the defence that the disseminator didn't know the information to be "false or misleading".
To address this, the regulator has now added "reckless or careless manner" to the provision. The amended regulation reads:
"...disseminating information or advice through any media, whether physical or digital, which the disseminator knows to be false or misleading in a reckless or careless manner and which is designed to, or likely to influence the decision of investors dealing in securities.."
The issue with the earlier language was that it required SEBI to prove intent, Shruti Rajan, securities law partner at Trilegal, pointed out. In cases involving dissemination of information over social media, it is difficult to demonstrate that the individual knew the information was false or misleading, she explained.
And while the false and misleading standard continues to exist, addition of "careless and reckless" has made things less onerous for SEBI, she said.
From a policy perspective, including the 'reckless and careless' standard is good to curb the unhealthy practice of speculative information being shared en masse on WhatsApp groups, Telegram etc.Shruti Rajan, Partner, Trilegal
The amended language is SEBI's way of netting in such reckless practices, Rajan explained.
We'll need to see how SEBI develops its case around the "reckless and careless" standard, Tomu Francis, partner at Khaitan & Co., said. The regulator can pick up Twitter handles who put out recommendations and say this was done in a "reckless and careless" manner.
There have been cases where SEBI has tried to bring a charge for violation of insider trading regulations for information disseminated via messaging apps. But the regulator has found it hard to sustain its case before the appellate authority. Now, SEBI may prefer bringing a charge under PFUTP Regulations, using the "reckless and careless" standard, instead of insider trading regulation.Tomu Francis, Partner, Khaitan & Co.