Hunting for evidence

THE RISING USE OF TECHNOLOGY TO THWART PROBES OF ILLICIT TRADING ACTIVITY IS CONCERNING. BUT SEBI'S PROPOSED SOLUTION IS ANTITHETICAL TO THE PRINCIPLES OF JUSTICE

- SANDEEP PAREKH

LAST MONTH, SEBI issued a consultation paper seeking to regulate unexplained suspicious trading activity as the use of untraceable or encrypted communication media and innovative ways of carrying out trades is posing a difficulty for the regulator to gather evidence and punish offenders.

Under this new proposed framework, if a person or a group exhibits unusual trading patterns (UTP)-repetitive abnormal gainful dealings in securities involving substantial change in risk taken, around the presence of Material Non-Public Information (MNPI)-it will be considered to be Suspicious Trading Activity (STA) and thus a deemed violation of securities laws. If such person/s do not offer effective rebuttals, it will be called Unexplained STA and an order may be passed. MNPI has been defined as information that is not generally available but which upon being so has reasonable impact on price of securities of a company (similar to the definition of UPSI in insider trading laws), any information about an impending order which would reasonably impact the price of a security when executed, or any information about impending recommendation in a security by an influencer. For example, if a trader repeatedly executes large orders and gains from such trades (UTP) right before the publication of quarterly results by a company (MNPI), then it will be a deemed violation (STA). If effective rebuttals are not offered to the satisfaction of Sebi (USTA), then an order can be passed.