SEBI TO BRING FRONT-RUNNING UNDER FRAUDULENT AND UNFAIR TRADE PRACTICES REGULATIONS

MUMBAI: In a major move to curb illegal activities, securities market regulator Sebi is bringing front-running by individuals under the ambit of fraudulent and unfair trade practices (FUTP) regulations, reviving an old rule it had abandoned a decade ago. The regulator is also bringing Collective Investment Scheme (CIS) activities under the FUTP umbrella after investors cried foul over losing money to ponzi schemes.

Front-running is an unethical activity whereby a person uses confidential information to buy or sell shares in a company ahead of a large order so as to benefit from the subsequent price movement. Sebi’s nine-member board, which is meeting on August 12, is likely to discuss front-running norms, among other things, said a source. Sebi’s current FUTP regulations only cover intermediaries, leaving out individuals. But a first legal case involving individuals in front-running, which Sebi has been fighting in recent months, has made the regulator sit up and take a review of its norms.

“If there is a lacuna in the regulations then it needs to be plugged to enhance the reach of the regulator to proceed against any person,” said RS Loona, managing partner of Alliance Corporate Lawyers and a former executive director of Sebi.

Sebi has been forced to review its FUTP regulations after the Securities Appellate Tribunal, on November 9, 2012, set aside its order penalising three individuals for alleged front-running activities. The tribunal had said that in the absence of any specific provision in the regulations prohibiting front-running by a person other than an intermediary, the regulator can’t hold individuals guilty.

Interestingly, the FUTP regulations in 1995 barred front-running activity by ‘any person’, covering both individuals and intermediaries. But the amended regulations of 2003 covered only intermediaries, leaving out individuals. Sebi now intends to plug this loophole by reviewing the norms.

Soon after SAT overruled sebi’s orders on front-running late last year, its chief UK Sinha had said that FUTP rules needs to be improved.

The FUTP norms will also treat fund-raising activity by those entities which doesn’t register as collective investment schemes with Sebi as fraud, said the same person quoted above. This will enable the regulator to impose monetary penalties on such entities. In recent months, investors have been duped of thousands of crores by ponzi schemes, especially from the eastern part of the country.

Besides the review of FUTP norms, the Sebi board is also likely to discuss the implementation of the recent Securities Laws Ordinance which gives the regulator more powers. The new law empowers Sebi to attach immoveable properties as well as bank accounts of those violating securities laws. Besides, it also gives the stock market watchdog powers to carry out search and seizure operations.

The board will discuss framing of rules for search and seizure activities, said the person quoted earlier. Sebi will also have to set up new cells for attachment and recovery of dues, similar to the lines of income tax department. “Search and seizure is a draconian power which impinges on right to privacy. Therefore, till now, the Sebi Act, 1992 required exercise of this power with the approval of judicial magistrate. Now that these powers would be exercised by Sebi, strict rules are required to regulate the exercise of this power to prevent any possible misuse,” said MS Sahoo, a former member of Sebi.

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