Sebi enacts stricter laws on CIS, front running

Gives nod for Oliver Wyman proposals; plans follow up action on recent ordinance

Market regulator Securities and Exchange Board of India (Sebi) on Monday approved critical changes to the law to crack down on illegal money collection schemes and also to nail individuals indulging in fraudulent activities such as front running.

Front running is the unethical practice of a broker trading an equity based on information from the analyst department before his or her clients have been given the information. For example, analysts and brokers who buy shares in a company just before the brokerage is about to recommend the stock as a strong buy are practicing front running.

 

Sebi has said illegal mobilisation of money, other than those registered as collection investment schemes (CIS), would be declared a fraudulent and unfair trade practice. Further, the regulator would also impose “deterrent adjudication penalties” on such entities.

Sebi would also tweak regulations to bring front-running by individuals under the ambit of fraudulent and unfair trade practice (FUTP) regulations. The current regulations were perceived to apply only to intermediaries after a recent Sebi order against three individuals was set aside by the Securities Appellate Tribunal (SAT).

The Sebi regulation currently mentions that intermediaries should not take positions ahead of large client orders. “...an intermediary buying or selling securities in advance of a substantial client order or whereby a futures or options position is taken about an impending transaction in the same or related futures or options contract,” said the law.  

“The board has approved the proposal to bring a clarificatory amendment to the Sebi (Prohibition of FUTP Practices relating to Securities Market) Regulations, 2003, to clarify that the list under regulation 4(2) is not exhaustive and the general provisions of regulation 3 will override,” Sebi said in a release.

Last year, SAT had overturned a Sebi order on the grounds that the law only talks of front running by intermediaries and not by individuals.

U K Sinha, the chairman had subsequently stated regulation would be suitably strengthened.

The Sebi board also took note of the new powers it had got following amendments made to the Securities Law through an ordinance and discussed further action on its part.

Experts said Sebi would have to beef up its staff strength and also devise a framework to implement its new powers, including that to attach properties and recover monetary penalties.

The market regulator also accepted the recommendation and agreed on the implementation plan made by international consulting firm Oliver Wyman on organisational restructuring.

The US-based firm was appointed by Sebi to “revisit the structural and organisational issues, re-prioritise areas of focus and to look at the technological and manpower needs of Sebi.”

Oliver Wyman, among other things, has recommended  “greater focus on mobilising household savings into capital market assets, enhanced focus on supervisory functions, oversight of listed companies, re-organisation of functional departments, increase in manpower, informational strategy for organisational efficiency and improving the training and performance management system,” Sebi said.