TK Viswanathan Committee on Fair Market Conduct
- The SEBI-appointed TK Viswanathan committee on fair market conduct recently released its report.
- Granting more powers to Securities and Exchange Board of India (SEBI) has given way too many concerns.
What was the committee on?
- The regulation of securities markets has evolved, since the setting up of the SEBI.
- However, it is still a work in progress as mischievous practices continue to exist.
- The committee was aimed at addressing the illegal practices and ensuring fair conduct among investors.
What are the key recommendations?
- Malpractices – The committee said Benami trading should also be deemed fraudulent if it leads to manipulation.
- Also, SEBI may consider any trading by players beyond their known ‘financial resources’ as fraud.
- The committee has suggested changes to existing regulations to better prosecute malpractices as these.
- It said the scope of regulations on fraud should not just cover intermediaries.
- It should also cover employees and agents of these intermediaries who often escape after indulging in fraudulent activity.
- It is also suggested that SEBI be given the power to grant immunity to whistle-blowers who help uncover illegal activities.
- Insider trading – It is a practice wherein investment decisions are made by having access to otherwise nonpublic information.
- Among several recommendations on insider trading, is the creation of two separate codes of conduct.
- One would set minimum standards on dealing with insider information by listed companies.
- The other would set standards for market intermediaries and others who are handling price-sensitive information.
- Information – Companies should maintain details of
- immediate relatives of designated persons who might deal with sensitive information
- people with whom the designated person might share a material financial relationship or who share the same address for a year
- Such information may be maintained by the company in a searchable electronic format.
- It may also be shared with the SEBI when sought on a case-to-case basis.
- Calls – Currently, SEBI has the power to only ask for call records including numbers and durations.
- The committee has recommended direct power for SEBI to tap telephones and other electronic communication devices.
- This is to check insider trading and other frauds.
- However, proper checks and balances over this power are to be ensured by necessary amendment in the relevant laws.
- Front entities – Front entities are that which lent their names or trading accounts to others.
- The committee has recommended the inclusion of a new sub-section within the SEBI Act, 1992 in this regard.
- This would specifically prohibit devices, schemes or artifices employed for manipulating the books of accounts or financial statements of a listed company.
What are the benefits?
- A strong regulator serves as a good deterrent to fraudulent practices in the market.
- Greater executive powers can help the regulator take swifter action against offenders.
- They do not, instead, must rely on government bodies such as the Ministry of Corporate Affairs.
- This could also free SEBI from various manifestations of political influence.
- As SEBI can better understand the complex nuances that financial market fraud entails, it may be better placed to enforce the law.
What are the contentions?
- Calls – Powers such as tapping phone calls are already vested in the police and investigating agencies. E.g. CBI
- So it might be extreme and tyrannical if extended to financial regulators as well.
- This gains significance in the backdrop of the increasing importance for privacy in recent times.
- Frauds – SEBI is set to be granted the power to act directly against “perpetrators of financial statements fraud”.
- This means SEBI can act not only against listed entities under its extant powers.
- Rather, it could also act against those who aid or abet financial fraud, including the accountants and auditors.
- Too much of deterrence could possibly discourage and drive away the genuine investors.