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SEBI should seek power to tap phone calls: TK Viswanathan Committee

Aug 10, 2018 15:10 IST
    SEBI should seek power to tap phone calls: TK Viswanathan Committee
    SEBI should seek power to tap phone calls: TK Viswanathan Committee

    The Committee on Fair Market Conduct, headed by former law secretary T K Viswanathan, submitted its report to SEBI Chairman Ajay Tyagi on August 8, 2018.

    In its report, the committee recommended the market regulator Securities and Exchange Board of India (SEBI) to seek powers to tap telephones and other electronic communication devices to check insider trading and other frauds.

    Currently, the SEBI has the power to only ask for call records, which includes numbers called and the duration of calls made.

    The Securities and Exchange Board of India (SEBI) has sought comments from public on the committee's recommendations till August 24, 2018.

    Significance

    If the recommendation is implemented, SEBI will be able to listen in on the calls, as well as intercept other forms of electronic communication.

    Recommendations of the TK Viswanathan Committee

    The committee says, “Currently there are several methods of electronic communication apart from telephone calls which are fairly widely used…, interception of electronic communication should also be covered in the powers being sought”.

    The committee suggested a series of changes in rules on market frauds, insider trading, surveillance and investigations.

    Recommendations on insider trading

    The report also made a number of recommendations on insider trading. It suggested 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, auditors, accountancy firms, law firms and consultants who are handling price-sensitive information.

    The ‘Prohibition of Insider Trading Regulations’ may be amended to have these two separate codes.

    • The regulator should seek direct access instead through an enforcement agency. The powers should be equivalent to those given to other regulatory agencies such as the Central Board of Direct Taxes to deal with economic offences.

    • SEBI should sign a Memorandum of Understanding with enforcement bodies like Income Tax Department, Economic Offences Wing, Reserve Bank of India, Enforcement Directorate and the Ministry of Corporate Affairs.

    • It suggested easier regulations for disclosure of trades and it should apply only to promoters, directors and designated persons.

    Designated persons

    The committee defines the designated persons as the promoters, directors, the chief executive officers and two levels below the CEO. The existing rules bring all employees under the designated persons, if they meet the threshold of trades.

    • The regulations against frauds should also cover all market participants and their employees as well as agents of intermediaries.

    • It recommended on need for brokers to self-certify compliance of algorithms and implementation of 'Model Risk Checks for Algo Trading’

    • It suggested a two-tiered approach for investigation and enforcement, wherein sensitive cases and matters involving large-cap companies should be handled by designated SEBI officials in a fast-track manner, while regular cases shall be handled by other SEBI officials in the normal course.

    • It recommended for the inclusion of definitions for the terms 'Financial Literacy', an important eligibility condition for a compliance officer.

    • It recommended that trading done by an entity in excess of its financial sources should be deemed to be fraudulent, if such trading leads to any manipulation in the price or volume of the security.

    • It recommended mandatory whistle-blower policies at listed firms and the companies should maintain details of immediate relatives of designated persons who might deal with price-sensitive information.

    • It recommended the inclusion of a new sub-section within the SEBI Act, 1992, that prohibits devices, schemes or artifices employed for manipulating the books of accounts or financial statements of a listed company.

    Note

    The TK Viswanathan Committee recommended amendments to SEBI Act,1992; SEBI (Prohibition of Insider Trading) Regulations, 2015; and SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 2003.

    Much of the recommendations came in the wake of several high-profile cases being probed by SEBI and other agencies where relatives of senior executives at listed companies have come under scanner.

    These cases include those related to ICICI Bank, HDFC Bank, Axis Bank and Tata Motors where sensitive financial information got leaked over WhatsApp before their formal announcement.

    Committee on Fair Market Conduct

    • The SEBI constituted a Committee on Fair Market Conduct in August 2017 under the Chairmanship of TK Viswanathan, Ex-Secretary General of Lok Sabha and Ex- Law Secretary.

    • The Committee was mandated to review the existing legal framework to deal with market abuse to ensure fair market conduct in the securities market.

    • It was mandated to review the surveillance, investigation and enforcement mechanisms being undertaken by SEBI to make them more effective in protecting market integrity.

    • The Committee comprised of representatives of law firms, mutual funds, brokers, forensic auditing firms, stock exchanges, chambers of commerce, data analytics firms and SEBI.

     

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