SEBI working on 'acceptable' form of much-feared and tough PUSTA regulations

The capital markets regulator is working towards creating a more acceptable form of the regulations that could be pass the muster with the board of the regulatory body.

The board of the Securities and Exchange Board of India (SEBI) may well have refused to clear the SEBI (Prohibition of Unexplained Suspicious Trading Activities in the Securities Market) Regulations at its meeting earlier this week, but that is not the end of the story for the much-feared and tough set of rules to act against wrongdoers and offenders.

According to sources familiar with the development, the capital markets regulator is working towards creating a more acceptable form of the regulations that could be pass muster with the board of the regulatory body.

More importantly, the regulator is mulling certain checks and balances to address some of the concerns raised by both, the board and market participants.

Incidentally, the biggest concern is that the SEBI (Prohibition of Unexplained Suspicious Trading Activities in the Securities Market) Regulations – PUSTA, in regulatory parlance – will give the regulator wide powers to initiate investigations and pass orders and hence there have to be "guardrails" built-in to minimise instances of misuse of the powers.

"It is true that PUSTA will give SEBI wide ranging powers and hence the obvious concern of its misuse. So internally at SEBI there are deliberations happening on ensuring that there are enough checks and balances to make it a fair law," said a source aware of the development.

The source further added that there is a consensus within SEBI that ex-parte interim orders should not be allowed under PUSTA as it will be unfair to the alleged wrongdoers.

"The rules allow the probe to be initiated on the basis of a suspicion. Plus the onus to prove his innocence would rest on the individual or the institution. Hence, allowing ex-parte interim orders would go against the principles of natural justice," he added.

Also Read: SEBI Board refuses to clear the much-feared PUSTA Regulations, say sources

Sources further add that all the deliberations on PUSTA are now internal in nature as the consultation and feedback stage is completed. The regulator has also received feedback from the government, both finance and law ministries.

Simply put, PUSTA will allow SEBI to initiate a formal investigation based on suspicious trading activities or presumption that a fraudulent action has taken place. This assumes significance as current regulations allow a formal investigation to be initiated only when there is enough evidence or proof that an entity has engaged in unfair or fraudulent activities.

Vasudha Goenka, Partner, Cyril Amarchand Mangaldas says that use of advanced technology like encrypted messaging services for market manipulation meant that SEBI's investigation was hitting a wall in many cases.

"SEBI had issued a consultation paper regarding the proposed PUSTA Regulations back in 2023… SEBI proposed that in situations where repeated suspicious trading activity was observed around the existence of any material non-public information, there would be a rebuttable presumption that the trading activity was related to such information. However, it would be onerous to rebut such a presumption and shifting of the onus of proof in this way may be contrary to the principles of natural justice," said Goenka.

Indeed, as the idea of PUSTA was introduced last year by way of a consultation paper, which stated that quite often wrongdoers are able to conceal the trail of their alleged malpractices using advanced tools and technology and hence such a regulation is needed.

The SEBI paper further stated that the proposed regulation can be triggered in instances of unusual trading pattern around the presence of material non-public information (MNPI) and suspicious trading activity among other things.

"One particular recommendation in the consultation paper says that if a person, found to be a part of the unusual trading activity, will have to explain the rational behind his trades as well as explain the rational behind the trades of other group of people whose trades might appear to be unusual trading activity," said KC Jacob, Counsel at Economic Laws Practice. He added that the person might not be able to explain the rationale behind the trading of others involved in unusual trading patterns.

He added that the person might not be able to explain the rationale behind the trading of others involved in unusual trading patterns.

"Typically, it is the regulator who has to establish the guilt. Here they are shifting the whole onus on the suspected persons," said another lawyer specialising in matters related to securities markets.

"This goes against the standards of evidentiary proof and the whole regulations seem like you will be proceeded against on suspicion. So it will likely see challenge if it comes in the way it has been proposed," he added wishing not to be named.