TK Vswanathan Committee on Fair Market- Giving More Power to SEBI - Seeker's Thoughts

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Saturday, 27 October 2018

TK Vswanathan Committee on Fair Market- Giving More Power to SEBI

Securities Market- A glance

In simple words, one can understand that it is a market like we have special market for bamboo crafts, or cloths, likewise securities need a market to be purchased and sold. 

This type of market is known as Securities Market. Or Officially, Securities market is a component of wider financial market where securities can be bought and sold between subjects of the economy, based on demand and supply. 

It involves huge amount of money of investors or day to day traders, so the government has set up a regulator SEBI (Securities Exchange Board of India). 

  Securities markets trade in equities or shares, bonds, and derivatives instruments where process can be determined and participants both professional and non-professionals.
Types of Security Market- Securities markets can be divided into two levels: -
Primary markets - where new securities are issued. It is where first time the company launches its shares or securities.
Secondary markets – It is a place where securities which are already in market and they are not launched new, but still buyers and sellers again buy and sell these.  
What are the current issues on regulation of security market?
India’s stock markets are booming with the Bombay Stock exchange Sensex touching new highs. The regulation of securities markets has evolved over the last two and half decades since the setting up of the securities and exchange board of India (SEBI). SEBI tries to keep ethical practices into the market but certain people find loop holes and bring new problems like - front running, insider trading, and shady accounting practices. These practices are harmful as these effects and manipulate share prices. Let us understand how these factors can affect on share market in detail.
1.      Front running (Tailgating) – It is an act of placing one’s own order in front of the others. In simple terms, in securities market there are brokers, and there are buyers.  
Front Running - Illustrations 

Brokers help buyers/sellers to buy/sell securities and that is understood.
There are some big buyers who have huge amount of money for investment. They order         securities to be purchased in advance. Somehow these brokers get access to that          data that someone is going to get these many securities. These brokers, if they           come to know that big buyers are going to buy particular securities, so what brokers do?         They go first and get more securities and then sell those securities and earn more.

This form of front- running is not only unethical; it is illegal as, it given an unfair advantage to the broker.
2.      Insider trading – Insider trading is when someone has information available to them like company is making loss, and going to lose money. So, what would be the response in this case? That someone will sell securities before public comes to know about the loss. This is an example of insider trading.   
Insiders Misuse the Secret
Same thing can happen when a person (insider) who has information that company is going to gain money, what can be the predictable response? They will buy shares or securities of that company. It is illegal when the material information is still non-public.
Illegal insider trading includes tipping other when anyone has any sort of non-public information. Legal insider trading happens when directors of the company purchase or sell shares, but they disclose their transaction legally. The Securities and Exchange Commission has rules to protect investment from the effects of insider trading.
3.      Shady accounting practices - Shady accounting practice is an unethical and fraud accounting practices which effect whole market less trust worthy for the investors.
Issues and TK Vishwanathan: 
Like International market regulators, SEBI was also worried about these practices. SEBI appointed TK Viswanathan committee on Fair Market Conduct. The Report was submitted recently. It talked about granting more powers to Securities And Exchange Board Of India (SEBI) has given way too many concerns. There are certain highlights of recommendations are given below-
Recommendations – These are some of the recommendations given below-
On Insider’s Trading- The committee has said that there should be two separate code of conduct for insider’s trading. One code is to set minimum standard and deal with insider information of listed companies. Second is set of standard for market intermediaries or brokers and others who handle price sensitive information.
Information Maintenance- The Company should maintain details of
1.      Immediate relatives of designated persons who might deal with serious information
2.      People with whom designated person might share a material financial relationship.
Such information may be maintained by company in a searchable electronic format.
It may share details with SEBI on case to case bases.
Calls- SEBI has power to ask for call records including numbers and durations. The recommendation is that SEBI could tap telephone and other electronic conversation which raised controversy as it hampers with fundamental rights to privacy of an individual. However the intention was to check insider trading and other frauds.
Malpractices The committee also recommended that “Banami Trading” should be considered fraud. A person who trades in other’s name is called as Benami Trading.
If someone trades from the money which is not from her/his financial resources- It should also be considered as a fraud.
Scope of regulation of fraud should not only cover the intermediaries but also employees and agents of them who often escape after being involved into frauds.
It also suggested that SEBI should be given the power to grant immunity to whistle- blower to help uncover illegal activities.
Controversy and criticism –
The recommendations of report created some controversies like recording phone calls. It will be considered as tyrannically and against fundamental rights of citizens.
Second SEBI is set to granted power to act directly against perpetrators of financial statement fraud. Too much power possible may discourage and drive away genuine investors as well
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 offender. 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.