Burden of proof – on Proposed regulation for unlawful trades

Source: This article is based on the article “Burden of proof”, published in Business Standard on 23rd May 2023.

Syllabus Topic: GS Paper 3, Industries and Industrial policy

News: Securities and Exchange Board of India (Sebi) has released a consultation paper “Prohibition of unexplained suspicious trading activities”.

This paper outlines the proposed regulations to tackle issues like insider trading, front-running, and pump and dump scams.

What are the challenges faced by regulators in the financial market associated with trading?

Some of the offences like the following are difficult to prove, like:

  • Front-running trades based on “material non-public information” (MNPI). For example, an employee of mutual fund company can know about a deal in advance and place trade in their personal account.
  • Insider trading on the basis of unpublished price-sensitive information (UPSI). Like company results, change of management.
  • Pump and dump schemes involve buying a stock and spreading rumours about good news in that company to “pump up the price”, and then “dump” shares by selling them at a profit.

Regulators face difficulty in proving guilt of the perpetrators, due to evasive tactics used by such as mule accounts, layering funds, and sharing transfers through a complex web of entities.

Mule accounts are used to earn profits. There is no apparent connection between the owner of the account and the perpetrators. Coordination is carried out through encrypted services such as WhatsApp.

In 2022, around 5,000 suspicious trading alerts were generated, involving 3,588 unique entities, but SEBI could not find conclusive proof of communication of UPSI or MNPI in most instances.

How the proposal tackles this issue?

If SEBI highlights a suspicious trading activity and believes MNPI or UPSI was involved, it can start a presumptive proceeding against the parties concerned. The burden of proving the allegations wrong will on the parties.

However, the challenge is that the burden of proof cannot be placed upon the accused. It can lead to many problems. Instead of such regulations, the regulator should strengthen its surveillance and evidence-collection methods.

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