SEBI reforms for stronger markets

India’s capital markets regulator, the Securities and Exchange Board of India (SEBI), has made a number of changes in its regulatory norms which should reduce many malpractices and make the markets stronger. The package of new rules was announced last week. They include important changes in insider trading regulations and listing and delisting norms.

Some regulations have existed for decades but they have been found to be ineffective in curbing malpractices. Stock markets have expanded tremendously in the last two decades but violations of rules and regulations have also increased correspondingly. SEBI’s regulations banning insider trading have been in force since 1992 but it has been rampant in the market. The malpractice is not uncommon even in developed and better regulated markets. So the stringent norms announced by the SEBI are welcome. Most of them are based on the recommendations made by the Sodhi committee which studied the existing regulations.

The new rules have broadened the definition of an insider and made it mandatory for officials of a company to make full and transparent disclosure of their trading activity. The new definition would make any “connected’’ person with access to unpublished price sensitive information an insider. The term will cover relatives of directors, employees and others who are connected on the basis of contractual or similar relations with the company which make them privy to such information. But the expanded definition does not cover public officials, ministers and judges who have access to sensitive information on account of their positions or decision-making powers. The Sodhi committee had recommended their inclusion also and there is no reason to leave them out. The new rules have also laid down the procedure to be followed by connected persons and insiders when they want to trade a stock. They will have to make disclosure of their trading plans well in advance to the stock exchanges.  

The regulator has also tightened the rules for disclosure of information by companies after their listing on the stock exchanges. There are mandatory requirements for disclosure of the financial position, prospects and business risks of companies before they go in for an Initial Public Offer. Though companies do it, they do not follow strictly the rules for disclosure of the financial status and other relevant information later. Such information is necessary for investors in taking decisions to invest in the company or to sell its shares. The new delisting regulations are clear. The SEBI and stock exchanges should ensure that the rules are strictly followed by companies.

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