We had earlier discussed two decisions of the Securities Appellate Tribunal (SAT) (here and here) and also an order of SEBI (here) on whether the front-running activities of persons other than “intermediaries” can be brought within the purview of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 2003 (the PFUTP Regulations). While the SAT held that the PFUTP Regulations do not apply to front running by persons who are not intermediaries, SEBI held otherwise in its order. In those posts, we had pointed to certain ambiguities that arose in the PFUTP Regulations that led to a somewhat incongruous situation and suggested that it must be remedied by an amendment to the PFUTP Regulations or through a pronouncement of the Supreme Court.
In a press release issued yesterday, SEBI seems to have exercised the amendment option. It has decided to clarify that the list under regulation 4(2) (which deals, among various other matters, with front running activities by intermediaries) is not exhaustive and that the general provisions of regulation 3 will override. Hence, the intention seems to be that even where the specific provisions of regulation 4 are not attracted (e.g. when the person involved is not an intermediary), such a front-running case could be brought within the general purview of regulation 3 thereby inviting consequences on the person violating. This “clarificatory” amendment seeks to put to rest the difficulties that arose in the above orders of SAT and SEBI.
In addition, the PFUTP Regulations have been expanded to include another type of activity within its purview. That is the illegal mobilization of funds without obtaining a certificate under the SEBI (Collective Investment Schemes) Regulations, 1999, which will be considered as a fraudulent and unfair trade practice. This is consistent with the regulatory approach (including in the recently promulgated Ordinance) to rein in large mobilization of funds. By including this as a fraudulent and unfair trade practice, the idea seems to be to make the penal consequences more onerous so as to operate as deterrence.