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Sebi not to penalize self trades, sets legal policy for such orders

LiveMint logoLiveMint 11-06-2017 Jayshree P. Upadhyay

Mumbai: The Securities and Exchange Board of India (Sebi) has decided not to penalize self trades, reversing its earlier stand. The markets watchdog has also formulated a legal policy to dispose of the adjudication proceedings related to 100 showcause notices issued to market entities on self trades, two people aware of the issue said. 

Orders that match each other but do not result in any change in ownership are called self trades. As many as 270,000 of an average of 12.2 million orders executed every day in the derivatives market are self trades, stock exchange data shows. Such trades typically take place when dealers from the same brokerage trade using the same client code.

“As part of the legal policy, such orders and proceedings would be allowed to be settled through the so-called ‘consent’ mechanism against a nominal fee of Rs2-5 lakh,” said the first person, requesting anonymity. “Allowing consent to these entities would help resolve these cases as there were diverse positions taken by adjudicating officers,” he added.

An email sent to a Sebi spokesperson was not answered at press time.

Sebi’s decision comes in the backdrop of its reply to a finance ministry query last September, wherein it said stock exchanges had already taken measures to prevent self trades and that no further action was envisaged in the matter. 

NSE and BSE had laid down the mechanism for preventing self trades in 2015. 

Starting 2014, Sebi considered all self trades manipulative and initiated proceedings under the Prohibition of Fraud and Unfair Trade Practices (PFUTP) regulations. Cases involving fraud or insider trading cannot be settled as per Sebi’s consent mechanism, under which a fine is paid without any admission of wrongdoing. 

“As per the policy drafted on 16 May, Sebi will proceed with orders only in cases where there is an intention to manipulate. An assessment would be done by analysing the number of self trades and instances of manipulation,” said the second person, also declining to be named. 

“Mere occurrence of self trades would not be considered illegal per se in the absence of additional evidence to prove intent to manipulate or commit fraud,” he added. 

“It is important to look at intention in self trades. There are thousands of instances of self trades which are completely legitimate and we have had case law which recognizes legal self-trade. These range from family settlement to broker shifting positions to free up capital,” said Sandeep Parekh, founder, Finsec Law Advisors. “There should be a proper assessment of self trades before a person is found to have violated securities laws. Whether doing self trades for tax reasons is avoidance or planning too would depend on the facts of each case,” he added. 

As many as 100 proceedings are pending before the regulator. About 10 of these cases were referred by the Securities Appellate Tribunal (SAT) to Sebi for re-examination. In some orders, the tribunal had also assessed the matter in terms of intent to manipulate and the number of self trades.

The decision would help the regulator ease its work load and focus on enforcement proceedings in important cases. Sebi is currently struggling under a load of 7,000 cases, as per its annual report.

Self-trades generally happen inadvertently as dealers doing algorithmic trading place buy and sell orders for the same stock to gain advantage of intra-day price movement. Similarly, domestic and foreign institutional investors use the secondary market to transfer their holdings from one scheme to another, which can lead to self trades.

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