SEBI seeks mechanism in place to prevent fraud

SEBI seeks mechanism in place to prevent fraud

The code of conduct and the institutional mechanism would apply to all market infrastructure institutions like the exchanges, clearing corporations and depositories, in lines with insider trading norms

The Securities and Exchange Board of India (SEBI) wants a code of conduct to minimise chances of fraud and market abuse thorough inside trading.

The market regulator last week asked stock exchanges, clearing corporations and depositories to devise an institutional mechanism and put in place a code of conduct to prevent fraud by the concerned companies and their designated persons. The code of conduct is to be framed by the MD and the CEO of a company would have to frame a code of conduct while the onus of its implementation and compliance would be on the board of directors.

In a circular, SEBI said that the code of conduct and the institutional mechanism would apply to all market infrastructure institutions like the exchanges, clearing corporations and depositories, in lines with insider trading norms.

The MIIs will have to formulate a code of conduct to regulate, monitor and report trading by their designated persons and their immediate relative to ensure compliance with the Prohibition of Insider Trading (PIT) Regulations. Furthermore, MIIs would be required to identify and designate a compliance officer to administer the code of conduct.

The boards of directors of MIIs, in consultation with the compliance officer, will have to specify the designated persons to be covered under the proposed code of conduct based on their role and function in the organisation.

SEBI further said that under the institutional mechanism, MDs or CEOs of MIIs would need to come out with an adequate and effective system of internal controls to ensure compliance with the regulations issued by the regulator.

The regulatory oversight committee of the MIIs would a minimum of once in a financial year review compliance with the provisions of this circular and verify that the systems for internal control are adequate and effective, SEBI said.

The board of directors would be required to approve the written policies and procedures for inquiry in case of suspected fraud or market abuse by the designated persons and their immediate relatives, which have to be formulated by the MIIs.

Any enquiry or investigation against the designated persons and their immediate relatives must be undertaken under the supervision of a regulatory oversight committee which would comprise of public interest directors and independent external expert with consideration to avoid conflict of interest to ensure maximum fairness and transparency, the SEBI circular said.

It would be incumbent upon the MIIs to initiate proper inquiry once they become aware of any unethical or illegal practices or transactions of suspected fraud or market abuse by the designated persons and their immediate relatives and promptly inform their board of directors about it along with the outcome of the inquiry.

Also, MIIs need to have an effective whistleblower policy to enable stakeholders, including employees to freely communicate their concerns about illegal or unethical practices and report instances of fraud or market abuse or any suspicion of fraud or market abuse.

Moreover, there must be provisions under the policy to be formulated to ensure suitable protection of a whistleblower against any discharge, termination, demotion, suspension, threats, harassment, directly or indirectly, or any form of discrimination against them, the SEBI circular said. The code of conduct and the institutional mechanism would come into force with immediate effect.