New Delhi: Markets regulator Sebi on Tuesday proposed an institutional mechanism that will require stock brokers to put in place systems for detection and prevention of market abuse.
Currently, there are no specific regulatory provisions that cast responsibility on brokers to have a system to prevent market abuse.
In a consultation paper, Sebi has proposed a regulatory framework which will require broking firms as well as their senior management to be accountable for detection and prevention of fraud or market abuse, by setting up robust surveillance and control systems.
In addition, the regulator has suggested that brokers should have appropriate escalation and reporting mechanisms.
Sebi has also listed out probable instances of fraud or market abuse which a broker's system should be equipped to monitor. The probable instances can include creation of misleading appearance of trading, price manipulation, front running, insider trading and mis-selling.
Unauthorised trading, including facilitation of 'mule' accounts that act as a front for unauthorised trading, pump and dump, spoofing, disproportionate trading activity vis- -vis reported income and frequent changes in KYC submitted by clients can also probable instances.
"Instances of fraud or market abuse distort transparency, imperil market integrity and undermine the confidence of investors in the capital market. Hence, there is a need for an institutional mechanism for brokers to ensure that systems are in place for detection and prevention of fraud or market abuse," Sebi said.
The Securities and Exchange Board of India (Sebi) has sought comments on the proposals till February 23.
The watchdog has suggested that CEO, MD, compliance officer, Key management personnel and directors of the brokerage house should be responsible to ensure surveillance systems to detect, prevent fraud or market abuse by its clients, promoters, employees and authorised persons.
"They shall be held accountable for non-compliance and negligence in implementing appropriate surveillance and internal control systems," Sebi noted.
Also, the brokerage houses should put in place robust trade surveillance systems and internal control procedures that are compatible with the nature of business and the size of its operations, to detect potential fraud.