Navigating FPI Outflows: India’s Challenge

I have a piece in today's Financial Express with Manas Dhagat and Pranjal Kinjawadekar of Finsec Law Advisors on the FPI outflows. While we cannot control most of the outflows because of global events, there are some changes that we can implement to delay the new norms which are causing some outflow of clean FPI money. The full piece is as below:

The RBI Bulletin for March 2025 noted a sustained foreign portfolio investment outflows exerting considerable pressure on India’s equity markets and contributing to a weakening of the rupee. Data from the NSDL suggests that FPIs sold equities worth ₹1,12,601 crore in February 2025, and outflows continued at ₹30,015 crore in March, with the trend persisting since last year. With the tarrif wars, this situation has further aggravated. Additionally, the number of registered FPIs declined for the first time in a year, dropping from 11,761 in December 2024 to 11,729 in January 2025, indicating growing concerns among foreign investors. As a consequence, the Indian rupee depreciated by 0.9 per cent month-on-month in February, highlighting the broader macro-financial implications of sustained capital outflows.

 

Foreign Portfolio Investors’ reduced exposure to Indian markets has been influenced by a mix of domestic and global developments. India’s economic growth has moderated, and corporate earnings—particularly among Nifty 50 companies— though quite robust, have remained relatively subdued over the past few quarters. Against the backdrop of relatively high market valuations, this has somewhat tempered investor appetite. The depreciation of the Indian rupee has also affected return expectations for foreign investors, as currency conversion becomes less favourable. Broader global concerns, including uncertainty around the U.S. economic outlook and ongoing trade tensions, have prompted a more cautious approach toward emerging markets like India. This shift in sentiment has contributed to notable FPI outflows, particularly from sectors such as IT, financial services, and consumer goods. FPI investments are critical to the health of financial markets, as they enhance liquidity, support asset prices, and contribute to currency stability by increasing the supply of foreign exchange. However, when FPIs withdraw, the demand for foreign currency rises, leading to depreciation of the local currency. These outflows can trigger market volatility, depress asset prices, and tighten liquidity, thereby posing broader challenges for macroeconomic management and policy response.

 

While the exit of FPIs from India may be attributed to geopolitical developments, broader macroeconomic trends, or a strategic rebalancing of global investment portfolios, the absence of  ease in investment norms also appears to have been a contributing factor.

 

In August 2023, SEBI came out with key regulatory interventions introducing additional disclosure requirements for FPIs. FPIs meeting the specified threshold were required to provide granular ownership details, including a full look-through disclosure up to the level of all natural persons holding any ownership, economic interest, or control. The circular did not impose any restrictions on investments but sought greater transparency from FPIs making large investments in a single group of companies. It required disclosure of the ultimate beneficial owner—the individual behind the investment. The requirements did not appear overly burdensome at first, with sufficient flexibility built into the framework, and initially impacted only a small number of FPIs. However, SEBI has additionally adopted the proposal to extend disclosure requirements to ODI subscribers and ODI issuing FPIs, through its Circular dated December 17, 2024. As a result, greater compliance and monitoring obligations have been placed on ODI issuing FPIs and their designated depository participants. These entities must now track investor thresholds, submit daily position reports, and monitor group entities that exercise significant control over ODIs, thereby strengthening oversight and transparency in the offshore derivative instruments space. Unlike direct FPIs, ODI subscribers were not previously required to disclose their ultimate beneficial ownership. In response, the market regulator has adopted a proactive stance, issuing a series of circulars aimed at addressing emerging risks, enhancing transparency, and strengthening compliance within the Indian securities market. These regulatory tightening coincides with a period of shifting FPI sentiment, as evidenced by recent capital outflows. In certain cases, the inability to furnish the requisite data—often due to its unavailability—has resulted in the forced exit of certain FPIs from the Indian market. This needs to be addressed immediately. In fact, the first set of deadlines for some of them is as early as May 2025, and the forced exit of clean FPIs from India can’t adequately be highlighted. Specifically, SEBI should do two things. One, delay the timelines for implemented the new norms to beyond 2026 (assuming the volatility of trade wars will subside by then). Two, use its exemptive authority to those FPIs who cannot find out the last human being in an FPI, which can be a real challenge if the investors number hundreds and many of them are listed companies or the like whose ultimate beneficial owner cannot be fairly obtained. This clearly is the worst time ever to get rid of clean money and make FPIs to divest.

 

SEBI and RBI play key roles in maintaining financial stability and investor confidence, to counteract FPI outflows. SEBI can review and ease investment norms where appropriate, while maintaining transparency. It can also engage with global investors to address concerns and clarify regulatory expectations. Investors seeking less restrictive regulatory environments may redirect their funds to other markets, affecting capital inflows into India. While SEBI’s broader objective of enhancing oversight and addressing regulatory arbitrage is well-intentioned, the practical implications of these measures warrant more thorough deliberation. Striking the right balance between regulatory rigour and market competitiveness will be crucial to sustaining India’s appeal as an investment destination in the global financial landscape. Similarly, RBI can intervene in the foreign exchange market to manage excessive currency volatility, ensure adequate liquidity in the banking system, and maintain orderly market conditions through monetary policy tools. On the other hand, the broader responsibility for sustaining foreign investor interest lies with the government, which must maintain macroeconomic stability, ensure policy predictability, and foster a favourable investment climate through structural reforms and sound fiscal management. A coordinated approach between regulators and the government is essential to effectively manage capital outflows and strengthen investor confidence. Key drivers of FPI inflows include strong economic fundamentals—such as robust GDP growth and low inflation—which signal long-term stability. Policy consistency, regulatory clarity, and simplified investment norms further support a positive investment environment, while attractive market valuations offer potential for higher returns. Together, these elements shall make India a compelling destination for foreign investors seeking both growth and security.

 

Disclosure: the firm has adviced FPIs with respect to the disclosures discussed.

 

Winds of change at SEBI: Tuhin Kanta Pandey charts a smarter, softer regulatory path

I have a piece in today’s Economic Times trying to read the tea leaves on the regulatory path ahead for SEBI with the new Chairman taking charge. The full piece is as follows: 

Winds of change at SEBI: Tuhin Kanta Pandey charts a smarter, softer regulatory path

Synopsis

Sebi, under Tuhin Kanta Pandey, is initiating a regulatory overhaul to ease compliance burdens and enhance market relevance. Key changes include raising the disclosure threshold for FPIs and adjusting AIF investment rules to boost flexibility.

At its first board meeting under the stewardship of newly appointed Chairperson Mr. Tuhin Kanta Pandey, the Securities and Exchange Board of India (SEBI) signaled that it isn’t just dusting off the rulebook — it’s rewriting key chapters with a reformist hand. Held on March 24, 2025, the meeting delivered a flurry of regulatory refinements aimed at boosting market transparency, governance, and investor participation — all while testing the waters with that ever-elusive goal: less red tape, more green signals.

 

Transparency Begins at Home: SEBI’s Own Code of Conduct in the Works

In perhaps the most symbolic decision of the day, SEBI announced the constitution of a High-Level Committee to review conflict-of-interest provisions, disclosure norms, and ethical guidelines for its own board members. Previously, senior officials like Whole Time Members and the Chairperson were exempt from the very code of conduct that SEBI imposes on every other employee. With this decision, SEBI is finally declaring that it too must “eat its own cooking.” Specially, given the past year’s history, this was an important step to bolster confidence in the integrity of the regulator.

 

FPIs Get Breathing Room (But Not a Free Pass)

SEBI’s first act is raising the disclosure threshold of ultimate beneficial owner for Foreign Portfolio Investors (FPIs) from ₹25,000 crore to ₹50,000 crore in equity assets under management. This change acknowledges the near-doubling of cash market trading volumes since 2023 — a nod to India's increasingly vibrant equity landscape.

 

In practical terms, fewer FPIs will now have to peel back the layers of their ownership structures to reveal the ultimate natural persons behind the money. SEBI’s message is clear: “We’ll trust you a little more — but don’t push it.” Still, the rule continues to cast a long shadow over some funds, several of which have been compelled to shut shop in the name of transparency. The solution? Keep the rule, but exercise exemptive powers based on demonstrable facts and a reasoned order. There should also be a de minimis rule – or removal of last human being disclosure for smaller investors. In these markets it would be a tragedy to allow clean FPIs to leave India because of rules they are not able to comply with. 

 

AIF: Regulatory Reality Meets Market Mechanics

When SEBI mandated that Category II Alternative Investment Funds (AIFs) invest at least 50% of their corpus in unlisted securities, nobody predicted a paradox: a shrinking supply of unlisted debt due to new listing requirements and less debt securities for AIFs to invest in.

 

To restore balance, SEBI has declared that listed debt securities rated ‘A’ or below will be treated as de facto unlisted for compliance purposes. A regulatory Rubik’s Cube solved with a twist — pragmatic, if a bit quirky. This move injects flexibility into AIF portfolios and at the same time deepens the bond market which is very thin below the investment grade. But broader deregulation of the AIF space may still be overdue — regulation fatigue is real, and many fund managers are feeling it.

 

Investment Advisors: Relief, But Not a Renaissance

Investment Advisors (IAs) and Research Analysts (RAs) can now breathe a little easier — SEBI has extended the advance fee collection period from two quarters to one full year (subject to client consent). For RAs, this is a change from the earlier one-quarter cap.

 

However, the broader reality remains grim. With compliance costs sky-high and regulations tighter than a bull market squeeze, the number of registered IAs has dropped from over a thousand to just 932 — in a country of 1.4 billion. While the fee reform is welcome, what India’s advisory industry really needs is regulatory decluttering. If SEBI wants to tame finfluencers and tipsters peddling wild promises on YouTube, it should empower the pros rather than bury them in costly paperwork.

 

Merchant Bankers: A Timely Reprieve from Regulatory Overreach

In a rare regulatory rollback, SEBI deferred its earlier decision requiring Merchant Bankers, Debenture Trustees, and Custodians to segregate activities across separate legal entities. The aim — to reduce conflicts of interest — was noble, but the execution would’ve been a logistical nightmare. The pause is wise. India’s merchant banking framework has operated effectively since 1992 without such compartmentalization. Regulatory changes must be rooted in evidence, not theoretical fears of “shadow banking” ghosts.

 

Final Word: Deregulation with Direction

Taken together, these decisions mark a shift in tone and tempo for SEBI under Mr. Pandey. The focus appears to be moving from hyper-regulation to smart regulation — from being a strict school principal to a mentor who trusts, but verifies. If SEBI can balance investor protection with market-friendly reforms — and curb the regulatory overreach that sometimes stifles innovation — it may finally achieve what every regulator dreams of: being respected, feared, and occasionally applauded.

The New Kid on the Block - Industry Standards Forum

Aniket Singh Charan and I have a piece in today’s Financial Express on the newly introduced ‘Industry Standards Forum’. Below is the full pieces:

SEBI recently introduced the Industry Standards Recognition Manual (“ISF Manual”), which is a set of guidelines that governs the formation and functioning of forums known as Industry Standards Forums (“ISFs”). While the ISF Manual came out only recently, the journey of ISFs began in 2023 with a pilot project, that sought to involve listed companies and stock-brokers for formulating standards based on regulatory instructions issued by SEBI.

In furtherance of representations from different market participants, similar forums were set up on a pilot basis for other stakeholders/participants of the securities markets. The concept of ISFs, however, is not new; the UK has similar provisions allowing industry groups to create codes that help their members implement existing financial laws. The securities market regulator of the UK, the Financial Conduct Authority (“FCA”) recognizes these codes to ensure compliance. Thus, trade associations or industry bodies develop standards, and the FCA reviews and endorses them if they meet certain criteria.

In the Indian context, the ISF Manual has clarified that the role of ISFs is to identify regulatory directives that require implementation standards. Once such directives are identified, ISFs will, through a consultative process, draft appropriate standards. These standards would primarily be in the form of specifics, checklists, or Standard Operating Procedures (SOPs) that would assist industry participants in compliance. ISFs will not be considered self-regulatory organizations and will not have any powers to undertake regulatory actions against any industry participant for failure to comply with the formulated standards.

ISF’s are expected to develop standards by seeking inputs from members and/or by setting up working groups chaired by members to provide comments. SEBI has further clarified that, throughout the process of formulating standards, consultation with SEBI is a sine qua non. It is only with the ultimate consent of SEBI that a standard is taken up for formulation and ultimately, implementation. While standards are expected to be formulated by consensus, in some matters where no consensus can be arrived at, ISFs are expected to submit all proposals received on the matter to SEBI, along with the respective pros and cons. In these matters, SEBI at its option, may choose to independently issue or not to issue relevant circulars, in part or in whole.

SEBI has also provided details of the structure/composition of ISFs. Essentially, ISFs will consist of a committee comprising of members of the concerned industry or regulated entities, with adequate representation from all segments of the entities required to comply with the regulatory directions. This will include a mix of large stakeholders, small and medium sized participants. Interestingly, SEBI has directed that 75% of the membership of the ISF will comprise of current practitioners i.e. persons who have to implement regulatory directions in their respective organizations. The remaining members can comprise of lawyers, consultants and regulatory advisors. Each member generally has a term of 2-3 years but in order to avoid all member posts vacating at the same time, SEBI has proposed to reconstitute at least one-third of the composition of the ISF every year, starting from the third year of its functioning.

SEBI’s approach to ISFs is commendable. It shows regulatory maturity and a willingness to create a structured regulatory environment that benefits all market participants. However, one of the biggest challenges these forums will face is in ensuring that they do not become an exclusive “big boys club”, where only large financial institutions, major market players end up dictating the agenda, leaving smaller participants unheard. For ISFs to be truly representative, small and mid-sized players must have an equal voice. Notably, SEBI has made efforts to address this issue by mandating representation from small and mid-size participants. However, ISFs must endeavour to select issues that affect all participants in the industry and not just the bigger players. If ISFs focus solely on the perspectives of dominant firms, the very purpose of fostering fair, competitive, and inclusive markets could be undermined. For ISFs to be a success diverse stakeholders—big and small—must contribute meaningfully. Structured consultations, representation quotas for smaller firms, and open feedback mechanisms are useful methods for achieving this. The importance of the above cannot be stressed enough, as the very effectiveness of ISFs will ultimately depend on their ability to balance the interests of all market participants, creating a regulatory ecosystem that promotes both innovation and investor protection. This should also include efforts to rationalise the current over-prescriptive laws. To give one example the mutual fund regulations and master circular run into over a thousand pages.

Another key priority for ISFs is incorporating industry feedback and conducting periodic reviews to keep standards relevant and manageable. Engaging with a diverse set of stakeholders will help in identifying unnecessary complexities and ensuring that compliance remains feasible for all participants.

Another major challenge ISFs will face is ensuring that the standards they formulate are effective. ISFs should focus on crafting crisp, concise, and practical standards that address key industry challenges without becoming onerous. Lengthy, vague, or overly prescriptive guidelines can lead to unnecessary bureaucracy, making compliance more about paperwork rather than real impact. Standards formulated by ISFs should be principles-based, allowing for flexibility in implementation while ensuring the regulatory intent is met. ISFs must avoid the pitfall of creating standards merely for the sake of it and should always remember that the primary goal of formulating standards is to reduce regulatory confusion, not to add to it.

Another aspect of the recent ISF Manual that merits further discussion is the manner in which the standards formulated by various ISFs will be published. Present practice suggests that SEBI merely notifies the recognition of standards, and the actual standards themselves are available on the website of the concerned ISF or participating entities of the ISF. It is advisable that such standards, in addition to being displayed on the concerned ISF’s website, must also be available on SEBI’s website. This will make these standards, that have the factual, if not legal, force of law, more accessible to practitioners and regulated entities.

While ISFs are still in their nascent stages, their introduction helps us in understanding what the future of securities market regulation would look like. It is too early to comment on whether ISFs will be a resounding success or a compliance burden, however, the underlying motive for their introduction is a noble one. For ISFs to truly emerge as valuable tools to ensure sustainable growth it is important that they maintain a balanced approach that fosters ease of doing business while upholding market integrity.

Fraud, Manipulation and Insider Trading in the Indian Securities Markets, 5th Edition

Delighted to bring the 5th edition of my book to you, published by LexisNexis. All books are labours of love, so do buy and leave a rating (please leave it on the official page of Amazon as there are multiple sellers). Link to Amazon.in micro-page.

Running Ahead and Running Amok

I have a piece in yesterday's Financial Express on front running with Rashmi Birmole and Manas Dhagat.

Many will recall the morning of 1^st March 2001 when the proverbial penny, long waiting in the shadows of the tech boom, finally dropped, triggering one of the most significant crashes in Indian stock market history. This canonical event, that went on to inform sweeping structural reforms in the years to come, also exposed an insidious and extensive pump and dump scheme orchestrated by one Ketan Parekh, no relative of the first author, a former broker, and several major players in India’s financial ecosystem. Nearly 23 years later, history seems to be repeating itself with another fraud masterminded by Ketan Parekh, uncovered by SEBI after a months-long investigation into trading records, mobile communications, IP address mappings and statements from key individuals.

The findings, released by SEBI in an interim order on January 2, 2025, expose a fraudulent scheme orchestrated to exploit sensitive, non-public information for illicit gains. This time around, though equally fraudulent, the modus operandi is fundamentally different from the last. SEBI’s investigation has identified several individuals, including Rohit Salgaocar, Ketan Parekh and others, who are found to have colluded to front-run the trades of an overseas institutional client, or ‘Big Client’, of two Indian stock brokers. For the uninitiated, front-running, is a form of market abuse where individuals trade securities based on advance knowledge of large, market-moving transactions by other investors. It allows the perpetrators to profit from predictable price movements, often at the expense of the original investor’s interests and to the prejudice of the public. The investigation also revealed the involvement of individuals who can be categorized into information carriers, front runners, facilitators, who played pivotal roles in enabling this malpractice.

The information about impending trades flowed from Rohit Salgaocar, a Singapore resident, whom the Big Client often consulted on trading decisions in the Indian markets. Salgaocar leveraged this role to access non-public trade information (as contrasted with non-public inside information), which was relayed to the front-runners. To add to this, traders of the Big Client, familiar with Salgaocar, interacted with him while executing trades in Indian securities. These communications typically took place over Bloomberg chats and calls. SEBI’s investigation revealed that Ketan Parekh played a central role in orchestrating the operation and coordinating between the individuals involved. Ketan Parekh and connected entities exploited sensitive trade information from the Big Client’s impending transactions in various securities to generate profits to the tune of roughly 65 crore rupees.

The operation involved three distinct groups. Rohit Salgaocar, based in Singapore, acted as a conduit for non-public information (NPI). By leveraging his role as a director of Strait Crossing Pte. Ltd. and MoUs with brokers, Salgaocar obtained detailed information about the Big Client’s substantial market transactions. Using this information, Ketan Parekh directed employees of stockbrokers, as well as certain individuals who executed trades through private companies. These entities positioned themselves to benefit from price movements triggered by the Big Client’s large orders. The frontrunners used their access to trading accounts and networks to ensure seamless operations, directly communicating with Ketan Parekh. A notable aspect of the operation was the use of novel trading strategies termed as BBSB (Buy-Buy-Sell-Buy) and SSBS (Sell-Sell-Buy-Sell). To illustrate, in the BBSB approach, the perpetrators would purchase shares before the Big Client’s buy order was placed in the market, which they would consistently match in terms of timing, pricing, and quantity, providing strong evidence of prior knowledge and coordinated execution, and then also go on to sell the remaining shares in the open market.

Privileged access to non-public information (NPI) distorts market fairness, which lays the foundation for investor trust. When trust diminishes, individuals and institutions become wary of investing, perceiving the market as inherently unsafe. In this case, the Big Client’s transactions, aimed at executing legitimate investment strategies, were compromised. The illicit profits were found to have been shared among the perpetrators, with Ketan Parekh orchestrating the scheme and distributing trade-related instructions. These coordinated trading patterns were critical to masking the front-running activities and misleading market observers.

The data released by SEBI for 2022-24 reveals a concerning rise in front running cases, with numbers tripling every consecutive year. Between 2020 and 2024, nearly 116 front-running cases have been taken up by the regulator. This highlights a troubling trend of escalating violations emphasizing the need for more vigil. At the centre of these cases lies the information leaker, who, based on past data, has predominantly been a dealer servicing the broker’s institutional clients. While the exponential rise in front-running cases may reflect more pro-active surveillance and enforcement, it is equally important to consider scenarios and systemic issues that make front-running possible and erode trust in the market. The broader policy implications are also significant and any questions around market integrity impacts private investment and capital formation, ultimately weaking economic growth. The lack of adequate oversight has made it easier for front-runners to leak sensitive information, allowing those with access to exploit it for personal gain.

It is time to adopt a more targeted approach to front-running that addresses its root causes. Brokers and other fiduciaries must re-imagine its compliance strategy and contemplate measures that minimize the possibility of front-running in the trading process by design. At the client end such measures, could include rotation of specific brokers by institutional clients, splitting up of large institutional orders between multiple dealers and systematic checks to closely monitor broker activities. Furthermore, introducing stringent accountability frameworks for brokers, accompanied by enhanced oversight of employees engaged in large-volume trading, can also strengthen preventive measures. The broking community, needs to collectively adopt a higher standard of monitoring and surveillance over dealer activities. Additionally, brokers, whose dealers are often the primary source of such leaks, should face stricter liabilities. Restrictions on access to communication channels during critical trading activities, such as proper implementation of dealing room restrictions, should be reviewed periodically to ensure that such restrictions don’t merely exist on paper. Separate dealers can be assigned for institutional trades, subject to a higher level of monitoring. These measures would help reduce the risk of sensitive information leaking and ensure greater integrity in trading operations.

The growing prevalence of front-running cases highlights the urgent need for an innovative strategy that addresses systemic flaws, enforces accountability and fosters a fair trading environment and SEBI’s improved surveillance and heightened enforcement action bode well. But mere enforcement action by the regulator will not suffice and the industry must come up with stringent best practices in internal surveillance and supervision which are adopted industry-wide and become a benchmark before any institutional clients approaches them.

Legal500 ranking of Finsec Law Advisors

Delighted and honoured that Finsec Law Advisors is recognised as a distinguished law firm in the space of financial services regulatory for 2025 by Legal500, London an international agency which ranks law firms globally based on client feedback. Grateful for the kind words by clients.

Cut all that flab from reg laws: Why SEBI's securities laws need a revamp

I have a piece in today's Economic Times on the need to eliminate 80% of all regulatory laws and how precision and brevity are important in designing law, specially law which is easy to pass without parliamentary approval. Below is the full piece:

It’s a Doge eat regulation world

 

Regulators think of introducing new regulations from two lenses. First in terms of errors. Whether the law will harm innocents or let the guilty get away. Second, in terms of cost-benefit analysis because every law has a cost on the market. In addition, for good process, they look at views of expert committees and exposing draft regulations to public comments. 

 

Students of criminology (with its origin in logic and later statistics) will immediately recognize the two error types. Type I error occurs when a guilty person escapes because the law is too lax. This error prioritizes protecting the innocent at the risk of letting some guilty individuals go free. Type II error occurs when an innocent person is found guilty. This reflects an overly stringent or biased system that compromises individual rights and undermines justice. 

 

Sadly, a lot of current regulations falls within these errors. In fact, the SEBI law against fraud is drafted so sloppily that it simultaneously creates both type I and type II errors at the same time. While it is easy to blame SEBI, many of these laws were created by market experts from the industry. The law against fraud, the law against insider trading and the takeover law are the most egregious examples (and also the cornerstone of securities laws).

Let’s take the example of the securities law against fraud. Fraud has been well understood for centuries under common law, even before a formal legislation came in. Based on the common law, five ingredients were identified: intent, materiality, mis-statement, causation and harm. These ingredients with minor modifications for the anonymous securities markets have created the US rule against fraud commonly called rule 10b-5 never modified since its introduction in 1942. There are now tens of thousands of US court rulings chiseling each of the requirements of the ingredients. That’s how the law becomes more sophisticated and nuanced.

Take the Indian law now, in what is called the Fraudulent and Unfair Trade Practices regulations of SEBI or FUTP. None of the five ingredients are required to prove fraud. I had written an article in this paper in Sept 2018 that under securities law I can prove that walking, running and swimming were all fraud. These kind of laws may sound fair to a layman, but if you put a lot of random people in jail for murder, likely-some-will-be- murderers kind of logic is not really a good way to draft law and puts the common law system of ‘innocent till proven guilty on its head’. Yes, it indeed makes the task of the prosecutor easy to put everyone they see in jail.

The other, somewhat related problem is prolixity. We love to write laws. With a lot of words. It may not make any qualitative difference in liberal arts subjects whether you describe an object with a thousand words or ten thousand. However, law is more akin to STEM subjects. At the cost of sounding pompous, I would go so far as to say, it is akin to surgery. Every single comma is like a millimeter while conducting surgery. Ask the insurers how the 9/11 insurance contract was drafted and whether the ‘event’ included two plane attacks or one, decided whether they paid an extra 3.5 billion dollars or not. With laws, the consequences can be alarmingly more serious than with drafting contracts. 

 

Let’s just start with one comparison and two examples from the same domain of fraud and insider trading laws in the securities markets. First, the anti-fraud rule in the US has 124 words. The insider trading law has 0 additional words as it is subsumed in the anti-fraud Rule. The Indian equivalent FUTP has over 4,400 words and the insider trading regulation has over 20,000 words. These additional 24,000 words are not just surplusage, but cause harm to innocent people, and let the guilty free. And no, we didn’t try to create a better definition, Regulation 3 of FUTP is a virtual lift off of the US rule. We just chose to write another 24,000 words and stuck a long tail on what matters.

 

Just look at one example where the Supreme Court had to intervene in a case where a person who had good news sold in the markets and was accused of insider trading. In its argument, SEBI relied on the fact that the regulation does not mention the direction of trading and thus the person will be found guilty. Even a high school student will note the absurdity of this argument, buying while holding unpublished bad news or selling while in possession of good news is irrefutable proof that insider trading did not happen. 

 

Even worse is the deeming provisions of these laws. For example, if a woman were to share the closure of a large M&A deal with her husband for going out on a celebratory dinner is a criminal according to SEBI laws on ‘need to know’ basis of sharing information even where no mis-use of the information occurs. The deeming provisions of insiders would deem almost any semi-random communication with any other person as refutable proof that the person illegally passed on information. If I were to give a legal opinion to a company on matters of intellectual property, and bought a few thousand shares contemporaneously, there could be a deemed provision that the company passed on illegal information (say quarterly earning) to me. The only way I will be able to disprove it would be for me to record every conversation had with company officials, and if I were to meet them, put a GoPro camera on my head while having dinner with them. The insider trading laws require no element of being an insider, no need to show trades and even no need to show any inside information. There is a need to take Elon’s scalpel, and cut down regulations and the overly broad laws. By my estimate, the existing laws of SEBI and other regulators could easily be improved by cutting them by 80% and bringing in precision. And we could see a real ease of doing business in India for public companies. 

 

The author’s book Fraud, Manipulation and Insider Trading in the Indian Securities Markets fourth edition will be published by LexisNexis next month.