Introduction:

The Reserve Bank of India (RBI) on June 06, 2018[1] issued Statement on Developmental and Regulatory Policies of the Second Bi-monthly Monetary Policy Statement for 2018-19. In the statement,  respect to introduction of a set of regulations, in line with best global practices, to prevent abuse in markets regulated by the Reserve Bank, it was proposed to introduce draft regulation for the same by end of August, 2018.

Various regulatory initiatives are being steadily undertaken to increase activity and participation in financial markets and redistribute financial exposure of the banking system. Some of them are as follows:

Fixed Income Money Market and Derivatives Association of India (FIMMDA):

Has developed a Fair practice code (FPC) for voluntary adoption by banks and other members.

FIMMDA Code of Fair Practices (CFP) is developed to build a culture of professionalism and a common set of guidelines to promote the integrity and effective functioning of the Market. It is intended to strengthen the level of adherence to best practices in dealing, to promote competence and ethics in activities and products in financial markets, minimise the risk of manipulation and sharing confidential information, so as to enhance the transparency, efficiency and integrity of the markets.

The Foreign Exchange Dealers’ Association of India (FEDAI):

Has also adopted for market participants in the Indian Foreign Exchange (FX) market-The FX Global Code a global code of conduct for the wholesale FX market.

It sets out principles to promote a robust, fair, liquid, open and appropriately transparent market, underpinned by high ethical standards.

Thus, as an effort in the same direction RBI had released the draft directions on Prohibition of Market Abuse dated Sep 28, 2018[2]. Comments on the same were invited from market participants and other interested parties by October 31, 2018.

Subsequently, the RBI vide notification dated 15th March, 2019 (RBI/2018-19/141) notified Prevention of Market Abuse Directions, 2019.

This article covers below the summary of direction issued by RBI.

Applicability:

These Directions shall apply to transactions of all participants in markets for financial instruments but shall exclude transactions executed through the recognized stock exchanges under and in accordance with the regulations of the Securities and Exchange Board of India.

The Prevention of Market Abuse Directions, 2019 will come into force with effect from 15th March, 2019.

Non-Applicability:

These Directions shall not apply to the Bank and the Central Government in furtherance of monetary policy, fiscal policy or other public policy objectives.

Meaning:

Market Abuse:

It includes market manipulation, benchmark manipulation, misuse of information, or any other similar practice. Market abuse may arise in circumstances where financial market investors have been unreasonably disadvantaged, directly or indirectly, by others who:

1. have used information which is not publicly available (insider dealing)

2. have distorted the price-setting mechanism of financial instruments

3. have disseminated false or misleading information

This lead to ill-gotten profits by insider/manipulator at the cost/interest of the large investor which in turns lead to downfall of investment in securities market.

Purpose:

RBI is satisfied that certain market practices are undesirable, create market distortion and adversely impact the outcome of the measures taken towards attaining the monetary policy objectives of the Bank.

Thus in order to prevent/curb such practices, RBI has introduced the below said directions for long term growth and prosperity of the economy.

Reserve Bank of India (Prevention of Market Abuse) Directions, 2019[3]

I. Market manipulation:

Market participants shall not engage in, or attempt to engage in, market manipulation. They shall not undertake transactions on an Electronic Trading Platform (ETP) that may disrupt or delay its functioning.

II. Benchmark manipulation:

Market participants, either acting independently or in collusion, shall not undertake any action, with the intention to manipulate the calculation of a benchmark rate or a reference rate. No market participant shall carry out a transaction or initiate any action with the sole or dominant intention of influencing a benchmark rate or a reference rate.

III. Misuse of information:

A market participant that is in possession of Non-public price-sensitive information shall not use it for any material benefit to itself or to others. They shall not use ‘Price-sensitive customer information’ for transacting on their own account in a manner that adversely affects the outcome for the customer in that (those) transaction. They shall maintain confidentiality of price-sensitive customer information. They shall not intentionally create or transmit false or inaccurate information, or, withhold timely information that is required to be reported or made public, that influences or is likely to influence the price of any financial instrument. Transmission of false or inaccurate information shall be deemed to have been done intentionally by a market participant if it had not exercised due diligence as to the veracity of the information before transmitting.

IV. Monitoring, compliance and reports

Market participants shall report any instance of market abuse or attempted market abuse detected by them to the RBI promptly. They shall provide any data and/or information as required by the RBI in the format and within the time frame prescribed.

V. Regulatory action for market abuse

Market participants committing market abuse are liable to be denied access to markets in one or more instruments for a period that may not exceed one month at a time. No such action shall be taken by the RBI without providing reasonable opportunity to the market participant to defend its actions. All instances of such action shall be made public by the RBI.

Comparative Analysis:

The below table covers comparison between the draft directions and issued directions of RBI.

Particular Nature Draft Directions Issued Directions Our Comments, if any
Misuse of information Deletion Market participants shall not use any mass media to express their opinion with an intention to influence the price of any financial instrument in which they have, or intend to have a financial interest. No such provision inserted
Monitoring, compliance and reports Deletion All market participants shall have in place a clear and transparent policy to monitor and prevent market abuse within their organizations, consistent with directions contained herein, which shall be reviewed periodically. The policy shall also include procedures to establish individual responsibility. No such provision inserted This would create an additional pressure on market participant to create a policy to monitor market abuse within their organizations.

Conclusion

The increase in the market practices leading to market abuse and manipulation which lead to false or misleading impression as to the price of, or supply of, or demand for financial instruments, were alarming and thus, hampering the market. RBI in order to curb gains to the manipulator has introduced the above said directions in public interest and to regulate the financial system of the country and avoid undue financial gain or any other material benefit to the manipulator by way of these directions.

[1] https://taxguru.in/rbi/second-bi-monthly-monetary-policy-statement-2018-19-policy-rates-increased-by-25-basis-points.html

[2] https://taxguru.in/rbi/rbi-releases-draft-directions-prohibition-market-abuse.html

[3] https://taxguru.in/rbi/reserve-bank-india-prevention-of-market-abuse-directions-2019.html

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