|Bharat Budholia||Shuchita Bhushan|
1. marked by a senseless, disorienting, often menacing complexity: Kafkaesque bureaucracies.
(Definition from the Random House Unabridged Dictionary. Copyright (c) 1997 Random House, Inc)
In Kafka's The Trial when the protagonist, Joseph K, on being arrested demands to know what he has done to warrant it, the response is:
We are not authorised to tell you that. Go to your room and wait there. Proceedings have been instituted against you, and you will be informed of everything in due course.
Lets you wonder what this has to do with securities markets regulation in India, read on.
The Securities and Exchange Board of India (Sebi) on March 23 and 24 2011 issued two circulars requiring Sebi registered market intermediaries to radically widen the internal code of conduct for their employees/temporary staff/voluntary workers (circulars).
The circulars mandate that intermediaries will either restrict or absolutely prohibit employees' access to blogs chat forums or messenger sites, and that logs of any such blogs, chats or sites be maintained as records.
Further, and undoubtedly the most flawed imposition: no market-related news received by the employees through email (including personal) or in any other manner, can be forwarded unless it is vetted by the designated compliance officer and the failure to do so shall deem the employee in violation of Sebi laws. Here, Sebi goes a step further to say that such contravention will also make the concerned compliance officer liable for breach of duty.
All this with the objective of curbing market manipulation by intermediaries, or rather their employees, by way of spreading rumours. The Sebi (Stock-brokers and sub-brokers) Regulations prohibit stockbrokers from spreading rumours for personal gain or for distorting the market. Also, on March 18 2011 Sebi issued a caution to investors against relying on market-related advice other than from Sebi-registered portfolio managers. According to reports, Sebi has also been carrying out investigations against entities giving market advice without being registered as portfolio managers.
Sebi may well have been inspired by measures taken in November 2008 and in September 2009 by the UK Financial Services Authority (FSA) and the Australian Securities and Investments Commission (ASIC) respectively. The FSA published industry best practices on handling market rumours which state that unauthenticated news can be forwarded only with a clear statement that the news has not been authenticated. Any unauthenticated news can also be forwarded if it is sourced and not embellished in any manner.
Similarly, the ASIC issued a consultation paper which proposed that circulating rumours will constitute a breach of the security laws unless such rumour is already in wide circulation. The inspiration seems to have struck a Big-Brotherly chord with someone in Sebi, hence the stipulation that there is to be no sharing of any market information without a compliance officer's vetting, even where the same is received in the employee's personal mail.
If during the 1975 internal emergency (when suspension of fundamental rights was actually upheld by the Supreme Court), the Indian government could ensure censoring of all newspaper and other media content, surely vetting by compliance officers is easily achievable! The existence of social media seems irrelevant!
Market participants have expressed misgivings over implementation of the circulars. While a number of intermediaries restrict the use of mobile phones, internet access, and so on, how does a compliance officer ensure that an employee accessing the internet through other sources does have information vetted before forwarding? Market participants have also expressed concern over the costs that will be incurred implementing this, including for maintaining records of all blogs, chats and messenger sites accessed by employees.
There is no doubt that rumours can and do result in market manipulation and that such activities generally are difficult to prove even with the best of resources. That still does not justify imposing obligations on the compliance officer to vet. It seems George Orwell's 1984 does not resonate with the authorities.
Bharat Budholia and Shuchita Bhushan
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