Code of Conduct & Institutional Mechanism for Fraud Prevention by SEBI

Code of Conduct & Institutional Mechanism for Fraud Prevention by SEBI
Shivani Jain
| Updated: Mar 20, 2021 | Category: News, SEBI Advisory

The Securities and Exchange Board of India (SEBI), pursuant to the report given by a committee held for Fair Market Conduct, has notified a Code of Conduct & Institutional Mechanism for the Prevention of Fraud or Market Abuse. Further, such a circular was issued on 03.03.2021 by way of Circular No SEBI/HO/MRD/DCAP/CIR/P/2021/23 and has been enforced with immediate effect.

Also, it shall be noted that to ensureaccountability and responsibility of the management or designated persons, in the case of negligence or failure, SEBI has made necessary changes in the SEBI (Prohibition of Insider Trading) Regulations 2015.

In this learning blog, we will cover in-depth the concept of SEBI, together with the key provisions concerning the Code of Conduct & Institutional Mechanism for Prevention of Fraud or Market Abuse.

Concept of Securities and Exchange Board of India

The SEBI is a statutory body founded on 12.04.1992, with headquarters in Mumbai. Further, the said body is entrusted with the power to regulate and administer the Indian Capital Markets. Also, it is responsible it is responsible for monitoring the securities market and for protectingthe interests of investors by implementing different rules and regulations for their benefit.

Further, the key objectives of the Securities and Exchange Board of India are as follows:

  • To ensure systematic manner;
  • To infuse more transparency in the environment;
  • To minimise the cases of malpractices;
  • To promote the development of capital markets;

Also, Read: SEBI Amends Guidelines for Unique Client Code and Requirement of PAN

Entities Eligible for Code of Conduct & Institutional Mechanism for the Prevention of Fraud or Market Abuse

The entities eligible for the Code of Conduct and Institutional Mechanism for the prevention of Fraud or Market Abuse are as follows:

  • Stock Exchanges;
  • Clearing Corporations;
  • Depositories;

Code of Conduct for Eligible Entities

The key provisions governing the Code of Conduct for Eligible Entities can be summarised as:

Formulation of Code of Conduct

All the entities eligible need to formulate a Code  of Conduct  (COC) to  regulate,  monitor,  and report the trading activities undertook by their designated  persons (DP) and  the immediate  relatives of these designated persons. The main reason for the same is to achieve compliance with the SEBI (Prohibition of Insider Trading) Regulations 2015 by adopting the minimum standards prescribed in Schedule C to the said regulations;

Authority to Formulate Code of Conduct

The MD (Managing Director)/ CEO (Chief Executive Officer) of these entities are obligated to frame the said code of conduct. Further, it shall be noted that the Board of Directors (BOD) may ensure compliance by the MD and CEOin this regard;

Appointment of Compliance Officer

To administer the compliance of the framed Code of Conduct, the entities need to appoint and designate a Compliance Officer;

Specify Designated Persons

Further, the Board of Directors (BOD) of these entities, in consultation with the appointed compliance officer will need to specify the designated persons (DP) to be covered by the said code of conduct. The same will be decided based on their role and function in the organisation and the contact that such function will provide to unpublished PSI (Price Sensitive Information), together with the seniority and professional designation. Also, the same will include the designation or position as mentioned in Regulation 9 (4) of the SEBI (Prohibition of Insider Trading) Regulations 2015;

Establishment of Institutional Mechanism for Prevention of Fraud or Market Abuse

The key provisions governing the establishment of Institutional Mechanism for Prevention of Fraud or Market Abuse are as follows:

Responsibility of the MD or CEO to Establish a Mechanism

It shall be noted that the MD or CEO of the entities mentioned needs to establish an effective mechanism for internal control. The reason behind the same is to ensure due compliance with the circulars and regulations issued by the SEBI from time to time and to prevent the cases of fraud or market abuse by these entities or their designated persons;

Duties of Board of Directors and Compliance Officer

The Board of Directors needs to ensure that the Managing Director or Chief Executive Officer of the organisation duly comply with Para 3 and Para 4.1. Further, the Compliance Officer of the respective entities need to administer and regulate the internal controls to preventthe cases of fraud or market abuse by the designated persons;

Regulatory Oversight Committee

The Regulatory Oversight Committee (ROC) of the entities will be responsible for reviewing the compliance with the provisions of the Circular. Such a review process must take place at least once in a fiscal year. Also, such a committee will verify that the mechanism for internal control is proper and are operating effectively and efficiently.

Formation of Written Policies

All the entities specified will need to draft written policies, plans, and procedures for conducting an inquiry in the case of allegedfraud or market abuse by their designated persons (DP) and immediate relatives of the said designated persons.

However, it shall be noted that such a plan, policies, and procedures must be approved by the Board of Directors.

Further, any enquiry or investigation conducted against the designated persons and their immediate relatives may be undertaken under thedirection and supervision of the Regulatory Oversight Committee.

Also, it shall be noted that to ensure maximum transparency and fairness, the Regulatory Oversight Committee will comprise of PIDs and Independent External experts;

Initiation of Inquiry

After becoming aware of any unethical or illegal practice, the entities specified need to initiate an appropriate inquiry. Also, these entities need to inform their BOD (board of directors)about such suspected fraud or market abuse.

Effective Whistle Blower Policy

It is mandatory for all the entities to have an effective whistle blower policy to allow its stakeholders, comprising of employees, to freely communicate their grievances and concerns regarding illegal or unethical practices. Also, they can report the instances of fraud, or market abuse, or any suspicion of fraud, or market abuse;

Provides Adequate Protection

The entities need to ensure that the policy or plan framed under the provisions of Para 4.6 offers for adequate protection against any termination, discharge, demotion, threats, suspension, harassment, either directly or indirectly or discrimination against any employee who reports instances of fraud or market abuse or any suspicion of fraud or market abuse;

Directions for Eligible Entities

The directions for eligible entities are as follows:

  • All the entities are directed to take the necessary steps for the implementation of the circular. Further, the same comprises of the required amendments, pertinent bye-laws, rules and regulations. Also, the entities required to disseminate the details of the same on their official website;
  • Also, they need to communicate the status of implementation of the circular by way of their Monthly Development Report to SEBI;

Conclusion

In a nutshell, SEBI is a statutory body responsible for regulating and administering the Indian Capital Markets. Also, it is responsible for protecting and safeguarding the interest of the general public.

Further, to increase theresponsibility of the management or designated persons, in the case of negligence or failure, SEBI has made necessary changes in the SEBI (Prohibition of Insider Trading) Regulations 2015. The same has been done by notifying the Code of Conduct & Institutional Mechanism for the Prevention of Fraud or Market Abuse.

Lastly, the entities eligible for implementing the provisions of the circular are Stock Exchanges, Clearing Corporations, and Depositories.

Also, Read: SEBI (Annual Report) Rules 2021: A Complete Guide

Official SEBI Circular on Code of Conduct & Institutional Mechanism

Official-SEBI-Circular-on-Code-of-Conduct-Institutional-Mechanism

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Shivani Jain

Shivani has completed her B com LLB (Hons) and has the experience of writing various research papers during her college time. Earlier she was working as an Associate in a Delhi based Law Firm, but her interest in writing made her pursue Legal Content Writing as a career. Her core area of interest is in writing about various legal enactments, tax, and finance.

 

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