In June 2018, in what might have been considered a period of relative stability (given the events that transpired thereafter), the Reserve Bank of India (RBI), in its statement on developmental and regulatory policies, proposed the issuance of directions that would prevent abuse in markets regulated by the RBI.
These directions would be in line with global best practices and would be, in addition to other regulations, aimed at increasing the depth of the financial markets. In this vein, while the RBI issued draft directions in September 2018 for public comments, the final Reserve Bank of India (Prevention of Market Abuse) Directions, 2019, were only issued in March 2019, delayed perhaps by turbulent market conditions.
The directions apply to all market participants in securities (including corporate bonds and debentures), derivatives, money market instruments, and similar instruments, but do not apply to transactions executed through recognized stock exchanges in accordance with the regulations of the Securities and Exchange Board of India (SEBI), or transactions by the RBI and the central government "in furtherance of monetary policy, fiscal policy or other public policy objectives".
The directions take the prescriptive approach and define various concepts that have not been previously defined in the context of the RBI's directions. For instance: 1) "market participants" are persons engaging in or facilitating transactions in financial instruments, 2) "transactions" include bids, orders, quotes, and offers whether or not these result in a trade, 3) "market manipulation" is "any transaction or any act of omission or commission by a market participant, or a group of market participants acting in collusion, that may result in, or seek to convey, a false or misleading impression as to the price of, or supply of, or demand for a financial instrument, carried out with the intention of making an undue financial gain or any other material benefit". Market manipulation also includes any transaction or action that may result in, or is intended to result in, an artificial price of a financial instrument and 4) "artificial price" is the price of a financial instrument pursuant to a transaction undertaken by a market participant with the sole purpose of setting its (or any related instrument's) price at a particular level or in a particular direction.
Notably, the directions explicitly prescribe that market participants cannot engage in market manipulation. In addition, in what appears to be inspired by the crisis on the determination of LIBOR, the directions also explicitly prescribe that market participants cannot take any action or engage in any transaction with the intent of manipulating or influencing a benchmark rate or a reference rate.
The directions require market participants to report any instance of market abuse or attempted market abuse to the RBI promptly. Market participants are also required to provide any information required by the RBI "in the format and within the time frame prescribed". Notably, this obligation does not provide any exception for confidentiality obligations applicable to any market participant.
In terms of recourse, the directions prescribe that market participants that commit market abuse can be denied access to markets in one or more financial instruments for a period of up to one month. The RBI will provide a "reasonable opportunity" to the market participant to "defend its actions". As a matter of concern, there is no procedure prescribed for the manner in which the RBI can issue notices or summons for purported actions of market abuse or the manner in which any hearing would be conducted or any determination of market abuse would be made. This can potentially leave the door open to judicial challenges to any such determination by the RBI.
Interestingly, the concepts defined by the RBI include not only actual transactions, but steps that can be taken by market participants leading up to a transaction, and also include any "act or omission" by a market participant. The latter could be reckoned as a subjective assessment and any determination based on this could be contentious. Conversely, if these directions are not enforced, then it may send wrong signals to the financial markets of posturing rather than proactive development. It remains to be seen whether the RBI takes an approach similar to SEBI in ramping up its enforcement activities, and also being more open to the mechanism of "consent orders" where non-compliances may be settled by way of penalty or fine.
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