SEBI Preparing Affordability Index To Ensure Investors Trade Within Verifiable Means

India’s market regulator is preparing a so-called affordability index to gauge if an investment is backed by the investor’s financial resources to ensure stock prices are not manipulated by trading through mule accounts. The Securities and Exchange Board of India is drafting the index that will be based on income and net worth of investors, according to the agenda papers of its Sept. 18 board meeting uploaded on its website on Oct. 16. This will establish the affordability of the transaction, it said. That’s based on the suggestions of a panel led by TK Viswanathan on fair market trade, aimed at curbing benami or illegal proxy investments. The regulator will now provide a framework to calculate the affordability of an investor. And the brokers will use information from documents of income and net worth given by a client. The objective is to enhance due diligence by market intermediaries in case of trading beyond specified limits to prevent the use of mule accounts for carrying out fraudulent transactions or insider trading, according to SEBI’s agenda papers aid. The suspicion of the so-called mule accounts would be for investigation inputs and not a conclusive factor, the regulator said. Such accounts would need to be flagged to the regulator by brokers. As a second level of check, SEBI will *also look at the intent behind trading beyond the affordability index* In the past three years, the regulator acted in 40 cases of violation of Prohibition of Insider Trading Regulations. Ill-gotten gains were impounded in just 12. The remaining were disclosure violations, according to its agenda papers. In the 12 cases, criminal prosecution was initiated but the matter hasn’t even reached the stage where evidence is presented, let alone conviction.

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