SEBI's Proposed Regulations on Suspicious Trading Activities: Overview and Implications

SEBI vs Suspicious Trades: What the PUSTA Debate Really Tells Us

Let’s be real—financial markets can feel like a black box to most of us. There’s a lot happening behind the scenes, and only when something goes wrong do we pay attention. But every now and then, a regulatory move comes along that really grabs people. SEBI’s proposed rules on unexplained suspicious trading—called PUSTA—was one of those moments.

It stirred debate. It raised eyebrows. And it forced an uncomfortable question: how do we keep markets clean without stepping on individual rights?

So, What Exactly Is PUSTA?

In May 2023, SEBI introduced a bold idea: a new regulation called the Prohibition of Unexplained Suspicious Trading Activities—PUSTA, for short. The goal? To catch market manipulators who were getting increasingly sophisticated with their tactics.

The problem was simple but serious. With advanced technology, some traders have figured out how to leave barely any trace. They execute suspicious trades, cover their digital tracks, and leave SEBI’s investigators chasing shadows. Even when something looks off—unusual price movements, offbeat timing, sudden spikes—it’s still hard to prove intent. And without evidence, the manipulators walk away untouched.

PUSTA was meant to change that.

The Big Shift That Sparked the Backlash

The most controversial part of PUSTA was this: If SEBI flagged your trade as suspicious, it was now your job to prove you hadn’t done anything wrong.

That’s a major departure from the usual legal standard, where the burden of proof lies with the accuser. It’s how justice works in most democracies: innocent until proven guilty. PUSTA wanted to flip that.

SEBI believed this reverse burden of proof would be a strong deterrent—especially for those who think they can outsmart the system with code and complexity. But that same idea quickly ran into trouble.

The Pushback Begins

As soon as the draft regulation came out, it hit a wall of opposition. Lawyers, brokerage firms, industry associations, even civil society groups—all raised serious red flags. Was it fair? Was it even constitutional?

The concern wasn’t just theoretical. People worried it could turn into a tool for overreach. Imagine being flagged by an algorithm, then having to justify every move—without knowing exactly what SEBI found suspicious in the first place.

Even SEBI Chairman Tuhin Kanta Pandey acknowledged the concerns. Speaking to Moneycontrol, he made it clear that the Board wasn’t fully convinced:

“It is not really on the table because there were certain concerns about it in the Board. When you shift the onus, it becomes an onerous law.” — Tuhin Kanta Pandey, SEBI Chairman

In simple terms? The Board hit pause. They weren’t ready to go ahead—not like this.

Why Did SEBI Pull Back?

Let’s break it down:

Legal & Ethical Doubts: Reversing the burden of proof clashed with the core principle of natural justice. It raised the risk of punishing people based on suspicion rather than proof.
Fear of Misuse: Giving regulators unchecked power—even with good intentions—can open doors to harassment or arbitrary action.
No Board Consensus: When the matter came up for discussion in December 2023, SEBI’s Board wasn’t on the same page. The idea stalled right there.

How Did the Market Respond?

The response was swift—and pretty unanimous. Traders, legal experts, and watchdogs didn’t mince words. Here were the top concerns:

Erosion of Natural Justice: Asking people to prove their innocence struck many as an overreach that undermines India’s legal foundations.
A Chilling Effect: Legitimate market participants feared being dragged into prolonged investigations, even if they’d done nothing wrong.
Potential for Arbitrary Action: If rules aren’t clear or balanced, they can be misused. Even honest traders could find themselves in trouble simply because of how a trade looked on a screen.

There’s already precedent. In 2022, a major brokerage found itself under investigation when some trades triggered SEBI’s alerts. The trades, it turned out, were perfectly legal. Under PUSTA, the burden would’ve been on them to prove that upfront—a risky game for any legitimate player.

Why SEBI Wanted This in the First Place

To be fair, SEBI’s reasoning wasn’t pulled out of thin air. They’re grappling with a real issue. Technology has made it far easier for bad actors to cover their tracks. Trades happen in milliseconds. Data can be erased. IPs can be masked. The playing field isn’t what it used to be.

From SEBI’s point of view, unless the law evolves, the most dangerous manipulators will stay ahead of the curve. But even so, the consensus from the Board was clear: you don’t fight tech-driven manipulation by weakening individual protections.

So What Happens Now?

SEBI isn’t abandoning the idea of cracking down on suspicious trades. But going forward, the approach is likely to be more balanced—and smarter.

Here’s what’s expected:

More Safeguards: Any future rule will need strong checks to prevent misuse and ensure fairness.
Narrower Scope: Instead of applying to every flagged trade, new rules might only activate when there’s solid evidence of tampering, like data destruction or pattern concealment.
Broader Dialogue: SEBI plans to consult more widely. Expect deeper conversations with legal experts, industry players, and civil society before anything new takes shape.
Transparency: New guidelines will likely spell out how investigations are handled, what rights traders have, and how appeals work—so no one’s left guessing.

Final Thoughts: A Tightrope Walk

The PUSTA episode is a classic case of regulation meeting resistance—and learning from it. SEBI tried to solve a real problem. But the solution, at least in its first draft, went a step too far. The fact that SEBI listened, recalibrated, and hit pause is a healthy sign.

Markets do need discipline. But that discipline has to come with accountability—on both sides. Regulation must protect the system, yes. But it also has to protect the individuals who make the system work.

In the end, the goal is still the same: to build a financial market that’s not just clean—but also fair, transparent, and trustworthy. Let’s hope the next version of these rules gets us closer to that balance.