SEBI's PUSTA Regulations: Addressing Concerns Over Regulatory Power and Fairness

SEBI’s PUSTA Framework Faces Scrutiny: Striking a Delicate Balance Between Enforcement and Investor Rights

As markets evolve and the tools for financial misconduct grow increasingly sophisticated, the Securities and Exchange Board of India (SEBI) has proposed a bold new enforcement framework — the Prohibition of Unexplained Suspicious Trading Activities (PUSTA) Regulations. Designed to target covert, high-tech abuses in the securities markets, PUSTA aims to bridge the enforcement gap where traditional insider trading laws often fall short.

But despite the regulator’s intentions, the draft proposal has sparked robust debate across legal, market, and policy circles — with critics raising concerns about procedural fairness, reversal of burden of proof, and potential overreach. Even SEBI’s own board has advised caution, prompting a reconsideration of the final contours of the regulation before formal adoption.

What Is PUSTA Trying to Solve?

PUSTA was envisioned as a response to the invisible edge used by certain market participants — shadow networks, family offices, and pre-event trades that seem too precise to be coincidental but fall outside the classic definitions of insider trading.

SEBI’s concern stems from a growing number of cases where trading patterns suggest misuse of unpublished price-sensitive information (UPSI), yet direct evidence of information flow or intent remains elusive.

As a senior regulatory source put it:

“We can track the footprints, but proving who left them — and why — is where the law runs dry. PUSTA is an attempt to update the toolkit.”

What Does the Draft Regulation Propose?

Here are the core features of the PUSTA framework, as it currently stands:

1. Suspicion-Based Investigations

SEBI can initiate inquiries based solely on unusual trading patterns, even before any price-sensitive information becomes public.

2. Presumption of Illicit Motive

If trades are executed unusually close to a major corporate announcement, SEBI may presume misconduct — unless the trader can prove otherwise.

3. Behavioral Linkages Over Direct Evidence

PUSTA allows SEBI to act on indirect signals — including proximity to insiders, family or office relationships, or unusual timing — without having to prove communication of UPSI.

Why Is There Pushback?

While few dispute the need for modernised surveillance, PUSTA’s aggressive design has drawn sharp criticism on several legal and operational fronts.

1. Scope and Discretion

Critics argue that suspicion alone is too weak a threshold for regulatory action — especially when coupled with broad discretionary powers.

Legal experts warn of a chilling effect on legitimate market activity, particularly for large investors or fund managers whose trades may appear large or well-timed but are often routine.

2. Ex-Parte Interim Orders

The draft framework allows SEBI to pass orders without hearing the accused — particularly during investigations.

This has raised alarm among constitutional lawyers. Interim action, critics argue, undermines natural justice, especially if the trade was legal when executed.

A potential revision may restrict such orders to cases where public interest or market stability is demonstrably at risk.

3. Reversal of Burden of Proof

Perhaps the most contested provision: under PUSTA, traders may need to justify their own innocence.

If a transaction appears suspicious, the accused must show why it wasn’t abusive — a reversal of the traditional principle that guilt must be proven by the regulator.

Market veterans and lawyers say this could open the door to overreach, where benign trading strategies get penalised simply for aligning too closely with a future event.

"How do you defend yourself against something you didn’t do, especially if a third party — like an associate or family office — executed the trade?" — K.C. Jacob, Economic Laws Practice

4. Data Triggers vs Legal Intent

PUSTA heavily relies on data-driven pattern recognition, including AI-assisted surveillance.

But experts caution that suspicion flagged by an algorithm is not evidence of intent or wrongdoing.

The concern is two-fold:

• Can SEBI’s case hold in court without proving intent?
• Is statistical proximity enough to override individual rights?

What Are Stakeholders Saying?

Consultations yielded strong feedback:

Stakeholder Type	Concern	Suggested Fix
Industry Bodies	Arbitrary enforcement	Use objective trade thresholds
Legal Experts	Burden reversal and due process	Insert fair hearing protections
Government Ministries	Need for balance	Propose internal oversight board
Investor Forums	Support intent, fear misuse	Add accountability mechanisms

Surveillance vs Safeguards: Can the Two Coexist?

SEBI’s surveillance has become increasingly sophisticated — leveraging time-stamped order data, relationship mapping, and event timing correlations.

But SEBI admits: even with technology, proving abuse is difficult when the line between well-timed trading and illicit access is blurred.

PUSTA tries to plug that gap — but critics argue that plugging leaks should not sink the ship of due process.

Possible Amendments to the Final PUSTA Draft

Following board-level feedback and external consultations, SEBI is reportedly considering several recalibrations:

• Ban on ex-parte orders, except in urgent, demonstrable cases
• Defined trading triggers (volume, frequency, proximity to event) to avoid subjective discretion
• Creation of an internal PUSTA Oversight Board for second-level review
• Retention of SEBI’s responsibility to establish a baseline of misconduct, even with a presumption clause
• Clear SAT appeal pathways with expedited timelines

Where Things Stand

• Consultation Period: Completed in FY 2023–24
• Board Review: Still underway as of December 2024
• Revised Draft: Expected in early or mid-2025
• Implementation: Subject to final SEBI board and legal vetting

Final Word: A Regulation for Modern Markets — But Not at the Expense of Fairness

PUSTA is undoubtedly a response to today’s complex, encrypted, and tech-driven misconduct. It acknowledges that traditional proof standards often lag behind modern abuse tactics. SEBI is right to want more flexible tools.

But flexibility must not replace fairness. Presumptions, surveillance, and suspicion can only take enforcement so far. The rule of law, natural justice, and the right to defend one’s trade decisions remain foundational to investor trust.