SEBI's PUSTA Regulations: Balancing Market Integrity and Fairness

SEBI’s PUSTA Rework: Walking the Tightrope Between Swift Justice and Legal Fairness

The Securities and Exchange Board of India (SEBI) is in the midst of a careful rewrite of its PUSTA regulations—short for the Prohibition of Unexplained Suspicious Trading Activities in the Securities Market Regulations, 2023.

The objective behind PUSTA was always clear: give the regulator sharper tools to detect and act on manipulative or suspicious trades before they inflict serious damage on market confidence. But as with all sweeping regulatory changes, the devil lies in the details. When the draft rules landed on the SEBI board’s table, the members paused. The powers being proposed were broad—arguably too broad for comfort.

What followed was a moment of reflection. SEBI is now revisiting the regulations, trying to preserve the teeth they need for timely enforcement, while stitching in due process and legal safeguards that protect the fair market players.

Why PUSTA Was Conceived in the First Place

Today’s securities markets aren’t what they used to be a decade ago. Manipulation isn’t just about price rigging in thinly traded stocks. It’s encrypted chat rooms, complex order routing, and trade patterns that appear clean on the surface but hide deeper intent. In this evolving landscape, SEBI’s traditional enforcement tools have struggled to keep pace.

PUSTA was designed to flip the script. Instead of reacting to confirmed violations, SEBI could initiate action the moment a pattern of suspicious trades emerged. The thinking was straightforward: don’t wait until the damage is done. Intervene early—even at the stage of a “suspicion”—so that bad actors don’t have the chance to manipulate prices or misuse insider information.

That’s a laudable goal. But the way those powers were initially framed raised eyebrows.

Concerns: When Aggressive Enforcement Meets Procedural Risk

Several legal experts, market veterans, and government stakeholders have voiced caution over the draft’s most potent tools. Let’s look at the three big red flags:

1. Broad Powers, Thin Checks

Under the original draft, SEBI could initiate investigations or issue restraint orders without first giving the accused a chance to respond. While that might allow for speedier intervention, critics argue that it risks trampling on basic principles of natural justice. A person’s trading rights—and potentially their reputation—could be restricted without ever being heard.

To its credit, SEBI seems to have taken this concern seriously. The internal consensus has shifted against allowing ex-parte interim orders—a critical safeguard that could now become part of the final rules.

2. Presumption of Suspicion: Flipping the Burden of Proof

The draft also proposes that SEBI may presume suspicious intent based on certain trading patterns, and that the burden would lie on the accused to explain themselves. This is where many legal experts draw a hard line.

Vasudha Goenka, a partner at Cyril Amarchand Mangaldas, has been among those warning that allowing presumptions of guilt—especially around Material Non-Public Information (MNPI)—could lead to unfair targeting. Even if the presumption is "rebuttable," she notes, the damage to an individual’s reputation or career may already be done.

In short, shifting the burden of proof to the accused, particularly in grey areas, is a slippery slope.

3. Vague Investigation Triggers

Another pain point is how suspicious activity is defined—or rather, how loosely it’s defined. The current version allows SEBI to initiate probes based on early signs of potential insider trading or manipulation. That might seem reasonable until you consider what that includes: trades by associates, trades that happen to align with news flow, or even trades that simply appear “unusual.”

But how does a trader explain the actions of someone else—especially if that someone is not under their direct control? Could SEBI open investigations based on little more than circumstantial alignment?

That possibility has rattled market observers. If the bar for suspicion is set too low, it could lead to endless litigation and dilute SEBI’s own ability to act decisively when it truly matters.

Where Things Stand Now

In response to the pushback, SEBI has gone back to the drawing board. After consultations with both the Ministry of Finance and the Ministry of Law, the board is now working to incorporate stronger due process protections in the revised draft.

The new version is likely to mandate:

• A hearing before issuing interim restraint orders,
• Clearer definitions of “suspicious activity”, and
• Explicit safeguards to ensure that enforcement remains proportionate.

The goal, SEBI officials say, is not to soften enforcement, but to make it sharper and more defensible in court.

Why This Matters—Far Beyond Legal Semantics

At its core, PUSTA is about trust.

For India’s markets to function smoothly, investors must believe that manipulation will be punished—but also that enforcement will be fair and grounded in evidence. If the system overreaches, even with good intentions, the risk is twofold: market participants might trade less freely, and SEBI could find its credibility challenged in protracted legal battles.

On the other hand, delay or inaction in catching real market abuse can leave retail investors and honest businesses badly exposed.

Final Thoughts: Getting the Calibration Right

PUSTA isn’t just another set of technical rules—it’s a blueprint for how modern market misconduct will be handled in a digital, high-speed, AI-influenced world. SEBI’s willingness to pause and refine the framework shows maturity. It’s not a retreat, but a recognition that strong enforcement is only effective when backed by strong legal footing.

As the final version of PUSTA nears completion, the broader takeaway is this: Speed and fairness must go hand in hand. SEBI’s ability to protect India’s capital markets will depend not just on its regulatory muscle—but on how well that muscle is balanced with due process, clarity, and constitutional discipline.

If SEBI gets that right, PUSTA could become a model for how smart regulation keeps pace with a fast-evolving financial system—without losing sight of the rights of those it seeks to govern.