SEBI should issue a stern code to curb corrupt financial journalism
Relevance: GS Paper II
Why in News?
The recent regulatory action against unethical financial reporting practices is not unprecedented.
More About the News:
- Front-running in stock dealings by individuals with privileged information poses a significant threat to the market.
- The current framework set by Sebi for financial journalists does not adequately address the nuanced conflicts of interest within the media. Therefore, there is a necessity for a new set of rules.
Background and Recent Cases:
- Recent global banking, market, and economic crises highlight the importance of responsible financial and business journalism.
- The efficiency of markets depends greatly on the quality, accuracy, and fairness of reporting. This was underscored by a directive from the Securities and Exchange Board of India (Sebi) on June 11, which emphasized "informational symmetry" as crucial to fair market functioning.
- SEBI imposed a five-year ban and a ₹1 crore fine on former CNBC Awaaz television anchor Pradeep Pandya for alleged front-running.
- This involved using undisclosed information to profit from stock trades before they were publicly disclosed.
- According to Sebi's order, the misuse of material non-public information by certain individuals led to unjust gains.
- According to SEBI, When television anchors share material non-public information, as observed in this case, it not only violates ethical norms but also distorts market dynamics..
- Such breaches erode investor trust and may create perceptions of market manipulation. Sebi's action against unethical financial reporting is not unprecedented.
- In 2022, Sebi had penalized another CNBC Awaaz anchor, Hemant Ghai, and his wife for allegedly profiting from non-public information by purchasing stocks in advance of news broadcasts.
- These cases highlight significant ethical and legal concerns within the realm of Indian financial journalism.
There is a pressing need for specific regulations:
- The current framework governing financial journalists includes The Sebi (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations of 2003, abbreviated as PFUTPR, and The Sebi (Research Analysts) Regulations of 2014 (RA regulations).
- These regulations were primarily crafted to oversee market intermediaries and research analysts, thus overlooking the nuanced roles and potential conflicts of interest involving financial reporters and journalists.
- This lack of specificity has led to regulatory gaps and challenges in enforcement.
- The scope of PFUTPR’s prohibition of front-running by financial journalists and other non-intermediaries was expanded by the Supreme Court’s decision in Sebi vs Shri Kanaiyalal Baldevbhai Patel and others, and a Sebi report dated August 8, 2018, on 'fair market conduct.'
- While the RA regulations cover personal trading and compensation, they do not encompass all scenarios unique to the roles and influence of financial journalists.
Issues with Current Regulations:
- Biased Reporting and Indirect Influences: Biased reporting stemming from vested interests or indirect favors extended to journalists, such as gifts or privileged access, is currently not adequately addressed by the existing framework.
- The current regulations focus mainly on direct financial arrangements, neglecting these nuanced forms of influence.
- Reactive Enforcement: While Sebi has used the PFUTPR in the past to handle similar cases, these actions are often reactive and face legal challenges during enforcement, with many orders being overturned by the Securities Appellate Tribunal (SAT), as seen in the case of Hemant Ghai.
- A more robust solution is needed to prevent non-market intermediaries from engaging in practices that breach market norms.
- This requires a dedicated framework capable of comprehensively addressing the ethical and legal complexities associated with journalists using privileged information.
- Practicality Issues: Balancing transparency with journalistic freedom is crucial in drafting new rules.
- For instance, Sebi's current approach of 'disclose or abstain' may not always be practical, especially in live broadcasts where journalists would find it impractical to disclose personal financial interests or those of family members within a limited timeframe.
Need for a New Framework:
- Sebi's efforts to establish a dedicated framework should align with its ongoing initiatives to regulate online 'finfluencers.
- 'Insights can be drawn from established codes like the Editors’ Code of Practice in the UK and anti-fraud provisions such as Section 10(b) of the US Securities Exchange Act of 1934.
- Precedents from US cases like David Carpenter vs US (1987) and Zweig vs Hearst Corp (1979) also offer valuable guidance.
Proposed Solutions:
- A potential solution could involve implementing a mandatory internal disclosure system where financial journalists are required to report personal interests and those of their family members to editors or internal compliance officers.
- Additionally, journalists could be restricted from trading in securities they cover during specified 'blackout periods,' such as 30 days before and five days after public reports are issued.
Conclusion:
To address practical challenges, exceptions might be considered where immediate disclosure is impractical, provided there are valid justifications and prior approval from a regulatory body. This flexibility would ensure that journalistic integrity is maintained without compromising operational effectiveness.
