Securities Markets Code: The Debate Over a Definition That Could Affect Ordinary Investors

India is preparing a new Securities Markets Code to bring together the rules that govern how shares, bonds and other securities are bought and sold. The Code is meant to consolidate and modernise the existing legal framework, including the powers of the market regulator, the Securities and Exchange Board of India (SEBI). As the draft moves through the legislative process, legal experts and former regulators have raised a debate about how precisely some of its key provisions are worded.

A central concern relates to the clause dealing with trading on certain kinds of information. The aim of such provisions is to stop unfair practices like insider trading and front-running, where a person trades using information that the rest of the market does not yet have. Critics argue that the way the clause is currently framed could, if read literally, cover far more people than intended. The worry is that a person trading after merely studying publicly available information, such as a company's published quarterly results, might fall within the wording, even though no unfair advantage was used.

The heart of the debate is whether the law should require two conditions together or either one alone. Securities regulation in major countries treats the problem as information that is both significant in nature and not publicly known. In the United States this is captured by the idea of Material Non-Public Information, and in India by SEBI's concept of Unpublished Price Sensitive Information under its insider trading regulations. Supporters of a change to the draft say the Code should clearly require both conditions to be met at the same time, so that only genuinely unfair trading is caught.

A second issue raised is the meaning of the phrase used for trading itself. Courts and the Securities Appellate Tribunal have long debated whether such conduct requires a completed purchase or sale, or whether merely placing an order or instructing a broker is enough. Because front-running can cause harm the moment a position is taken, some experts suggest the Code should define the term clearly for this purpose, to reduce inconsistent enforcement and give market participants certainty.

These concerns matter more because breaches of the relevant chapter can attract serious consequences, including imprisonment, heavy financial penalties and links to anti-money-laundering law. Those urging revisions present these as technical drafting improvements rather than political changes, and argue they should be settled before the Code becomes law. Others note that detailed rules made by the regulator already apply the stricter, combined standard in practice. The discussion reflects a broader principle in law that provisions carrying criminal liability should state clearly and exactly what conduct they cover.