07 February 2014

Book review - Fraud, Manipulation and Insider Trading in the Indian Securities Market - Monika Halan

Sorry for the overload on my book. But the first review of the book Fraud, Manipulation and Insider Trading in the Indian Securities Markets is just out. Monika Halan, the reputed financial journalist has critiqued the book. Here is her piece which appeared in the FPSB's Financial Planning Journal:

"Fraud, Manipulation and Insider Trading in the Indian Securities Market
Sandeep Parekh
Publisher: CCH, a Wolters Kluwer business
Price: 795

Speak to average retail investors and they talk about the stock market with some bits of awe mixed with desire and fear. Awe, because smart looking people in movies seem to do complicated deals and get very rich. Desire, because of all the stories of the roulette-like stockmarket, that has the potential to make you seriously rich very quickly. You just need the right tip and do the trade. Fear, because of the frequent news stories about fraud and manipulation on the markets. How true are these stories? Is our stock market really a den of thieves as popular folk lore has it?

Those looking for answers may do well to read Sandeep Parekh’s book titled Fraud, Manipulation and Insider Trading in the Indian Securities Market. A racy Michael Lewis read this is not since the book is about regulations in the securities market, their evolution and the role of the regulator. The text-bookish treatment of the subject and the text-book like design feel will put off a casual reader, but for students of finance, would-be securities market lawyers, and other participants in the market will do well to invest time to read the book. Financial planners will find it useful as well, specially the chapter on ‘Mis-selling and Unsuitability’. Heavy reading the book may be, but persist and get rewarded with gems such as: “..the purpose of modern securities regulations is not to remove stupidity from the capital markets – only ignorance.” You chance upon another one while reading about how market upticks and bubbles are fertile grounds for fraud: “the beta of the market hides the negative alpha of frauds.”

The key focus of the book is how fraud, manipulation and insider trading is defined by regulators and how it is dealt with. In fact, stock markets have been in operation much longer than regulations and people have been defrauding each other since the beginning of time. It isn’t as if till the anti fraud regulations came into being there was no legal recourse for a person who felt cheated or defrauded in the market. Even before written law, fraud has been prohibited under common law, or “law as decided without statutes and passed on and evolved from generations through court decided cases”. Read through the Sebi (Prohibition of Fraudulent and Unfair Trade practices relating to Securities Market) Regulations 2003 (FUTP Regulations) and the use of common law principles of fraud show up clearly. The bedrock for anti-fraud regulations is the tort of deceit. Writes Parekh: “Since Pasley v Freeman in 1789, it has been the rule that A is liable in tort to B if he knowingly or recklessly makes a false statement to B with intent that it shall be acted upon by B, who does act upon it and thereby suffers damage.” The six ingredients that make up the common law fraud are intention, materiality, mis-representation of fact, transaction, loss and damage. Financial sector regulation and the appellate bodies have the delicate task of deciding ‘intent’ and that means either getting into somebody’s head or using circumstantial evidence to prove it.

Though the book is about the securities market and the regulations to prevent fraud and manipulation are about stocks, the book is relevant for those preparing for the future of Indian finance according to the road map laid down by the Financial Sector Legislative Reforms Commission (FSLRC). The draft Indian Financial Code envisages a collapse of the current multiple regulators into one United Financial Agency (UFA). Given the roots of current security market regulation from common law fraud, other regulators like the Irda, PFRDA and RBI must begin to use the common law fraud to think about fraud in their areas. The Rs 1.5 trillion of loss caused to individual investors in bundled life insurance products over seven years fits the five step definition of common law fraud to a T.

Ideally I would like Parekh to write a non-text book next, where he writes about securities market regulation for the interested, but lay reader. The glimpses of story in an otherwise dry book (and it needs to be dry because it deals with actual regulation) are fascinating. And the average reader would understand markets much better, lifting the veil of high finance and its seeming complication.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at expenseaccount@livemint.com"

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