Sebi should issue a stern code to curb corrupt financial journalism

Reiterating ‘informational symmetry’ as a fundamental working principle behind the fair functioning of markets, Sebi banned a television anchor Pradeep Pandya, formerly associated with CNBC Awaaz, from the securities markets for five years and fined him ₹1 crore. 

This penalty was imposed for his alleged involvement in front-running. The anchor allegedly used material non-public information to benefit from stock trades before it was broadcast. Sebi found that wrongful gains were made by a few who had advance access to that information.

“When TV anchors engage in sharing material non-public information, as noted in this case, it not only breaches ethical standards but also distorts market dynamics… This erosion of trust can lead to a significant loss of confidence among investors, who may feel that the markets are rigged against them,” Sebi’s order stated.

The market regulator’s crackdown on unethical financial reporting practices is not the first of its kind. In 2022, it had passed an order against another CNBC Awaaz news anchor, Hemant Ghai, and his wife for wrongfully profiting from information that was not yet in the public domain. In this case, he allegedly bought stocks in his wife’s and mother’s names before airing the news so as to profit from an anticipated rise in prices.

These cases highlight glaring ethical and legal issues in the realm of Indian financial journalism.

We need specific regulations: The current framework governing financial journalists comprises Sebi (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations of 2003, or PFUTPR for short, and the Sebi (Research Analysts) Regulations of 2014 (RA regulations). 

As these two sets of rules were primarily designed to govern market intermediaries and research analysts, they did not take into account the nuanced roles and potential conflicts-of-interest of others like financial reporters/journalists. This lack of specificity has given rise to regulatory gaps and enforcement challenges.

The scope of PFUTPR’s prohibition of front-running by financial journalists and other non-intermediaries was broadened by the Supreme Court’s pronouncement in Sebi vs Shri Kanaiyalal Baldevbhai Patel and Ors, and a Sebi report of 8 August 2018 on ‘fair market conduct.’ 

The provisions of personal trading and compensation under RA regulations, although applicable, do not encompass all scenarios unique to the position and influence of financial journalists. 

Biased reporting that stems from vested interests or indirect favours extended to journalists in the form of gifts and privileged access cannot be said to be covered by the existing framework, which is restricted to financial quid pro quo deals.

Even though Sebi in the past has used the PFUTPR to address similar instances, these measures are often reactive and fail to withstand questions of law at the time of enforcement. Many such orders have been overturned by the Securities Appellate Tribunal (SAT), as witnessed in Hemant Ghai’s case.

We need more than a stop-gap solution to prevent non-market intermediaries from indulging in practices that violate market norms. We need a dedicated framework that will comprehensively address the ethical and legal challenges posed by cases of journalists making use of privileged data.

Balance transparency and journalistic freedom: Drafting a new set of rules will also present its own challenges. For instance, Sebi’s conventional approach of ‘disclose or abstain,’ which requires journalists to either refrain from covering companies in which they have a financial interest or disclose it to their audience, may not be pragmatic. 

Imagine a scenario where a journalist is required to disclose his positions and personal financial interests, including those of family members, within the constraints of a live one-hour broadcast. It is essentially unfeasible.

Sebi’s effort to create a dedicated framework should align with its ongoing efforts to tackle challenges posed by ‘finfluencers’ who operate online. Inspiration may be drawn from established codes such as the Editors’ Code of Practice by the UK’s press self-regulatory panel, as well as anti-fraud provisions like Section 10(b) of the US Securities Exchange Act of 1934. 

Principles established in US cases such as David Carpenter vs US (1987) and Zweig vs Hearst Corp (1979) also offer valuable insights.

A mandatory internal disclosure system could be established, for instance, under which financial journalists must report their and their family’s personal interests to their editors or an internal compliance officer. Journalists could also be prohibited from trading in securities they cover within a specified ‘blackout period,’ such as 30 before and five days after reports go public.

To address operational challenges, the framework could allow for exceptions where full disclosure is impractical, provided there are clear justifications and prior approval from a regulatory body. A journalist might be permitted to disclose a conflict of interest after a broadcast if immediate disclosure is not feasible. Such flexibility would ensure that a journalist’s work is not hindered.