SEBI (Prohibition of Fraudulent and Unfair Trade Practices

SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003

Definition: The SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 aim to prohibit fraudulent, unfair, and manipulative trade practices in securities.
Details: These regulations have been made in exercise of the powers conferred by section 30 of the SEBI Act, 1992.

Key Concepts

Fraud: Defined as any act, expression, omission, or concealment committed to induce another person to deal in securities, whether or not there is any wrongful gain or avoidance of loss.
Prohibited Dealings: Certain dealings in securities are prohibited, including buying, selling, or dealing in securities in a fraudulent manner.
Manipulative, Fraudulent, and Unfair Trade Practices: Dealing in securities shall be deemed to be a manipulative, fraudulent, or unfair trade practice if it involves acts such as:
- Creating a false or misleading appearance of trading in the securities market.
- Dealing in security not intended to effect transfer of beneficial ownership.
- Inducing any person to subscribe to an issue of securities for fraudulently securing the minimum subscription.
- Inducing any person for dealing in any securities for artificially inflating, depressing, maintaining, or causing fluctuation in the price of securities.

Investigation

Duty of Person under Investigation: Every person under investigation shall produce books, accounts, and other documents, furnish statements and information, and appear before the Investigating Authority personally when required.
SEBI's Powers: SEBI may issue orders, take actions, or give directions to:
- Suspend the trading of the security found to be or prima facie found to be involved in fraudulent and unfair trade practice.
- Restrain persons from accessing the securities market and prohibit any person associated with securities market to buy, sell, or deal in securities.
- Impound and retain the proceeds or securities in respect of any transaction which is in violation or prima facie in violation of these regulations.

SEBI (Prohibition of Fraudulent and Unfair Trade Practices (Part 2)

Market Manipulation: SEBI investigated a case where the scrip price of FFSL rose exponentially from May 15, 2012, to February 8, 2013, followed by a high-volume trade period where most shares were off-loaded in the market.
Preferential Allotment: The company had raised funds through preferential allotments, but the money was not utilized for the stated purposes and was instead transferred back to allottees or other entities through multiple transactions.
Fund Transfers: FFSL and its connected entities were found to have transferred funds in a way that benefited certain allottees, and the company's directors were involved in orchestrating a fraudulent scheme.
SEBI Action: SEBI passed interim orders restraining 154 entities from accessing the securities market and later confirmed the directions against 149 entities, while revoking them against 5 entities.
Final Order: The final order restrained 29 entities, including FFSL, from accessing the securities market for a period of three years.

Key Concepts

Front Running: A practice where a person trades on the basis of non-public information about an impending trade, which can be considered a fraudulent or unfair trade practice.
Tippee Trading: A type of front running where a person trades on the basis of information received from someone who has access to non-public information.
Trading Ahead: A type of front running where an intermediary trades ahead of a customer's order for their own profit.
Regulations 3 and 4 of FUTP 2003: These regulations prohibit fraudulent and unfair trade practices, including front running, and require that the ingredients of such practices be established in order to prove a violation.

Case Law

SEBI vs. Shri Kanaiyalal Baldevbhai Patel: The Supreme Court considered whether front running by a non-intermediary is a prohibited practice under regulations 3 and 4 of FUTP 2003.
Findings: The court found that front running can take many forms, including tippee trading and trading ahead, and that non-intermediary front running can be brought under the prohibition prescribed under regulations 3 and 4(1) if the ingredients of a fraudulent or unfair trade practice are established.

SEBI (Prohibition of Fraudulent and Unfair Trade Practices (Part 3)

Definition: SEBI (Prohibition of Fraudulent and Unfair Trade Practices) regulations aim to prevent and penalize fraudulent and unfair trade practices in the securities market.
Details: The regulations cover various aspects, including synchronized trading, circular trading, and reversal trading, which can be used to manipulate the market.

Key Concepts

Joint Liability: Both the initiator of a fraudulent practice and the other party who knowingly aided in it can be held jointly liable.
Penal Consequences: Breach of the code of business integrity in the securities market can lead to penal consequences, including fines and other penalties, under the provisions of Section 15HA of the SEBI Act.
SEBI Act: The SEBI Act, 1992, provides the framework for regulating the securities market in India, including provisions for prohibiting fraudulent and unfair trade practices.
PFUTP Regulations: The SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, provide detailed guidelines for preventing and penalizing fraudulent and unfair trade practices.

Case Studies

Ms Sunita Gupta vs SEBI: The case involved allegations of manipulation of trading in the scrip of M/s. Gangotri Textiles Ltd. The appellant was found to have violated provisions of the SEBI Act and PFUTP Regulations.
SEBI vs Hemant Ghai, Shyam Mohini Ghai, Jaya Hemant Ghai: The case involved allegations of front running and manipulation of trading in the show "Stock 20-20" co-hosted by Hemant Ghai. The entities were found to have earned proceeds of Rs 2.95 crore through limited trades examined during the period.

Important Terms

Synchronized Trading: Trading in a manner that is coordinated with other entities to manipulate the market.
Circular Trading: Trading in a manner that involves buying and selling securities in a circular manner to manipulate the market.
Reversal Trading: Trading in a manner that involves reversing a previous trade to manipulate the market.
Front Running: Trading on advance information of a pending transaction to benefit from the expected price movement.

SEBI (Prohibition of Fraudulent and Unfair Trade Practices (Part 4)

Fraudulent Trade Practices: Include actions where a person does not dispose of or create a charge on assets, and depositories and registrar transfer agents must ensure no credits in accounts held by them jointly or severally until further direction.
Prohibitions: The SEBI regulations prohibit a person from directly or indirectly dealing in securities in a fraudulent manner, which includes buying, selling, or otherwise dealing in securities.
Fraud Definition: Includes a wilful misrepresentation of truth or concealment of material fact, resulting in another person acting to their detriment.
Intermediary Responsibilities: Intermediaries must not provide clients with unverifiable information related to securities, as this can be considered fraudulent.
SEBI Actions: In cases of fraud, SEBI can cancel or suspend the registration of an intermediary.

Review Questions:

1. Fraud includes a wilful misrepresentation of truth or concealment of material fact: (a) True
1. The SEBI regulations prohibit a person from directly or indirectly (d) All of the above (buying, selling, dealing in securities) in a fraudulent manner.
1. Fraud includes an intermediary providing unverifiable information: (a) True
1. SEBI can (c) Both a & b (cancel or suspend) the registration of an intermediary in cases of fraud.