It is the primary function/duty of SEBI is to take care of the practices being followed while dealing in the securities market and for this; various trading norms, regulations etc. are in place to keep a check for it.
The SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 was issued for prohibiting of certain dealings in securities and to prohibit the manipulative, fraudulent and unfair trade practices. This has repealed the earlier regualtions of 1995.
To better understand the purpose and intent behind this regulations, there are few important definitions/terms that should be clear, overall the regulations has divided into 3 chapters (13 regulations).
The important definitions/meaning of the terms defined under the regulations are;
- ‘dealing in securities’: it includes
| an act of buying, selling or subscribing pursuant to any issue of any security or
agreeing to buy, sell or subscribe to any issue of any security or otherwise transacting in any way in any security by any persons either by themselves or through mule accounts, including as principal, agent, or intermediary. |
acts which may be knowingly designed to influence the decision of investors in securities. |
| and any act of providing assistance to carry out the above two acts. | |
- ‘fraud’: what is fraudulent is to be understood with the help of term ‘fraud’ as defined in the regulations, therefore it is important to note that fraud includes
| any act, expression, omission or concealment
whether in a deceitful manner or not by a person or by any other person with his connivance or by his agent while dealing in securities in order to induce another person or his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss |
and shall also include the following; |
| a knowing misrepresentation of the truth or concealment of material fact in order that another person may act to his detrimental | |
| a suggestion as to a fact which is not true by one who does not believe it to be true; | |
| an active concealment of a fact by a person having knowledge or belief of the fact; | |
| a promise made without any intention of performing it; | |
| a representation made in a reckless and careless manner whether it be true or false; | |
| any such act or omission as any other law specifically declares to be fraudulent, | |
| deceptive behaviour by a person depriving another of informed consent or full participation, | |
| a false statement made without reasonable ground for believing it to be true. | |
| act of an issuer of securities giving out misinformation that affects the market price of the security, resulting in investors being effectively misled even though they did not rely on the statement itself or anything derived from it other than the market price. |
Prohibition of certain dealings in securities
| Person directly/indirectly shall not; | |
|
in a fraudulent manner |
|
use or employ- any manipulative or deceptive device
(in contravention of the provisions of the Act or the rules or the regulations made) |
(which are listed or proposed to be listed on a recognized stock exchange) |
employ any device, scheme or artifice to defraud |
(which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under.) |
engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person |
Prohibition of manipulative, fraudulent and unfair trade practices
Dealing in securities shall be deemed to be a manipulative, fraudulent or an unfair trade practice if it involves any of the following:
- Knowingly indulging in an act which creates false or misleading appearance of trading in the securities market;
- Dealing in a security not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress or cause fluctuations in the price of such security for wrongful gain or avoidance of loss;
- Inducing any person to subscribe to an issue of the securities for fraudulently securing the minimum subscription to such issue of securities, by advancing or agreeing to advance any money to any other person or through any other means;
- Inducing any person for dealing in any securities for artificially inflating, depressing, maintaining or causing fluctuation in the price of securities through any means including by paying, offering or agreeing to pay or offer any money or money’s worth, directly or indirectly, to any person;
- Any act or omission amounting to manipulation of the price of a security including, influencing or manipulating the reference price or bench mark price of any securities;
- Knowingly publishing or causing to publish or reporting or causing to report by a person dealing in securities any information relating to securities, including financial results, financial statements, mergers and acquisitions, regulatory approvals, which is not true or which he does not believe to be true prior to or in the course of dealing in securities;
- Entering into a transaction in securities without intention of performing it or without intention of change of ownership of such security
- Selling, dealing or pledging of stolen, counterfeit or fraudulently issued securities whether in physical or dematerialized form: Provided that if:
– the person selling, dealing in or pledging stolen, counterfeit or fraudulently issued securities was a holder in due course; or
– the stolen, counterfeit or fraudulently issued securities were previously traded on the market through a bonafide transaction,
– such selling, dealing or pledging of stolen, counterfeit or fraudulently issued securities shall not be considered as a manipulative, fraudulent, or
unfair trade practice;
- Disseminating information or advice through any media, whether physical or digital, which the disseminator knows to be false or misleading in a reckless or careless manner and which is designed to, or likely to influence the decision of investors dealing in securities
- A market participant entering into transactions on behalf of client without the knowledge of or instructions from client or misutilizing or diverting the funds or securities of the client held in fiduciary capacity
- Circular transactions in respect of a security entered into between persons including intermediaries to artificially provide a false appearance of trading in such security or to inflate, depress or cause fluctuations in the price of such security;
- Fraudulent inducement of any person by a market participant to deal in securities with the objective of enhancing his brokerage or commission or income;
- An intermediary predating or otherwise falsifying records including contract notes, client instructions, balance of securities statement, client account statements;
- Any order in securities placed by a person, while directly or indirectly in possession of information that is not publically available, regarding a substantial impending transaction in that securities, its underlying securities or its derivative;
- Knowingly planting false or misleading news which may induce sale or purchase of securities
- Mis-selling of securities or services relating to securities market;
- Illegal mobilization of funds by sponsoring or causing to be sponsored or carrying on or causing to be carried on any collective investment scheme by any person.
Any general comments made in good faith whether made in public or in private related to— the economic policy of the government/ economic situation of the country/ trends in the securities market or any other matter of a like nature; shall not be considered as fraud/fraudulent.
Under the regulations, the SEBI has given power to investigate, enforce and suspend/cancel the registration also.
In brief, the regulations can be summarized as;
CHAPTER I PRELIMINARY
Short title and commencement
Definitions
CHAPTER II PROHIBITION OF FRAUDULENT AND UNFAIR TRADE PRACTICES RELATING TO THE SECURITIES MARKET
Prohibition of certain dealings in securities
Prohibition of manipulative, fraudulent and unfair trade practices
CHAPTER III INVESTIGATION
Power of the Board to order investigation
Powers of Investigating Authority
Duty to co-operate, etc.
Submission of report to the Board
Enforcement by the Board
Manner of service of summons and notices issued by the Board
Suspension or cancellation of registration
Repeal and savings
References:
1. SEBI Website/www.sebi.gov.in
2. Securities and Exchange Board of India Act, 1992
3. SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003
Note: Readers are advised to go through the original content of the Act/regulations/given references.
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