In this article, Bharath Selvakumar, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses on fraudulent and unfair trade practices in the securities market.
The Securities market is a part of the financial market where buying and selling of securities are done. Just like any other financial market, securities market is also prone to scams, frauds and illicit activities. Securities market in India involves millions of active investors on a daily basis investing and earning money through the trade done. So it is very essential to check and prevent any of the scams or frauds in the market to safeguard the interests of all the investors in the securities market.
Governing body for the Securities Market
Owing to the growth of securities market in the Indian economy in 1992, the Government of India established a regulatory body to look after this market. It was called the Securities and Exchange Board of India (SEBI). This Securities and Exchange Board of India (SEBI) was entrusted with the following responsibilities:
- Protecting the interests of investors in securities market.
- Regulate the operations of the securities market.
- Promote and develop securities market.
- Regulate the insider trading in a company.
Protection of Investor Interests
One of SEBI’s key responsibilities is to regulate and maintain the interests of the investors in the securities market which is the key for the functioning of the securities market. This is evident from the case below:
Securities and Exchange Board of India (SEBI) v. Sahara India Real Estate Corporation Ltd.
Sahara issued Optionally Fully Convertible Debentures (OFCDs) to investors without the approval of SEBI from 25th April 2008 to 13th April 2011 and collected over Rs.17,400 crore. SEBI, on noticing the interests of the investors at risk took up this issue and ordered Sahara to return the entire collected amount to the investors with 15% interest rate.
Fraudulent and Unfair Trade practices
As stated by SEBI in the Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market Regulations, 2003
“Fraud includes any act, expression, omission or concealment committed 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”.
Prohibition of unfair dealings in Securities
The Prohibition of fraudulent and unfair trade practices regulation passed on July 17, 2003 lists down the following points as unacceptable in securities market for regulating the securities market from frauds and scams. Chapter II (3) of this regulation deals with prohibition of unfair dealings in securities. It states that:
- Nobody directly or indirectly should indulge in fraud relating to selling, buying or dealing with securities;
- No one should use any manipulative or deceptive means to violate the provisions of the Act;
- No one should employ any scheme or device or a strategy to defraud the dealings connected with securities.
Any breach to the above-mentioned statements would be considered, unlawful. If any of those breaches are done by any individual or a company it would be investigated by SEBI and appropriate actions would be taken against the party who commits such unlawful activity by SEBI.
Prohibition of Manipulative, Fraudulent and Unfair trade practices
Securities and Exchange Board of India (SEBI) plays a pivotal and instrumental role in prohibiting any sort of activities that are manipulative or fraudulent or unfair in the securities market. After SEBI encountered many unfair practices, frauds that affect the securities market, SEBI passed a special regulation pertaining to prohibition of manipulative, fraudulent and unfair trade practices in chapter II (4) of 2003 regulation. The following has been mentioned:
- No person shall indulge in frauds or unfair trade practices in the securities market.
- Creating a fake appearance of trading of securities that would give a false appearance of trading to the investors is not allowed.
- Handling with securities with a purpose of inflating or causing fluctuations in securities is not allowed instead it should be intended for transfer of ownership only.
- To pay any person money or money’s equivalent for the purpose of handling securities with a motive of causing fluctuations or inflation is not allowed.
- Any act to manipulate the price of securities is not allowed.
- Use of any information that is false to make a person handle with securities is not allowed.
- To handle securities without any intention of performing or without the intention of change in ownership is not allowed.
- Should not deal with any securities that are stolen or fake.
SEBI also has certain regulations to the intermediaries such as stock brokers, sub-brokers etc. which are:
- No intermediary should promise a price to a person and if any change of price occurs later, profiting from that change occurred is not allowed.
- An Intermediary should not offer any information that is not verifiable and make a person handle securities with that unverified information.
- Should not advertise with half or partially true information that is misleading and influences a person to handle with securities.
- An intermediary handling inflated securities on behalf of a person with an intent of higher brokerage is not allowed.
- No intermediary should restrain from reporting the transactions in securities that is done on a person’s behalf.
- To make circular transactions that projects a fake view of buying or selling of securities in securities market is not allowed.
- No intermediary should encourage or recommend a person to handle certain securities with a motive of higher brokerage.
- No intermediary should falsify or predate any documents like contracts.
- An intermediary should not sell or buy securities in advance knowing a future order of a company or a client, which known as the act of front-running.
- To spread fake news that induces selling or buying of securities.
These are the interpretations of regulations that have been passed by the Securities and Exchange Board of India (SEBI) which states those things to a company or an intermediary or an investor those things that are unacceptable and are punishable. To know these regulations with more clarity a couple of orders by SEBI are discussed below:
Adjudication order against Mr. Dipak Patel in the matter of Trading Activity of Kanaiyalal Baldevbhai Patel with Passport India Investment (Mauritius) Limited (see here).
Kanaiyalal Baldevbhai Patel used the information from his cousin Dipak Patel who was Portfolio Manager for Passport India Investment Ltd. (PII) illegally to front-run for those stocks that were to be ordered by the company and later sold those to PII for a profit. By doing this for a period of over 2 years Kanaiyalal Baldevbahi Patel earned a profit of about Rs.1,56,32,364. The Adjudication Officer after the investigation of SEBI sighting this act of front-running with illicit information unlawful levied a fine of Rs.5,00,00,000 to Dipak Patel.
Adjudication Order in respect of Shri. N. Narayanan and Shri. V. Natarajan in the matter of Pyramid Saimira Theatre Limited (see here).
N.Narayanan and V.Natarajan the full-time directors of Pyramid Saimira Theatre Limited (PSTL) during the financial year 2007-2008 published fake accounts with inflated figures in their financial report. This act of fraud deliberately done to lure investors was investigated by SEBI and the Adjudication Officer levied fine of Rs.50,00,000 to V.Narayanan and Rs.40,00,000 to V.Natarajan.
Complaint against Unfair Trade Practices
If any of the investors encounter any frauds or unfair trade practices in securities market they can approach SEBI and file a complaint for the same. SEBI has a separate complaint cell named SEBI Complaints Redress System (SCORES) for quicker resolution of complaints. SCORES has an online platform (https://scores.gov.in/) for the ease of investors to file a complaint.
For any market to flourish and maintain a constant growth on a long-term, it is necessary to maintain the market free from any frauds, illicit activities, unfair and manipulative actions. This goes same with Securities market. In order to maintain a long-term growth and protect the people involved in investing in the securities market, the Securities and Exchange Board of India (SEBI) has taken every step possible to maintain the same with all possible means. In India owing to population and many investors entering into the market, there is a greater risk for any frauds to occur capitalizing from a large number of investors and also in the modern technological era, India lags behind cybersecurity compared to other developed countries. Since most securities are handled now through online platforms, applications etc. SEBI should also bring in the cybersecurity guidelines and cyber security wing to protect the securities market from any possible cyber hacking eventually protecting and guiding securities market in India to a path of development.
Regulation on Securities and Exchange Board of India act [https://www.sebi.gov.in/acts/futpfinal.html (March 31, 2018)].