Question1.
Which type of dealings in securities are prohibited under the SEBI (Prohibition of Fraudulent & Unfair Trade Practice relating to Securities Market) Regulations, 2013?
Answer: 1.
Prohibition of certain dealings in securities [Regulation 3]: No person shall directly or indirectly:
(a) Dealing in securities in fraudulent manner: Buy, sell or otherwise deal in securities in a fraudulent manner.
(b) Using manipulative or deceptive device: Use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the SEBI Act, 1992 or the Rules/ Regulations made thereunder.
(c) Fraud in dealing or issue of securities: Employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange.
(d) Fraud with person in dealing or issue of securities: Fraud or deceit Engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed be listed on a recognized stock exchange in contravention of the provisions of the SEBI Act, 1992 or the Rules/Regulations made thereunder.
Question2.
In case if a Company is found to be in violation of the SEBI (Prohibition of
Fraudulent & Unfair Trade Practice relating to Securities Market) Regulations, 2003, what are the actions SEBI can take against the company?
Answer: 2.
Enforcement by the SEBI [Regulation 10]: After consideration of the report of Investigating Authority, the SEBI may issue such directions or take such action mentioned in Regulations 11 & 12 if it satisfied that there is a violation of the regulations.
The SEBI may give a reasonable opportunity of hearing to concerned persons.
The SEBI may issue directions in the interest of investors and the securities market under Regulation 11 even in case of pending of receipt of the report of investigating authority.
The SEBI may, in the interest of investors and securities market, dispense with the opportunity of pre – decisional hearing by recording reasons in writing and shall give and opportunity of post – decisional hearing to the persons concerned as expeditiously as possible.
Directions and action in case of default [Regulation 11]: The SEBI may, without prejudice to the provisions contained in Sections 11 & 11B of the SEBI Act, 1992, by an order, for reasons to be recorded in writing, in the interests of investors and securities market, issue or take any of the following actions or directions, either pending investigation or enquiry or on completion of such investigation or enquiry:
(a) Suspend the trading of the security found to be or prima facie found to be involved in fraudulent and unfair trade practice in a recognized stock exchange.
(b) Restrain persons from accessing the securities market and prohibit any person associated with securities market to buy, sell or deal in securities.
(c) Suspend any office – bearer of any stock exchange or self – regulatory organization from holding such position.
(d) Impound and retain the proceeds or securities in respect of any transaction which is in violation or prima facie in violation of these regulations.
(e) Direct and intermediary or any person associated with the securities market in any manner not to dispose of or alienate an asset forming part of a fraudulent and unfair transaction.
(f) Require the person concerned to call upon any of its officers, other employees or representatives to refrain from dealing in securities in any particular manner.
(g) Prohibit the person concerned from disposing of any of the securities acquired in contravention of these regulations.
(h) Direct the person concerned to dispose of any such securities acquired in contravention of these regulations, in such manner as the SEBI may deem fit, for restoring the status quo ante.
Question3.
What do you mean by ‘Fraud’ and what are the exceptions to the fraud as per the SEBI (Prohibition of Fraudulent & Unfair Trade Practice relating to Securities Market) Regulations, 2003?
Answer: 3.
Fraud [Regulation 2(1)(c)]: 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.
Fraud shall also include –
(1) A Knowing misrepresentation of the truth or concealment of material fact in other that another person may act to his detriment.
(2) A suggestion as to a fact which is not true by one who does not believe it to be true.
(3) An active concealment of a fact by a person having knowledge or belief of the fact.
(4) A promise made without any intention of performing it.
(5) A representation made in a reckless and careless manner whether it be true or false.
(6) Any such act or omission as any other law specifically declares to be fraud.
(7) Deceptive behaviour by a person depriving another of informed consent or full participation.
(8) A false statement made without reasonable ground for believing it to be true.
(9) The 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.
Exception: Following comments made in good faith cannot be treated as fraud:
(a) Economic policy of the government.
(b) Economic situation of the country.
(c) Trends in the securities market.
(d) Any other matter of a like nature.
It not relevant whether above comments are made in public or in private.
MCQ’s
1. Mr. Sunil Gupta entered some transactions in security market and on investigation it was found by the SEBI that he had indulged fraudulent and unfair trade practices in relation to securities of XYZ Limited. Which of the following penalty can be imposed on him as per section 15HA of the SEBI Act, 1992?
(a) If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty which shall not be less than Rs 10 lakh but which may extend to Rs 10 Crore or 3 times of profits made out of such practices, whichever is higher.
(b) If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty which shall not be less than Rs 5 lakh but which may extend to Rs 5 Crore or 5 times of profits made out of such practices, whichever is higher.
(c) If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty which shall not be less than Rs 5 lakh but which may extend to Rs 25 Crore or 3 times of profits made out of such practices, whichever is higher.
(d) If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty which shall not be less than Rs 20 lakh but which may extend to Rs 20 Crore or 2 times of profits made out of such practices, whichever is higher. (2 Marks)
Answer: (c)
2. Which of the following can be treated as ‘Fraud’ as per the SEBI (Prohibition of Fraudulent & Unfair Trade Practice relating to Securities Market) Regulations, 2003?
(a) A knowing misrepresentation of the truth or concealment of material fact in order that another person may act to his detriment.
(b) A suggestion as to a fact which is true by one who believes it to be true.
(c) A promise made with intention of performing it.
(d) Comments made in good faith about economic policy of the government. (1 Mark)
Answer: (a)
1. Define 'Fraudulent and Unfair Trade Practices' under the SEBI Act, 1992. Explain how these practices affect the securities market and investors.
Answer:
'Fraudulent and Unfair Trade Practices' under the SEBI Act, 1992, refer to actions and behaviors in the securities market that are deceitful, misleading, or manipulative, intending to create false market conditions, defraud investors, or unfairly influence the market price of securities. These practices include:
Insider Trading: Trading based on non-public, material information about a company.
Market Manipulation: Creating artificial prices or misleading information to influence the market.
Pump and Dump Schemes: Inflating stock prices through false or misleading statements and then selling off the inflated stock.
Circular Trading: Simultaneous buying and selling of securities to create an illusion of high trading volumes.
These practices harm the integrity of the securities market, erode investor confidence, and can lead to significant financial losses for investors. They undermine the market's fairness and transparency, leading to a distorted price discovery process and increased volatility.
2. Discuss the legal framework established under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003. What are the key provisions of these regulations?
Answer:
The SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, provide a comprehensive legal framework to prevent and penalize fraudulent and unfair practices in the securities market. Key provisions include:
Prohibition of Fraudulent Practices: The regulations prohibit fraudulent acts, including false or misleading statements, insider trading, and any actions intended to deceive investors.
Prohibition of Unfair Trade Practices: The regulations ban any unfair practices that distort the market, such as market manipulation, circular trading, and front-running.
Penalties: SEBI has the authority to impose penalties, including monetary fines, suspension or cancellation of licenses, and debarment from accessing the securities market for individuals and entities found guilty of such practices.
Investigative Powers: SEBI has the power to investigate any suspicious activities in the securities market, summon individuals, and demand documents and records as part of its investigation.
These regulations aim to maintain the integrity of the securities market by deterring fraudulent and unfair practices through stringent enforcement and penalties.
3. Explain the concept of 'Insider Trading' and its impact on the securities market. How does SEBI regulate and penalize insider trading in India?
Answer:
Insider trading refers to the buying or selling of securities by individuals who have access to non-public, material information about a company. This information can significantly impact the company's stock price once it becomes public, giving insiders an unfair advantage over other investors. Insider trading negatively impacts the securities market by:
Undermining investor confidence, as it creates an uneven playing field.
Distorting the price discovery mechanism, leading to artificial stock prices.
Reducing market liquidity, as investors may withdraw from the market due to perceived unfairness.
SEBI regulates insider trading through the SEBI (Prohibition of Insider Trading) Regulations, 2015, which prohibit insiders from trading based on unpublished price-sensitive information (UPSI). SEBI's measures include:
Disclosure Requirements: Insiders are required to disclose their trading activities to the company and the stock exchanges.
Trading Window Restrictions: Companies must establish trading windows during which insiders are prohibited from trading.
Penalties: SEBI can impose fines, issue orders for disgorgement of profits, and debar individuals from accessing the securities market if found guilty of insider trading.
These regulations aim to ensure transparency and fairness in the securities market, protecting the interests of all investors.
4. What is 'Market Manipulation,' and how does it differ from legitimate trading activities? Discuss SEBI's approach to detecting and preventing market manipulation.
Answer:
Market manipulation involves actions that artificially influence the price or volume of securities, creating a misleading appearance of active trading or affecting the market value of securities. Common forms of market manipulation include:
Pump and Dump Schemes: Inflating stock prices through false information and selling the stock at the inflated price.
Wash Trading: Buying and selling the same security simultaneously to create the illusion of high trading activity.
Cornering the Market: Acquiring a significant portion of a security to manipulate its price.
Market manipulation differs from legitimate trading as it involves deceitful tactics intended to distort the market, whereas legitimate trading is based on actual supply and demand and transparent information.
SEBI's approach to detecting and preventing market manipulation includes:
Surveillance Systems: SEBI uses advanced surveillance systems to monitor trading patterns and detect unusual market activity.
Investigation: SEBI has the authority to investigate suspected market manipulation and gather evidence through various means.
Enforcement Actions: SEBI can impose penalties, including fines, suspension of trading, and legal actions against individuals or entities involved in market manipulation.
SEBI's proactive monitoring and enforcement help maintain market integrity and protect investors from fraudulent activities.
5. Discuss the role of SEBI in protecting investors from fraudulent and unfair trade practices in the securities market. What mechanisms does SEBI have in place to address investor grievances?
Answer:
SEBI plays a crucial role in protecting investors from fraudulent and unfair trade practices through regulation, surveillance, and enforcement. The mechanisms SEBI has in place to address investor grievances include:
Investor Education: SEBI conducts investor awareness programs to educate investors about the risks of fraudulent practices and how to avoid them.
Grievance Redressal Mechanism: SEBI provides a platform called SEBI Complaints Redress System (SCORES) where investors can lodge complaints related to securities market frauds or unfair practices. SEBI ensures timely resolution of these complaints.
Investor Protection Fund: SEBI has established an Investor Protection Fund (IPF) to compensate investors who suffer losses due to fraudulent activities in the securities market.
Prompt Enforcement: SEBI takes swift action against entities involved in fraudulent practices, including imposing fines, suspensions, and legal actions.
These mechanisms ensure that investors are well-protected and that their grievances are addressed promptly, maintaining their confidence in the securities market.
6. What is 'Circular Trading,' and why is it considered an unfair trade practice? How does SEBI identify and act against entities involved in circular trading?
Answer:
Circular trading refers to a deceptive practice where entities buy and sell the same securities among themselves repeatedly to create an illusion of high trading volume and inflate the stock's price. This practice is considered unfair because it misleads other investors into believing that the security is in high demand, leading them to invest based on false information.
SEBI identifies circular trading through:
Surveillance: Monitoring trading patterns to detect repeated transactions between the same parties.
Analysis of Trading Data: SEBI analyzes trading data to spot discrepancies such as sudden spikes in volume or price without any significant news or events.
Investigations: SEBI conducts investigations to gather evidence against entities involved in circular trading, including reviewing trading records and interviewing market participants.
Once identified, SEBI can take action against the involved entities, such as imposing fines, suspending trading privileges, and initiating legal proceedings to deter such practices and protect market integrity.
7. Explain the concept of 'Price Rigging' and its impact on the securities market. How does SEBI take preventive measures against price rigging?
Answer:
Price rigging involves artificially inflating or deflating the price of a security through coordinated buying or selling activities, creating a misleading appearance of the security's value. The impact of price rigging on the securities market includes:
Distorted Price Discovery: It disrupts the natural supply and demand dynamics, leading to artificial prices.
Investor Losses: Investors who buy or sell based on manipulated prices can suffer significant financial losses.
Erosion of Market Confidence: Price rigging undermines the trust investors have in the fairness and transparency of the market.
SEBI's preventive measures against price rigging include:
Surveillance Systems: SEBI uses advanced technology to monitor trading activities and identify unusual patterns that may indicate price rigging.
Market Intelligence: SEBI gathers market intelligence through various channels, including tip-offs from market participants, to detect potential price rigging activities.
Regulatory Actions: SEBI imposes strict penalties on those found guilty of price rigging, including fines, suspensions, and legal actions, to deter such activities.
SEBI's vigilance and enforcement help maintain the integrity of the securities market and protect investors from the harmful effects of price rigging.
8. Discuss the penalties and enforcement actions that SEBI can impose on entities found guilty of fraudulent and unfair trade practices. How do these penalties contribute to maintaining market integrity?
Answer:
SEBI has the authority to impose a range of penalties and enforcement actions on entities found guilty of fraudulent and unfair trade practices, including:
Monetary Fines: SEBI can levy significant fines on individuals and entities involved in fraudulent practices.
Suspension and Debarment: SEBI can suspend or debar individuals or entities from accessing the securities market for a specified period.
Cancellation of Registration: SEBI can cancel the registration of market intermediaries found guilty of violating regulations.
Disgorgement Orders: SEBI can order the disgorgement of profits made through fraudulent activities, ensuring that wrongdoers do not benefit from their actions.
Prosecution: In severe cases, SEBI can initiate criminal prosecution against the offenders.