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CHAPTER 14 Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market

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)


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