The SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003 enable SEBI to investigate into cases of market manipulation and fraudulent and unfair trade practices. The regulations specifically prohibit market manipulation, misleading statements to induce sale or purchase of securities, unfair trade practices relating to securities. SEBI can conduct investigation, suo moto or upon information received by it, by an investigating officer in respect of conduct and affairs of any person dealing, buying/selling/dealing in securities. Based on the report of the investigating officer, SEBI can initiate action for suspension or cancellation of registration of an intermediary.
The term “fraud” has been defined by 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 or his agent while dealing in securities in order to induce another person with his connivance or his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss, and shall also include –
1. a knowing misrepresentation of the truth or concealment of material fact in order that another person may act to his detriment;
2. the 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 one 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 fraudulent;
7. deceptive behaviour by a person depriving another of informed consent or full participation;
8. a false statement made without reasonable ground for believing 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.
And “fraudulent” shall be construed accordingly :
Nothing contained in this clause shall apply to any general comments made in good faith in regard to –
(a) the economic policy of the Government;
(b) the economic situation of the country;
(c) trends in the securities market;
(d) any other matter of a like nature;
Whether such comments are made in public or in private.
The regulation prohibits:
(1) dealings in securities in a fraudulent manner,
(2) market manipulation,
(3) misleading statements to induce sale or purchase of securities, and
(4) unfair trade practice relating to securities
Prohibition of certain dealings in securities
“No person shall directly or indirectly”
(a) buy, sell or otherwise deal in securities in a fraudulent manner
(b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognised stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made there under.
(c) employ any device, scheme or artifice to degrade in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognised stock exchange;
(d) 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 on a recognised stock exchange in contravention of the act, rules and regulations. (Regulation 3).
Prohibition against Manipulative, fraudulent and unfair trade practices
Regulation 4 provides that no person shall indulge in a fraudulent or an unfair trade practice in securities.
Further any dealing in securities shall be deemed to be fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following :-
(i) indulging in an act which creates false or misleading appearance of trading in the securities market.
(ii) 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.
(iii) advancing or agreeing to advance any money to any person thereby inducing any other person to offer to buy any security in any issue only with the intention of securing the minimum subscription to such issue.
(iv) paying, offering or agreeing to pay or offer, directly or indirectly, to any person any money or money’s worth for inducing such person for dealing in any security with the object of inflating, depressing, maintaining or causing fluctuation in the price of such security.
(v) any act or omission amounting to manipulation of the price of a security.
(vi) publishing or causing to publish or reporting or causing to report by a person dealing in securities any information which is not true or which he does not believe to be true prior to or in the course of dealing in securities.
(vii) entering into a transaction in securities without intention of performing it or without intention of change in ownership of such security.
(viii) selling, dealing or pledging of stolen or counterfeit security whether in physical or dematerialized form.
(ix) an intermediary promising a certain price in respect of buying or selling of a security to a client and waiting till a discrepancy arises in the price of such security and retaining the difference in prices as profit for himself.
(x) an intermediary providing his clients with such information relating to a security as cannot be verified by the clients before their dealing in such security.
(xi) an advertisement that is misleading or that contains information in a distorted manner and which may influence the decision of the investors.
(xii) an intermediary reporting trading transactions to his clients entered into on their behalf in an inflated manner in order to increase his commission and brokerage.
(xiii) an intermediary not disclosing to his client transactions entered into on his behalf including taking an option position.
(xiv) circular transactions in respect of a security entered into between intermediaries in order to increase commission to provide a false appearance of trading in such security or to inflate, depress or cause fluctuations in the price of such security.
(xv) encouraging the clients by an intermediary to deal in securities solely with the object of enhancing his brokerage or commission.
(xvi) an intermediary predating or otherwise falsifying records such as contract notes.
(xvii) an intermediary buying or selling securities in advance of a substantial client order or whereby a futures or option position is taken about an impending transaction in the same or related futures or options contract.
(xviii) planting false or misleading news which may induce sale or purchase of securities.