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Unfair Trade Practices in the securities market

Like any financial market, securities markets are prone to scams, frauds and Illicit activities. The money of millions of investors remains at stake on a daily basis. Therefore, checking and preventing any scam and fraud in the market on a regular basis is of paramount importance. And for this purpose, SEBI was entrusted with the below responsibilities:

  1. To protect investors’ interests in the securities market
  2. To regulate the operations of the securities market
  3. To promote and develop the securities market
  4. To regulate insider trading

Fraudulent and Unfair Trade PrActices

Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market Regulations, 2003 which was passed on July 17, 2003, defines fraud as: “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

Prohibition of Fraudulent and Unfair Trade Practices Regulations states that:

  • Nobody directly or indirectly should indulge in any fraud related to selling/buying/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

All the above points are unacceptable in the securities market to protect it from frauds and scams. Any breach would be considered unlawful and will be investigated by SEBI and appropriate Action will be taken.

Harshad Mehta Scam

Harshad Mehta, a well-known stockbroker was alleged to have manipulated the stock market in 1992. He withdrew funds from banks using worthless bank receipts and used the money to buy considerable shares across industry verticals. Bank funds of around 3500 crore rupees were diverted this way and were infused into the stock market aggressively thereby making the Sensex surge to over 4500 points from just 2300 points in a span of 3-5 months. When the scam bursted in the month of April 1992, SBI realized that it owed 500 crore by Harshad, the stock market crashed and investors realized that they lost a lot of money. Harshad was also accused of diverting money from MUL (Maruti Udyog Ltd) to his own accounts.

Ketan Parekh Scam

Ketan Parekh was a chartered accountant and had worked with Harshad Mehta in the past. The modus operandi of Ketan Parekh was to look out for stocks which had a low market capitalization and low liquidity. He used to get these shares bought and getting them traded between his own network of companies. The normal traders started believing that the stocks are having an organic growth. He didn’t trade on his own, rather commissioned other brokers to hold securities on his behalf. When the stocks Ketan’s brokers held, started going down in value, Ketan found himself locked out of cash. Brokers who were holding positions on his behalf were forced to liquidate causing a massive sell-off in the market and normal investors lost approximately Rs. 2000 crores.

The penalty for Insider Trading

  • As per the section 15G and 24 of the SEBI Act, insiders, who violate the 2015 regulations, are liable to a penalty that may be imposed by SEBI of Rs.25 Crores or 3 times the amount of profit made out of the insider trading, whichever is higher and shall also be punishable with imprisonment for a term extending to 10 years or a fine up to 25 crores or both.
  • As per section 11(C) (6) of the SEBI Act, if any person refuses to co-operate in any investigation by SEBI with respect to insider trading, then he shall be punishable with an imprisonment for a term extending up to one year, or with fine up to Rs. 1 Crore or with both, and also with further fine up to Rs. 5 Lakh for every day of such non-cooperation.
  • As per section 11(4) (B) of SEBI Act, SEBI is also empowered to pass directions to such insider not to deal in the concerned securities in any particular manner and/or prohibit him from disposing of the concerned securities and /or declaring the concerned transaction(s) of securities as null and void, restraining the insider from communicating or counselling any person to deal in securities.
  • As per section 195 of the companies Act, 2013 if any insider contravenes the provisions of this section, he/she shall be punishable with imprisonment for a term which may extend to five years or with fine which shall not be less than five lakhs rupees but which may extend to twenty five crore rupees or three time the amount of profits made out of insider trading, whichever is higher, or with both.

We hope this article would have helped you in your preparation of SEBI Grade A exam.  Let us know in the comments section if you want any specific topic to be covered. Wishing you all the best for your SEBI Grade A preparation!

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  1. Ashwini

    Sir, please provide notes related to commodity market & exchange and International commodity market.

  2. sir , is this much info on the topic sufficient for the exam?

    also please provide the study material for the remaining topics of securities market or please suggest me a book which covers all the topics mentioned under heading securities market as i cannot find one anywhere which contains all of these topics

  3. The notes on the blog would not be sufficient. We would advise you to also follow a book called Indian Financial System by Bharti Pathak.

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