Unfair, Manipulative and Fraudulent Trade Practices in the Indian Securities Market

Introduction:

The securities market is a section of the financial market, where securities transactions have been conducted. As with any other financial market, the securities market is prone to scams, fraud and illegal activities. The Indian securities market involves millions of active investors, who are investing and making money through trading every day. Therefore, controlling and preventing any scams or frauds in the market is of vital importance to safeguarding the interests of all  ​investors in the securities market.

Due to the growth of the securities market in the Indian economy in 1992, the Government of India established a regulatory agency which is known as the Securities and Exchange Board of India (SEBI) to manage the market. The Securities and the Exchange board of India (SEBI) were assigned the following duties:

1. Protecting the investors’ benefits in the securities market.
2. Regulating the operation of the securities market.
3. Promoting and developing the securities market.
4. Regulating internal transactions of the company

Unfair, Manipulative and Fraudulent Trade Practices

According to the Securities and Exchange Board of India’s Prohibition of Fraudulent and Unfair Trade Practices in accordance to the 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[1]”.

Prohibition of Fraudulent, Manipulative and Unfair Trade Practices

The Securities and Exchange Board of India (SEBI) is responsible for forbidding any manipulative, fraudulent, or unfair practices in the securities market. SEBI created a unique regulation prohibiting manipulative, fraudulent, and unfair trade practices in Chapter II (4) of the 2003 regulation[2] after encountering numerous unfair practices and frauds affecting the securities market.

The following regulations are:

• No one shall directly or indirectly participate in fraud related to the sale, purchase or negotiation of securities;
• No one shall use any manipulation or deception to violate the provisions of the law ; 
• No one shall adopt any plan, Equipment or strategies to deceive securities-related transactions.
• Dealing with securities for the purpose of exaggerating or causing value fluctuations is not allowed, but it must only be used for the transfer of ownership.
• No one shall pay any person money or the equivalent of money for the purpose of processing securities for the purpose of causing volatility or inflation.
• Manipulation of securities prices is not allowed.
• No false information is allowed to allow individuals to process securities.
• Do not deal with securities without intention to comply with or change ownership. 
• No one should deal with stolen or forged securities.

Regulations for Intermediaries[3] (Stockbrokers, Sub-Brokers, Etc.)

Intermediaries, such as stockbrokers and sub-brokers, are also subjected to SEBI regulations which are:

• No broker should promise someone a price, and if there is a price change in the future, they are not allowed to benefit from that change.
• Intermediaries must not provide any information that cannot be verified, and must not allow someone to use unverified information to process securities.
• Part of the truth or part of information should not be used for advertising. This information is misleading and affects people’s behaviour in dealing with securities.
• Brokers are not allowed to deal with exaggerated securities on behalf of persons with senior brokerage intentions.
• No intermediary should avoid reporting securities transactions on someone’s behalf.
• The false purchase or sale of securities on the stock market is not allowed.
• No broker should encourage or recommend a person to use a superior broker as motivation to trade certain securities.
• No intermediary should falsify or be prior to any document, such as contracts.
• Intermediaries should not sell or buy securities in advance Future orders from the company or clients this is called preventive behaviour.
• Spreading false news to induce the purchase and sale of securities.

Any violation of the preceding statements would be considered illegal. If any of these breaches are committed by an individual or a firm, SEBI would examine the matter and take appropriate action against the offender. SEBI will investigate who is involved in such illegal activities.

Types of Unfair Trade Practices

Unfair trade practice denotes any unfair method or unfair or deceptive practice used to promote the sale, usage, or supply of any goods or the provision of any service by a trade practice or a business practice.

False Representation

The act of making any statement or representation, whether orally or in writing, that:

• Falsely implies that the goods are of a specific quality, amount, grade, composition, style, or model.
• Any re-built, second-hand restored, reconditioned, or old products are falsely represented as new goods;
• Indicates sponsorship, approval, performance, qualities, accessories, uses, or benefits not found in the items or services
• Gives any promise or assurance about the goods’ performance, efficacy, or life span that isn’t based on a sufficient or proper test;
• Intentionally misleads the public regarding the prices at which such goods or services are accessible.

False ‘Bargain Price’ Offer

Unfair Trade Practices occur when an advertisement is published in a newspaper or elsewhere in which products or services are offered at a bargain price when there is no intention of the same being given at that price for a reasonable period of time or in a reasonable quantity. For this context, the term “bargain price” refers to —

• The price is indicated in the advertisement in such a way that it appears to be lower than the usual price, or
• The price that everyone who sees the advertisement would believe is lower than the price at which such things are normally sold.

Bid Rigging

Bid rigging is illegal to conduct in which two or more competing parties work together to decide the winner of a bidding procedure. When bidders work together, the bidding process is harmed, and the outcome might be a rigged price that is greater than what would have been obtained through a free market, competitive bidding process. Bid rigging can occur in any field where commercial contracts are issued through a competitive bidding procedure, such as car and home auctions, construction projects, and government procurement contracts.

Cartels

A cartel is a group of producers of a product or service who have formed a formal agreement to manage supply and influence prices. In other words, a cartel is a group of normally autonomous businesses or countries that act as if they were a single manufacturer, allowing them to set prices for goods and services without any competition. Cartels are competitors in the same business who strive to decrease competition by agreeing on a pricing control strategy. Cartels use tactics like supply reduction, price-fixing, collusive bidding, and market carving. In the majority of places, cartels are regarded as illegal and promoters of anti-competitive behaviour. Because of higher prices and a lack of transparency, cartel activities damage consumers.

How to Report Unfair Trade?

Investor complaints against Trading Members of the Exchange or listed firms are handled by the Exchange’s Investor Services Cell. Investors might file their complaints in the format given by the Exchange, along with supporting documents, either electronically through the website www.nseindia.com[4] or by mailing their complaints to the nearest investor care centre.

Insider Trading

A connected individual or someone in possession of or with access to such unpublished price sensitive knowledge is referred to as an insider. Insider trading is defined as a practice in which people who, as a result of their work, have access to otherwise non-public information that can be critical in making investment decisions engage in trading of a company’s securities. In other terms, insider trading refers to dealing with a company’s securities using undisclosed information about the company’s performance or other concerns. In simple words, it can be defined as dealing in a business’s securities on the basis of specific proprietary information about the company that is not disclosed or is present in the public domain, i.e. unpublished price sensitive information.

Insider trading has three fundamental components:

1. Material non-public information must exist.

2. This information must come from an inside source and be in the hands of a few people.

3. These individuals must trade securities based on material non-public information they possess.

Penalties for Insider Trading

On January 15, 2015, the Securities and Exchange Board of India (SEBI) adopted the SEBI (Prohibition of Insider Trading) Regulations, 2015. The main objective of this regulation is to prevent the abuse of transactions that have undisclosed price-sensitive information. Therefore, it is important whether the person making business decisions owns such information, and not the person who owns the ownership of the operation and owns such information.

The following are the penalties for insider trading

• Insiders who violate the 2015 regulations are subject to a penalty of Rs. 25 crores or three times the amount of profit made from insider trading, whichever is higher, as well as imprisonment for a term of up to ten years or a fine of up to 25 crores, or both, as per section 15G and 24 of the SEBI Act.
• According to section 11(c) (6) of the SEBI act, any person who refuses to cooperate in any SEBI investigation into insider trading without justification is punishable by imprisonment for a term of up to one year, a fine of up to Rs. 1 crore, or both, as well as a further fine of up to Rs. 5 lakhs for each day of such non-cooperation.
• SEBI is also empowered under section 11(4) (b) of the SEBI Act to issue instructions to such insiders not to deal in the concerned securities in any particular manner, to prohibit him from disposing of the concerned securities, to declare the concerned transaction(s) of securities null and void, and to restrain the insider from communicating or counselling anyone to deal in securities.
• If an insider violates section 195 of the Companies Act, 2013, he or she may be sentenced to five years in prison, a fine of not less than five lakhs rupees but not more than twenty-five crore rupees, or three times the amount of profits made from insider trading, whichever is higher, or both.

Case Laws Related to Unfair Trade Practices

Securities Exchange Board of India vs. Rakhi trading Private Limited[5]

The Supreme Court ruled that the transactions were deceptive and unfair. The traders’ activities were determined to be in breach of PFUTP Regulations 3 (a), 4 (1), and 4 (2) (a) by the Court, and the appeals were dismissed. Apart from the fact that they aided the disputed transactions, there was no proof that the brokers acted in breach of the PFUTP Regulations. The SEBI was unable to establish negligence or connivance on the side of the brokers, according to the report. The issue of the transactions constituting an act of tax planning was not raised in the SCN or by the AO, hence the Court did not rule on it.

Godfrey Philips India Ltd v Ajay Kumar[6]

The lawsuit was filed against the tobacco company’s allegedly deceptive advertisement. The product was marketed as “red & White,” with the slogan “Red &White smokers are one of a kind.” The package also featured a photograph of star Akshay Kumar, as well as a line describing the dangers of smoking. The complainant claimed that the image of a famous celebrity promoting the tag lined cigarette provides the idea that the cigarette can perform acrobatics similar to those performed by the actor. As a result, the customer’s attention would be drawn away from the warning. The complaint was dismissed in district court since it had also been filed in civil court. The case was taken to the National Commission, where the appellants claimed that there was no evidence of any harm or loss as a result of the advertisement. The National Commission ruled that the complainant could not submit since he was not acting on behalf of a volunteer organization. The appeal was granted with no costs attached.

N. Ravindranath Kamath v. Spice Communications Ltd[7]

Spice Communications Ltd. approached Kamath and gave him a form and a pamphlet with a map of Karnataka on it, indicating that the tower would be built in Virajpet. On the basis of such assurance, Kamath filled out an application for the connection and paid them Rs. 3,100/-. The cost of the SIM card was Rs. 6,800/-. Spice Communications was unable to install the tower, and Kamath was unable to use his cell phone from Virajpet despite being charged Rs. 22/- each day. On the map of Karnataka included in the brochure, it was said that it will be completed by mid-99. The tower was not built by Spice Communications because it was not economically viable. Kamath was paid a total of Rs. 30,000/- plus Rs. 10,000/-, and the Commission ruled that this was an unfair trade practice.

Consumer Guidance Society v. Amway India Enterprises[8]

Amway Enterprises is a company that sells a variety of consumer goods and nutritional supplements. It was discovered that several Amway items were misbranded and adulterated. Nutrilite Protein and Amway Madrid Safad Musli, for example, featured lower-quality components than those listed on the label. Amway was found to have used unfair business practices and was fined, as well as ordered to remove their misbranded items and renew their marketing, based on the findings.

Pooja Roy v. Krishnango Bhattacharya[9]

 M/s Kasko India, a wholesale license drug dealer, was charged with modifying the manufacturer’s original labels and pasting new printed labels to extend the expiration date and distributing counterfeit medications. In the pharmaceutical industry, this was regarded as an unfair trading practice.

Conclusion

It is vital to keep any market free of frauds, illicit activities, unjust and manipulative behaviours in order for it to thrive and grow consistently throughout time. This is also true in the securities market. The Securities and Exchange Board of India (SEBI) has taken every step feasible to ensure long-term growth and protect the people who invest in the securities market. Due to India’s population and the vast number of investors entering the market, there is a higher chance of frauds taking advantage of a big number of investors, and India also lags behind other industrialized countries in terms of cybersecurity. Because most securities are now handled through online platforms, applications, and other means, SEBI should establish cybersecurity guidelines and a cybersecurity wing to protect the securities market from any potential cyber hacking, thereby safeguarding and guiding the securities market in India toward development.

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References:

[1] https://www.sebi.gov.in/acts/futpfinal.html

[2] https://www.sebi.gov.in/acts/pfutpregu.pdf

[3] https://www.sebi.gov.in/legal/regulations/may-2021/securities-and-exchange-board-of-india-intermediaries-regulations-2008-last-amended-on-may-05-2021-_38453.html

[4] https://www.nseindia.com/

[5] SEBI v. Rakhi Trading (P) Ltd. [on 8 February, 2018 CIVIL APPEAL  NO. 1969  OF 2011]

[6] Godfrey Philips v Ajay Kumar [AIR 2008 SC 1828]

[7] N. Ravindranath Kamath v. Spice Communication Ltd. [(2006) (4) CPJ 67 NC]

[8]Consumer Guidance Society v. Amway India Enterprises[(2007) C.C 140 of 2007]

[9] Pooja Roy v. Krishnango Bhattacharya [(2008) C.R.R 2796 of 2008 Calcutta H.C]