Fraudulent and Unfair Trade Practices Regulation

In order to prohibit fraudulent and unfair trade practices relating to securities market, the SEBI issued regulations in October 1995. The scheme of regulations is briefly discussed in this article.

Prohibition of fraudulent and Unfair Trade Practices:

Prohibition of dealing in Securities: No person should buy, sell or otherwise deal in securities in a fraudulent manner as a principal or agent. The term fraud is defined to include any of the following committed by a party to a contract or with his connivance or by his agent with intent to deceive another party/his agent or to induce him to enter into the contract: (1) the suggestion, as to fact, of that which is not true, by one who does not believe it to be true. (2) the active concealment of a fact by one having knowledge or belief of the fact; (3) a promise made without any intention of performing it; (4) any other act intended to deceive; and (5) any such act or omission as the law specially declares to be fraudulent. However, mere silence as that he facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, with their due regard, it is duty of the person keeping silence to speak or unless his silence is, in itself equivalent to speech.

Prohibition against Market Manipulations: No person should (a) effect, take part in, or enter into either directly or indirectly, transactions in securities, with the intention of artificially raising or depressing the prices of securities and thereby inducing the sale or purchase of securities by any person ; (b) indulge in any act, which is calculated to create a false or misleading appearance of trading in the securities market; (c) indulge in any act which results in a reflection of the prices of securities based on transaction that are not genuine trade transactions; (d) enter into a purchase or sale of any securities, not indeed to effect transfer of beneficial ownership but intended to operate as a device to inflate, depress, or cause fluctuations in the market price of securities and (e) pay, offer or agree to pay or offer, directly or indirectly, to any person any money or money’s worth for inducing another person to purchase or sell any security with the sole object of inflating, depressing or causing fluctuations in the market price of securities.

Prohibition of misleading Statements: No person should make any statement or disseminate any information which (i) is misleading in material particular; and (ii) is likely to induce the sale or purchase of securities by any other person or is likely to have the effect of increasing or depressing the market price of securities, when he makes the statement or disseminates the information: (i) he does not care whether the statement or information is true or false; or (ii) he knows, or ought reasonably to have known that the statements of information is misleading in any material particular.

However, this does not apply to any general comments made in good faith in regard to (1) economic policy of the Government, (2) the economic situation in the country, (3) trends in the securities market, or (4) any other matter of similar nature, whether such comments are made in public or in private.

Prohibition of Unfair Trade Practices: No person should, in the course of his business, (a) knowingly engage in any act or practice which would operate as a fraud upon any person in connection with the purchase/sale or any other dealing in securities, (b) on his behalf or on behalf or any person. Knowingly buy/sell or otherwise deal in securities, pending the execution of any order of his client relating to the same security for purchase, sale or other dealings in respect of securities. However, these restrictions do not apply where according to the instructions of the client the transaction is to be affected only under specified conditions or in specified circumstances. They should also not (I) intentionally and in contravention of any law for the time being in force delay the transfer of securities in the name o the transferee or the dispatch of securities or connected documents to any transferee; (2) indulge in falsification of the books, accounts and records whether maintained manually or in computer or any other form; and (3) when acting as an agent, execute a transaction with a client at a price other than the price at which the transaction was executed by him, whether on a stock exchange or otherwise, or at a price other than the price at which it was offset against the transaction of another client.