Regime on Fraudulent Trade Practices Strengthened

We had earlier discussed two decisions of the Securities
Appellate Tribunal (SAT) (here
and here)
and also an order of SEBI (here)
on whether the front-running activities of persons other than “intermediaries”
can be brought within the purview of the SEBI (Prohibition of Fraudulent and
Unfair Trade Practices Relating to Securities Markets) Regulations, 2003 (the
PFUTP Regulations). While the SAT held that the PFUTP Regulations do not apply
to front running by persons who are not intermediaries, SEBI held otherwise in
its order. In those posts, we had pointed to certain ambiguities that arose in
the PFUTP Regulations that led to a somewhat incongruous situation and suggested
that it must be remedied by an amendment to the PFUTP Regulations or through a
pronouncement of the Supreme Court.
In a press release
issued yesterday, SEBI seems to have exercised the amendment option. It has
decided to clarify that the list under regulation 4(2) (which deals, among
various other matters, with front running activities by intermediaries) is not
exhaustive and that the general provisions of regulation 3 will override.
Hence, the intention seems to be that even where the specific provisions of
regulation 4 are not attracted (e.g. when the person involved is not an
intermediary), such a front-running case could be brought within the general
purview of regulation 3 thereby inviting consequences on the person violating.
This “clarificatory” amendment seeks to put to rest the difficulties that arose
in the above orders of SAT and SEBI.
In addition, the PFUTP Regulations have been expanded to
include another type of activity within its purview. That is the illegal
mobilization of funds without obtaining a certificate under the SEBI
(Collective Investment Schemes) Regulations, 1999, which will be considered as
a fraudulent and unfair trade practice. This is consistent with the regulatory
approach (including in the recently promulgated Ordinance)
to rein in large mobilization of funds. By including this as a fraudulent and
unfair trade practice, the idea seems to be to make the penal consequences more
onerous so as to operate as deterrence.

These
amendments have been approved by SEBI’s board, and the actual text of the
amendments is awaited.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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