SEBI is the Securities and Exchange Board of India that protects the interest of the investors in securities and to promote the development of, and to regulate the securities markets and for matters connected therewith or incidental thereto. The capital and securities market of India is monitored and regulated by SEBI. The Board was established under the SEBI Act, 1992. The SEBI is an administrative body and the Board consists of members who are officers from the Indian Union Finance Ministry and RBI.
Functions and objectives of SEBI
As mentioned earlier, the functions of SEBI are to protect, promote and regulate the security market. In order to protect the investors’ interest, the SEBI look into the matters that cause commotion like –
● insider trading (to avoid buying own shares);
● price rigging (malpractices that affects the market price and create loss for investors);
● to keep unfair and fraudulent trade practices under control;
● awareness strategy for the investors to avoid such malpractices.
To regulate and develop, SEBI took several steps like –
● prepared guidelines;
● code of conduct;
● levying fees;
● regulation to follow while undertaking inquiries;
● to provide, promote and launch training sessions, online trading options, and DEMAT.
The Government has established a quasi-judicial, quasi-legislative and quasi-executive body and that is SEBI.
The term ‘insider’ in the Insider trading is defined in s.2(e) of the SEBI (Prohibition of Insider Trading Regulations) Act, 1992. The trading though is generally considered as illegal due to the information of those bonds, stocks and securities that trade here is the secret information of the company and the investors or the insiders who have the access to such information may use it for their own profit. The Patel Committee defined insider trading as “trading in shares of a company by the persons who are in management of the company or are too close to them, based on and disclose the price sensitive information, regarding the working of the company which they possess but are not available to others.”
The insider trading is first made illegal in USA in the case of United States v. Newman(1). There are cases when India has less to no regulations regarding insider trading and when the insider trading cases were filed before the court, Indian courts relied on the foreign laws to decide the case. One such case is Hindustan Lever Limited v SEBI(2). In India, there are several strict regulations and recognition in the PIT Act. Till date, the Act has been amended several times, new Chapters inserted and new definitions of terms. The Act is amended thrice and the amendment of 2002 prohibits the deal of insider trading.
Indiabulls Insider Trading case(3)
The insider trading standard is what the non-executive director, CS of the company failed to comply with. The fact is that the Price Sensitive Information is associated with the possession of the non-executive director and the employee of the firm. The firm sets a period for trading (trading window) the securities and these people have violated the specified period and performed the trading after it is closed. The profit is worth more than 69 lakh rupees. After the investigation, the fine of Rs. 25 lakhs for each is placed. Also, when the subsidiary company was selling its stake for 685 crores, the shares worth 8.55 lakhs were bought by the above said non-exec director and the employee. Again, the trading period ended and violated the norms.
The consequent violation is noticed by the authorities and it is believed that the actions are not in the interest of the securities market and also the insiders have misused their positions. The subsidiary India Bull is also equally responsible as it failed to notify the trading period. The monitoring of the same is also failed by the authorities of the company. The order to take criminal action against the non-executive director and her husband/employee is made by SEBI along with the direction to confiscate the 87 lakhs that were unlawfully gained by them.
Rakesh Agarwal v Securities Exchange Board of India(4)
The appellant party Rakesh Agarwal is MD of ABS Industries. Along with a German Company, he entered into an agreement which resulted in him undertaking 51% shares of ABS. There are allegations that said purchase is made even before the announcement of such purchase. Through the investigation of the said allegation, SEBI found that the Managing Director through his Brother-in-law sold shares before the German Co.’s substantial acquisition. Hence, the appellant is guilty of insider trading.
The intention to make profit is in question and that the law prior amendment is that insider trading on the basis of unpublished price sensitive information is a sine qua non. To take criminal action against the accused, the proof of the mens rea and unfair gain is must. The Appellate Tribunal, after making through study and interpretation of the concept ‘insider trading’ and its jurisprudence held that the regulations of SEBI prohibiting the insider trading, the motive shall be the acquaintance. It is true that the regulation does not specifically bring in men’s Rea as an ingredient of insider trading.
Likewise, a case in 2017 where the UPSI of several entities was leaked in whatsapp prior to the announcement made by the company. Even though there is no criminal intent and no knowledge of the actual financial figures and earnings, the information leaked is UPSI. The information may have been received from others but such disclosure is a breach of rule of parity and is a violation of provisions 12A(d) & (e) of SEBI as well as Regulation No. 3(1) of PIT, 2015. Hence, the penalty of Rs. 15 lacs is charged to each Notice.
In the matter of IPO Irregularity – Chandrakanth Amratlal Parekh case(5)
An ad interim ex-parte order was passed after the report of irregularities in the transactions. The order itself is a show cause notice. The investigation took place. SEBI after the completion of the investigations issued a show cause notice that states there is a violation of section 12 A (a) to (c) and regulations 3 & 4 of PFUTP regulations. The party Chandrakant, is both financial and key operator and it is alleged that he violated and made unlawful gain of shares by selling meant for retail individual investors. The party is believed to be employed in fraudulent and manipulative practices as he filed different applications through different persons under the retail individual investors category and cornered some 13,200 Suzlon shares worth Rs.24,29,340 and is directed to disgorge the amount.
Chandrakant claimed that there is no illegal transaction and that the gain attained through shares is lawful. The issues are –
● Whether the multiple applications made by Chandrakant are valid in IPO?
● Whether the gains made by Chandrakant is lawful and whether there is any violation of law?
● Whether SEBI has the power to impose a penalty of disgorgement?
To make multiple applications of certain percentage under retail individual investors, DIP guidelines are issued by SEBI. Usually, RII is an investor who applies for securities of value more than one lakh or up to one lakh which clearly does not foresee who can make 825 applications each up to Rs.100,000. Hence, the court held though multiple applications are not prohibited, such applications for securities for an aggregate value of more than one lakh rupees in retail segment are clearly prohibited.
The contention of Chandrakant that the transactions made by him is lawful is false as the court believed that the multiple applications were filed in a fraudulent way so that he can corner large numbers of shares. Since the regulations 3 & 4 of PFUTP regulations prohibits a person from buying, selling or otherwise dealing in securities in a fraudulent manner and indulging in unfair trade practices in securities, Chandrakant has gone to a new level of making 825 applications which amounts to fraud. Also, the DIP guidelines are framed as per the provisions of SEBI, hence it is forceable as same as SEBI. It has the same statutory effect.
Chandrakant has violated the provisions of SEBI and DIP guidelines by designing a new structure of market manipulation. As for the disgorgement, the penalty imposed is valid as the gain and conduct of the person is unlawful. No person is allowed to augment themselves at other people’s (investors) interest. The multiple applications are a threat to the market, and in order to protect the interest of the investors, the court ordered and directed Chandrakant to restrain his access to the market. The court held him to disgorge the amount along with 6% p.a. for 4 years. Failed to do shall have effect:
‘He shall be restrained from buying, selling or dealing in securities market in any manner whatsoever or accessing the securities market, directly or indirectly for a further period of seven years without prejudice to SEBI is right to enforce the disgorgement along with further interest actual payment is made.’
The question of law on how to held the brokers liable for fraudulent actions and their negligence against SEBI’s Code of Conduct is discussed and ruled in SEBI v. Kishore R Ajmera(6). The proof shall be of degree from which the person should be held liable, i.e., evidence shall be of different circumstances that affected the trade. Another issue where several artificial volumes were created. The court said that the proofs have to gather various circumstances like the volume of the trade affected; the period of persistence in trading in the particular script; the particulars of the buy and sell orders, namely the volume that off; the proximity of time between the two and such other relevant factors.
Both the broker and sub-broker indulged in matching trades, the trading of illiquid scrips; the clients were the beneficiaries of the shares allotted and also related to each other. An advice note was circulated among the brokers to act very cautiously as the market has been facing several illegal trades. So, the amount of artificial volume of scrips is because of negligence and lack of care. The enquiry is established under the provisions of SEBI, Conduct regulations, PFUTP regulations and the enquiry regulations. The penalty is levied against them. Aggrieved by the decision of penalty the broker filed an appeal and the same was disposed of and the orders of the penalties were restored.
1. 773 F.3d 438 (2d Cir. 2014)
3. In Re: Mehul Johnson in the matter of Indiabulls Ventures Limited
1. Ms. Roohi Babu, B.SC., B.L., (Hons), Advocate practicing at Madras High Court, with 5 years of experience in IPR and Family matters.
2. Angujanani. G, 4th Year student of BBA, LLB (Hons) at Saveetha School of Law, SIMATS, Chennai.