Just like any other market, the Indian share market is also prone to scams and frauds. So to protect the interests of the millions of investors who trade in the exchanges daily and for the market to function smoothly, it is essential to prevent these practices. But how do you define trading frauds? Any trade in securities that involves unfair practices to mislead investors/agents is known as fraudulent trading.
If you plan to start investing in equities, knowing common frauds will help you to stay safe.
As per SEBI’s Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations passed on July 17, 2003, fraud is defined 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 to induce another person or his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss”.
Some of the examples of fraudulent and unfair trade practices are:
- A tempered his financial reports to lure investors into buying the stocks.
- X bought shares in advance of ABC company based on the price-sensitive information received from the employee of XYZ and later sold those shares of ABC company to XYZ company for profit (front-running).
SEBI’s regulations against fraudulent and unfair trade practices
As per the unfair trade practices act, the below-mentioned points are unacceptable in the stock market and will be considered as fraudulent and unfair trade.
- Directly or indirectly indulging in frauds related to buying and selling of securities
- Creating a fake appearance in front of the investors and giving them a false air
- Holding securities without an intention of transferring the ownership and with a purpose of fluctuating or inflating the prices
- Paying money or giving assets to any person to hold securities to inflate or fluctuate the prices
- Indulging in any activity that may manipulate the price of a particular security
- Dealing in securities that are stolen or fake
Any breach of the statements mentioned above by an individual or a company will be considered unlawful, leading SEBI to take appropriate actions.
Apart from the above, specific regulations are issued by SEBI for governing intermediaries like sub-brokers, etc. as mentioned below:
- Should not promise a price to a person
- Should not offer unverifiable information and make any investor handle securities based on that
- Should not advertise partially accurate information that is misleading and may influence a person’s investment decision
- Should report all the transactions done on a person’s behalf
- Should not make circular transactions that may project a fake view of trading of securities
- Should not trade any security in advance when they know a future order of a company (front-running)
- Should not spread fake news
Complaint against unfair trade practices
If anyone encounters fraud or an unfair trade in the Indian share market, they can approach SEBI to file a complaint. SEBI has created a separate online complaint cell called ‘SEBI Complaints Redress System (SCORES) to resolve such queries quickly.
For the Indian stock market to flourish and maintain constant growth, preventing fraud and unfair trade practices is crucial. SEBI has taken all the steps to make it possible by implementing various regulations and setting up a redressal cell. Anyone who is involved in such fraudulent and unfair trade practices will be liable for punishment. If a person witnesses any such illicit activities, they should immediately file a complaint.