This article has been written by Ms.Drishti Rawat, a second-year student at National Law University, Delhi.

Abstract

 This article aims to discuss SEBI’s role in safeguarding against market abuse, highlighting the importance of its oversight in preventing fraudulent activities, manipulation, and insider trading. Additionally, it will explore how SEBI’s regulatory measures contribute to maintaining a fair and transparent securities market, fostering investor trust, and promoting economic growth through increased investments. 

Introduction

Fairness and transparency are pillars of efficient capital markets, where investors can participate with confidence in a rules-based system. However, history shows that in the absence of oversight, players succumb to greed and unethical practices that engulf the system in crises. This underscores the critical need for a strong regulator that can firmly rein in market abuse.  

The Securities and Exchange Board of India (SEBI) plays this pivotal role in the Indian securities markets. Established in 1988, SEBI regulates stock exchanges, intermediaries and market participants to protect investor interests and promote market integrity.  

The objective of this article is to discuss the regulations and enforcement actions employed by SEBI to detect and deter market abuse including insider trading, fraudulent practices, manipulation and misconduct. It will analyze SEBI’s multi-pronged approach to safeguard Indian financial markets against unethical behaviour by players and highlight its impact on strengthening investor trust. 

Key Regulations Against Market Abuse  

SEBI has instituted several regulations and guidelines focused on promoting ethics, transparency and fairness in securities market operations. Some major regulations targeting market manipulation and abuse are   

1. SEBI (Prohibition of Insider Trading) Regulations, 2015 – It prohibits communicating or procuring unpublished price-sensitive information and trading based on such information by company insiders. Key provisions include disclosure requirements for promoters, employees and connected persons, and penalties up to Rs.25 crores or three times profits made for violations. In 2022, SEBI barred Poonawalla Fincorp MD Abhay Bhutada from markets for violating insider trading norms. 
2. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 – Also called Takeover Code, it mandates open offers during the substantial acquisition of shares and change in company control above threshold limits. This safeguards public shareholder interests during M&As. In 2018, SEBI ordered open offers totalling over Rs.4000 crores by acquirers in Fortis Healthcare highlighting Takeover code enforcement. 
3. SEBI Act, 1992 – Provides SEBI powers of investigation, issues directions and penalties up to Rs.25 crores for manipulative and fraudulent activities. In 2001, SEBI imposed a Rs.1.5 crore fine on Reliance Industries for violating the SEBI Act through fraudulent transactions in Reliance Petroleum shares. 
4. SEBI Investment Advisers Regulations – Prescribes code of conduct, and certification requirements for investment advisers to avoid conflict of interest while advising clients on securities. In 2022, SEBI cancelled the licences of over 600 investment advisers for violations. 

These regulations coupled with surveillance systems deter market players from unethical practices and abuse of investors’ trust. 

Clampdown on Market Manipulation 

SEBI’s authority to investigate and penalize market manipulation has been upheld by several landmark judgements by the Securities Appellate Tribunal (SAT) and Supreme Court:   

1. In the Rakhi Trading manipulation case, SEBI imposed penalties on over 100 entities for synchronized trades that artificially inflated share prices of Parmar Industries and Avon Corporation in 2001. SAT and the Supreme Court upheld SEBI’s decision in 2018, recognizing circular trading, the creation of artificial volumes and false market appearance as market manipulation. Under the rationale stated below given by the Supreme Court of India:

“On analysis of the reversal transactions undertaken by the noticee, it is seen that the percentage to market gross is in the range of 30 percent to 50 percent in the 14 contracts executed by the noticee. In two contracts of NIFTY, the percentage to market gross reached 50 percent. This accounts for a significant percentage of trades on the concerned days and the traded value was Rs.95.75 lakhs for those two reversal trades. The trade quantities are also high. The total traded value is Rs.503.00 lakh in a matter of just 4 (four) trading days. As submitted by the noticee, NIFTY moves constantly. Also, NIFTY is the most active of the options contracts traded on the exchange and it has contributed to 92.21 percent of the contracts traded in the Options segment during March 2007. Further, the NIFTY options contracts contributed to 99.97 percent of the total Index Options contracts traded in March 2007 (source: NSE website). In such a scenario it is seen that the noticee’s counter party to all the trades in NIFTY contracts is Kasam Holding Pvt. Ltd. 

(trading through the broker Vibrant Securities Private Limited), this clearly gives an indication to the existence of a pre-arrangement/synchronization / matched trades between the clients. Otherwise it does seem unrealistic that the orders should match exactly both quantity and price wise, just as a matter of coincidence, with the same party again and again. It is clear that there was an intention of creating a false or misleading appearance in the market and also that a manipulative /deceptive device was used for synchronization of trades.”

1. In the Roofit Industries case, SAT concurred with SEBI’s debarment of company promoters in 2019. SEBI found promoter entities engaged in fraudulent related party transactions and accounting irregularities to artificially boost Roofit share prices. 
2. In 2021, SAT upheld Rs. 18 crore penalty imposed by SEBI on Viaan Industries, associated entities and Raj Kundra for indulging in manipulative trading activities in Viaan’s shares. 

These judgments have strengthened SEBI’s authority to investigate sophisticated market manipulation cases, disregard legal technicalities, and impose penalties in the interest of securities markets and investors. It has set strong precedents for SEBI to act decisively against pumping stock prices, circulation of unsubstantiated information and other unfair trade tactics. 

Ongoing Challenges

While SEBI has expanded regulations and surveillance capabilities over the years, new-age market abuse tactics continue to emerge such as: 

1. Social media pumping – Creating hype and manipulating sentiment regarding small-cap stocks through platforms like Telegram, Twitter, and WhatsApp groups. 
2. Opaque corporate structures – Use of shell companies, complex holdings, and beneficiary ownership to conceal ultimate beneficiaries and mask manipulative actions. 
3. Crypto market manipulation – Spreading misinformation about crypto projects, wash trading, pump and dump schemes on crypto exchanges outside the purview of securities regulators. 
4. High-frequency algorithmic trading – Sophisticated algorithms execute trades in microseconds to exploit the slightest opportunities for price arbitrage and manipulation. 

To tackle these challenges, SEBI needs to continuously enhance market surveillance systems leveraging the latest technology like AI, big data analytics and behavioural pattern recognition. There is also a need for greater coordination between securities, banking, competition and telecom regulators to have a consolidated view and close regulatory gaps. With innovation in market abuse tactics, SEBI needs to persistently strengthen its capabilities to detect and clamp down on unethical practices that undermine market integrity. 

Conclusion

SEBI has instituted a robust framework of regulations, surveillance systems and enforcement actions to prevent market abuse over the past decades. Regulations like PIT, Takeover Code, and the SEBI Act coupled with technology-driven monitoring enable SEBI to uphold ethics and discipline in Indian markets. SEBI’s decisive interventions against manipulation as upheld by SAT and Supreme Court judgements have strengthened its position as regulator. However, the ever-evolving nature of markets calls for persistent enhancements to their capabilities, coordination between agencies and reliance on self-regulation by market entities. SEBI plays a pivotal role in safeguarding market integrity, promoting fairness and building investor trust. With strong and agile regulation of financial markets, SEBI aims to foster efficient capital allocation, disciplined conduct and sustainable value creation for all stakeholders. 

References

1. This article was originally written by Securities and Exchange Board of India published on Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 website. The link for the same is herein: https://www.sebi.gov.in/legal/regulations/nov-2022/securities-and-exchange-board-of-india-prohibition-of-insider-trading-regulations-2015-last-amended-on-november-24-2022_65864.html
2. This article was originally published on The Economic Times Markets website. The link for the same is herein: https://economictimes.indiatimes.com/markets/stocks/news/sebi-revokes-securities-market-ban-on-poonawalla-finances-md-abhay-bhutada-in-insider-trading-case/articleshow/91989903.cms?from=mdr
3. This article was originally published on Livemint website. The link for the same is herein: https://www.livemint.com/companies/news/ihh-healthcare-says-fortis-remains-its-main-platform-for-growth-in-india-11668356728977.html#:~:text=IHH%20Healthcare%20had%20acquired%2031.17,per%20cent%20stake%20in%20Fortis.
4. This article was originally published on India Today website. The link for the same is herein: https://www.indiatoday.in/india/story/sebi-bans-ril-from-equity-derivatives-market-for-1-year-967520-2017-03-24
5. This article was originally written by Securities and Exchange Board of India published on SEBI Investment Advisers Regulations, 2013 website. The link for the same is herein: https://www.sebi.gov.in/legal/regulations/jan-2013/sebi-investment-advisers-regulations-2013-last-amended-on-december-08-2016-_34619.html
6. SEBI v. Rakhi Trading (P) Ltd., (2018) 13 SCC 753 
7. Roofit Industries v. SEBI,  2016 (12) SCC 125
8. This article was originally published on The Economic Times Markets website. The link for the same is herein:

https://economictimes.indiatimes.com/markets/stocks/news/sebi-slaps-fine-on-viaan-industries-raj-kundra-shilpa-shetty-for-disclosure-lapses/articleshow/84830689.cms?from=mdr

1. This article was originally published on Livemint website. The link for the same is herein: https://www.livemint.com/Money/LbQmarrU9npKMDahfBXlGI/Sebi-plans-new-system-to-crawl-social-media-websites.html
2. This article was originally written by Bindu Ananth published on Forbes India website. The link for the same is herein: https://www.forbesindia.com/blog/economy-policy/shadow-banking-as-the-symptom-and-not-the-disease/
3. This article was originally written by Sidhartha Shukla published on Bloomberg website. The link for the same is herein: https://www.bloomberg.com/news/articles/2023-03-08/india-imposes-money-laundering-provisions-on-the-crypto-sector
4. This article was originally published on The Economic Times Markets website. The link for the same is herein: https://economictimes.indiatimes.com/markets/stocks/news/the-new-landscape-of-indian-stock-trading-empowered-retail-investors-and-advanced-technology/articleshow/107250955.cms?from=mdr