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Critically analyse various types of Securities Fraud in India and how

they are sought to be prevented in India

Mukund Multani, SLC 2013-14, SLC Roll No: 35
Research Paper Set II
Word Count: 5700

Indian corporate and securities law has its roots in English common law. England passed a
homogenous set of company laws throughout the British Colonies to assist British entrepreneurs via
a common investment framework. Post independence, Prime Minister Nehru believed that state
control of foreign investment was necessary to prevent foreign capital, foreign interests, and foreign
businesses from dominating India. Consequently, the Capital Issues Controls Act 1947 provided
government with the power to regulate equity issuance - to ensure companies that raised money
served the governments goals and priorities. This Act required companies to obtain approval from
the Controller of Capital Issues to raise money, and the government restricted the price of equity
issuances to a complex accounting formula rather than letting the market set the price.
From the mid-1960s until the economic reforms of 1991, the government viewed the financial
system as a source of public finance. During this time, the government controlled the banks and
their lending decisions and used this to control competition. Commercial and cooperative banks
provided companies with working capital. Indian development banks and a few government-funded
financial institutions provided most of the medium- to long-term financing of companies.
In the 1990s, the most significant reform involving capital markets was the governments abolition
of the Controller of Capital Issues in 1992. After the government abolished the Act, companies were
free to set the price of their issues.
Securities regulation in India evolved into a primarily disclosure based regime, with the philosophy
that accurate and timely disclosures are fundamental in maintaining the integrity of the securities
market. The evolution of securities markets in India began with the establishment of the Securities
and Exchange Board of India (SEBI) in 1989, initially as an informal body and in 1992 as a statutory
autonomous regulator with the twin objectives of protecting the interests of investors and
developing and regulating the securities market over a period of time. This was a dramatic shift from
the focus of the Securities Contracts Act of 1956, which primary focused on investor protection
through heavy regulation and disregarded market promotion
The regulatory regime evolved in response to changing market dynamics as well as to instances of
fraudulent activity, more prominent among these being the Harshad Mehta fraud, the vanishing
companies scam, the Ketan Parekh scam, the Satyam accounting fraud, and more recently, the crisis
at the National Spot Exchange of India Limited (NSEL).
While analysing each of these in detail is beyond the scope of this paper, we will look at the Harshad
Mehta scam closely, as it was instrumental in shaping SEBIs behaviour in the 1990s.
Harshad Mehta Fraud of 1991-1992
The securities market scam of 1991-1992, perpetrated by Harshad Mehta (Harshad Mehta Fraud)
was in essence a diversion of funds from the banking system (in particular the inter-bank market in
government securities) to brokers for financing their operations in the stock market.
The regulatory response included the establishment of the Janakiraman Committee by the RBI to
investigate the possible irregularities in funds management by Commercial Banks & Financial
Institutions, and in particular in relation to their dealings in Government Securities, Public Sector
Bonds, and other instruments. The Janakiraman Committee submitted its final report in April 1993,
concluded that there was collusion between the officials of some nationalised banks and stock
brokers. According to the committee, the gross problem exposure of banks in the securities scam
was Rs 4,025 Cr.
The detailed mechanism of the fraud is explained in the following sections.
Ready forward / repurchase transactions
The mechanism through which the scam was effected was the ready forward deal (more commonly
known internationally as a repurchase agreement or a repo). A ready forward deal is a combination
of two transactions entered into between the same parties on the same security. One transaction is
a spot transaction and the other is a forward transaction. Essentially, a ready forward is a secured
short-term loan with the difference between the spot and forward price being the interest
The ready forward served two purposes in the Indian context:
It provided liquidity to the government securities market
It was an important tool for banks to manage their Statutory Liquidity Ratio (SLR)
requirement - banks were required to maintain 38.5% of their demand and time liabilities
(DTL) in government securities and certain other approved securities, collectively known
as SLR securities. For instance, a bank with a temporary surge in DTL may not want to
purchase SLR securities outright and then sell them when the DTL comes back to normal.
Instead, it could enter a ready forward deal, effectively borrowing the securities for the
Importantly, a ready forward is not legally considered to be a loan. Since the deal is not shown as a
loan in the books of accounts, the bank is not required to make cash reserve ratio (CRR) and SLR
provisions for the funds procured under the deal.
Issuance of Bankers Receipts / BRs in ready forward deals
Typically, in a ready forward deal, the selling bank delivers the securities and the buying bank makes
the payment by cheque as a settlement of the spot deal. However, if the selling bank was not able to
deliver the securities due to certain technical reasons, then it was allowed to issue a bankers receipt
(BR) instead.
The BR specified the name of the securities sold, along with the quantity and other necessary
identifying details, and was a valid document for the buying bank towards (i) proof of purchase, (ii)
compliance with SLR provisions.
In practice, a BR was allowed to be issued in the following circumstances
1. When the selling bank is waiting for the receipt of securities from another bank
2. When the selling bank is yet to receive the (physical) certificate of securities allotted to it
under a public issue
3. When the selling bank has a (physical) consolidated jumbo certificate for a large quantity of
securities, but the quantity sold is less than the quantity represented by the jumbo
In practice, BRs came to be used in lieu of actual securities for several reasons. For example, since
they BRs eliminated the need for delivery, they could simply be cancelled and returned when the
deal was reversed.
RBI Role & Subsidiary General Ledger
Specifically as far as government securities were concerned, the Reserve Bank of India acted as
custodian for these securities via its Public Debt Office (PDO). Physical securities are never issued,
and the holding of these securities is represented by book entries at the PDO. The ledger in which
the PDO maintains these accounts is called the Subsidiary General Ledger (SGL), and these
securities are referred to as SGL securities.
When a holder of SGL securities sells them and wishes to transfer them to the buyer, he fills up an
SGL transfer form and gives it to the buyer. This SGL form can be compared to a cheque: the buyer
deposits it into his SGL account at the PDO, and the PDO makes a book entry reducing the holding of
the seller and increasing that of the buyer.
However, the PDO was an inefficient and slow-moving organization in an industry where accuracy
and speed was essential. Like a cheque, an SGL form could bounce if the seller did not have sufficient
securities in his SGL account. The buyer needs to be informed about this promptly; else, he may
resell the same securities by issuing his own SGL forms in the belief that he has sufficient balance in
his account. The inefficiency of the PDO made the SGL form an inconvenient and unreliable
instrument, and banks preferred to use BRs, a practice which was in violation of an RBI directive
stating that BRs were not to be used for SGL securities.
Brokers Increasing Role in Ready Forward Deals
The normal settlement process in government securities is that the transacting banks make
payments and deliver the securities directly to each other. The broker's only function is to bring the
buyer and seller together and help them negotiate the terms, for which he earns a commission from
both the parties. He does not handle either the cash or the securities.
During the scam, however, the banks or at least some banks adopted an alternative settlement
process which was similar to the process used for settling transactions in the stock market. In this
settlement process, deliveries of securities and payments are made through the broker. That is, the
seller hands over the securities to the broker who passes them on to the buyer, while the buyer
gives the cheque to the broker who then makes the payment to the seller. In this settlement
process, the buyer and the seller may not even know whom they have traded with, both being
known only to the broker.
There were two important reasons why the broker intermediated settlement began to be used in
the government securities markets:
The brokers instead of merely bringing buyers and sellers together started taking positions in
the market. In other words, they started trading on their own account, and in a sense
became market makers in some securities thereby imparting greater liquidity to the
When a bank wanted to conceal the fact that it was doing an RF deal, the broker came in
handy. The broker provided contract notes for this purpose with fictitious counterparties,
but arranged for the actual settlement to take place with the correct counterparty.
Brokers Misuse of Account Payee Cheques
As described above, the broker intermediated settlement now allowed the broker to lay his hands
on the cheque since it went from one bank to another through him.
If the broker could now find a way of crediting the cheque to his account, he could essentially divert
funds from the banking system to finance his operations in the stock market. The hurdle was that
the cheque was drawn in favour of a bank and was crossed account payee.
As it happens, it is purely a matter of banking custom, that an account payee cheque is paid only to
the payee mentioned on the cheque. In fact, exceptions were being made to this norm, well before
the scam came to light. Privileged (corporate) customers were routinely allowed to credit account
payee cheques in favour of a bank into their own accounts to avoid clearing delays, thereby reducing
the interest loss.
Normally, if a customer obtains a cheque in his own favour and deposits it into his own account, it
may take a day or two for the cheque to be cleared and for the funds to become available to the
customer. At 15% interest, the interest loss on a clearing delay of two days for a Rs. 100 Cr cheque
was about Rs. 8 lacs. On the other hand, when banks make payments to each other by writing
cheques on their account with the RBI, these cheques are cleared on the same day. The practice
which thus emerged was that a customer would obtain a cheque drawn on the RBI favouring not
himself but his bank. The bank would get the money and credit his account the same day. This was
the practice which the brokers in the money market would eventually exploit to their benefit.
The buying bank used to issue an RBI cheque favouring the selling bank that would state Pay to XYZ
Bank. Brokers such as Harshad Mehta would add their name on the cheque, making it look like Pay
to XYZ Bank A/C Harshad Mehta. Consequently, the amount was routed to the brokers account
instead of the selling banks account.
As a result of the regulatory loopholes described above, Harshad Mehta was able to divert funds
from the banking system into the stock market. Between December 1991 and April 1992, the Sensex
rose by nearly 150%. After the fraud was discovered, the Sensex fell nearly 40%.
The scam became a catalyst for policy-makers to think hard, setting in motion a chain reaction which
lead to developments like the development of the listing agreement, Securities Laws (Amendments)
Act 1995, which widened SEBIs jurisdiction and allowed it to regulate depositories, FIIs, venture
capital funds and credit-rating agencies. SEBI was also empowered to penalise capital-market
violations and its investigative arm could summon persons, enforce production of books of accounts,
and conduct enquiries, audits and inspections of mutual funds, stock exchanges and other

Various Types of Securities Fraud in India
Some of the more prominent types of securities fraud that have occurred in India and the regulatory
measures taken to counteract them are detailed below:
Mis-selling and unsuitability:
Under the current distribution model in India, financial intermediaries (agents, financial advisors,
etc) sell products to customers, but these intermediaries earn their income from the product
manufacturers (banks, mutual funds, insurance companies, etc).
Often, the investment advice is bundled with distribution. Due to this model, distributors are
incentivized to market the product which is most profitable to them rather than recommend the one
most suitable for the client.
In response, SEBI has sought to segregate the roles of a distributor and that of an advisor and under
the new regulatory structure both roles cannot be assumed by the same person. SEBI has approved
and notified the SEBI (Investment Advisers) Regulations, 2013 in this regard. Under these
regulations, a distributor is liable for mis-selling and an investment adviser is liable for
recommending unsuitable products. Additionally, mis-selling of financial products is dealt with
under the SEBI FUTP Regulations, where it is considered as unfair and fraudulent activity.
Manipulation of Securities:
Broadly, this may be of two types price manipulation or volume manipulation.
Price Manipulation: Popularly known as pump and dump, the process involves constantly
purchasing shares of a company with the intent of forcing up the price, and then selling the shares at
the artificially inflated price.
Other forms of price manipulation could include making false statements touting the stock to
unsuspecting investors. There have been instances where manipulators have stimulated demand in
an IPO after-market by entering into arrangements with persons to purchase additional shares in the
after-market. In another form of manipulation commonly known as painting the tape,
manipulators make a series of end-of-day purchases in order to influence the closing price of a stock,
since this is the most widely reported number by the financial media.
Volume manipulation: This could be of several types, (i) artificially constricting supply by capturing
the free float of the company, (ii) circular transactions i.e. placing simultaneous orders to buy and
sell quantities with no effective change in beneficial ownership, with the intention of artificially
creating volumes, (iii) matched sales where orders on opposite sides of the trade are entered at
substantially the same time, place and quantity. However, these may be entered by genuine
investors as well. (iv) Parking or withholding shares thereby reducing the trading float and
constricting supply.
These types of manipulation are dealt with under Regulations 3 and 4 of SEBI FUTP Regulations,
relevant portions of which are reproduced below:
3. Prohibition of certain dealings in securities
No person shall directly or indirectly
(a) buy, sell or otherwise deal in securities in a fraudulent manner;
(b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be
listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in
contravention of the provisions of the Act or the rules or the regulations made there under;
(c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of
securities which are listed or proposed to be listed on a recognized stock exchange;
(d) engage in any act, practice, course of business which operates or would operate as fraud or deceit
upon any person in connection with any dealing in or issue of securities which are listed or proposed
to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules
and the regulations made there under.
4. Prohibition of manipulative, fraudulent and unfair trade practices
(1) Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an
unfair trade practice in securities.
(2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves
fraud and may include all or any of the following, namely:
(a) indulging in an act which creates false or misleading appearance of trading in the securities
(b) dealing in a security not intended to effect transfer of beneficial ownership but intended to
operate only as a device to inflate, depress or cause fluctuations in the price of such security for
wrongful gain or avoidance of loss;
(c) advancing or agreeing to advance any money to any person thereby inducing any other person to
offer to buy any security in any issue only with the intention of securing the minimum subscription to
such issue;
(d) paying, offering or agreeing to pay or offer, directly or indirectly, to any person any money or
moneys worth for inducing such person for dealing in any fluctuation in the price of such security;
(e) any act or omission amounting to manipulation of the price of a security;
(f) publishing or causing to publish or reporting or causing to report by a person dealing in securities
any information which is not true or which he does not believe to be true prior to or in the course of
dealing in securities;
(g) entering into a transaction in securities without intention of performing it or without intention of
change of ownership of such security;

(k) an advertisement that is misleading or that contains information in a distorted manner and which
may influence the decision of the investors;

(n) circular transactions in respect of a security entered into between intermediaries in order to
increase commission to provide a false appearance of trading in such security or to inflate, depress or
cause fluctuations in the price of such security;

(r) planting false or misleading news which may induce sale or purchase of securities.
Insider Trading
Insider trading is dealt with by the SEBI (Prohibition of Insider Trading) Regulations, 1992. In recent
times, there has been a move to overhaul the regulatory regime, and SEBI has set up an advisory
committee headed by Justice N.K. Sodhi, which has developed the draft SEBI (Prohibition of Insider
Trading) Regulations, 2013.
Regulation 3 and 3A of the Insider Trading Regulations reads as follows:
Prohibition on dealing, communicating or counselling on matters relating to insider trading.
3. No insider shall
(i) either on his own behalf or on behalf of any other person, deal in securities of a company listed on
any stock exchange when in possession of any unpublished price sensitive information; or
(ii) communicate o] counsel or procure directly or indirectly any unpublished price sensitive
information to any person who while in possession of such unpublished price sensitive information
shall not deal in securities :
Provided that nothing contained above shall be applicable to any communication required in the
ordinary course of business or profession or employment or under any law.
3A. No company shall deal in the securities of another company or associate of that other company
while in possession of any unpublished price sensitive information.
Any person who violates these regulations Is guilty of insider trading. An insider is defined in
Regulation 2(e), which reads as follows:
insider means any person who,
(i) is or was connected with the company or is deemed to have been connected with the company
and is reasonably expected to have access to unpublished price sensitive information in respect of
securities of a company, or
(ii) has received or has had access to such unpublished price sensitive information
One of the measures taken with respect to trading by insiders is the enhancement of disclosures.
The Companies Act, the listing agreement and the Insider Trading Regulations require the company
to make dissemination of price sensitive information to the market. Regulation 13 of the Insider
Trading Regulations requires that major shareholders dealing in shares of a company shall
disseminate information about their trades on crossing certain threshold limits prescribed in the
Additionally, the Companies Act 2013 has also defined and prohibited insider trading, as per section
195, which reads as follows:
195. (1) No person including any director or key managerial personnel of a company shall enter into
insider trading:
Provided that nothing contained in this sub-section shall apply to any communication required in the
ordinary course of business or profession or employment or under any law.
Explanation.For the purposes of this section,
(a) insider trading means
(i) an act of subscribing, buying, selling, dealing or agreeing to subscribe, buy, sell or deal in any
securities by any director or key managerial personnel or any other officer of a company either as
principal or agent if such director or key managerial personnel or any other officer of the company is
reasonably expected to have access to any non-public price sensitive information in respect of
securities of company; or
(ii) an act of counselling about procuring or communicating directly or indirectly any non-public price-
sensitive information to any person;
(b) price-sensitive information means any information which relates, directly or indirectly, to a
company and which if published is likely to materially affect the price of securities of the company.
(2) If any person contravenes the provisions of this section, he shall be punishable with imprisonment
for a term which may extend to five years or with fine which shall not be less than five lakh rupees
but which may extend to twenty-five crore rupees or three times the amount of profits made out of
insider trading, whichever is higher, or with both.
The power to enforce insider trading under the Companies Act 2013 for listed and about to be listed
companies is delegated to SEBI.
Overview of Regulatory Provisions Dealing with Fraud
Establishment of SEBI & SEBI Act
As a result of the unravelling of the Harshad Mehta scam, the Government of India promulgated the
Securities and Exchange Board of India Ordinance, 1992 giving substantial powers to SEBI over the
securities market, Finally, a statute by the name SEBI Act, 1992, was enacted and notified by the
Parliament on 12 April 1992. Section 3 of the SEBI Act establishes SEBI.
The SEBI Act was amended in 1995 to introduce monetary penalties on violators of the SEBI Act and
the regulations made thereunder. These penalties, subsequently enhanced, can extend up to Rs 25
Cr and are in addition to any remedial provisions like disgorgement of ill-gotten gains.
With the establishment of SEBI, India began to evolve from the old philosophy of merit based
control (prevalent under the Controller of Capital Issues regime) to a philosophy of full and fair
Source of Regulators Powers
Constitution of India: List I of Schedule VII of the Constitution of India prescribes the areas where
the Parliament of India is competent to pass laws. The key entries which are used to give powers to
SEBI are contained in entries 43, 46, and 48 of List I.
Statutes: Statutory provisions include the SEBI Act 1992, the SCRA 1956, Companies Act 2013, and
the Depositories Act 1996. The statutes provide a broad framework, and the detailed regulatory
regime is included in the delegated legislation
Delegated Legislation: There are four kinds of delegated legislation:
(a) Rules passed under the SEBI Act by the government of India which describe the way the
Board will function, provisions for appeal, etc, and which provide a broad governance
structure to SEBI. Further, there are rules made under the the SCRA 1956, Companies Act
2013, and the Depositories Act 1996

(b) Body of regulations where the legislature has given SEBI the power to fill in the mandate of
the SEBI Act by way of delegated authority. For example, insider trading is prohibited by SEBI
(Prohibition of Insider Trading) Regulations, 1992, and fraud and manipulation are
prohibited by the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to
Securities Market) Regulations, 2003. The majority of securities laws are contained in SEBI
regulations. Both the rules and regulations passed under the SEBI Act are tabled before each
house of the Indian parliament for 30 days and have the full force of law supported by
punitive provisions for disobedience.

(c) Clarificatory or interpretive powers of SEBI are used to issue guidelines, circulars, schemes,
no-action letters and interpretive letters. This set of regulation does not pass through the
Parliament, and as a result, parties have challenged the validity of guidelines, albeit
unsuccessfully. Though there is no direct authority to pass guidelines, and the securities
tribunal, SAT, has held the guidelines to be not strictly of the nature of law, its legitimacy has
not been disturbed in the interest of market integrity. SEBI has already converted its
guidelines into regulations.

There is also a system of informal law making by way of circulars, which are distributed to
the public, stock exchanges, companies and entities registered with SEBI. SEBI issues
clarificatory letters to persons writing a letter to it with a fee. These no action letters and
interpretive letters give the opinion of SEBI or affirm that no enforcement action will be
recommended given a particular set of facts of the case and subject to the conditions as
stated. On a more specific level, SEBI can pass directions to regulated entities under the
powers granted to SEBI under section 11 read with section 11B of the SEBI Act 1992.

(d) Lastly, there are the stock exchange rules, regulations, by-laws and the listing agreement.
The rules and regulations of exchanges and the listing agreement have statutory force as
delegated legislation. Section 23E of the SCRA 1956 specifically penalises the violation of the
listing agreement, which would otherwise be merely a contractual document between the
company and the exchange.
SEBI has powers under the SEBI Act over all listed companies and any person committing securities
frauds in such companies. Fraud is covered in section 12 A of the SEBI Act, which reads as follows:
Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of
securities or control.
12A. No person shall directly or indirectly
(a) use or employ, in connection with the issue, purchase or sale of any securities listed or
proposed to be listed on a recognized stock exchange, any manipulative or deceptive device
or contrivance in contravention of the provisions of this Act or the rules or the regulations
made thereunder;
(b) employ any device, scheme or artifice to defraud in connection with issue or dealing in
securities which are listed or proposed to be listed on a recognised stock exchange;
(c) engage in any act, practice, course of business which operates or would operate as fraud or
deceit upon any person, in connection with the issue, dealing in securities which are listed or
proposed to be listed on a recognised stock exchange, in contravention of the provisions of
this Act or the rules or the regulations made thereunder;
(d) engage in insider trading;
(e) deal in securities while in possession of material or non-public information or communicate
such material or non-public information to any other person, in a manner which is in
contravention of the provisions of this Act or the rules or the regulations made thereunder;
(f) acquire control of any company or securities more than the percentage of equity share
capital of a company whose securities are listed or proposed to be listed on a recognised
stock exchange in contravention of the regulations made under this Act.
Fraud is also defined in the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to
Securities Markets) Regulations, as follows:
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 in order to induce another person or his agent
to deal in securities, whether or not there is any wrongful gain or avoidance of any loss, and shall
also include
(1) a knowing misrepresentation of the truth or concealment of material fact in order that another
person may act to his detriment;
(2) a suggestion as to a fact which is not true by one who does not believe it to be true;
(3) an active concealment of a fact by a person having knowledge or belief of the fact;
(4) a promise made without any intention of performing it;
(5) a representation made in a reckless and careless manner whether it be true or false;
(6) any such act or omission as any other law specifically declares to be fraudulent,
(7) deceptive behaviour by a person depriving another of informed consent or full participation,
(8) a false statement made without reasonable ground for believing it to be true.
(9) the act of an issuer of securities giving out misinformation that affects the market price of the
security, resulting in investors being effectively misled even though they did not rely on the statement
itself or anything derived from it other than the market price.
Enforcement Actions by SEBI
There are three forms of remedies for securities fraud
(a) Administrative enforcement action by SEBI
(b) Criminal prosecution
(c) In some cases, civil law remedies in courts either under the a statute or under common law
SEBI has been authorised under the SEBI Act 1992, to take remedial actions (which are in addition to
civil and criminal actions which can be sought in courts). SEBI also has administrative powers under
SCRA, 1956 and the Depositories Act, 1996, however its powers are the widest and most developed
under the SEBI Act.
The broad categories of actions which can be passed by SEBI under the SEBI Act are as under:
(a) Cease & Desist order under section 11D
(b) Suspension or debarment of person registered as intermediary with SEBI under section 12(3)
(c) Imposition of administrative penalty under sections 15A to 15HB read with section 15-I
(d) Remedial directions whether interim or final under section 11 read with section 11B
Role of Other Regulators
Several other regulators may also have concurrent jurisdiction where economic offences are
committed. Besides the role of RBI, IRDFA, PFRDA, and FMC with respect to sectoral offences, the
MCA and their subordinate office, the Serious Fraud Investigation Office (SFIO) also often plays a
vital role.
While SEBI continues to play the lead role in dealing with fraud, the Companies Act 2013 places
additional tools in the hands of SEBI and also bodies like the registrar of companies and the Serious
Fraud Investigation Office. Under the Companies Act, 2013, the registrar of companies or SFIO can
investigate fraud under section 206 or 211. A civil suit and class action by investors would lie against
fraud under section 245. And penalty for fraud has been provided in section 447 as follows:
447. Without prejudice to any liability including repayment of any debt under this Act or any other
law for the time being in force, any person who is found to be guilty of fraud, shall be punishable with
imprisonment for a term which shall not be less than six months but which may extend to ten years
and shall also be liable to fine which shall not be less than the amount involved in the fraud, but
which may extend to three times the amount involved in the fraud
Provided that where the fraud in question involves public interest, the term of imprisonment shall not
be less than three years.
Explanation.For the purposes of this section
(i) fraud in relation to affairs of a company or any body corporate, includes any act, omission,
concealment of any fact or abuse of position committed by any person or any other person with the
connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the
interests of, the company or its shareholders or its creditors or any other person, whether or not
there is any wrongful gain or wrongful loss;
(ii) wrongful gain means the gain by unlawful means of property to which the person gaining is not
legally entitled;
(iii) wrongful loss means the loss by unlawful means of property to which the person losing is
legally entitled.
Indias securities regulations have evolved with and in response to various securities frauds. We have
already discussed the impact the Harshad Mehta scam in the empowerment of SEBI. Similarly, the
Ketan Parekh scam resulted in the SEBI (Amendment) Act of 2002, which gave SEBI the power to call
for records from any bank, authority or board. It also empowered the regulator to inspect books of
any listed public company. Post this amendment, SEBI could suspend trading of a security, bar
persons and companies from accessing markets and suspend any office bearer in a stock exchange.
It was also granted powers to attach, impound, and retain the proceeds of any transaction that was
not by the book. SEBI could also specify requirements for listing and transfer of securities. Offences
like insider trading and unfair trade practices were more clearly defined and expressly forbidden.
Penalties of upto Rs 25 cr or three times the unlawful gains, whichever is higher, were allowed and
jail terms from 1 to 10 years were introduced.
Recently, the government of India has passed the Securities Laws (Amendment) Second Ordinance,
2013 which has further strengthened SEBIs hand in controlling fraudulent activity. Among other
things, the Ordinance has given SEBI greater powers to crack down on ponzi schemes, seek call data
records to check insider trading and carry out search and seizure operations. The amendments also
give SEBI the legal backing to clamp down on unscrupulous entities "using newer methods to take
gullible investors for a ride", as per a government statement issued at the time of promulgating the
first ordinance.


1. SEBI Adjudication Order NO. ASK/AO-54/2014 (disclosure based regime)
2. Frauds in Banks by Ramaswami Narasimhan
3. Securities Scam: Genesis, Mechanics and Impact by Samir K. Barua & Jayanth R. Varma
4. Security Analysis & Portfolio Management by Dhanesh Kumar Khatri
5. Development of the Securities Market in India- G.N. Bajpai
6. Fraud, Manipulation & Insider Trading in Indian Securities Markets by Sandeep Parekh
7. SEBI Act and SEBI Regulations
8. Evolution of the Indian Securities Markets by David Winkler
9. News reports: Second Ordinance promulgated giving greater powers to Sebi (September 19,
2013), Sebi@25: Greater powers after the Harshad Mehta scam (May 21, 2013)