On December 31, 2018, Securities and Exchange Board of India notified several amendments to the Sebi (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations) which has come into effect from February 1, 2019.
The amended PFUTP Regulations has incorporated recommendations of the Committee on Fair Market Conduct which was constituted by Sebi inter alia to identify opportunities for improvement of the Sebi (Prohibition of Insider Trading) Regulations, 2015 and the PFUTP Regulations.
Further, through these amendments, Sebi has made an attempt to bring the provisions of the PFUTP Regulations in line with several Supreme Court judgements which have dealt with matters related to fraud and unfair trade practices, including
Sebi vs Kanaiyalal Baldevbhai Patel (2017 15 SCC 1) and N Narayanan vs Adjudicating Officer, Sebi (2013 12 SCC 152).
In the ‘definitions’ section of the PFUTP Regulations, the meaning of ‘dealing in securities’ has been expanded. The scope of ‘dealing in securities’ has been widened from activities directly linked to transacting in securities to i) activities undertaken to influence the decision of investors in securities and ii) any assistance provided to carry out the aforesaid activities.
Non-intermediaries/fiduciaries who do not directly transact in securities but through their actions influence or assist in influencing the decisions of investors in dealing in securities will now be covered under the PFUTP Regulations. For instance, the new PFUTP Regulations will cover the activities of a statutory auditor of a listed company.
A Wider Ambit
The other important amendments have been incorporated in Regulation 4. Regulation 4 has been amended to encompass a wider range of persons and entities under the ambit of the PFUTP Regulations. Further, with the intent to ensure adequate safeguards, the element of ‘knowledge’ has also been introduced with respect to undertaking manipulative, fraudulent or unfair trade practices in certain sub-clauses of Regulation 4(2).
An attempt has been made to distinguish between acts done in good faith vis-à-vis fraudulent acts to protect bonafide cases of ‘dealing in securities’.
Regulation 3 and 4(1) lay down the underlying principles governing fraud and unfair trade practice and Regulation 4(2) provides specific instances which are deemed to be manipulative, fraudulent or an unfair trade practice.
Sebi has continued to keep the broader charging provisions of Regulation 3 and 4(1) intact to capture diverse situations and possibilities and modified the deeming provision. A need was felt by Sebi to amend and expand the scope of Regulation 4(2), to ensure that the PFUTP Regulations stayed in tune with technological progress, financial innovation and new forms of fraudulent market practices.
For instance, in Regulation 4(2)(q), which deals with front running, the term ‘an intermediary’ has been replaced with ‘by a person’. Such an amendment will now allow more individuals to be covered under Regulation 4(2)(q). For instance, now, cases of front running by employees of a company or his relatives and by the employee of a broker and his relatives will also be covered under the PFUTP Regulations. Similar amendments have been incorporated in several other sub-clauses in Regulation 4(2).
Broad Safeguards Incorporated
Further, the terms ‘knowingly’ and ‘fraudulently’ have been incorporated in Regulation 4(2)(a), (c), (f) and (r). Furthermore, broad safeguards have been provided in Regulation 4(2)(h) and (s) to protect bonafide activities.
For instance, Regulation 4(2)(h), which entails dealing or pledging of stolen or counterfeit security, now provides that if a person was a ‘holder in due course
’ for such securities or if it ‘were previously traded on the market through a bonafide transaction’, such acts of dealing in securities would not be deemed to be manipulative, fraudulent, or an unfair trade practice.
The amendments to the PFUTP Regulations have broadened the scope of individuals and entities that will now be covered under the ambit of the regulations and simultaneously, safeguards have been incorporated to restrict the scope of activities that will be deemed to be manipulative, fraudulent or unfair trade practice.
The amendments have been made inter alia to protect bonafide cases of ‘dealing in securities’ which should not be equated with manipulative, fraudulent, or unfair trade practices.
The new safeguards will now allow the possibility of excluding inadvertent or accidental trades of innocent investors from being classified as manipulative, fraudulent or an unfair trade practice. Though Sebi may continue to rely on the same standard of circumstantial evidence to allege violations under the PFUTP Regulation, concerned noticees can now rely upon the requirement of the element of ‘knowledge’ to better defend their cases.
Sandeep Parekh is a partner and Rahul Das is an associate at .
Finsec Law Advisors