Fraud shakes investor
confidence and damages both the capital markets and capital-raising because
people develop long memories when they lose a large part of their hard-earned
savings because of fraud. The disillusionment with the markets, a consequence
of the Harshad Mehta scam in the early 1990s, lingers even today. Though the
Harshad Mehta scam was really a massive banking scandal, it was the securities
markets which took the blame for it as the tainted and stolen money was put
into the securities markets on a huge scale leading to market manipulations and
disruptions. Another scam with Ketan Parekh at its helm towards the beginning
of this century, and later India’s most (in)famous corporate scam in recent
years, at Satyam Computers Limited, have shaken investor confidence in the
capital markets and corporate India. Fraud has a system-wide impact on the
economy and society, and not just on those defrauded. Where fraud exists,
honest companies’ cost of raising capital becomes higher, whether it’s issuing
debt or equity securities.
1. BACKGROUND
TO REGULATION OF FRAUD AND MANIPULATION BY SEBI
Almost invariably,
successful economic times hide many problems including fraud to take root even
more easily in times of economic bubbles. The beta
of the market hides the negative alpha
of frauds. As the economic waters recede, many frauds are uncovered as it is no
longer possible to skim off returns without being noticed when the markets
can’t hide your fraud. Such phases are invariably followed by reports,
committees, investigations and, finally, new regulations.
After periods of fraud like
the ones led by Charles Ponzi, Harshad Mehta, Enron and WorldCom, and Ramalinga
Raju of Satyam Computers Limited, a host of new regulations were brought in.
The Harshad Mehta scam helped mould the outlook of the modern regulator of
India, SEBI, on the need for a robust regulatory environment.
SEBI recognised that in
order to ensure confidence, trust and integrity in the securities market, there
was a need to ensure fair market conduct. Fair market conduct can be ensured by
prohibiting, preventing, detecting and punishing such market conduct that leads
to market abuse. Market abuse is generally understood to include market
manipulation and insider trading and such activity is regarded as an
unwarranted interference in the operation of ordinary market forces of supply and
demand and thus undermines the integrity and efficiency of the market1
which, in turn, erodes investor confidence and impairs economic growth2.
It was for this purpose,
i.e., to ensure fair market conduct, to deal with fraudulent and unfair trade
practices related to the securities market, and to provide for the means of
detection, prohibition and prevention thereof3 that SEBI framed the
Prohibition of Fraudulent and Unfair Trade Practices relating to Securities
Markets, Regulations, 1995. These were thereafter reviewed and replaced with
the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to
Securities Market) Regulations, 2003 (PFUTP
Regulations) which were notified on 17th July, 2003 and thereafter
amended in 2012, 2013, 2018 and 2020, respectively4.
The Supreme Court has
highlighted5 that the object
and purpose of the PFUTP Regulations is to safeguard the investing public and
honest businessmen. It is established6 that the aim of the
Regulations is to prevent exploitation of the public by fraudulent schemes and
worthless securities through misrepresentations, to place adequate and true
information before the investor, to protect honest enterprises seeking capital
by accurate disclosures, to prevent exploitation against the competition
afforded by dishonest securities offered to the public and to restore the
confidence of the prospective investor in his ability to select sound
securities.
The underlying aim behind
enacting the PFUTP Regulations is thus to preserve market integrity and to
prevent market abuse. The Supreme Court also asserted that in order to
effectively ensure security and protection of investors from fraud and market
abuse, SEBI, as regulator of the securities market must sternly deal with
companies and their directors indulging in manipulative and deceptive devices,
insider trading, etc., or else the regulator will be failing in its duty to
promote orderly and healthy growth of the securities market7.
__________________________________________________________________________________________________________________________________
1 Palmer’s Company Law, 25th Edition
(2010), Volume 2 at page 11097; Gower & Davies-Principles of Modern Company
Law, 9th Edition (2012) at page 1160
2 T.K. Vishwanathan Committee, Report of
Committee on Fair Market Conduct (8th August, 2018)
3 Munmi Phukon, ‘SEBI’s expanded power to
protect investors’ interest’ < http://vinodkothari.com/2019/01/sebis-expanded-power-to-protect-investors-interest/>
4 Id
5 SEBI vs. Kanhaiyalal Baldevbhai Patel,
2017 (8) SCJ 650
vinodkothari.com/2019/01/sebis-expanded-power-to-protect-investors-interest/>
6 Id
7 Id
2. WHAT
CONSTITUTES FRAUD AND UNFAIR TRADE PRACTICES?
When one speaks of fraud in
general, it could include all forms of unfair behaviour starting from the
morally improper to the legally prohibited. However, fraud when legally defined
is a term of art used to describe a wide variety of conduct which is
fraudulent, deceptive or manipulative. At the same time, all conduct which may
be unfair may not be fraudulent.
Fraud
A subject like fraud which
attracts a lot of careful attention because of the stigma attached to it must
be read and interpreted carefully so that non-fraudulent conduct does not get
caught in its net. The definition of fraud under the PFUTP Regulations thus
requires a closer scrutiny and better understanding. It says that ‘“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…’
However,
this definition of fraud under Regulation 2(1) of the PFUTP Regulations does
not clearly delineate the scope of fraud. What is stated therein is only part
of the expanse of the definition. If anything, the definition is not exhaustive
but only indicative by example. And the examples outlined by SEBI include, inter alia, a knowing misrepresentation of truth, active concealment of material
facts, suggesting as a fact something known to be untrue by the person making
it, a promise made without any intention of performing it and other deceptive
behaviour with a view to induce another person to act to his detriment or to
deprive him of informed consent and full participation. Further,
the definition includes within its ambit representations made in a reckless or
careless manner (irrespective of whether or not the same are true), acts or
omissions specifically declared to be fraudulent, false statements made without
reasonable ground for believing them to be true. Further, acts of an issuer of
securities involving misinformation affecting the market price of the
securities in a misleading manner also falls within the scope of the definition
as explicitly laid down thereunder.
However, general comments
made in good faith in regard to the economic policy of the government, the
economic circumstances of the country, trends in the securities market or any
other matter of like nature, whether such comments are made in public or in
private, are excluded from the definition of fraud.
Thus, the scope of
definition of fraud provided by SEBI is not exhaustive. Regulations 3 and 4
enlist ingredients of fraudulent and unfair trade practices. The term fraud has
been interpreted by the Supreme Court in SEBI
vs. Kanhaiyalal Baldevbhai Patel8
to be wider than ‘fraud’ as used and understood under the Indian Contract Act.
The term ‘unfairness’ has been interpreted to be even broader than and
inclusive of the concepts of deception and fraud. Unfair trade practices, the
Supreme Court has noted, are not subject to a single definition but require
adjudication on a case-to-case basis. Conduct undermining good faith dealings
may make a trade practice unfair. The Supreme Court has defined unfair trade
practices as follows:
‘having
regard to the fact that the dealings in the stock exchange are governed by the
principles of fairplay and transparency, one does not have to labour much on
the meaning of unfair trade practices in securities. Contextually, and in
simple words, it means a practice which does not conform to the fair and
transparent principles of trades in the stock market.’
Prohibited
dealings
By
virtue of Regulation 3 of the PFUTP Regulations, certain dealings in securities
including buying, selling or otherwise dealing in securities in a fraudulent
manner are prohibited. These dealings include using or employing any
manipulative or deceptive devices or contrivances in contravention of the
provisions of the SEBI Act or the rules of the regulations made thereunder in
connection with the issue, purchase or sale of listed or to-be-listed
securities. Further, it includes employing any device, scheme or artifice to
defraud as well as engaging 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 recognised stock exchange in contravention of the provisions of the SEBI
Act or rules or regulations made thereunder are prohibited dealings.
Regulation
4
Regulation 4 prohibits
manipulative, fraudulent and unfair trade practices. It provides indicative
examples of what constitutes fraud under the scope of the PFUTP Regulations.
The following are examples of instances of fraud governed under the
aforementioned provisions of the PFUTP Regulations:
Market
manipulation
The
regulations describe two classic forms of volume manipulation, one of which is
creation of an appearance of trading volume in the market. Regulation 4(2)(a)
deems dealings which knowingly create a false or misleading appearance of trading to be
fraudulent. The false appearance of trading is intended to create an impression
amongst gullible investors that the securities are traded frequently and are
therefore highly liquid. The illusion of liquidity fools investors to purchase
the securities, only to be left holding illiquid securities when the artificial
trading ceases.
The second form of
classical volume manipulation pertains to another type of volume manipulation
where the same person is on both sides of the transaction. This is dealt with
under Regulation 4(2)(b) which provides that dealing in a security where parties
do not intend to effect transfer of beneficial ownership but intend 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, is fraudulent.
In simple terms, the manipulator
(person), wearing the buyer’s hat, puts in successive bids of higher and higher
prices. Wearing the seller’s hat, the same person or his nominee sells at the
higher price. The false trade would give the appearance of a price higher than
is in fact the true value of the security. Similarly, a buyer can put
successively lower bids to reduce the price artificially.
Under-cutting
minimum subscription norms
The SEBI Act provides for
minimum subscription of shares on issue. There are people who try to undercut
these requirements by advancing money to potential subscribers so as to induce
them to subscribe to the shares for fulfilment of the minimum subscription on
issue requirement. Regulation 4(2)(c) classifies these kinds of transactions as
fraudulent and unfair trade practices. Such frauds are committed when a company
or its promoters seek to fill subscription of shares in a public offer through
fictitious trades to satisfy the minimum subscription requirements.
Price
manipulation
There are several forms of
fraudulent conduct leading to price manipulation of shares, some of which are
dealt with specifically in the regulations as provided below.
Regulation 4(2)(d) deals
with inducing someone to deal in securities with the objective of artificially
inflating, depressing, maintaining or causing fluctuation in the price of a
security by any means, including by paying, offering or agreeing to pay or
offer any money or money’s worth, directly or indirectly, to any person. This
form of fraud is a variation of classical manipulation described in Regulation
4(2)(b), with the difference being that it includes price manipulation using
another person.
Secondly, Regulation
4(2)(e) provides that any act, omission amounting to manipulation of the price
of a security, including influencing or manipulating the reference price or
benchmark price of any securities is fraudulent. This is also a variation of
volume manipulation described in Regulation 4(2)(b) with the significant
difference being that it does not require the person to be on both sides of the
transaction.
For example, a person can
inflate or depress the price of securities without being on both the buy and
the sell sides. This can be done by simply purchasing a large number of
securities for a nefarious purpose. In other words, there is a possibility of a
buyer (or a seller) putting in successively higher (or lower) prices in the
market driving up (or down) the prices artificially without the other side
knowing that such person is manipulating the market. Such actions amount to
manipulation.
Spreading
false information
PFUTP Regulations prohibit
spreading rumours or false information about a company and then profiting from
such information. This prohibition is dealt with by Regulation 4(2)(f) which
covers the knowing publication of false information relating to securities,
including financial results, financial statements, mergers and acquisitions,
regulatory approvals, which is not true or which the publisher does not believe
to be true, prior to or in the course of dealing in securities.
The
classic example is when a promoter talks up the prospectus of a company’s
performance and sells the shares of the company while it is in an inflated
state of informational being. However, it has more complex forms.
Another form of propagation
of false information has been prohibited in Regulation 4(2)(k) that pertains to
disseminating information or advice through the media, knowing such information
to be false and / or misleading and which is designed or likely to influence
the decision of investors dealing in securities.
Moreover, Regulation
4(2)(r) pertains to knowingly planting false or misleading news which may
induce sale or purchase of securities. This can range from false rumours about
a company to placing a wrong advertisement about an event of a company to
modify the price of its security.
Instances
of unauthorised trading
The following set of
regulations deal with different circumstances of unauthorised trading in the
market.
Regulation 4(2)(g) deems
any act of entering into a transaction in securities without the intention of
performing it or without the intention of change of ownership of such security;
this is a variation of regulation 4(2)(a) and is often described as ‘painting
the tape’. It is a form of market manipulation whereby market players attempt
to influence the price of a security by buying and / or selling it among
themselves so as to create the appearance of substantial trading activity in
it.
While Regulation 4(2)(h)
deals with stolen, fraudulently issued or counterfeit securities, persons
selling, dealing in such securities who are holders in due course, or
situations where such securities were previously traded on the market through a
bona fide transaction are, however,
excluded from this provision.
Regulation 4(2)(m) pertains
to churning. Churning means entering into repeated buy and sell transactions
merely to generate more commission income. It involves unauthorised trades that
may be made by a portfolio manager and suppressed from the client.
Regulation 4(2)(o) pertains
to market participants fraudulently inducing any person to deal in securities
with the objective of enhancing their brokerage or commission or income. And
Regulation 4(2)(t) pertains to illegal mobilisation of funds by carrying on or
facilitating the carrying on of any collective investment scheme by any person.
Circular
transaction
Circular trading is a
fraudulent scheme where sell orders are entered by a broker who knows that
offsetting buy orders for the exact same number of shares at the same time, and
at the same price, have either been or will be entered.
The
Regulation 4(2)(n) pertains to circular transactions in respect of a security
entered into between persons including intermediaries to artificially provide a
false appearance of trading in such security or to inflate, depress or cause
fluctuations in the price of such security.
Intermediary
predating
This
pertains to a broker or any other intermediary providing bogus records to
inflate the price a purchaser of security pays to such broker. Similarly, a
mutual fund may change the date of investment to give a favoured investor a
superior price (say of the previous date); these would be clearly fraudulent.
Regulation 4(2)(p) pertains to intermediary predating or otherwise falsifying
records, including contract notes, client instructions, balance of securities
statement, client account statements and so on.
Front-running
Front-running pertains to
any order in securities placed by a person on the basis of unpublished
price-sensitive information. It is a serious and common malpractice involving a
broker or other intermediary who knows about the client’s order and placing an
order ahead of the client.
Thus, a broker who knows
that his client wants to place an order of one million shares of Infosys
punches in his own order ahead of the client’s order. This front-running order
would increase the price available to his client and thus hurt his client.
Regulation 4(2)(q) prohibits front-running.
Misselling
of securities
Regulation 4(2)(s) pertains
to misselling of securities or services related to the securities market, which
means sale of securities or services related to the securities market by any
person directly or indirectly, by knowingly making a false or misleading
statement, or concealing or omitting material facts, or concealing the risk
associated with the securities, or by not taking reasonable care to ensure the
suitability of the securities or service, as the case may be, to the purchaser.
__________________________________________________________________________________________________________________________________
8 SEBI vs. Kanhaiyalal Baldevbhai Patel,
2017 (8) SCJ 650
3. POWERS
FOR ENFORCEMENT OF PFUTP REGULATIONS
In order to effectively
enforce the provisions of the PFUTP Regulations, SEBI is empowered to inter alia restrain persons from accessing
the securities market and prohibit any person associated with the market to
buy, sell or deal in securities, and to impound and retain the proceeds or
securities in respect of any transactions which are in violation or prima facie in violation of these
regulations. Further, SEBI is also empowered to prohibit the person concerned
from disposing of any of the securities acquired in contravention of these
regulations and to direct such person to dispose of the securities acquired in
contravention of these regulations in such manner as the Board may deem fit,
for restoring the status quo ante.
Disgorgement
It is well established that
the power to disgorge is an equitable remedy and is not a penal or even quasi-penal action. It differs from
actions like forfeiture and impounding of assets or money. Unlike damages, it
is a method of compelling a defendant to give up the amount by which he was
unjustly enriched. Disgorgement is intended not to impose on defendants any
demand not already imposed by law, but only to deprive them of the fruit of
their illegal behaviour. It is designed to undo what could have been prevented
had the defendants not outdistanced the investors in their unlawful project. In
other words, disgorgement merely discontinues an illegal arrangement and
restores the status quo ante.
Disgorgement is a useful equitable remedy because it strips the perpetrator of
the fruits of his unlawful activity and returns him to the position he was at
before he broke the law. But merely requiring a defendant to return the ‘stolen
goods’ does not penalise him for his illegal conduct.
In its order dated 4th
October, 2012 in the matter of Shailesh
S. Jhaveri vs. SEBI, the Securities Appellate
Tribunal (‘SAT’) ruled that disgorgement proceedings do not amount to
punishment and are merely an equitable monetary remedy. In this case, SEBI had
issued orders barring the persons concerned for a period of two years from
accessing the securities market and also issued a disgorgement order for
violation of Regulations 4(2) and 4(d) of the erstwhile PFUTP Regulations9.
By
virtue of Regulation 11(1)(d) of the PFTUP, SEBI is now expressly empowered to
impound, retain and order disgorgement of the proceeds or securities in respect
of transactions which are in violation or prima facie in
violation of the PFUTP Regulations. In the Morgan Industries price rigging case10, SEBI had charged
Alka Synthetics and some other entities with having rigged the prices of the Magan Industries scrip. SEBI had directed the stock exchange concerned to impound the
proceeds totalling Rs. 10 crores (Rs. 100 million). Alka Synthetics challenged
this decision in the Gujarat High Court. The Bench held that SEBI was within its rights to issue directions to impound the auction proceeds and
that this did not amount to deprivation of property and hence did not violate
Article 300(A) of the Constitution. The Supreme Court remanded the ruling back
to the High Court, though the setting aside was not on the merits.
Debarring
from accessing capital markets
In case of manipulation of
a public issue, debarring a person from accessing and associating with the
capital markets was upheld as a preventive measure while distinguishing cases
where similar orders were passed even though manipulation was not connected to
raising of capital from the public11.
Further, in the matter of Polytex India Limited12,
SEBI observed violation of the provisions of Regulations 3 and 4 of the PFUTP
Regulations as a consequence of manipulation of the price of the Polytex scrip.
It barred various noticees thereunder for periods ranging from five to seven
years from accessing the securities market and from buying, selling or
otherwise dealing in securities, directly or indirectly, or being associated
with the securities market in any manner whatsoever. It also passed directions
with regard to disgorgement of an amount of Rs. 3,05,99,174 with interest
accrued at 12% per annum from 17th December, 2012 till the date of
payment. Notably, this order was issued by SEBI on 31st January,
2019.
In the matter of Chetan Dogra & Ors13,
SEBI passed an order barring noticees therein from accessing the securities
market for six months to one year, as well as imposing disgorgement of unlawful
gains made to the tune of Rs. 2,14,85,115 for violation of Regulations 3(a),
(b), (c), (d), 4(1), (2a), (b) and (g) of the PFUTP Regulations.
The Supreme Court in SEBI vs. Pan Asia Advisors Ltd.14 affirmed SEBI’s power to pass
orders debarring respondents for a period of ten years in dealing with
securities while considering the role played by the respondents as lead
managers relating to the GDRs issued by six companies which had issued them.
Moreover, section 11(2)(e)
of the SEBI Act, 1992 expressly enables SEBI to take measures to prohibit
fraudulent and unfair trade practices. Regulations 3(a), (b) and (c) mirror the
provisions u/s 12A of the SEBI Act, 1992. Section 12A prohibits the use of
‘manipulative and deceptive devices’ and section 15HA provides for a penalty
for fraudulent and unfair trade practices u/s 12A.
__________________________________________________________________________________________________________________________________
9 Shailesh S. Jhaveri vs. SEBI [2012] SAT
180
10 SEBI vs. Alka
Synthetics, [1999] 19 SCL 460
11 Manu Finlease vs.
SEBI, [2003] 48 SCL 507 (SAT)
12 SEBI Whole-Time member
order dated 31st January, 2019 in the matter of Polytex India
Limited, Gemstone Investments Limited and KGN Enterprises Limited and Ors.
13 SEBI Whole-Time member order dated 31st
August, 2020 in the matter of Chetan
Dogra & Ors.
4. SEBI
PFUTP (SECOND AMENDMENT) REGULATIONS, 2020
By way
of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) (Second
Amendment) Regulations, 2003, an explanation has been inserted under Regulation
4(1) which clarifies that any act
of diversion, misutilisation or siphoning off of assets or earnings of a
company whose securities are listed or any concealment of such act or any
device, scheme or artifice to manipulate the books of accounts or financial
statement of such a company that would directly or indirectly manipulate the
price of securities of that company, shall be and shall always be deemed to
have been considered as manipulative, fraudulent and an unfair trade practice
in the securities market.
This explanation clarifies
that SEBI has always held inherent powers to take appropriate action under the
PFUTP Regulations for violations involving fudging of books of accounts and
financial statements of listed companies where such fudging, directly or indirectly, results
in manipulation in the price of the company’s securities. The explanation has
far-reaching effects and addresses questions pertaining to SEBI’s
jurisdictional prowess that remained unanswered for years.
Jurisdictional
conundrum – PwC
After
the unfolding of the large-scale accounting fraud in Satyam Computers Limited (‘Satyam Computers’), SEBI had initiated proceedings against PriceWaterhouse Cooper (‘PwC’) since the accounting firm had conducted the audit in Satyam Computers
and their alleged failure to detect financial misdoings within the company of
momentous scale in turn resulted in severe losses to Satyam’s shareholders. The
financial wrongdoing by PwC included, inter alia,
overstatement of cash and bank balances and misstatements in the books of
accounts.
When SEBI attempted to
charge the auditors involved in this massive accounting fraud by initiating
show cause proceedings against PwC under sections 11, 11B and 11(4) of the SEBI
Act and Regulation 11 of the PFUTP Regulations, it was faced with critical
uncertainty about its jurisdiction over such matters and the entities involved
therein.
In PricewaterhouseCoopers and Co. and Ors. vs. SEBI15, PwC challenged SEBI’s
initiation of proceedings against it and argued that SEBI did not have the
jurisdiction to initiate action against auditors who are discharging their
duties as professionals. It was also argued that the scope of SEBI’s power is
limited to entities forming part of the securities markets and that auditors
cannot be considered to be associated directly with the securities markets.
The Bombay High Court,
however, affirmed that SEBI has jurisdiction under provisions of the SEBI Act
and Regulations framed therein to inquire into and investigate matters in
connection with manipulation and fabrication of books of accounts and the
balance sheets of listed companies. It was further held that SEBI is empowered
to take regulatory measures under the SEBI Act for safeguarding the interest of
investors and the securities market. The Court held that in order to achieve
the same SEBI can take appropriate remedial steps which may include debarring a
Chartered Accountant from auditing the books of a listed company.
This resulted in the
implication that, even if indirectly, auditors owed a duty to shareholders and
investors. The High Court stated that ‘The auditors in the company are
functioning as statutory auditors. They have been appointed by the shareholders
by majority. They owe a duty to the shareholders
and are required to give a correct picture of the financial affairs of the
company.’
This decision of the Bombay
High Court was appealed against and is pending before the Supreme Court of
India.
SEBI’s
deliberations
In its report16,
the Committee on Fair Market Conduct under the chairmanship of Dr. T.K.
Viswanathan (ex-Secretary-General Lok Sabha and ex-Law Secretary) had inter alia noted that financial statement
frauds in a listed company has resulted in the loss of confidence by domestic
and international investors not only in the listed company in question but also
the entire industry to which that listed company belonged.
The committee had also
noted that there is a need for SEBI to take direct action against the
perpetrators of such financial fraud since it not only has an adverse impact on
the shareholders of the company but also impacts investor confidence in the
securities markets.
SEBI
felt17 that artificially inflating a company’s revenue, profits and
receivables, or hiding diversion of funds, will impact the price of its shares
and would influence the investment / disinvestment decisions of the investors.
In cases relating to diversion of funds or misstatements in disclosures of a
listed company and its management, the intention of the perpetrators has a
direct bearing on the interest of the investors as they remain invested or deal
in securities without having any information of such diversion. Therefore, such
diversion of funds or misstatements in disclosures are unfair trade practices
and the element of dealing in securities or the element of inducing others to
deal in securities need not be specifically proved in such cases.
SEBI felt that it was
important that gullible investors were not duped by such manipulative diversion
or misstatements and that the trust reposed in the securities markets was not
eroded by such fraudulent and manipulative activity18.
For the purpose of removal
of doubts, SEBI has now clarified that the existing provisions of the FUTP
Regulations always provided for effectively dealing with such fraudulent
activities of manipulating the prices of listed securities or diverting,
misutilising or siphoning off or hiding the diversion, misutilisation or
siphoning off of public issue proceeds or assets or earnings.
IMPLICATION
It is pertinent to note
that SEBI has acted upon the Report of the Committee on Fair Market Conduct for
issuing the clarification under the SEBI (Prohibition of Fraudulent and Unfair
Trade Practices) (Second Amendment) Regulations, 2020. Notably, the Committee
had observed that SEBI had powers u/s 11B of the SEBI Act, 1992 to issue
various directions, including directions to bar persons involved in financial
statement frauds, from associating with listed companies as promoter / director
/ auditor of any listed company, impounding and disgorgement of any illegal
gain made by such person, etc.19
Thus, SEBI has clarified that it was and is empowered to take action against
listed companies, their promoters, directors and auditors or any person
responsible for fudging and fraudulent actions pertaining to books of accounts
and financial statements of listed companies, where such actions result in or
have potential to mislead investors.
__________________________________________________________________________________________________________________________________
14 SEBI vs. Pan Asia Advisors Ltd., AIR 2015
SC 2782
15 PricewaterhouseCoopers and Co. and Ors.
vs. SEBI, 2011 (2) Bom CR 173
16 Report of the Committee on Fair Market Conduct
under the Chairmanship of Dr. T.K. Viswanathan (8th August, 2018)
17 SEBI Board Meeting dated 29th
September, 2020
18 Id
19 Report of the Committee on Fair Market Conduct
under the Chairmanship of Dr. T.K. Viswanathan (8th August, 2018)
