Introduction
In a bid to fortify the integrity of India’s securities market, the Securities and Exchange Board of India (‘SEBI’) has recently introduced significant amendments to the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (‘FUTP Regulations’). These amendments, notified on 27.06.2024[i], address emerging challenges and enhance regulatory safeguards against fraudulent and manipulative activities in the securities market. The amended regulation is known as SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) (Amendment) Regulations, 2024 (‘Amended Regulations’)
Background
The FUTP Regulations were introduced in 2003 to combat fraudulent and unfair trade practices in the Indian securities market. These regulations aim to maintain market integrity, protect investors, and ensure fair trading practices. Before introducing these regulations, the Indian securities market faced significant challenges, including insider trading, market manipulation, inadequate disclosure practices, and actions, omissions, or behaviours likely to deceive or defraud investors or affect the market’s fairness and transparency. The primary objective of the FUTP Regulations is to prohibit any manipulative, fraudulent and unfair trade practices that may distort the market.
The rise of sophisticated trading technologies and the increasing complexity of financial markets have introduced new challenges for regulators in recent years. Cybersecurity threats, the use of mule accounts, and other advanced fraudulent schemes have necessitated further strengthening of the regulatory framework. The amended regulations reflect SEBI’s proactive approach to addressing these emerging threats and ensuring that the regulatory environment remains robust and effective.
Key Amendments Introduced
The recent amendments to the FUTP Regulations introduce several critical changes to strengthen the regulatory framework:
Inclusion of Mule Account: One significant amendment is the term ‘mule account’ within the framework. A mule account now encompasses trading accounts maintained with a stockbroker, dematerialized accounts, or bank accounts linked with the trading account maintained by one person but are effectively controlled by another. The inclusion of this definition aims to curb illicit practices in situations where accounts are used to conceal the true beneficiaries of transactions, thereby enhancing transparency and accountability. Henceforth, transactions through mule accounts will be considered manipulative, fraudulent, and unfair trade practices under reg. 4 of the FUTP Regulations.
Clarification on Manipulative Practices: The amendments clarify what constitutes manipulative practices within the securities market. Notably, any acts that involve the diversion, misuse, or siphoning off of assets or earnings of a listed company, as well as any concealment or manipulation of such a listed company's financial statements to influence securities prices, is explicitly prohibited. By explicitly defining and prohibiting these practices, SEBI aims to enhance market transparency and investor protection while deterring illicit activities.
Our Analysis
The amendments to the FUTP regulations represent a significant step towards fortifying the regulatory framework governing securities markets. By explicitly defining mule accounts and broadening the scope of manipulative practices, SEBI aims to deter market abuse and enhance investor confidence. Market participants must strictly adhere to the amended regulations, including listed companies, brokers, fund managers, and investors. Compliance with these regulations is essential to avoid regulatory scrutiny and penalties, uphold market integrity, and safeguard the interests of the investors. These measures are expected to significantly deter market manipulation and foster a more transparent trading environment.
End Notes
[i] Notification No. SEBI/LAD-NRO/GN/2024/187.
Authored by Muskaan Jain, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.
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