Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market

Under Regulation 2 (1) (c) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, certain exceptions have been provided to the term ‘Fraud’ and states that nothing contained in the clause shall apply to any general comments made in good faith in regards to:

i)the economic policy of the government

ii)the economic situation of the country

iii)trends in the securities market, or

iv)any other manner of a like nature

whether such comments are made in public or in private.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2025, Q. 5(a) (Syllabus 2022).

Mule account and its restrictions

Regulation 2(1)(da) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, defines the term mule account which includes a trading account maintained with a stock broker or a dematerialized account or bank account linked with such trading account in the name(s) of a person, where the account is effectively controlled by another person, whether or not the consideration for transaction in the account are paid by such other person.

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 or transactions through mule accounts for indulging in manipulative, fraudulent and unfair trade practice shall be and shall always be deemed to have been considered as manipulative, fraudulent or an unfair trade practice in the securities market.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2025, Q. 6(b) (Syllabus 2022).

Fraud

As per regulation 2(1)(c) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, 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 –

a)a knowing misrepresentation of the truth or concealment of material fact in order that another person may act to his detriment;

b)a suggestion as to a fact which is not true by one who does not believe it to be true;

c)an active concealment of a fact by a person having knowledge or belief of the fact;

d)a promise made without any intention of performing it;

e)a representation made in a reckless and careless manner whether it be true or false;

f)any such act or omission as any other law specifically declares to be fraudulent;

g)deceptive behaviour by a person depriving another of informed consent or full participation;

h)a false statement made without reasonable ground for believing it to be true;

i)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.

And “fraudulent” shall be construed accordingly;

Nothing contained in this clause shall apply to any general comments made in good faith in regard to –

(a)the economic policy of the government

(b)the economic situation of the country

(c)trends in the securities market or

(d)any other matter of a like nature

whether such comments are made in public or in private.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 6A(v) (Syllabus 2022).

Regulation 3 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 deals with the prohibition of certain dealings in securities. It provides, no person shall directly or indirectly:

i)buy, sell or otherwise deal in securities in a fraudulent manner,

ii)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 SEBI Act or the rules or the regulations made there under,

iii)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,

iv)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 SEBI Act or the rules and the regulations made there under.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 5(a) (Syllabus 2022).

On the instruction of Premlata, CEO of the Company, Kamla has dealt in securities trading and indulged in front running by using information received from Premlata for trading in some script and squared off trades along with trades of Premlata for making wrongful gain which is not an appropriate action of Kamla.

Regulation 3 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 lays down the provisions on prohibition of certain dealings in securities. It is provided that 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 SEBI Act, 1992 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 SEBI Act, 1992 or the rules and the regulations made there under.

Further, Regulation 11A of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 provides the manner of service of summons and notices issued by the SEBI. It is provided that-

(1)A summons or notice issued by the SEBI shall be served on the person through any of the following modes, namely—

(a)by delivering or tendering it to that person or his duly authorised agent; or

(b)by sending it to the person by fax or electronic mail or electronic instant messaging services along with electronic mail or by courier or speed post or registered post.

However, the courier or speed post or registered post shall be sent to the address of his place of residence or his last known place of residence or the place where he carried on, or last carried on, business or personally works, or last worked, for gain, with acknowledgment due.

Further, a summons or notice sent by fax shall bear a note that the same is being sent by fax and in case the document contains annexure, the number of pages being sent shall also be mentioned.

Also, a summons or notice sent through electronic mail or electronic instant messaging services along with electronic mail shall be digitally signed by the competent authority and bouncing of the electronic mail shall not constitute valid service.

(2)In case of failure to serve a summons or notice through any one of the modes as mentioned above, the summons or notice may be affixed on the outer door or some other conspicuous part of the premises in which the person resides or is known to have last resided, or carried on business or personally works, or last worked, for gain and a written report thereof shall be prepared in the presence of two witnesses.

(3)In case of failure to affix the summons or notice on the outer door, the summons or notice shall be published in at least two newspapers, one of which shall be in an English daily newspaper having nationwide circulation and another shall be in a newspaper having wide circulation published in the language of the region where that person was last known to have resided or carried on business or personally worked for gain.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2023, Q. 5(c) (Syllabus 2022).

A summons or notice or an order issued by the SEBI shall be served on the person through any of the following modes, namely—

(a)by delivering or tendering it to that person or his duly authorised agent; or

(b)by sending it to the person by fax or electronic mail or electronic instant messaging services along with electronic mail or by courier or speed post or registered post.

However, the courier or speed post or registered post shall be sent to the address of his place of residence or his last known place of residence or the place where he carried on, or last carried on, business or personally works, or last worked, for gain, with acknowledgment due. Further, the summons or notice sent by fax shall bear a note that the same is being sent by fax and in case the document contains annexure, the number of pages being sent shall also be mentioned.

Also, the summons or notice sent through electronic mail or electronic instant messaging services along with electronic mail shall be digitally signed by the competent authority and bouncing of the electronic mail shall not constitute valid service.

In case of failure to serve the summons or notice through any one of the modes as mentioned above, the summons or notice may be affixed on the outer door or some other conspicuous part of the premises in which the person resides or is known to have last resided, or carried on business or personally works, or last worked, for gain and a written report thereof shall be prepared in the presence of two witnesses.

In case of failure to affix the summons or notice on the outer door as provided above, the summons or notice shall be published in at least two newspapers, one of which shall be in an English daily newspaper having nationwide circulation and another shall be in a newspaper having wide circulation published in the language of the region where that person was last known to have resided or carried on business or personally worked for gain.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2026, Q. 4(b) (Syllabus 2022).