Crackdown: Share Market Manipulation Penalties in India

Penalties for Share Market Manipulation in India

The share market serves as a crucial financial hub, enabling investments and driving economic growth. However, with the vast opportunities come risks, particularly in the form of share market manipulation and fraud. 

This article sheds light on the types of share market manipulation and the regulatory framework in India, emphasising the penalties imposed by the SEBI.

What is Stock Market Manipulation?

Stock market manipulation refers to intentional, deceptive actions that aim to influence the price or volume of securities with the aim of misleading the market. This benefits manipulators and harms investors. Understanding how manipulation works is essential. It helps investors protect their money.

Types of Stock Market Manipulation

Share market manipulation takes on various forms. Each has its own tactics and strategies. These manipulations distort markets. Investors must be vigilant and find red flags. Some common forms include:

Pump and Dump

Pump and Dump is a classic market manipulation tactic. Perpetrators inflate a stock’s price through false or misleading statements to hype the stock and attract unsuspecting investors. However, once the price peaks, the manipulators sell their inflated shares for a profit.

People who fall victim to a Pump and Dump scheme often face big losses. The scheme causes stock prices to collapse after being artificially inflated.   

Wash Trading

Wash Trading involves buying and selling the same security at the same time. A single entity or many entities work together to do this. The main aim is to create fake trading. It attracts investors with the illusion of high demand or supply.

Artificial activity may draw investors in. They may then make decisions based on misleading signals. Revealing the true market conditions can result in losses.

Spoofing/Layering

Spoofing and Layering involve placing orders with no intention of execution. This tactic is manipulative. Its design is to deceive traders and manipulate stock prices by creating a false impression of market demand or supply.

Traders and investors rely on accurate market information. They may find themselves making decisions based on false signals. Once the deception is uncovered, it will result in financial losses.

Marking the Close

Marking the Close involves placing many buy orders near the market’s close, creating the illusion of an upward trend. This manipulative tactic aims to increase prices and attract more investors.

Investors who rely on closing trends to make decisions may receive misleading information. The trends can create higher prices, which can lead to bad choices and financial losses.

SEBI Guidelines on Market Manipulation

The Securities and Exchange Board of India (SEBI) is instrumental in overseeing and regulating the securities market. SEBI has devised regulations aimed at deterring and penalising market manipulation. These regulations establish a thorough structure for detecting, probing, and remedying manipulative practices.

Responsibilities during Investigation

Upon the initiation of an investigation, individuals are mandated to cooperate fully with the Investigating Authority. This entails providing all requested books, accounts, documents, and records promptly. Additionally, individuals must attend meetings with the Investigating Authority as required and respond to inquiries to the best of their abilities.

Corporate Obligations

Similarly, managers, directors, officers, and employees of companies have specific responsibilities during investigations. They are required to preserve and furnish all relevant company documents to the Investigating Authority. This ensures transparency and facilitates the investigative process.

Report Submission to the Board

Upon the conclusion of the investigation, it is incumbent upon the Investigating Authority to submit a comprehensive report to the appointing authority. However, in cases where it is deemed necessary, interim reports may be submitted to address urgent matters in the interest of investors and the securities market.

Board’s Enforcement Actions

Upon receiving the investigative report, the board is empowered to take decisive action to enforce regulations. These actions may include suspending trading of fraudulent securities, restricting individuals’ access to the securities market, seizing proceeds or securities involved in violations, and issuing directives to safeguard assets related to fraudulent transactions.

Order Issuance and Public Disclosure

Orders or directives issued by the Board, based on investigation findings, are accompanied by thorough documentation of reasons. Additionally, final orders issued by the Board under these regulations are made publicly available on the Board’s website, ensuring transparency and accountability.

Summons and Notices Service Method

The Board employs various methods to serve summons or notices, including delivery, fax, email, courier, or registered post. In cases where traditional methods fail, alternative methods such as affixing the summons or notice to premises may be utilised. Furthermore, failure to serve summons or notices through traditional means may necessitate publication in newspapers.

Registration Suspension or Cancellation

The Board reserves the right to take stringent actions, such as issuing warnings, suspending, or cancelling the registration of intermediaries found in violation of regulations. However, before final suspension or cancellation, procedural requirements specified under relevant regulations must be meticulously followed.

Repeal and Transitional Provisions

Finally, the repeal of previous regulations regarding fraudulent and unfair trade practices in the securities market signals a transition to a new regulatory framework. Violations of regulations under the old framework will be investigated and addressed under the new regulations, ensuring continuity and adherence to regulatory standards. Ongoing investigations at the time of transition will be concluded in accordance with the new regulations, ensuring a seamless transition process.

SEBI Appellate Tribunal: Strengthening Regulatory Oversight

The SEBI Appellate Tribunal serves as an appellate authority to review SEBI’s orders and decisions. It ensures fairness and adherence to legal principles. Investors and market participants can appeal SEBI’s decisions at the tribunal, contributing to a robust regulatory system.

Penalties for Stock Market Manipulation in India

The government, through SEBI, imposes stringent penalties on those found guilty of share market manipulation. Penalties may include fines, imprisonment, and trading restrictions. The severity of penalties aims to deter individuals and entities from engaging in fraudulent activities, preserving market integrity.

The Securities and Exchange Board of India (SEBI) oversees the sanctions for stock market manipulation in India.

Individuals participating in dishonest and unfair trade practices pertaining to securities may face penalties under Section 15HA of the SEBI Act 1992. The maximum fine is 25 crore rupees or three times the profits made from deceptive activities, whichever is greater. 

In addition to monetary penalties, individuals involved in share market manipulation can face imprisonment and trading restrictions. SEBI has the authority to recommend criminal proceedings against offenders, which can lead to imprisonment.

Moreover, SEBI can impose bans or restrictions on trading activities, prohibiting individuals or entities from participating in the market for a certain period or permanently. These stringent penalties aim to maintain a fair and transparent securities market in India, upholding market integrity and protecting investors’ interests.

Conclusion

Understanding the types of stock market manipulation, SEBI guidelines, and the imposed penalties is crucial for investors and market participants. It empowers them to make informed decisions, contributes to a fair and transparent market environment, and reinforces the regulatory measures in place. As the financial landscape evolves, staying vigilant against share market fraud becomes an integral part of safeguarding investments and ensuring market integrity.

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