Tightening the noose around entities running illegal collective investment schemes (CIS), the Securities and Exchange Board of India (SEBI) has notified new norms to classify such activities as frauds and impose penalties of up to three times of their profits.
Besides, the new rules expand the list of activities to be covered under fraudulent and unfair trade practices to hold individuals as well as companies equally guilty for manipulations.
The amendments have been made with effect from September 6, 2013 to SEBI’s Prevention of Fraudulent and Unfair Trade Practices (PFUTP) Regulations, a gazette notification said.
As per amendments, the list of such practices would now include “illegal mobilisation of funds by sponsoring or causing to be sponsored or carrying on or causing to be carried on any collective investment scheme by any person”.
Besides, an “explanation” has been inserted into these regulations to state that the list of such practices is not exhaustive in nature and the norms would be applicable to all categories of persons and entities.
The 10-year old norms in this regard have been amended to remove certain regulatory gaps, which enabled penal actions against individuals to be challenged on the ground that they meant only for market entities, and not the individuals.
The SEBI has come across many cases where it has been claimed that the norms do not explicitly permit penal action against individuals at fund houses and foreign funds, for certain ’fraudulent and unfair trade practices’ like front running, withholding of key information from the investor and making false promises or claims to induce the clients into a securities transaction.
In some cases, these individuals have been employees or associates of market intermediaries like brokerage firms.
‘Front running’ refers to an intermediary (or an associated individual) buying or selling securities in advance of a substantial client order, or whereby a forward position is taken about an impending transaction in the same or related futures or options contract.
The amendment would allow the list of ‘fraudulent and unfair trade practices’ to remain open ended, rather than restricting it to 19 broad categories currently.
The SEBI has also decided to strictly enforce these norms, which cover a wide array of manipulative activities, such as publishing advertisements with misleading or distorted information to influence the investors’ decision, planting of false or misleading news and inducing investors to carry out transactions for personal gains.
With regard to illegal money-pooling schemes, the operators of such activities earlier faced a meagre fine of Rs one crore and the same was not found to be sufficient to deter such unauthorised raising of funds.