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CS Executive · Capital Market and Securities Laws

Prohibition of Fraudulent and Unfair Trade Practices in Securities Market

This chapter covers what SEBI treats as fraud, manipulation and unfair dealing in securities, and how it acts against them. You learn the PFUTP Regulations 2003, insider trading, the penalty under Section 15HA of the SEBI Act, and investigation and enforcement. Answer by stating the provision, applying it to the facts, and concluding.

What this chapter covers

This chapter deals with conduct that damages trust in the securities market: fraud, price manipulation, misleading statements and misuse of unpublished price sensitive information. The main rule-book is the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003. Its legal base is the SEBI Act, 1992. Section 12A of the Act bars anyone, directly or indirectly, from using manipulative or deceptive devices, employing any scheme to defraud, engaging in acts that operate as fraud or deceit, engaging in insider trading, dealing while in possession of material or non-public information, or acquiring control or securities beyond permitted limits in breach of the regulations.

The chapter has two layers. The first is the conduct layer: what counts as a fraudulent or unfair trade practice, and what insider trading means. The second is the consequence layer: the penalty and the powers SEBI has to investigate and act. Section 15HA sets the penalty for fraudulent and unfair trade practices. Section 15G sets the penalty for insider trading. Section 11 gives SEBI its duty to protect investors and regulate the market, including prohibiting insider trading, and its powers to call for information, inspect and pass interim orders.

This chapter links closely with the rest of Paper 5. It builds on your study of SEBI as the regulator, on intermediaries and stock exchanges in Part I, and on the securities laws in Part II. Insider trading also connects to the SEBI (Prohibition of Insider Trading) Regulations, 2015 and to takeover rules. Read them together so that you can cross-refer in answers.

This chapter is compact, concept-driven and well suited to written answers. Questions often ask you to define a term, list prohibited practices, explain insider trading, or state the penalty and the enforcement powers of SEBI. Case-style questions ask you to decide whether a given act is a fraudulent practice or insider trading. If you know the provision, the key words and the penalty range, you can write a complete answer in the ICSI pattern: provision, analysis, conclusion. It also gives you material that helps in other chapters on SEBI powers and market regulation.

Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market: topics in the order to study them

  1. 1PFUTP Regulations 2003: Overview and DefinitionsStart here because every later topic uses its terms, such as fraud, dealing in securities and the scope of the regulations.
  2. 2Prohibition of Fraudulent and Unfair Trade PracticesNext learn the actual prohibitions, since the penalty and enforcement topics only make sense once you know what conduct is banned.
  3. 3Insider Trading ConceptsInsider trading is a specific form of market abuse with its own terms such as insider and unpublished price sensitive information, so study it after the general prohibitions.
  4. 4Penalty under Section 15HA of the SEBI ActOnce you know the conduct, learn the monetary consequence, and compare it with the insider trading penalty in Section 15G.
  5. 5Investigation, Adjudication and Enforcement ActionFinish with how SEBI inquires and acts, which ties the whole chapter together and gives you the conclusion part of answers.

How to prepare Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market

Treat this chapter as a set of definitions, prohibitions and consequences. Learn the exact wording first, then practise applying it to short facts.

  1. Read Section 12A of the SEBI Act and note its six limbs in your own words. This is the statutory base for the whole chapter.
  2. Learn the definitions and the list of prohibited practices in the PFUTP Regulations. Make a one-page list with a plain example next to each item.
  3. Study insider trading separately. Write down who an insider is, what unpublished price sensitive information is, and the three acts covered in Section 15G: dealing, communicating, and counselling or procuring.
  4. Memorise the penalty figures. Under Section 15HA the penalty is not less than ₹5 lakh and may extend to ₹25 crore or three times the profits made, whichever is higher. Under Section 15G the minimum is ₹10 lakh with the same upper limit.
  5. Learn SEBI's powers from Section 11: calling for information, inspection, civil court powers, and interim measures such as suspending trading, restraining access to the market, impounding proceeds and attaching property for up to ninety days.
  6. Practise two or three short fact-based questions. For each, write the provision, apply it to the facts, and end with a clear conclusion.
  7. In the last week, revise from your one-page lists and rewrite the penalty figures from memory.

Common mistakes in Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market

  • Mixing up the penalty figures of Section 15HA and Section 15G.

    Fix: Remember the minimums: ₹5 lakh for fraudulent and unfair trade practices, ₹10 lakh for insider trading. Write both side by side in your notes.

  • Writing that the maximum penalty is simply ₹25 crore.

    Fix: State that the penalty may extend to ₹25 crore or three times the profits made, whichever is higher.

  • Treating insider trading as only the act of buying or selling shares.

    Fix: Include communicating unpublished price sensitive information and counselling or procuring others to deal, as listed in Section 15G.

  • Giving general answers without citing the section or regulation.

    Fix: Name Section 12A, 15HA, 15G or 11 where it matters, and refer to the PFUTP Regulations, 2003 for the detailed practices.

  • Ignoring the process side, such as inquiry and hearing.

    Fix: Add a line on SEBI's powers and the requirement of a hearing and inquiry before a penalty is levied, so your conclusion covers enforcement.

  • Leaving out the conclusion in fact-based questions.

    Fix: Always end with one clear sentence stating whether the act is prohibited and what consequence follows.

Last-day revision: Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market

  • Section 12A of the SEBI Act bars manipulative and deceptive devices, fraud, insider trading and unlawful acquisition of control.
  • Section 12A covers securities listed or proposed to be listed on a recognised stock exchange.
  • Section 15HA penalty: not less than ₹5 lakh, up to ₹25 crore or three times the profits, whichever is higher.
  • Section 15G penalty for insider trading: not less than ₹10 lakh, up to ₹25 crore or three times the profits, whichever is higher.
  • Section 15G covers dealing on the basis of unpublished price sensitive information, communicating it, and counselling or procuring others to deal.
  • Communication is not an offence under Section 15G if required in the ordinary course of business or under any law.
  • Section 11(1) makes it SEBI's duty to protect investors and to promote and regulate the securities market.
  • Section 11(2)(g) lists prohibiting insider trading as a SEBI measure.
  • Section 11(4) lets SEBI suspend trading, restrain market access, impound proceeds and direct that assets not be disposed of.
  • Attachment of bank accounts or property under Section 11(4) is for not more than ninety days unless the Special Court confirms it.
  • Section 11(4A) lets SEBI levy penalties under Section 15HA and Section 15G after an inquiry in the prescribed manner.
  • SEBI must give an opportunity of hearing to the persons concerned before or after passing orders under Section 11(4).

Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market practice questions

Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market: frequently asked questions

What are the PFUTP Regulations?

They are the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003. They set out the practices that are banned in dealing with securities. They work together with Section 12A of the SEBI Act.

What is the penalty under Section 15HA of the SEBI Act?

A person who indulges in fraudulent and unfair trade practices relating to securities is liable to a penalty of not less than ₹5 lakh. It may extend to ₹25 crore or three times the amount of profits made out of such practices, whichever is higher.

How is Section 15G different from Section 15HA?

Section 15G applies to insiders who deal on unpublished price sensitive information, communicate it, or counsel or procure others to deal. Its minimum penalty is ₹10 lakh. Section 15HA applies to fraudulent and unfair trade practices generally, with a minimum of ₹5 lakh.

What interim steps can SEBI take during an investigation?

Under Section 11(4), SEBI can suspend trading in a security, restrain persons from accessing the market, impound proceeds or securities, and attach bank accounts or property for up to ninety days. It can also direct that assets under investigation not be disposed of. It must give the persons concerned a hearing, either before or after the order.

Is Paper 5 an objective paper?

No. Each CS Executive paper is a descriptive paper of 3 hours, with 15 extra minutes for reading the question paper. There is no MCQ section and no negative marking, so write structured answers citing the provision.