SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003

The SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereafter called the 2003 Regulations) were introduced to curb manipulative and deceptive activities in the Indian securities market. They apply to every market participant, including portfolio managers, distributors, brokers, and listed companies.

The Regulations define “fraudulent practice” as any act that creates a false or misleading impression about a security, its price, or its value. “Unfair trade practice” refers to conduct that gives an undue advantage to any party or harms the interests of investors. Both concepts are central to the NISM exam because many multiple‑choice questions test the candidate’s ability to differentiate between permissible and prohibited actions.

For the exam, remember that the 2003 Regulations form the backbone of SEBI’s market‑integrity framework. They are frequently cross‑referenced with the SEBI (Portfolio Managers) Regulations, 2020, especially when questions ask about the hierarchy of rules or the specific duties of a portfolio manager.

• Scope – all entities dealing in securities.
• Objective – protect investors and ensure fair price discovery.

The Regulations list several specific fraudulent and unfair practices. The most common include:

Misrepresentation – providing false or misleading information about a security’s nature, price, or prospects. This can be intentional (fraud) or negligent (unfair practice).

Insider Trading – buying or selling securities on the basis of unpublished price‑sensitive information. SEBI treats this as a serious breach with heavy penalties.

Market Manipulation – actions such as creating a false demand or supply, price rigging, or “pump‑and‑dump” schemes. The Regulations forbid any activity that distorts the true market price.

False Price Publication – publishing or circulating a price that is not derived from a genuine transaction. This misleads investors and undermines confidence.

• Each prohibited act carries a distinct penalty schedule.
• Portfolio managers must have internal controls to detect and prevent these practices.

Portfolio managers (PMs) are directly bound by the 2003 Regulations. Their primary duty is to ensure that all investment recommendations, executions, and disclosures are free from fraud or unfairness.

Key responsibilities include:

Due Diligence – verifying the authenticity of information before acting on it. This helps prevent inadvertent insider trading.

Record Keeping – maintaining transaction logs, communication records, and audit trails for at least five years. SEBI may inspect these records during investigations.

Client Suitability – ensuring that investment strategies match the client’s risk profile, thereby avoiding mis‑selling, which is an unfair practice.

• Compliance officers must conduct periodic internal audits.
• Any breach must be reported to SEBI within the stipulated timeline.

SEBI has wide‑ranging powers to enforce the 2003 Regulations. Penalties can be monetary, disciplinary, or both, depending on the severity of the violation.

Typical monetary penalties include a fine up to 10% of the turnover of the offending entity, or a fixed amount prescribed in the Regulations (e.g., Rs. 5 lakh for minor infractions). For repeated or serious breaches, SEBI may impose a higher multiplier.

Non‑monetary actions include suspension or cancellation of registration, prohibition from trading, and disgorgement of ill‑gotten profits. The exam often asks you to match a violation with its corresponding penalty type.

• SEBI may also direct a disgorgement of profits earned through fraudulent activity.
• Immediate suspension can be ordered if the market integrity is at risk.

Distributors must ensure that every recommendation and transaction they facilitate complies with the 2003 Regulations. The following checklist is exam‑friendly and can be memorised as the ‘5‑C’ framework.

1. Client Suitability – Verify risk profile before suggesting any security.

2. Communication Accuracy – Ensure all disclosures are truthful and complete.

3. Conflict of Interest – Disclose any personal or financial interest in the recommended security.

4. Compliance Records – Keep audit‑ready documentation of all client interactions and trade confirmations.

5. Continuous Monitoring – Conduct periodic reviews to detect any deviation from fair practice norms.

• Failure in any of the 5‑C items can attract penalties under the 2003 Regulations.
• SEBI may audit these records without prior notice.

Since 2003, SEBI has issued several amendments to tighten the anti‑fraud framework. Notable updates include the 2015 amendment that introduced higher penalties for repeat offenders and the 2020 amendment aligning the Regulations with the new Portfolio Managers Regulations.

These changes primarily affect the quantum of fines and the reporting timelines. For example, the 2020 amendment reduced the mandatory reporting period for suspected fraud from 30 days to 15 days, emphasizing swift action.

Exam questions often reference these amendments to test whether candidates know the latest compliance timeline. Remember the key dates: 2003 (original), 2015 (penalty boost), 2020 (reporting period reduction).

• Do not confuse the amendment dates with the dates of unrelated SEBI circulars.
• Focus on the impact on penalties and reporting duties.