New Delhi: The Supreme Court has advocated for a comprehensive legislation to deal with the ingenuity of fraudsters who take advantage of loopholes emerging from undefined concepts of fraud in the Sebi Act and regulations.
Even after Sebi (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, came into force, the market regulator has been regularly detecting 'front running'. This modus operandi is used by fraudsters to pass on inside information about a company's decision to buy bulk shares of a particular kind to enable his/her associates to purchase those very kind of shares minutes before the bulk purchase, which pushes up share prices.
Taking advantage of this increase, the individual purchasers offload the shares and earn handsome profit.
The question before the court was whether the intent of the 2003 regulations was to punish only intermediaries who conspire to do 'front running' or would it extend to individuals.
A bench of Justices Ranjan Gogoi and N V Ramana, through separate but concurrent judgments, said the provision meant to prevent intermediaries from indulging in 'front running' would also be applicable to individuals.
Justice Ramana said, "(As) a somewhat unclear picture emerges from undefined concepts contained in the (Sebi) Act and the regulations framed thereunder, a comprehensive legislation can bring about more clarity and certainty on these aspects. In actuality, 'front running' is more complicated than these definitions suggest."
"Anti-fraud provisions of securities laws are not coextensive with common law doctrines of fraud as common law fraud doctrines are too restrictive to deal with complexities involved in the securities market," he said.
Justice Gogoi explained why the meaning of fraud or inducement to commit an unfair trade practice had to be broader to stop irregular activities in a complex world of stock markets. He said mere parting of information about a decision by a company for bulk purchase of a particular kind of shares by itself had the element of inducing a stock broker to buy those shares for reaping handsome profit later.