5 types of stock-trading malpractices that SEBI acts on

Securities and Exchange Board of India (SEBI) is the controller of the securities market and is responsible to ensure that people don't lose their hard-earned money to frauds. This means it has to impose penalties on all sorts of problems. 

Recently, SEBI has taken control and imposed fines on companies, stock exchanges, business owners, and even employees to stop malpractices like insider trading, misutilisation of IPO funds, non-disclosure and much more. Here's how it has been:

FIRST, WHO IS SEBI? 

Just like India's Home Ministry is the apex body responsible for internal security, border management, administration, and disaster management, SEBI is the apex body that is responsible for controlling the stock market in India and protecting the interest of shareholders. SEBI is made of board members, most of whom are nominated by the central government. 

HOW DOES SEBI IMPACT THE STOCK EXCHANGES?

SEBI acts within the purview of 'The Securities and Exchange Board of India Act, 1992' and regulates the way the stock exchanges and their components work. Stock exchanges like NSE and BSE are platforms that allow companies to list their shares so that people can trade them publicly. But SEBI is the one that makes rules on preventing stock market malpractices, regulating merchant brokers and stock brokers, registering new brokers, managing complaints and providing learning opportunities. 

PENALTIES

SEBI can levy penalties under sections 15 A to 15HB of the SEBI Act, 1992, SEBI LODR Regulations, 2015 and Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market Regulations, 2003. But, in everyday life, here are some of the penalties that SEBI has levied on companies and stock exchanges. 

1. VIOLATING FAIR DISCLOSURE NORMS

In April 2020, Facebook invested $5.7 billion in Reliance so that WhatsApp's payment services could reach millions of small business owners through Jio. This investment is said to have reduced Reliance's debt load and was expected to be reported to the stock exchange. But, Reliance did not disclose the complete information even after the media managed to report some tit-bits. SEBI observed that this lack of disclosure caused price fluctuations in the share prices of Reliance and in June 2022, imposed a fine of Rs 20 lakh on Reliance and its two compliance officers. 

2. MISUTILISATION OF FUNDS RAISED FROM THE PUBLIC 

When companies go for an IPO, they have to follow what they say in their draft prospectus. Any deviation from their prospectus will lead to them paying penalties. Midvalley Entertainment's IPO got listed in January 2011, but after recent investigations, SEBI got to know that MVEL not only diverted the funds somewhere else, it also changed its object clause, which meant a change in the description of the type of business it will run once it receives money. As directors did not use any kind of due diligence, about 32 entities of the group were fined Rs 2.3 crore. 

3. VIOLATION OF SEVERAL SEBI RULES

SEBI levied a fine of Rs 2 crore on Ravi Narain, the former MD, and vice-chairman of NSE, because he violated several SEBI rules that came to notice when the co-location scam was probed. SEBI also levied a fine of Rs 3 crore on Chitra Ramkrishna, the former chief of NSE, because of governance lapses during her tenure. These lapses included appointing Anand Subramanian as the Group Operating Officer without any records and also sharing confidential information with her so-called 'guru'.   

4. MISUTILISATION OF CLIENT SECURITIES

When SEBI checked the books of accounts of IIFL Securities from April 2011 to January 2017, it found that IIFL had misused clients' funds ranging from Rs 59 lakh to 397 crore to settle their own obligations that were payable to clients. They had also used the client's money ranging from 26 lakh to 78 crore and the interest payable on this amount for their personal purposes. Since these offenses were repetitive, SEBI imposed a fine of Rs 1 crore.   

5. INSIDER TRADING

SEBI imposed a fine of Rs 1 lakh each on three employees of Titan and 2 employees of Mindtree for insider trading. 3 employees of Titan and 2 employees of Mindtree had contravened the Prevention of Insider Trading (PIT) rules and Code of Conduct. Both companies had to inform the SEBI of this contravention which led SEBI to investigate the matter. As per the rules, when the traded value of transactions crosses Rs 10 lakh, the transactions need to be reported within 2 days of the transaction. But since these employees conducted these transactions but did not report them, they had to personally pay the fine.    

Dhani Services (formerly Indiabulls Venture) and their former non-executive director Pia Johnson, her husband Mehul Johnson, and their company secretary were fined Rs 1.05 crore for trading in its shares while being aware of certain unpublished price-sensitive information. Pia and Mehul, who made a joint profit of about Rs 69 lakh were also individually fined Rs 25 lakh separately.