SEBI
Topic36 PFUTP Definitions Regulation 2 Fraud
Definitions under PFUTP Regulations 2003 — Regulation 2
Topic 36 — Fraud, Fraudulent Practice, Market Manipulation, Misleading Appearance & Connected Persons | SEBI Law Officer
Regulation 2 of the PFUTP Regulations, 2003 contains the definitional framework — defining 'fraud', 'fraudulent practice', 'market manipulation', 'misleading appearance', 'connected person', and related terms. These definitions determine the scope of prohibited conduct under Regulations 3 and 4. The definition of 'fraud' under PFUTP is significantly broader than its common law counterpart, covering a wide range of manipulative, deceptive, and unfair practices that may not constitute fraud under traditional Indian contract law. These definitions are directly tested in SEBI Law Officer MCQs and descriptive papers.
1. Regulation 2(1)(c) — 'Fraud'
Regulation 2(1)(c): 'Fraud' includes any act, expression, omission or concealment committed whether in a deceitful manner or not by a person or by any other person with his connivance or by his agent while dealing in securities in order to induce another person or his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss, and shall include — (i) a knowing misrepresentation of the truth or concealment of material fact in order that another person may act to his detriment; (ii) a suggestion as to a fact which is not true by one who does not believe it to be true; (iii) an active concealment of a fact by a person having knowledge or belief of the fact; (iv) a promise made without any intention of performing it; (v) a representation made in a reckless and careless manner whether it be true or false; (vi) any such act or omission as any other law specifically declares to be fraudulent; (vii) deceptive behaviour by a person in a transaction of securities; (viii) a false statement made without reasonable ground for believing it to be true; (ix) the act of an issuer as defined in the Depositories Act, 1996 diverting the funds raised from public or financial institutions for the purpose other than those stated in the offer document or stated as a material fact in the disclosures; (x) manipulation of the price or volume of trading in securities. |
Key features of the PFUTP definition of 'fraud':
- 'Whether in a deceitful manner or not': Unlike common law fraud which requires deliberate deceit, PFUTP fraud does not require the act to be 'deceitful'. Reckless, negligent, or even innocent misrepresentations can constitute fraud.
- 'Whether or not there is any wrongful gain': Unlike civil fraud, PFUTP fraud does not require proof of profit. A person can be liable for PFUTP fraud even if they did not gain financially.
- Clause (x) — Price/volume manipulation: Manipulation of price or volume is specifically included as fraud — connecting market manipulation directly to the fraud prohibition.
- Clause (ix) — Fund diversion: An issuer diverting IPO proceeds to purposes other than stated in the offer document commits fraud — a direct regulatory response to post-IPO fund diversion by promoters.
2. PFUTP Fraud vs Common Law Fraud — Critical Differences
Feature | Common Law Fraud (IPC / Contract Act) | PFUTP Fraud (Regulation 2(1)(c)) |
|---|---|---|
Deceitfulness required? | Yes — deliberate misrepresentation required | No — 'whether in a deceitful manner or not' |
Wrongful gain required? | Generally yes — must result in loss to victim | No — 'whether or not there is any wrongful gain' |
Covers omissions? | Generally no — must be a positive statement | Yes — 'any act, expression, OMISSION or concealment' |
Reckless statements | Only deliberate false statements | Yes — clause (v): reckless and careless representations |
Abetment / connivance | Separate offence | Expressly included — 'by his connivance or by his agent' |
Fund diversion | IPC offences (cheating, criminal breach of trust) | Expressly covered — clause (ix): fund diversion by issuers |
3. Regulation 2(1)(e) — 'Fraudulent Practice' (Expanded Definition)
Regulation 2(1)(e): 'Fraudulent practice' means a fraud to which a person is a party and includes — (i) a market manipulation; (ii) a misleading appearance in the market; (iii) creating a false market; (iv) impersonation; (v) creating an illusion of trading; (vi) dissemination of information or statement which is false or misleading relating to securities. |
Regulation 2(1)(e) enumerates specific forms of fraudulent practice. Each sub-clause is tested as a standalone MCQ topic:
Sub-clause | Practice | Example |
|---|---|---|
(i) | Market manipulation | Coordinated buying/selling to artificially inflate/deflate price |
(ii) | Misleading appearance in market | Creating false impression of high trading activity through wash trades |
(iii) | Creating a false market | Spreading false news to move stock prices |
(iv) | Impersonation | Placing trades in someone else's name without authority |
(v) | Creating illusion of trading | Circular trades — buy and sell same shares between related entities |
(vi) | False/misleading information | Spreading rumours; manipulated research reports; fake corporate announcements |
4. Regulation 2(1)(g) — 'Misleading Appearance'
Regulation 2(1)(g): 'Misleading appearance' in trading in securities means an appearance which is not genuine and does not reflect genuinely the normal legitimate forces of supply and demand in the securities market. |
The 'misleading appearance' concept is central to market manipulation law. Normal price movements reflect genuine supply and demand. A misleading appearance is created when:
- Trading volume is inflated artificially — wash trades between related parties make a stock appear more liquid than it is.
- Price moves are driven by coordinated activity rather than genuine investor demand.
- Order books are manipulated — placing and cancelling large orders to create false depth (spoofing).
5. Regulation 2(1)(b) — 'Connected Persons'
Regulation 2(1)(b): 'Connected persons' means any person who is connected directly or indirectly with the management or administration of a company, either as a director, promoter, employee, banker, advisor, consultant, auditor, chartered accountant, company secretary, cost accountant, or is in a position to obtain unpublished price-sensitive information of the company. |
The 'connected persons' definition is broad — it captures anyone with access to inside information, not just formal insiders. Key aspects:
- Includes directors, promoters, employees of the company.
- Includes professional advisers — bankers, auditors, CAs, CSs, cost accountants, legal advisers.
- 'In a position to obtain UPSI' — even a person who might obtain UPSI (not just those who actually have it) is covered.
- This definition overlaps with — but is broader than — the PIT Regulations' definition of 'insider'.
6. PFUTP Definition of Fraud vs IPC Section 415 (Cheating)
📖 Prakash Gupta v. SEBI SAT Order, 2014 Facts: The accused argued that SEBI's PFUTP action was barred because the conduct amounted to 'cheating' under IPC Section 415 — a criminal offence already prosecuted — and SEBI's civil action was double jeopardy. Held: SAT held that PFUTP fraud is wider than IPC cheating. PFUTP regulation is a civil/quasi-criminal regulatory framework operating independently of criminal prosecution. SEBI's enforcement under PFUTP for the same facts as an IPC prosecution does not violate double jeopardy — they serve different purposes (regulatory deterrence vs criminal punishment). SEBI v. Ajay Agarwal (2010 SC) confirmed concurrent civil and criminal proceedings are valid. Ratio: PFUTP fraud is conceptually broader than IPC fraud/cheating. SEBI's PFUTP action and criminal prosecution under IPC/SEBI Act can run concurrently — double jeopardy does not apply to regulatory and criminal proceedings. |
7. Model Examination Questions
Q1. Define 'fraud' under Regulation 2(1)(c) of the PFUTP Regulations. How is it broader than common law fraud?
Definition of 'Fraud' under PFUTP — Regulation 2(1)(c) Model Answer — 'Fraud' under Regulation 2(1)(c) includes any act, expression, omission or concealment — whether in a deceitful manner or not — committed to induce another person to deal in securities, whether or not there is any wrongful gain. The definition is exhaustive — 10 sub-clauses enumerate specific fraudulent acts including: knowingly misrepresenting material facts (i); statements not believed to be true (ii); active concealment of material facts (iii); promises without intention to perform (iv); reckless representations (v); deceptive behaviour (vii); false statements (viii); fund diversion by issuers (ix); and price/volume manipulation (x). Differences from common law fraud: (i) PFUTP fraud does not require deceitfulness — 'whether in a deceitful manner or not'; (ii) no wrongful gain required — 'whether or not there is any wrongful gain'; (iii) covers omissions; (iv) covers reckless (not just deliberate) misstatements; (v) connivance/agency expressly covered. 'Fraudulent practice' under Regulation 2(1)(e) specifically includes: market manipulation, misleading appearances, creating false markets, impersonation, creating illusion of trading, and disseminating false information. In Prakash Gupta v. SEBI (SAT 2014), SAT confirmed that PFUTP fraud is wider than IPC cheating and SEBI's PFUTP action can proceed concurrently with criminal prosecution. |
🎯 EXAM POINTERS — Topic 36: PFUTP Definitions [Regulation 2]
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← Topic 35: PFUTP Regulations 2003 — Introduction | Next → Topic 37: Prohibition under PFUTP [Regulations 3-4]
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