Imphal Review of Arts and Politics

Dept of Environment and Climate Change
Stock market fraud depiction

Time to Stop Fraudulent and Unfair Stock Market Trading

(This article is intended to bring awareness to general people about the illegal stock market trading with money collected from the general public)


Looking at the questions and answers given by the then union finance minister of state, Name Narain Meena in the parliament on 5 December 2012 by sending notification to Indian state governments to stop the unlicensed illegal trading in the stock market by pooling money from the public. Securities and Exchange Board of India – SEBI also circulated via PR 112/2016 to the state governments to stop the fraudulent and unfair trading in the stock market.

Seeing the time and year of the circulation both from the Central Government and SEBI, it looks like the fraudulent and unfair means of trading in the stock market was going on rampant in different states in India.

This was not heard much in the north eastern states until in recent time, the news particularly from Manipur started pouring out of with the names of different companies at Imphal, Moirang and Kakching etc., where huge amount of money are pooled by individuals with names of different entities promising of high rate of interest monthly. Public are lured into these schemes by websites, apps, WhatsApp messages and invested huge amounts of money in these companies.

The state government and the law enforcement agencies seem to have less knowledge about the circulation from the Government of India in 2012 and SEBI in 2016. Now is the time before it is late, for the government of Manipur and others and the law enforcement to stop the illegal, unlicensed, fraudulent and unfair means of trading by pooling the money from the public.

The general public, including those who have lured and invested are struggling to get back their invested money from these unlicensed individuals or companies. The general public and those lured by those unlicensed traders, needs the SEBI Act 2014 and its regulations. Any person or group collecting money from the public and trading in the stock market without obtaining a license from SEBI is illegal and punishable with penalties.

Sebi Licenses For Trading Stock Market With Fund Collected From Public

As per 12(1B) of SEBI Act 2014 “No person shall sponsor or cause to be sponsored or carry on or caused to be carried on any venture capital funds or collective investment schemes including mutual funds, unless he obtains a certificate of registration from the Board in accordance with the regulations.” There are four or five licenses from SEBI, under which the money collected from the public can be used in stock market trading.

Asset Management License (AMC) is generally known as licensed by SEBI to set up Mutual Funds. AMC is extremely difficult and required Rs 50 crore to start this. Under the AMC, intraday trading is not allowed. AMC allows Mutual Funds and it is a highly regulated entity and any individual can invest in Mutual funds as little as Rs 100.

Portfolio Management License (PMS) is easier to set up compared to AMC. Rs 5 crore net is required to set up PMS, it has higher risk. Minimum amount customers to invest in PMS is Rs 50L and leverage and intraday trading is not allowed. It does not allow pool funds from clients.

Alternate Investment Fund (AIF) is easier to start compared to AMC and PMS. It needs Rs 20 crore net to start. AIF has three categories, under different categories, it allows pooling funds from the public but the minimum amount from one client is Rs 1 crore and it allows a maximum 1000 customers.

Registered Investment Advisers (RIA) are not allowed to collect funds from the public and use them to trade in the stock market. People holding RIA from SEBI can advise people on stock market trading. It needs a net of Rs 5 lakh to set up. Certain qualification is required, and license can be obtained from SEBI with Rs 5000 application fee, annual and renewal fee of Rs 10000 for individual and Rs 1L for entities.

Without the above-mentioned licenses under SEBI, any individual or entities or group people or company involved trading in the stock market with the money collected from the public with different schemes and high interest rate, is illegal, fraudulent and unfair trade. They are punishable with heavy penalties under SEBI Act 2014 and regulations thereafter.

Penalties For Fraudulent And Unfair Trading:

15HA SEBI (Amendment) Act 2014 – If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty 85[which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher.

SEBI under 2012 Amended Act and regulations thereafter lays the outlines of penalties for the license holders that includes various aspects that the general public need to know. Penalties for entering with any client without agreement, amounting Rs 5L and failing to add Rs 1L each day. Penalties for failing to address the grievances within the time frame, amounting Rs 1L each day. Penalties for failing to refund money to client, amounting Rs 1L each day. Penalty for failing to invest the money, liable of Rs 5L each failure and each day.

Recovery Of Amounts

Nithin Kamath, CEO of Zerodha, one of leading brokers under SEBI says that 80% of the fraudulent and unfair trading without obtaining license from the regulator, cheats money collected from the public. Once the money collected from the general public and invested in the stock market is fraud without license from SEBI, it has high chances of losing money. However, SEBI has regulations to find penalties and collect the money from those fraud individuals and entities. 28A of SEBI Act 2021 empowers to collect the penalties from persons or entities: (a) attachment and sale of the person’s movable property; (b) attachment of the person’s bank accounts; (c) attachment and sale of the person’s immovable property; (d) arrest of the person and his detention in prison; (e) appointing a receiver for the management of the person’s movable and immovable properties.

Jurisdiction Of Fraudulent And Unfair Stock Market Trading

The matter related to the stock market, involving the fraudulent and unfair trading comes under the jurisdiction under the Establishment of Securities Appellate Tribunals and the Composition of Securities Appellate Tribunal. They are exempted from the civil court, however the SEBI appellate will apply the related civil and criminal section of the law depending on the nature of the case. The grievances of the public matter related to stock market comes under the appellates setup by SEBI.

In conclusion, the general public with a desire to earn easy money falls into the hands of the people offering high interest, initially the interests are given on time and attract more people to invest money. When more people invest in big amounts, they will fail to pay the promised interest and later refuse to refund the money. Thereafter, public unrest takes extreme steps.

In order to stop such unrest of the public and stop the illegal means of trading in the stock market, the state government and the law enforcement agencies should follow the directive given by the Union Government in 2012 and SEBI circulation PR 112 of 2016. SEBI’s circulate says, the general public should not be attracted or lured by those who practice fraudulent and unfair trade. The circulation also appeals to the general public to report any such persons and entities to Government and local police.

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