RESEARCH PROJECT

On
A CRITICAL REVIEW OF SECURITIES LAWS AND REGULATIONS
IN INDIA

Submitted to

MAHARASHTRA NATIONAL LAW UNIVERSITY,

AURANGABAD

Submitted by
SANA MARIYAM

B.A.LL.B. (Hons.) Semester- VI

Roll no. 2022/BALLB/82

CORPORATE LAW- II

Under the guidance of

Ms. Sakshi Gupta
Assistant Professor of Law
Maharashtra National Law University, Aurangabad

1
DECLARATION

This declaration is made at Aurangabad that this project is prepared and drafted by me, Sana
Mariyam.

It contains the project work that was assigned to me during my 6th Semester period, and
successfully accomplished from my side.
This project is a sincere attempt at compilation of the aforementioned work.

This has not been submitted, either in whole or in part, to any other Law University or
affiliated Institute under which any University is recognized by the Bar Council of India,
for the award of any other law degree or diploma, within the territory of India.
SANA MARIYAM

2022/BALLB/82

2
INDEX

SR. NO. TITLE PAGE

NO.
1 INTRODUCTION 7

2 LEGAL FRAMEWORK GOVERNING 12

SECURITIES IN INDIA
3 SEBI AND STOCK EXCHANGES- THEIR 15
ROLES AND REGULATIONS

4 CORPORATE GOVERNANCE AND INVESTOR 20

PROTECTION

5 INSIDER TRADING AND MARKET 23

MANIPULATION
6 SECURITIES FRAUDS AND SCAMS IN INDIA 26

7 28

8 29

9 36

10 38

3
ABSTRACT
Securities laws and regulations in India serve as the foundation of a well-functioning capital
market, ensuring transparency, investor protection, and economic stability. This study
critically examines the evolution, framework, and effectiveness of securities regulations in
India, with a particular focus on the role of key regulatory bodies such as the Securities and
Exchange Board of India1 (SEBI), the Reserve Bank of India (RBI), and the Ministry of
Finance. The paper analyzes major legislation, including the Securities Contracts
(Regulation) Act, 19562, the SEBI Act, 19923, the Depositories Act, 19964, and the
Companies Act, 20135, highlighting their impact on corporate governance, market integrity,
and investor confidence. The review further explores critical issues such as insider trading,
market manipulation, takeover regulations, and corporate governance norms, assessing
SEBI’s enforcement mechanisms and the effectiveness of recent regulatory amendments.
Case studies of significant securities frauds, including the Harshad Mehta Scam (1992)6, the
Ketan Parekh Scam (2001), 7and the NSE Co-location Scandal 8, provide insights into
regulatory loopholes and enforcement challenges. Additionally, the paper evaluates the role
of Foreign Portfolio Investors (FPIs), algorithmic trading, and ESG (Environmental, Social,
and Governance) regulations in shaping India’s securities market in a globalized economy. A
comparative analysis with international securities regulations, particularly the United States
Securities and Exchange Commission (SEC) and the United Kingdom’s Financial Conduct
Authority (FCA), highlights best practices that India can adopt to strengthen its regulatory
framework. The study concludes with recommendations for policy reforms, enhanced
enforcement mechanisms, and increased investor awareness, emphasizing the need for a
dynamic and adaptive regulatory system to address emerging challenges in the financial
markets. The findings underscore the importance of a robust securities law framework in
fostering market efficiency, investor protection, and economic growth in India.

1
Securities and Exchange Board of India,1992
2
Securities Contracts (Regulation) Act, 1956
3
The SEBI Act, 1992
4
The Depositories Act, 1996
5
he Companies Act, 2013
6
Harshad Mehta Scam (1992)
7
Ketan Parekh Scam (2001)
8
NSE Co-location Scandal

4
A.1 Significance of the Study
This study is crucial for understanding India’s securities laws and their impact on market
regulation, investor protection, and economic growth. By analyzing key legislations such as
the SEBI Act, 1992, the Securities Contracts (Regulation) Act, 1956, and the Depositories
Act, 1996, it highlights strengths and regulatory gaps in the current framework. The research
assesses SEBI’s role in tackling insider trading, market manipulation, and corporate
governance failures, using case studies like the Harshad Mehta Scam (1992) and NSE Co-
location Scam to illustrate enforcement challenges. It also compares Indian regulations with
global standards, particularly those of the U.S. SEC and U.K. FCA, to identify best practices
India can adopt. With the rise of ESG compliance, algorithmic trading, and foreign portfolio
investments, this study evaluates how India’s securities laws adapt to emerging challenges. It
also provides policy recommendations to enhance market transparency, investor confidence,
and regulatory efficiency, making it valuable for regulators, investors, and legal
professionals.

A.2 Objectives of Study

This study aims to critically analyze the legal framework governing securities markets in
India, focusing on key regulations such as the SEBI Act, 1992, the Securities Contracts
(Regulation) Act, 1956, and the Depositories Act, 1996. It seeks to assess the effectiveness of
SEBI and other regulatory bodies in ensuring investor protection, preventing market
manipulation, and maintaining transparency. The research also examines major securities
frauds and enforcement challenges, identifying regulatory gaps that need reform.
Additionally, it provides a comparative analysis with global securities laws, highlighting best
practices that India can adopt. Lastly, the study aims to propose policy recommendations for
strengthening regulatory mechanisms, improving corporate governance, and adapting to
emerging challenges in financial markets.

A.3 Contemporary legal relevance

India’s securities laws remain highly relevant in today’s dynamic financial landscape, given
the increasing complexity of capital markets, technological advancements, and evolving
global regulations. Recent amendments in SEBI regulations, insider trading norms, ESG

5
compliance, and algorithmic trading laws highlight the need for a robust legal framework to
address emerging risks. High-profile cases like the NSE Co-location Scam and corporate
governance failures have intensified debates on regulatory enforcement and investor
protection. Additionally, the rise of cryptocurrency, fintech innovations, and foreign portfolio
investments (FPIs) has created new challenges for securities regulation. A comparative study
of Indian laws with global frameworks like the U.S. SEC and U.K. FCA is crucial to
adopting best practices. Strengthening securities regulations is essential to maintaining
market integrity, fostering investor confidence, and ensuring economic stability.

A.4 Research Question:

This study seeks to explore the effectiveness, challenges, and future prospects of securities
laws and regulations in India. It examines whether the existing legal framework, including
the SEBI Act, 1992, and related regulations, adequately protects investors and ensures market
transparency. The research aims to address how regulatory bodies like SEBI, RBI, and the
Ministry of Finance respond to securities fraud, insider trading, and corporate governance
failures. Additionally, it investigates the impact of global financial trends, algorithmic
trading, and ESG compliance on India’s securities market. A key focus is on whether India’s
securities regulations align with international best practices and how they can be improved to
enhance market efficiency and investor confidence.

A.5 Statement of Problem

Despite a well-established regulatory framework, India’s securities market continues to face
challenges related to insider trading, market manipulation, corporate governance failures, and
enforcement inefficiencies. While laws like the SEBI Act, 1992, the Securities Contracts
(Regulation) Act, 1956, and the Depositories Act, 1996 aim to ensure transparency and
investor protection, frequent securities frauds and compliance lapses raise concerns about
their effectiveness. The rise of algorithmic trading, ESG compliance, foreign portfolio
investments (FPIs), and fintech innovations further complicates regulatory oversight.
Additionally, comparisons with global regulatory bodies like the U.S. SEC and U.K. FCA
highlight gaps in enforcement and investor protection. This study seeks to identify these
shortcomings and propose reforms to strengthen India’s securities laws and market
governance.

6
A.6 Research Methodology
The project was conducted using secondary sources. Analysing literature, reports, and case
studies constitutes secondary research.

7
INTRODUCTION
Securities laws in India form the foundation of a well-regulated capital market, ensuring
market integrity, investor protection, and economic stability. The term “securities” refers to
financial instruments such as shares, bonds, debentures, and derivatives, which are issued and
traded in financial markets. Securities laws govern the issuance, trading, and regulation of
these instruments to prevent fraudulent activities like insider trading, market manipulation,
and unfair trade practices. A well-structured legal framework is essential to instill investor
confidence, regulate corporate behavior, and maintain transparency in capital markets
(Varottil, 2010). The Securities Contracts (Regulation) Act, 19569, was the first major
legislation enacted to regulate stock exchanges and securities trading in India. However, with
economic liberalization and the increasing complexity of financial markets, the need for a
dedicated regulatory body led to the enactment of the Securities and Exchange Board of India
(SEBI) Act, 199210, which established SEBI as the apex regulatory authority responsible for
overseeing securities markets and enforcing compliance with legal provisions. The evolution
of securities regulations in India has been shaped by market developments, financial scams,
and globalization. Initially, the capital markets were largely unregulated, leading to
fraudulent practices that undermined investor confidence. The Harshad Mehta Scam of 1992,
which exposed loopholes in banking and stock market regulations, was a turning point,
prompting the government to strengthen securities laws through the establishment of SEBI
with statutory powers under the SEBI Act, 1992. Subsequent reforms, such as the
Depositories Act, 1996, facilitated dematerialization and electronic trading, reducing risks
associated with physical securities. The Companies Act, 2013, introduced stricter corporate
governance norms, mandating disclosures, independent directors, and enhanced investor
protection mechanisms. Further amendments in SEBI regulations, such as the SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 201511, have ensured that listed
companies adhere to high standards of transparency and corporate governance.

India’s securities market is regulated by multiple institutions, with SEBI, the Reserve Bank
of India (RBI), and the Ministry of Finance playing key roles. SEBI, established under the
SEBI Act, 1992, is responsible for regulating stock exchanges, protecting investor interests,

9
The Securities Contracts (Regulation) Act, 1956
10
Securities and Exchange Board of India (SEBI) Act, 1992
11
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

8
preventing fraudulent practices, and overseeing market intermediaries. It administers various
regulations, including the SEBI (Prohibition of Insider Trading) Regulations, 201512, and
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 201113, which ensure
fair market practices. The RBI, under the Reserve Bank of India Act, 1934, regulates
government securities, monetary policies, and foreign exchange transactions, playing a
crucial role in maintaining financial stability. The Ministry of Finance, through the
Department of Economic Affairs (DEA) and Department of Financial Services (DFS),
formulates policies, oversees capital market regulations, and coordinates with SEBI and RBI
to implement reforms. Additionally, the Foreign Exchange Management Act (FEMA),
199914, governs foreign investments and ensures smooth capital flows in Indian securities
markets. With the rise of algorithmic trading, ESG (Environmental, Social, and Governance)
compliance, and digital securities, securities laws in India continue to evolve to address
emerging challenges. Recent amendments in SEBI’s alternative investment fund (AIF)
regulations, corporate governance norms, and market surveillance mechanisms demonstrate
the government’s commitment to fostering a transparent, efficient, and investor-friendly
market. However, enforcement challenges remain, as seen in cases like the NSE Co-location
Scam, which highlighted regulatory gaps in high-frequency trading. Strengthening securities
laws through global best practices, stricter enforcement, and technological advancements is
essential for India’s capital market to remain competitive in the global financial system.

LEGAL FRAMEWORK GOVERNING SECURITIES IN INDIA

India’s securities market operates under a well-defined legal framework that ensures market
integrity, investor protection, and regulatory compliance. Various laws govern different
aspects of securities trading, market infrastructure, and corporate governance. The primary
legislations include the Securities and Exchange Board of India (SEBI) Act, 199215, the
Securities Contracts (Regulation) Act, 195616, the Depositories Act, 199617, the Companies
Act, 201318, and the Foreign Exchange Management Act (FEMA), 199919. These laws

12
SEBI (Prohibition of Insider Trading) Regulations, 2015
13
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
14
The Foreign Exchange Management Act (FEMA), 1999
15
Securities and Exchange Board of India (SEBI) Act, 1992
16
Securities Contracts (Regulation) Act, 1956
17
The Depositories Act, 1996
18
Companies Act, 2013
19
Foreign Exchange Management Act (FEMA), 1999

9
collectively regulate stock exchanges, market participants, and financial transactions,
ensuring a stable and transparent capital market.

Securities and Exchange Board of India (SEBI) Act, 1992

The SEBI Act, 1992, established the Securities and Exchange Board of India (SEBI) as the
primary regulatory authority overseeing the securities market. Enacted in response to
increasing financial frauds and the need for investor protection, the Act grants SEBI statutory
powers to regulate stock exchanges, market intermediaries, and listed companies). SEBI
enforces regulations to curb insider trading, market manipulation, and unfair trade practices
through mechanisms like the SEBI (Prohibition of Insider Trading) Regulations, 2015, and
the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
Additionally, SEBI has the power to impose penalties, conduct investigations, and issue
directives to ensure market stability. Over the years, amendments to the Act have
strengthened SEBI’s authority, allowing it to act against fraudulent activities and enhance
corporate governance norms.

Securities Contracts (Regulation) Act, 1956

The Securities Contracts (Regulation) Act (SCRA), 1956, is one of the earliest laws
governing India’s capital markets. It was enacted to regulate stock exchanges, prevent
undesirable securities transactions, and define what constitutes securities (Goswami, 2018).
The Act provides SEBI with powers to recognize, regulate, and deregister stock exchanges if
they fail to comply with regulatory norms. The SCRA also governs listing agreements,
trading practices, and the recognition of derivative instruments. Amendments to the Act have
enabled the development of electronic trading, clearing corporations, and stronger investor
protection mechanisms. SEBI enforces compliance with SCRA provisions, ensuring fair and
transparent securities trading.

Depositories Act, 1996

The Depositories Act, 1996, was enacted to facilitate electronic trading and dematerialization
of securities, eliminating risks associated with physical share certificates (Bhattacharya &
Daouk, 2002). The Act provides the legal foundation for National Securities Depository
Limited (NSDL) and Central Depository Services Limited (CDSL), the two major
depositories in India. It establishes a framework for depository participants, account holders,
and the transfer of securities in electronic form, significantly reducing fraud, delays, and
10
settlement risks in securities trading. By mandating paperless transactions, the Depositories
Act has played a crucial role in enhancing efficiency, reducing transaction costs, and
improving market accessibility.

Companies Act, 2013 (Relevant Provisions)

The Companies Act, 2013, serves as the backbone of corporate governance and financial
disclosures in India. While it primarily governs corporate law, several provisions impact
securities regulation. The Act includes mandatory corporate governance norms, disclosure
requirements, and stringent regulations on public offerings. Key provisions include Section
42 (private placement of securities), Section 62 (rights issue), and Section 135 (corporate
social responsibility compliance). Additionally, the Act mandates independent directors,
stricter audit requirements, and enhanced transparency to prevent corporate fraud. The
National Company Law Tribunal (NCLT) plays a crucial role in adjudicating securities-
related disputes, ensuring compliance with corporate laws.

Foreign Exchange Management Act (FEMA), 1999

The Foreign Exchange Management Act (FEMA), 1999, governs foreign investments, capital
flows, and foreign exchange transactions in India’s securities market. Enacted to replace the
restrictive Foreign Exchange Regulation Act (FERA), 1973, FEMA aims to facilitate external
trade, promote orderly foreign exchange management, and regulate capital account
transactions. It lays down rules for Foreign Portfolio Investors (FPIs), Foreign Direct
Investment (FDI), and the repatriation of investment proceeds. The Reserve Bank of India
(RBI), in collaboration with SEBI, enforces FEMA regulations to prevent money laundering,
maintain financial stability, and ensure compliance with international financial standards.

India’s securities market operates under a comprehensive and evolving legal framework
designed to address market transparency, investor protection, and regulatory efficiency. The
SEBI Act, SCRA, Depositories Act, Companies Act, and FEMA collectively regulate
securities transactions, enforce compliance, and safeguard market integrity. As financial
markets continue to evolve with algorithmic trading, ESG compliance, and fintech
innovations, ongoing reforms and stricter enforcement mechanisms are necessary to
strengthen regulatory oversight and enhance investor confidence.

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SEBI AND STOCK EXCHANGES - THEIR ROLES AND
REGULATIONS

The Securities and Exchange Board of India (SEBI) is the apex regulatory body overseeing
India’s securities market, established under the SEBI Act, 1992, with the primary objective of
ensuring investor protection, market integrity, and fair trade practices. SEBI was initially
constituted as a non-statutory body in 1988, but in response to increasing stock market scams

12
and fraudulent activities, the Indian government granted it statutory powers in 1992 (Varottil,
2010). The Harshad Mehta Scam (1992), 20which exposed severe loopholes in the financial
system, emphasized the need for a strong, independent market regulator with enforcement
capabilities. Over the years, SEBI has evolved into a proactive regulatory authority,
formulating rules, conducting investigations, imposing penalties, and introducing policy
reforms to strengthen India's capital markets

SEBI’s Structure and Powers

SEBI operates through a multi-tiered governance structure, comprising a Chairperson and

full-time as well as part-time board members, appointed by the Government of India. The
Board includes representatives from the Ministry of Finance, the Reserve Bank of India
(RBI), and other financial sector bodies. SEBI’s regulatory framework empowers it to
regulate stock exchanges, market intermediaries, and securities transactions, ensuring
compliance with fair trading practices. It supervises stockbrokers, mutual funds, foreign
portfolio investors (FPIs), credit rating agencies, venture capital firms, and alternative
investment funds (AIFs) (Bhattacharya & Daouk, 2002). SEBI’s enforcement powers include
conducting investigations, imposing penalties, passing orders against fraudulent practices,
and banning entities from the market for violations. The SEBI (Settlement Proceedings)
Regulations, 2018, allow for settlement of regulatory violations, ensuring timely compliance
while avoiding prolonged litigation.

SEBI’s authority extends to developing market infrastructure, promoting transparency, and

facilitating ease of trading through technological advancements. It plays a critical role in
fostering corporate governance, regulating public offerings, and monitoring securities
transactions to prevent financial fraud. The SEBI Act, through various amendments, has
consistently expanded SEBI’s scope, allowing it to conduct search and seizure operations,
recover investor compensation, and initiate criminal proceedings against violators.

Key SEBI Regulations

To effectively regulate the securities market, SEBI has introduced several key regulations
that govern disclosures, corporate governance, investor protection, and fair trade practices.
These include:

20
The Harshad Mehta Scam (1992)

13
 1. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR)

The LODR Regulations set forth comprehensive disclosure and compliance requirements for
listed companies, ensuring corporate transparency and investor protection. The regulations
mandate that companies must provide timely and accurate financial disclosures, maintain fair
corporate governance practices, and ensure prompt reporting of material events. Provisions
include mandatory appointment of independent directors, establishment of an audit
committee, and enhanced disclosure norms for related-party transactions. SEBI enforces
LODR compliance through stock exchange surveillance and penalties for non-compliance,
ensuring market discipline and investor confidence.

2. SEBI (Prohibition of Insider Trading) Regulations, 2015

These regulations prohibit insider trading and unauthorized access to price-sensitive

information, ensuring that market participants operate on a level playing field. Under this
framework, SEBI defines insiders, connected persons, and unpublished price-sensitive
information (UPSI) and mandates strict reporting norms, pre-clearance of trades, and
maintenance of structured digital databases to track insider trading activities (Sarkar, 2017).
In cases of violations, SEBI has imposed heavy penalties, such as in the Reliance Industries
Ltd. insider trading case (2021), where the company was fined for failing to disclose insider
trades

3. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover

Code)

The Takeover Code 21governs the acquisition of shares and control over listed companies,
ensuring that investors receive fair treatment and adequate disclosures in the event of a
takeover. It mandates that acquirers disclose shareholding patterns, issue open offers to
minority shareholders, and adhere to fair valuation norms during acquisitions (Bhattacharya
& Daouk, 2002). The regulations aim to prevent hostile takeovers and market manipulation,
ensuring transparency in mergers, acquisitions, and restructuring activities. SEBI has actively

21
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

14
monitored corporate takeovers, as seen in cases like the Mindtree-L&T takeover (2019)22,
where the regulator ensured compliance with open offer requirements.

4. SEBI (Alternative Investment Funds) Regulations, 2012

Recognizing the need for structured regulations for venture capital funds, private equity, and
hedge funds, SEBI introduced the AIF Regulations, 201223, classifying funds into Category I,
II, and III. These regulations provide a transparent framework for fund registration,
disclosure, and risk management, ensuring investor protection and reducing systemic risks in
alternative investment markets.

5. SEBI (Mutual Funds) Regulations, 1996

The Mutual Fund Regulations24 set forth governance norms for asset management companies
(AMCs), trustees, and investors, ensuring transparency in fund operations, risk disclosures,
and ethical management. SEBI enforces regulations on fund performance reporting, expense
ratios, and investor grievance redressal, protecting retail investors from mismanagement.

Role of SEBI in Protecting Investors and Regulating the Market

SEBI plays a crucial role in safeguarding investors and ensuring market stability through a
combination of regulatory oversight, enforcement actions, and investor education initiatives.
Investor protection remains one of SEBI’s core objectives, with various mechanisms in place
to address fraud, misrepresentation, and unfair trade practices. The SEBI Investor Protection
and Education Fund (IPEF) conducts awareness programs, disseminates financial literacy
materials, and facilitates investor grievance redressal. Additionally, SEBI mandates that stock
exchanges, depositories, and market intermediaries maintain investor helplines and dispute
resolution forums, ensuring swift resolution of complaints. SEBI has taken stringent action
against market frauds, corporate governance failures, and stock manipulation schemes.
Landmark cases such as the Sahara India Real Estate Corp. Ltd. v. SEBI (2012) 25and Karvy

22
Mindtree-L&T takeover (2019)

23
SEBI (Alternative Investment Funds) Regulations, 2012

24
SEBI (Mutual Funds) Regulations, 1996

25
Sahara India Real Estate Corp. Ltd. v. SEBI (2012)

15
Stock Broking Scam (2019)26 highlight SEBI’s proactive stance in protecting investors from
Ponzi schemes and broker misconduct. The Unified Payment Interface (UPI) system for IPO
applications, introduced by SEBI, has streamlined retail investor participation, ensuring faster
allotment, reduced fraud risk, and enhanced transparency in public offerings. In addition to
domestic regulatory oversight, SEBI plays a key role in global financial cooperation, working
with international bodies like the International Organization of Securities Commissions
(IOSCO) to align India’s capital market regulations with global best practices. It collaborates
with foreign regulators, such as the U.S. Securities and Exchange Commission (SEC) and the
UK Financial Conduct Authority (FCA), in matters related to cross-border securities fraud,
foreign investments, and corporate governance standards. SEBI’s role in regulating the
securities market is multifaceted, encompassing policy-making, market supervision,
corporate governance, and investor protection. By enforcing strict regulations, conducting
investigations, and ensuring compliance, SEBI has significantly enhanced the efficiency,
transparency, and resilience of India’s capital markets. However, with the rise of algorithmic
trading, environmental and social governance (ESG) regulations, and digital assets, SEBI
faces new challenges in adapting regulatory frameworks to evolving financial landscapes.
Continued regulatory reforms, technological integration, and global cooperation will be
essential for SEBI to maintain market integrity and investor trust in the future

Stock exchanges

They play a pivotal role in India’s capital markets, serving as platforms for trading securities,
facilitating liquidity, price discovery, and investor participation. They provide an organized
marketplace where companies raise capital, investors buy and sell securities, and regulatory
oversight ensures fair and transparent trading. The regulation of stock exchanges in India is
primarily governed by the Securities and Exchange Board of India (SEBI) under the SEBI
Act, 1992, the Securities Contracts (Regulation) Act, 1956 27(SCRA), and various SEBI
regulations. These laws ensure that exchanges function efficiently, protect investor interests,
and prevent market malpractices such as insider trading, price manipulation, and unfair trade
practices.

Major Stock Exchanges in India

26
Karvy Stock Broking Scam (2019)
27
Securities Contracts (Regulation) Act, 1956

16
India has two primary stock exchanges:

1. Bombay Stock Exchange (BSE) – Established in 1875, the BSE is Asia’s oldest stock
exchange and plays a crucial role in India’s financial markets. It houses benchmark
indices like the S&P BSE Sensex, which tracks the 30 largest and most actively
traded stocks on the exchange. BSE facilitates trading in equities, debt instruments,
derivatives, commodities, and mutual funds, ensuring a diverse investment
environment.

2. National Stock Exchange (NSE) – Founded in 1992 and operational since 1994, the
NSE revolutionized stock trading in India by introducing electronic trading,
eliminating open outcry systems, and increasing market accessibility. Its benchmark
index, the Nifty 50, tracks 50 major stocks across key economic sectors. NSE
dominates India’s securities market in terms of trading volume, liquidity, and
technological advancements, offering high-frequency and algorithmic trading
solutions.

Both BSE and NSE are regulated by SEBI and function under strict compliance norms to
ensure fair trading, investor protection, and corporate governance transparency. Other
recognized exchanges, such as the Metropolitan Stock Exchange of India (MSEI28), cater to
specific trading needs but hold a smaller market share compared to BSE and NSE

Role of Stock Exchanges in Capital Markets

Stock exchanges perform several critical functions in India’s financial ecosystem:

1. Facilitating Capital Formation – By enabling companies to issue shares through Initial

Public Offerings (IPOs) and raise capital, stock exchanges play a vital role in
economic growth and industrial expansion. Publicly traded companies can access
diverse funding sources, reducing dependence on bank loans and strengthening
corporate financial structures (Bhattacharya & Daouk, 2002).

28
Metropolitan Stock Exchange of India (MSEI

17
 2. Ensuring Liquidity and Price Discovery – The presence of an active trading
environment allows investors to buy and sell securities efficiently, ensuring market
liquidity and fair price determination based on supply-demand dynamics. This
mechanism benefits companies by maintaining a transparent valuation of their stocks
and helps investors in making informed decisions (Sarkar, 2017).

3. Enhancing Investor Protection – Stock exchanges work under SEBI’s regulatory

framework to prevent market manipulation, enforce fair trading practices, and
safeguard investor interests. Surveillance systems detect unusual trading activities,
insider trading, and fraudulent practices, ensuring market discipline (Varottil, 2010).

4. Corporate Governance and Transparency – By mandating compliance with financial

disclosure norms, auditing standards, and corporate governance regulations, stock
exchanges ensure that listed companies adhere to ethical business practices and
maintain transparency in financial reporting. This fosters investor confidence and
market credibility (Goswami, 2018).

5. Regulating Market Participants – Stock exchanges regulate brokers, market makers,

mutual funds, and institutional investors, ensuring that all participants follow ethical
trading practices, avoid excessive speculation, and comply with SEBI’s regulations
(Sarkar, 2017).

Listing and Delisting Regulations

Stock exchanges operate under strict listing and delisting norms to maintain market integrity
and investor protection.

Listing Regulations

18
Companies seeking to list their securities must comply with the SEBI (Listing Obligations
and Disclosure Requirements) Regulations, 2015 (LODR), which outline requirements such
as:

 Minimum public shareholding requirements (at least 25% public shareholding for
listed companies).
 Financial disclosures, corporate governance norms, and annual reporting obligations.
 Compliance with insider trading and related-party transaction guidelines.
 Regular earnings disclosures, board meetings, and shareholder communication (

Companies listing on main boards, SME platforms, and Innovators Growth Platforms (IGP)
must also meet additional eligibility norms specified by SEBI and stock exchanges.

Delisting Regulations

The SEBI (Delisting of Equity Shares) Regulations, 2021, govern voluntary and compulsory
delisting of companies:

Voluntary Delisting – Companies may voluntarily delist from exchanges if they meet the
following conditions:

 Approval from at least 90% of shareholders.

 Exit opportunity for minority shareholders at a fair price determined via the reverse
book-building process.
 Regulatory clearance and adherence to procedural guidelines (Bhattacharya & Daouk,
2002).

Compulsory Delisting – SEBI can forcefully delist companies due to non-compliance with
listing regulations, fraudulent activities, or prolonged trading suspension. In such cases,
promoters and directors face restrictions on re-listing and investor protection mechanisms are
activated to compensate shareholders.

Stock exchanges such as BSE and NSE maintain strict monitoring mechanisms to identify
defaulting companies and take action accordingly. A recent example is the delisting of
companies due to financial non-compliance and fraud detection in the wake of corporate

19
scandals like IL&FS29 (Infrastructure Leasing & Financial Services) and DHFL (Dewan
Housing Finance Corporation Limited)30

Stock exchanges are fundamental to India’s financial system, playing a critical role in capital
formation, market transparency, and investor protection. Regulated by SEBI and governed by
stringent laws, these exchanges ensure that listed companies adhere to disclosure norms, fair
trading practices, and corporate governance principles. The evolution of listing and delisting
regulations, coupled with enhanced surveillance mechanisms, has strengthened India’s
capital markets, making them more efficient, transparent, and globally competitive. However,
with emerging challenges such as algorithmic trading, financial frauds, and digital assets,
continued regulatory enhancements and technological advancements will be necessary to
sustain investor confidence and market integrity.

CORPORATE GOVERNANCE AND INVESTOR PROTECTION

Corporate governance plays a crucial role in maintaining transparency, accountability, and

fairness in the securities market. It ensures that companies adhere to ethical business
practices, protect shareholder rights, and prevent financial mismanagement. In India,
corporate governance norms are primarily regulated by the Securities and Exchange Board of
India (SEBI), the Companies Act, 2013, and various SEBI regulations such as the SEBI
(Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR). These
regulations are designed to enhance investor confidence, prevent corporate fraud, and
promote sustainable business growth. The importance of corporate governance was
highlighted in major financial scandals such as the Satyam Scam (2009)31 and the IL&FS
Crisis (2018)32, which exposed loopholes in financial reporting and board oversight (Varottil,
2010).

SEBI’s Corporate Governance Norms

29
Infrastructure Leasing & Financial Services scam
30
Dewan Housing Finance Corporation Limited scam

31
Satyam Scam (2009)
32
Infrastructure Leasing & Financial Services scam

20
SEBI has introduced a robust framework for corporate governance, primarily through
amendments to the LODR Regulations, 2015, which incorporate key recommendations of the
Kotak Committee on Corporate Governance (2017). Some of the major provisions include:

1. Board Composition and Independence – SEBI mandates that listed companies must
have an optimal mix of executive and non-executive directors, with at least one-third
of the board comprising independent directors (if the company has a non-executive
chairperson) and at least half of the board if the chairperson is an executive director
(SEBI LODR, 2015).
2. Enhanced Disclosure Requirements – Companies must disclose financial results,
related-party transactions, shareholding patterns, and corporate governance
compliance reports in a timely manner. SEBI also enforces mandatory disclosure of
loan defaults, credit rating downgrades, and environmental, social, and governance
(ESG) policies.
3. Separation of CEO and Chairperson Roles – To prevent excessive concentration of
power, SEBI has recommended the separation of the roles of CEO and Chairperson in
large listed companies, ensuring better checks and balances in corporate decision-
making.
4. Related-Party Transaction (RPT) Regulations – SEBI has strengthened RPT rules by
requiring prior approval from the audit committee and disclosure of transactions
involving promoters, directors, and their relatives to prevent financial
mismanagement.
5. Mandatory Risk Management Committees – SEBI mandates that the top 1,000 listed
entities must have a risk management committee responsible for assessing and
mitigating financial, operational, and cybersecurity risks. This ensures that companies
proactively address potential threats to financial stability.

Role of Independent Directors and Audit Committees

Independent directors and audit committees play a critical role in maintaining corporate
governance standards by ensuring board accountability, financial oversight, and investor
protection.

Independent Directors

21
Independent directors act as guardians of minority shareholder rights and provide an unbiased
perspective on board decisions. SEBI mandates that independent directors:

 Be appointed through a transparent selection process approved by the nomination and

remuneration committee (NRC).
 Serve a maximum of two consecutive five-year terms, ensuring fresh perspectives and
avoiding undue influence by promoters.
 Have no material pecuniary relationship with the company, preventing conflicts of
interest33
 Conduct separate meetings without the presence of executive directors to assess board
functioning, corporate strategy, and governance policies.

Despite these provisions, challenges remain in ensuring genuine independence, as many

independent directors are appointed by promoters, leading to conflicts of interest. SEBI has
sought to address this by introducing greater transparency in appointment and removal
processes, including a mandatory shareholder approval mechanism for independent directors.

Audit Committees

Audit committees are essential for ensuring financial integrity, compliance with accounting
standards, and fraud detection. SEBI requires that audit committees:

 Consist of at least three directors, with two-thirds being independent directors.

 Be chaired by an independent director with expertise in finance and accounting.
 Have the power to investigate financial irregularities, review internal audit reports,
and approve related-party transactions.

In the Satyam Scam (2009), 34where fraudulent financial statements led to investor losses,
audit committee failures were identified as a major governance lapse. Following this, SEBI
strengthened the role of audit committees by mandating increased financial disclosures and
regular forensic audits in high-risk companies.

Investor Grievance Redressal Mechanisms

33
SEBI LODR, 2015
34
Satyam Scam (2009)

22
Investor protection is a key mandate of SEBI, ensuring that retail and institutional investors
have access to fair dispute resolution mechanisms in case of fraud, mismanagement, or
market manipulation. SEBI has introduced several investor grievance redressal mechanisms,
including:

1. SCORES (SEBI Complaints Redress System) – An online platform where investors

can file complaints against listed companies, brokers, mutual funds, and other market
intermediaries. SEBI ensures that grievances are resolved within 30 days, failing
which penalties are imposed on the concerned entity
2. Investor Protection Fund (IPF) – Established by stock exchanges, the IPF
compensates investors who suffer losses due to broker defaults or fraudulent
activities. Investors can claim compensation if brokers engage in unauthorized trades,
fail to return client funds, or misuse client securities.
3. Arbitration Mechanism at Stock Exchanges – Investors can approach stock exchange
arbitration panels to resolve disputes with brokers or other market participants. NSE
and BSE have dedicated arbitration processes where disputes are settled in a cost-
effective and time-bound manner.
4. Class-Action Suits under the Companies Act, 2013 – Shareholders can file class-
action suits against companies for mismanagement, financial fraud, or
misrepresentation. This provision strengthens investor protection by allowing
collective legal action against corporate wrongdoers.
5. SEBI’s Whistleblower Policy – SEBI encourages employees and stakeholders to
report corporate fraud, insider trading, and governance failures through a
whistleblower mechanism. This helps in early detection of financial misconduct and
ensures regulatory action against violators.

Corporate governance and investor protection are integral to maintaining market integrity and
ensuring investor confidence. SEBI has continuously strengthened governance norms,
enforced transparency in financial disclosures, and introduced mechanisms to redress
investor grievances efficiently. However, challenges such as board independence, corporate
frauds, and market manipulation persist, necessitating continuous regulatory evolution and
enforcement. Going forward, enhanced corporate governance, stronger enforcement
mechanisms, and increased investor awareness will be crucial in ensuring a resilient and fair
securities market in India.

23
INSIDER TRADING AND MARKET MANIPULATION

Insider trading and market manipulation are severe offenses in securities markets as they
undermine investor confidence, distort fair price discovery, and create an unfair advantage
for certain individuals or entities. In India, insider trading and market manipulation are
primarily regulated under the SEBI (Prohibition of Insider Trading) Regulations, 2015 35(PIT
Regulations) and the SEBI Act, 1992. SEBI has strict surveillance mechanisms to detect and
prevent such fraudulent activities, imposing severe penalties, including monetary fines,
trading bans, and imprisonment (SEBI Act, 1992).

Prohibition of Insider Trading Regulations, 2015

The SEBI (Prohibition of Insider Trading) Regulations, 2015 were introduced to prevent
unfair trading practices based on non-public material information. These regulations define
insider trading, outline penalties, and establish compliance mechanisms for listed entities.
The key provisions include:

 Definition of Insider Trading – Insider trading refers to buying, selling, or dealing

in securities based on Unpublished Price-Sensitive Information (UPSI), which is
information that could materially affect a company’s stock price if disclosed (SEBI
PIT Regulations, 2015). UPSI includes details related to financial results, mergers,
acquisitions, dividend announcements, and regulatory actions.
 Who is an Insider? – An insider includes:

1. Connected persons (e.g., company directors, employees, auditors, legal advisors,

consultants, and immediate relatives).
2. Persons with access to UPSI due to their relationship with the company.
3. Anyone who has received UPSI from an insider (SEBI PIT Regulations, 2015).

 Restrictions on Trading During UPSI Possession – Any trading in securities while in

possession of UPSI is strictly prohibited. Companies must implement trading
windows, ensuring that insiders do not trade before major announcements (SEBI,
2015).
35
SEBI (Prohibition of Insider Trading) Regulations, 2015

24
  Code of Conduct and Compliance Officers – Companies must adopt an internal code
of conduct for preventing insider trading, appoint a compliance officer, and maintain
a list of employees who have access to UPSI. This ensures greater accountability and
transparency (SEBI PIT Regulations, 2015).
 Disclosures by Insiders – SEBI mandates that promoters, directors, and key
managerial personnel (KMPs) disclose their trading activities, ensuring that market
participants are aware of any suspicious transactions (Sarkar, 2017)

High-Profile Cases of Insider Trading in India

Several high-profile cases in India have highlighted regulatory loopholes and enforcement
challenges in curbing insider trading:

 Rakesh Jhunjhunwala Case (2021)36 – The legendary investor and his firm Rare
Enterprises were investigated by SEBI for alleged insider trading in the shares of
Aptech Ltd. SEBI imposed penalties and settlement charges, reinforcing its strict
stance against insider trading

 HDFC Bank Case (2007-2021)37 – Employees of HDFC Bank were caught leaking
UPSI related to corporate clients' financial transactions to stock market participants.
SEBI imposed penalties on the involved individuals and brokers, strengthening its
surveillance mechanisms for detecting such leaks.
 Infosys and Wipro Cases (2019-2021) 38– Senior employees of Infosys and Wipro
were accused of sharing UPSI with external traders for illicit stock trading. SEBI
imposed fines and restricted trading access, emphasizing the need for strict internal
compliance mechanisms (Varottil, 2010).
 Reliance Industries Case (2007) – One of the biggest insider trading cases, SEBI
found Reliance Industries guilty of manipulating stock futures in 2007. The company
was fined ₹447 crore (approx. $60 million), marking one of the largest penalties
imposed in an insider trading case in India (Bhattacharya & Daouk, 2002).39

36
Rakesh Jhunjhunwala Case (2021)
37
HDFC Bank Case (2007-2021)
38
Infosys and Wipro Cases (2019-2021)
39
Reliance Industries Case (2007)

25
  Dish TV and Zee Group (2022) 40– SEBI investigated the Zee Group for insider
trading allegations, leading to restrictions on directors and executives from trading in
securities. This case highlighted the need for stricter oversight of promoter-linked
transactions

Legal Consequences and Penalties

 SEBI has the power to impose severe penalties under the SEBI Act, 1992, and the PIT
Regulations, 2015. The penalties for insider trading and market manipulation include:
 Monetary Penalties – SEBI can impose fines up to ₹25 crore or three times the profit
made from insider trading, whichever is higher (SEBI Act, 1992, Section 15G).
 Trading Bans – Individuals found guilty of insider trading may face a ban from
trading in securities for up to 10 years, ensuring that market manipulators are kept
away from stock trading activities (SEBI, 2015).
 Criminal Prosecution and Imprisonment – Under Section 24 of the SEBI Act, 1992,
insider trading is a criminal offense punishable with imprisonment of up to 10 years
and additional fines.
 Confiscation of Profits – SEBI can freeze trading accounts and confiscate illegal
profits made through insider trading, ensuring that offenders do not benefit from illicit
activities
 Director Disqualifications – Individuals involved in insider trading may be
disqualified from holding directorship positions in listed companies under the
Companies Act, 2013.
 Surveillance and Investigation – SEBI’s Integrated Market Surveillance System
(IMSS) and Artificial Intelligence (AI)-based monitoring tools track unusual trading
patterns, helping detect insider trading in real-time.

Insider trading and market manipulation are serious threats to market integrity, leading to
unfair advantages, loss of investor confidence, and financial instability. SEBI has
implemented stringent regulations and advanced surveillance mechanisms to detect and
prevent such offenses. However, high-profile cases continue to expose challenges in
enforcement, necessitating continuous regulatory improvements, stricter corporate
governance, and enhanced investor awareness. Moving forward, SEBI must leverage AI-

40
Dish TV and Zee Group (2022)

26
based surveillance tools, strengthen whistleblower mechanisms, and impose stricter penalties
to deter insider trading and market manipulation in India's securities market.

SECURITIES FRAUDS AND SCAMS IN INDIA

27
28
CONCLUSION AND SUGESSTIONS

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