THE IMPACT OF SECURITIES FRAUD: INSIDER TRADING,

MARKET MANIPULATION AND REGULATORY RESPONSES.

CHARULATHA M student of TAMILNADU DR AMBEDKAR LAW UNIVERSITY

Co-Author Ms.T. VAISHALI ASSISTANT PROFESSOR OF LAW , SOEL, CHENNAI

ABSTRACT

An integral part of the nation's financial system, the Indian capital market has been marred by
cases of securities fraud, including insider trading and market manipulation. Such illegal
activities have very serious negative effects on the economy and finances, compromise
market integrity, warp security values, and seriously erode investor confidence. The present
research aims to explore the extent and impact of these securities frauds to provide a
comprehensive analysis of their impact on the financial system. It explains complex strategies
used by fraudulent participants for market manipulation by analysing several major cases.
The two main components of financial crimes include market manipulation, that involves the
artificial alteration of the price of stock, and insider trading, where the person in the know
trades for a profit based on his access to private information. Other than depriving real
investors of their money, the activities also distort the market by deterring honest competition
and investment. To stop this fraud, the SEBI created regulatory mechanisms. This paper
assesses the effectiveness of these mechanisms. It looks at the recent amendments of SEBI to
enhance oversight of the market, legal frameworks, and enforcement actions. It also discusses
the ethical dilemmas, privacy issues, and enforcement challenges that regulators face in
trying to ensure market integrity. The persistence of securities frauds over time speaks to the
need for continuous monitoring and improvement, even in the face of strict regulatory
measures. The report concludes with policy recommendations to strengthen investor
protection, promote moral corporate governance, and enhance the regulatory environment.
The study promotes a multi-faceted approach to protect the financial system from the adverse
effects of insider trading and market manipulation and underlines the importance of
technological advancements and international cooperation. To regain and maintain investors'
confidence in the Indian capital market, this study aims at the crucial requirement of sound
regulatory frameworks and proactive measures.

KEYWORDS: Insider Trading, Market Manipulation, Securities Fraud, Financial Crimes,

SEBI Regulations, Investor Trust, Corporate Governance, Market integrity
INTRODUCTION

Besides being regulatory violations, market manipulation and insider trading are destructive
forces that undermine confidence in the financial system and open the door for more serious
financial crimes. Insider trading and market manipulation have long been a threat to the
integrity of the Indian capital market. These unethical practices, despite stern laws and
stringent scrutiny by the Securities and Exchange Board of India (SEBI), continue to erode
investor confidence and distort the very notion of market fairness. This research delves into
the dark underbelly of the Indian capital market by examining the occurrence and effects of
insider trading and market manipulation. It discusses notable cases that depict the
sophisticated techniques adopted by perpetrators and subsequent actions of the Securities and
Exchange Board of India (SEBI). This paper seeks to critically assess the extent to which
current regulatory structures work towards curbing such practices. The study aims at
highlighting the inadequacies in the existing regulatory responses and make
recommendations for improvement towards transparency and equity in the market. This is
done by reviewing salient case studies and involving expert interviews. Conclusions drawn
from the research will further knowledge on how best to effect regulations in protecting
investors and the integrity of the market.

LEGAL FOUNDATIONS OF INSIDER TRADING IN INDIA

Insider trading is the buying and selling of a firm's equity based upon access to material, non-
public information. Legal in appropriate circumstances, insider trading can become illegal
when trades are made in reliance on a duty of trust owed to obtain or maintain positions of
insider status confidentially. The term therefore covers both lawful and unlawful activities.
Insider Trading in India is regulated under Section 195 of the Companies Act, 20131, and
SEBI (Prohibition of Insider Trading) Regulations, 20152

+The regulations define insiders who include directors, employees, and any person who has
access to unpublished price sensitive information, close the trading windows, mandate a code
of conduct, require disclosure of trading activities, prohibit communication of unpublished
price sensitive information and aims at achieving fairness and ensuring investor confidence in
a fair trading environment. Insider trading devalues market fairness and transparency by

1
The Companies Act, No. 18 of 2013, § 195, India Code (2013).
2
The SEBI (Prohibition of Insider Trading) Regulations, 2015, Gazette of India, Part III, Section 4 (Jan.
15, 2015).
allowing those with privileged information to reap an unfair advantage, resulting in mispriced
securities and resource misallocation.3 It further deteriorates investor confidence and
compromises the integrity of financial markets.

Insider Trading: A Threat to Market Integrity

The role of the stock market in Indian economic growth justifies the seriousness with which
this issue needs to be addressed. Notorious insider trading cases have exposed weaknesses in
the regulatory framework, resulting in instant financial loss and long-term damage to
reputation. Retail and global investor inclusion into the system further calls for refining
insider trading regulations. Reviewing past incidents can help improve legal and regulatory
measures to ensure market integrity, investor protection, and national economic growth.
Insider trading undermines the fairness and transparency of financial markets, creating an
uneven playing field and eroding investor confidence.4 This can lead to mispriced securities
and a misallocation of resources, causing financial losses for uninformed investors and
reputational damage for companies involved in such scandals. Legal and regulatory
consequences, including fines and imprisonment, are enforced to maintain market integrity.
On a broader scale, insider trading can reduce the efficiency of capital markets, hindering
economic growth and development.

In the world of Insider Trading , material non-public information is the secret weapon that
can make or break a trader's success, which encompassing financial data, mergers and
acquisitions, regulatory approvals, legal proceedings, product launches, and management
changes. Insiders use this confidential information to gain unfair advantages in the stock
market, which underscores the complexity and breadth of insider trading activities. Insiders
exploit non-public information through various mechanisms, such as trading on material non-
public information (MNPI), tipping others to trade, front-running large transactions,
backdating stock options, trading through proxies, selective disclosure to certain investors,
and using complex financial instruments like derivatives.. Misuse of inside information is
discouraged because it allows insiders to take unfair advantage, creates a conflict of interest

3
. Vaibhav Shahi, Regulation and Analysis of the Concept of Insider Trading: A Critical Analysis, Legal Service
India, https://www.legalserviceindia.com/legal/article-16704-regulation-and-analysis-of-the-concept-of-insider-
trading-a-critical-analysis.html
4
. Bhatt & Joshi, Insider Trading: Evolution, Regulation, and Challenges, TaxGuru (2024),
https://taxguru.in/sebi/insider-trading-evolution-regulation-and-challenges.html#:~:text=Despite%20significant
%20progress%2C%20insider%20trading%20continues%20to%20pose,criminal%20liability%2C%20and
%20the%20need%20for%20investor%20protection.
by prioritizing personal gain over the company's best interests, and damages market
reputation, discouraging investment5.

In 1996, Rakesh Agrawal,6 , who's an managing director of ABS diligence Ltd., vended
significant portion of his7 shares before the public advertisement of a deal with AG Bayer,
leading SEBI to charge him of bigwig trading and direct him to deposit the quantum of Rs.
34 lakhs. still, the Securities Appellate Tribunal( SAT) concluded that Agrawal wasn't
shamefaced as his conduct were in the stylish interests of the company2 and there was no
intention to make a profit. SAT also emphasized that to correct an bigwig, it must be proven
that the bigwig served unfairly from the1 trade, and that the motive of the bigwig should be
considered in the bigwig trading cases .7.

Hindustan Lever Ltd. (HLL)8 the company bought shares of Brook Bond Lipton India Ltd.
( BBLIL) before the public advertisement of their junction, which leading SEBI to suspect
insider trading and issue a Show Beget Notice. SEBI determined that HLL and its directors
were insiders3 with previous knowledge of the junction.6 The Securities Appellate Tribunal(
SAT) upheld SEBI's order, stating that HLL had access to unpublished price sensitive
information( UPSI) due to its common operation with BBLIL. This decision led to
emendations in the description of unpublished and price sensitive information under SEBI
regulations to more address bigwig trading issues. the company bought shares of Brook Bond
Lipton India Ltd company , before the public announcement of their merger, which leading
SEBI to suspect insider trading and issue a Show Cause Notice. SEBI determined that HLL
and its directors were insiders with prior knowledge of the merger. The Securities Appellate
Tribunal (SAT) upheld SEBI's order, stating that HLL had access to unpublished price
sensitive information (UPSI) due to its common management with BBLIL. This decision led
to amendments in the definition of "unpublished" and "price sensitive information" under
SEBI regulations to better address insider trading issues9.

WhatsApp Leak Case10

5
. Akshat Mall, Insider Trading in India: A Study of the Emerging Issues of Insider Trading with Reference to
Securities Laws, (2023).
6
Rakesh Agarwal v. Securities and Exchange Board of India, 2003 (24) DRJ 392 (Delhi High Court)
7
. jayant Saxena, Five Landmark Cases on Insider Trading, iPleaders (2021), https://blog.ipleaders.in/five-
landmark-cases-insider-trading/.
8
Hindustan Lever Limited v. Securities and Exchange Board of India, (1998) 18 SCL 311 (Securities Appellate
Tribunal).
9
Ankoosh Mehta & CAM Disputes Team, Insider Trading: Hindustan Lever Limited v. SEBI, Oct. 25, 2017.
10
. Lakshya Garg & Vimlendu Agarwal, Hinged Upon Conjectures: A Meticulous Study of WhatsApp Leak
Case, CBCL, https://cbcl.nliu.ac.in/company-law/hinged-upon-conjectures-a-meticulous-study-of-whatsapp-
leak-case/.
The WhatsApp Leak Case involved Shruti Vora from Antique Stock Broking Ltd. circulating
price-sensitive information through WhatsApp groups, leading to SEBI's disquisition and
forfeitures for several individualities. The indicted argued that similar information sharing,
known as Heard on Street( HOS), is common among dealers. SEBI's bigwig trading charges
were set away by the Securities Appellate Tribunal( SAT), which concluded that SEBI could
not find the origin of the dispatches and4 that simply encouraging similar information does
not produce someone an bigwig. SAT emphasized that information can only be labelled as
UPSI if the philanthropist knew it was UPSI, and SEBI must establish transcendence of
probability. Some argue that insider trading can enhance request effectiveness by snappily
incorporating private information into stock prices, serving all request actors. still, critics
believe that this advantage primarily benefits interposers themselves rather than contributing
to overall request effectiveness.

Market Manipulation: Distorting Market Dynamics

Market manipulation thus undermines the integrity of markets because buyers are
deceived and artificially influenced in terms of the share prices, which ultimately affects the
market. Market manipulation a great threat to financial markets and
investors. The practices should be detected and combated with a good understanding of the
methods involved. Targeted regulatory measures can be implemented by
the authorities in order to maintain market integrity and fairness. This deceptive
practice mostly entails spreading false information or rumors that finally confuse investors
and disturb the dynamics of markets11. Some of the modes of executing market manipulation
includes Pump-and-dump schemes involve artificially inflating a stock's price to attract
unsuspecting investors before selling at a higher price. Detection requires monitoring trading
activities, with regulatory bodies playing a crucial role. Currency
manipulation, carried out by governments or central banks, affects the foreign exchange
market as it interferes with trade dynamics and world economic
stability. It creates uncertainty, potentially causing trade disputes and conflicts. Order
spoofing is placing more than one order in an attempt to manipulate the price of a

11
. Capital Market and securities law: SEBI’s regulatory framework and challenges in ensuring market integrity
(no date) Legal Service India - Law, Lawyers and Legal Resources. Available at:
https://www.legalserviceindia.com/legal/legal/legal/article-14949-capital-market-and-securities-law-sebi-s-
regulatory-framework-and-challenges-in-ensuring-market-integrity.html (Accessed: 09 September 2024).
stock. This form of manipulation fools traders through false demand or supply,
causing the price to be influenced artificially.12
The Satyam Scandal Of 2018 involved the chairman confessing to account manipulation,
causing market uproar. The audit firm was found guilty of conspiracy for relying on
fraudulent documents, resulting in inflated profits and false financial statements. Similarly,
between 2011 and 2019, IL&FS management manipulated rating agencies for favourable
ratings. A forensic audit revealed auditor failures, leading to NFRA declaring Deloitte's
appointment illegal due to conflicts of interest. This highlights significant professional
misconduct and failure to meet expected standards13.
SEBI, in a recent case14, sent a letter to PNB Housing Finance Company relating to its
proposed deal with an American investor and queried why all shareholders were not given
equal opportunities and why common shareholders were ignored. The corporate
governance issue involved the failure of the company to comply with disclosure
obligations under appropriate law provisions, and SEBI called for an explanation by the
board of directors on the legal transgression involved. Stock market manipulation can disrupt
market dynamics and undermine investor confidence, thereby affecting the overall financial
stability of the economy.

Economic and Legal Implications of Securities Fraud

Securities fraud, including insider trading and market manipulation, results in significant
financial losses for investors, economic instability, and erosion of market integrity and
investor confidence15. These activities distort market prices, deter foreign investment, and
reduce market liquidity, affecting the broader economy. Legal consequences for perpetrators
include fines, disgorgement of profits, and imprisonment, with regulatory bodies like SEBI
playing a crucial role in enforcement. The broader economic ramifications of insider trading

12
javidomjim95 (2024) Types of market manipulation: Understanding the strategies and impact - on thy law,
La Libroteca. Available at: https://onthylaw.com/securities-fraud/types-of-market-manipulation/?= (Accessed:
12 September 2024).
13
Mahawar, S. (2024) Satyam scam case, iPleaders. Available at: https://blog.ipleaders.in/case-study-satyam-
fraud-case/ (Accessed: 16 September 2024).
14
PNB Housing Finance-Carlyle deal: SEBI raises issue of corporate governance in new letter (no date)
Moneylife NEWS & VIEWS. Available at: https://www.moneylife.in/article/pnb-housing-financecarlyle-deal-
sebi-raises-issue-of-corporate-governance-in-new-letter/64506.html (Accessed: 27 September 2024).

15
Kumar, V. (2024) The impact of corporate frauds on the Indian Economy: A Critical Analysis of causes,
consequences, and reforms ", The Impact of Corporate Frauds on the Indian Economy: A Critical Analysis of
Causes, Consequences, and Reforms ". Available at: https://www.lawaudience.com/the-impact-of-corporate-
frauds-on-the-indian-economy-a-critical-analysis-of-causes-consequences-and-reforms/?form=MG0AV3
(Accessed: 29 September 2024).
and market manipulation include reduced market participation, lower capital formation, and
slower economic growth. These activities erode investor confidence, hinder resource
allocation, and stifle innovation and expansion. Strengthening regulatory frameworks and
enhancing transparency are essential to deter fraudulent activities, ensure market integrity,
and restore investor trust. By addressing these issues, it is possible to promote healthy market
participation and foster a stable and growing economy.16

REGULATORY FRAMEWORK AND SEBI'S ENFORCEMENT POWERS

The Securities fraud in Indian capital market is regulated by – the Companies Act , 201317 ,
The Securities Exchange Board Of India Act, 1992(SEBI Act)18 which was made with two
main purpose (a) safeguarding investors' interests in securities and (b) fostering the
development and regulation of the securities market19. SEBI is responsible for overseeing the
issuance and transfer of securities by companies that are listed or seeking to be listed, as per
the Companies Act, 2013 (Section 24). It regularly issues orders concerning governance,
disclosure, and financial integrity matters of these companies20. The SEBI (Prohibition of
Insider Trading) Regulation, 201521, provides a comprehensive and robust legal framework
to deter insider trading, employing advanced technology and real-time monitoring systems to
detect suspicious activities effectively. It imposes stringent penalties for violations, promoting
transparency and accountability through timely disclosure of material information. However,
challenges remain, including enforcement difficulties due to legal ambiguities and evidentiary
hurdles, technological impediments that can hinder effective monitoring, and resource
constraints in terms of staffing and expertise, which affect the effectiveness of enforcement
efforts. The primary goal of SEBI's establishment is to protect the interests of investors in the
securities market and address related or incidental matters.22

16
saxena, S., Pathania, B. and Shenoy, A. Effectiveness of insider trading laws in India, Indian Journal of
Integrated Research in Law . Available at: https://ijirl.com/wp-content/uploads/2023/06/EFFECTIVENESS-OF-
INSIDER-TRADING-LAWS-IN-INDIA-IDENTIFYING-AND-ADDRESSING-LEGAL-LACUNAE.pdf
(Accessed: 21 September 2024).
17
Companies Act, No. 18, Acts of Parliament, 2013.
18
The Securities and Exchange Board of India Act, No. 15 of 1992, India Code (1992).
19
Mathew, J. (2023) Explained: How is the stock market regulated in India?, The Hindu. Available at:
https://www.thehindu.com/business/markets/explained-how-is-the-stock-market-regulated-in-india/
article66526291.ece?form=MG0AV3 (Accessed: 5 October 2024).
20
Mitchell, Mark L., and Jeffry M. Netter. “The Role of Financial Economics in Securities Fraud Cases:
Applications at the Securities and Exchange Commission.” The Business Lawyer, vol. 49, no. 2, 1994, pp. 545–
90. JSTOR, http://www.jstor.org/stable/40687469. Accessed 10 Oct. 2024.
21
The SEBI (Prohibition of Insider Trading) Regulations, 2015, Gazette of India, Part III, Section 4 (Jan. 15,
2015).
22
Sunil Kumar D, Capital Market Reforms - Indian Economy Notes, prepp (Oct. 8, 2024),
https://prepp.in/news/e-492-capital-market-reforms-indian-economy-notes.
Detection of insider trading and market manipulation cases followed by prosecution in
India poses serious challenges, such as evidentiary hurdles which demand direct evidence,
problematic implementation of criminal liability provisions, and judicial
delays prolonging the resolution of cases. Even the advanced systems of surveillance are hind
ered by resource constraints related to personnel and
expertise for more potent enforcement by SEBI. Inconsistencies in enforcement arise from le
gal ambiguities. Addressing these challenges is crucial for enhancing SEBI's regulatory
effectiveness and ensuring a fair and transparent market environment.
SEBI (Fraudulent and Unfair Trade Practices) Regulations, 2003: Aims to combat fraudulent
practices like price manipulation and spreading false information, allowing SEBI to
investigate and impose penalties. Mechanisms under SEBI to curtail market manipulation
and in still investor confidence include banning fraudulent practices like front running and
insider trading, high surveillance through advanced technology to detect suspicious
transactions, with strict enforcement along with heavy penalties, international cooperation
with international regulatory bodies, education of investors, company guidelines for handling
unpublished price-sensitive information (UPSI), and verification of market rumors by listed
companies. Together, these steps provide a transparent and trustworthy market
environment, which in turn strengthens investors' confidence and keeps the securities
market healthy.
An even more daunting challenge for India's securities litigation is its labyrinth of regulations
by SEBI, RBI, and the Ministry of Corporate Affairs; delayed litigation; and
enforcement challenges. Inadequate investor awareness, market manipulation, insider trading,
and cross-border disputes add to the adversity, requiring strong evidence and coordination.
The evolving landscape of class action suits and technological changes also necessitates
continuous adaptation by regulatory bodies and legal professionals. Overcoming these
challenges will help build an environment in Indian securities litigation that is transparent,
efficient, and investor-friendly..23
On January 15 of 2015, the Securities and Exchange Board of India( SEBI) has adopted the
SEBI(Prohibition of Insider Trading) Regulations, 2015. The primary ideal of this regulation
is to assist the abuse of deals that have undisclosed price-sensitive information. thus, it's
important whether the person making business opinions owns similar information, and not
the person who owns the power of the operation and owns similar information.

23
Khurana And Khurana, SEBI And The Capital Market Regulations: A Critique, (Mar. 21, 2022),
https://www.mondaq.com/india/securities/1174060/sebi-and-the-capital-market-regulations-a-critique.
Penalties on the following charges for insider trading Interposers violating the 2015
regulations attract a penalty of Rs. 25 crores or three times the amount of profit gained from
insider trading, whichever is advanced, plus imprisonment for more than to ten times or
a fine amount which is more than 25 crores, or both, section 15G and 24 of the SEBI Act.
According to section 11( c)( 6) of the SEBI act, any person who denies complying with any
SEBI inquiry into insider trading without any kind of defense
is liable for being imprisoned for a term of over to one time, forfeiture of over to Rs. 1 crore,
or both, and a further forfeiture of over to Rs. 5 lakhs for each day of such similar non-
compliance. SEBI is also vested under section 11 (4) (b) of the SEBI Act with the authority to
issue instructions to similar inter-posers not to deal in the concerned securities in any
particular manner, to enjoin him from disposing of the concerned securities, to declare the
concerned sale(s) of securities null and void, and to restrain the insider from communicating
or counselling anyone to deal in securities.24. Still, 2013, he or she may be doomed to five
times in captivity, If an insider violates section 195 of the Companies Act. Since the
introduction of SEBI's Prohibition of Insider Trading Regulations in 2015, various
amendments have been made, including THE SEBI (PROHIBITION OF INSIDER
TRADING) (SECOND AMENDMENT) REGULATIONS, 202425. These
amendments, effective 23 September 2024, reduce the cool-off period for trading plans from
6 months to 120 days and eliminate the requirement of a 12-month trading plan.
They have specified trade parameters; introduced the concept of price
limits; and provided for deviations for specific exceptional circumstances. Compliance
officers have to approve or reject the trading plans within two trading days and report them
to the respective stock exchanges. Corporate actions are allowed and contra trades
are disallowed with a six months block requirement26.

The Reserve Bank of India (RBI) issued the Prevention of Market Abuse Directions, 201927,
to regulate financial markets. These guidelines apply to persons dealing in securities, money
markets, foreign exchange, derivatives, etc., excluding banks and the central government. The

24
Staff, E. (2024) Understanding securities fraud: Legal implications and consequences - statute online, The
Insurance Universe. Available at: https://statuteonline.com/securities-fraud/?form=MG0AV3 (Accessed: 17
October 2024).
25
The SEBI (Prohibition of Insider Trading) (Second Amendment) Regulations, 2024, Gazette of India, Part III,
Section 4 (June 25, 2024).
26
Banerjee, S. (2021) Framework for protection of investors in securities market, iPleaders. Available at:
https://blog.ipleaders.in/framework-for-protection-of-investors-in-securities-market/ (Accessed: 27 October
2024).
27
Reserve Bank of India (Prevention of Market Abuse) Directions, 2019, Gazette of India, Part III, Section 4
(Mar. 15, 2019).
directions aim to prevent market and benchmark manipulation and the misuse of non-public
price-sensitive information and price-sensitive customer information, prohibiting their use for
personal or others' material benefit. This ensures fair transactions without adversely affecting
customers' outcomes.28

ASSESMENT ON REGUALTORY MECHANISM

The SEBI (Prohibition of Insider Trading) Regulation, 2015, provides a strong legal
framework to deter insider trading, using advanced technology and real-time monitoring. It
promotes transparency and imposes stringent penalties. However, challenges include
enforcement difficulties due to legal ambiguities, evidentiary hurdles, and resource
constraints in staffing and expertise, which affect effectiveness. Technological limitations
hinder detection, and judicial delays prolong case resolution. Addressing these challenges is
crucial to enhance SEBI's regulatory effectiveness and ensure a fair and transparent market
environment.29

In the United States, the Securities and Exchange Commission regulates the securities market
and absolutely bans insider trading. Corporate governance is supposed to be rigorous under
the Sarbanes-Oxley Act and antidotes to manipulations by the Dodd-Frank Act. Data
protection, however, is regulated by an incoherent patchwork of state laws due to the lack of
a federal law.. In the United Kingdom, the Financial Conduct Authority is a person who
administers and enforces the laws concerning insider trading in the securities market. UK
Corporate Governance Code sets very good standards for governance and corporate
governance, although the FSMA handles issues related to market manipulation.. In the EU,
ESMA oversees and applies EU-wide measures for insider trading in the securities market.
The EU has corporate governance directives, whereas the Market Abuse
Regulation relates to market manipulation. The general Data Protection Regulation
applies across the whole of the EU in relation to data protection..30

While SEBI, SEC, FCA and ESMA all regulate securities markets, their mandates and powers
are different from one another. The UK and EU have relatively more codified standards in

28
Leo (2023) RBI issues directions on market manipulation, Law.asia. Available at: https://law.asia/rbi-issues-
directions-market-manipulation/ (Accessed: 03 November 2024).

29
prakash, suriya (no date) ‘INSIDER TRADING REGULATIONS IN INDIA: A CRITICAL EVALUATION
OF SEBI (PROHIBITION OF INSIDER TRADING) REGULATION, 2015’, Indian Journal of Integrated
Research in Law , 4(1), pp. 510–518.

30
Bflr35-3 1..176, (May 26, 2021), https://bflr.ca/wp-content/uploads/2021/11/BFLR35-3_BR03.pdf.
corporate governance as compared to India. The EU has corporate governance directives,
while the Market Abuse Regulation has tackled market manipulation. The general data
protection regulation that applies across the EU is extremely comprehensive on data
protection issues.

The Harshad Mehta case31, known as the 1992 Indian Stock Market Scam, involved
manipulation of stock prices using fake bank receipts, resulting in a market bubble and
significant investor losses. Stockbroker Harshad Mehta exploited loopholes in the Indian
banking system, using fake bank receipts and ready forward deals to cheat. It collapsed in
April 1992, wiping out as much as 40 percent of the market value or equivalent to about
₹1,000 billion32. This led to a massive change in the form of reforms such as establishing the
National Stock Exchange (NSE) for transparent trading, online trading for the risk of fraud,
and enhanced SEBI regulations33. Harshad Mehta was sentenced for five years of
imprisonment along with a fine of ₹25,000. The scandal translated to loss of public trust in
the stock market, increased demands for stronger corporate governance and, ultimately,
enhanced transparency; increased governmental regulatory oversight; and regulatory reforms
of the Indian financial sector34. This scandal exposed financial system weaknesses and led to
major regulatory reforms by SEBI35. In response, SEBI increased transparency in stock
trading through stricter disclosure requirements, strengthened insider trading regulations,
emphasized corporate governance with mandatory codes of conduct, improved surveillance
and monitoring to detect market manipulation, and imposed penalties and legal action against

31
Harshad S. Mehta v. Central Bureau of Investigation, 1992 (24) DRJ 392 (Delhi High Court).
32
Harjyot Singh, Scam 1992: Harshad Mehta Scam Story, Pocketful (Oct. 8, 2024),
https://www.pocketful.in/blog/scam-1992-harshad-mehta-scam-story/

33
Sneha Mahawar, All about the Harshad Mehta Scam - iPleaders, IPleaders (May 25, 2022),
https://blog.ipleaders.in/all-about-the-harshad-mehta-scam/.

34
Taxguru In, Harshad Mehta Scam: Analysis of India’s Infamous Financial Fraud, (June 22, 2023)
https://taxguru.in/finance/harshad-mehta-scam-analysis-indias-infamous-financial-fraud.html.

35
Decoding The Deception: A Case Study Of The Harshad Mehta Scam And Its Repercussions In The Indian
Stock Market » Lawful Legal, (Jan. 14, 2024), https://lawfullegal.in/decoding-the-deception-a-case-study-of-the-
harshad-mehta-scam-and-its-repercussions-in-the-indian-stock-market/.
those involved36. These measures aimed to restore investor trust and ensure a fair and
transparent market, leading to significant regulatory changes to prevent future incidents. 37

Policy Recommendations and Legal Reforms

SEBI has significantly impacted the development of the Indian capital market through
extensive reforms, enhanced transparency, and increased investor confidence. Since its
establishment, SEBI has introduced crucial reforms that have transformed the economy,
improved access to international markets, and protected investor interests. These changes
include a more robust surveillance and monitoring system for stock exchanges. By ensuring
greater transparency and boosting investor confidence, SEBI has played a vital role in
shaping the modern landscape of India's capital market. SEBI's influence on the Indian
capital market is marked by its rigorous regulations for disclosure, corporate governance, and
market practices, ensuring fair and transparent operations. By reshaping regulatory
frameworks to align with international standards, SEBI has enhanced the structure and
efficiency of stock exchanges, making them more accessible and reliable for investors.
SEBI's comprehensive regulatory reforms and emphasis on transparency and investor
protection have been fundamental in developing and maturing India's capital market. In terms
of IPOs and corporate governance, SEBI has significantly shaped the landscape with
stringent disclosure requirements, eligibility criteria, and fair pricing mechanisms, making the
IPO process more complex but vital for corporate finance. Studies by Sabarinathan (2010)
and Manjari Sharma (2013) highlight SEBI's critical role in the evolution and regulation of
the Indian securities market and IPO issuer profiles.38

The general regulatory impact of the Securities and Exchange Board of India (SEBI) on the
Indian financial market can be understood through various research studies that have
explored different aspects of its influence. Capital Market Reforms and Investor Protection:
The establishment of SEBI has significantly transformed the Indian economy, especially the
financial system. This transformation resulted in higher transparency, easy access to

36
Nishant Kumar, Harshad Mehta scam: 10 key points of the scam that jolted India in 1992, (Oct. 9, 2020),
https://www.moneycontrol.com/news/business/markets/harshad-mehta-scam-10-key-points-of-the-scam-that-
jolted-india-in-1992-5939931.html

37
Kandukuri, R. (2023) An analysis of stockbroking frauds and regulatory action in India, journal of financial
crime . Available at: https://www.emerald.com/insight/publication/issn/1359-0790 (Accessed: 14 November
2024).

38
Srivastava, P.K. (2021) ‘SEBI’ Regulatory Role In Strengthening Capital Market In India’, webology , 18(6),
pp. 9466–9487.
international markets, and greater protection of investors’ interests. SEBI played a pivotal
role in changing the structure and functioning of stock exchanges through the introduction of
proper surveillance and monitoring systems. Corporate Governance39 Enhancement: SEBI’s
continuous updating of guidelines, rules, and regulations has played a crucial role in
improving corporate governance standards in India.

This has helped raise public trust in the market and led to more accountable boards.
One of the Landmark stock Manipulation case known as The Ketan Parekh case which is
filed against the stockbroker named Ketan Parekh who done the stock manipulation.
SEBI's probe revealed channels through which banking funds were
misused and the share prices were manipulated. This led to mass-market regulation reform40.

SEBI regulates and develops the securities market through several critical functions:
formulating regulations to ensure transparency and fairness safeguarding investor interests by
curbing malpractices promoting market development and participation and overseeing market
intermediaries to ensure regulatory compliance. SEBI employs advanced surveillance
systems, investigations, and enforcement actions to curb insider trading, while also
conducting awareness programs and investor education initiatives. Listed companies must
establish codes of conduct and implement internal controls, while market intermediaries must
adhere to SEBI regulations. Strict enforcement of insider trading laws enhances market
confidence, reduces volatility, and fosters long-term investment. Best practices for traders and
investors include staying informed about regulations, engaging in ethical trading, and using
technology to validate market strategies.41

SEBI's recent regulatory enforcement faces a lot of challenges in adapting to new

technological advancements and balancing investor protection with market development.
Anticipated reforms aim to enhance regulatory mechanisms to keep pace with global
financial trends and innovations, including updating policies for new financial instruments
and digital platforms. SEBI's evolving role involves embracing digital technologies for
39
The Indian Landscape of Insider Trading Understanding Regulations, Managing Risks, and Upholding
Ethical Governance for Board Members, (Oct. 28, 2024), https://www.legal500.com/developments/thought-
leadership/the-indian-landscape-of-insider-trading-understanding-regulations-managing-risks-and-upholding-
ethical-governance-for-board-members/.
40
Ketan Parekh v. Securities and Exchange Board of India, 2006 (3) Bom CR 289 (Securities Appellate
Tribunal).
41
‘Insider Trading Laws: Protections Against Market Manipulation’ (2024b) https://alphashots.ai/, 26 June.
Available at: https://blog.alphashots.ai/the-role-of-regulatory-bodies-in-the-indian-stock-market/insider-trading-
laws-protections-against-market-manipulation/ (Accessed: 23 November 2024).
market surveillance and adapting to global trends to keep Indian markets competitive,
requiring continuous evolution to balance market development and investor protection.

CONCLUSION

The exploration of insider trading and market manipulation in Indian capital markets
highlights significant impacts on market integrity, investor confidence, and economic
stability. On a larger scale, they weaken economic growth due to deterred investment,
decreased consumer confidence, and inefficiencies. The additional costs of regulation to curb
these practices add to the economic costs. These activities adversely affect both the stability
of the market and the nation's GDP growth. High-profile cases like the Harshad Mehta scam
stands as an eye opener which emphasize the need for robust regulatory frameworks and
vigilant enforcement by SEBI. Despite progress with regulations like the SEBI (Prohibition
of Insider Trading) Regulations, 2015, challenges in detection and compliance persist. The
evolving landscape of market manipulation calls for adaptive approaches, advanced
surveillance technologies, global collaborations, and enhanced public awareness. Future
research should assess regulation effectiveness, integrate AI , and address ethical challenges.
Ensuring market integrity and investor trust requires rigorous enforcement and continuous
innovation, aiming for sustainable growth and stability.