SEBI (PFUTP) Regulations, 2003 — Introduction & Background

Topic 35 — Object, Legislative History, Scope & Overview of PFUTP Regulations | SEBI Law Officer

The SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations) are the primary anti-fraud and anti-manipulation regulations for India's securities market. They implement SEBI's function under Section 11(2)(d) of the SEBI Act (prohibit manipulative, fraudulent, and unfair trade practices) and the prohibition in Section 12A of the SEBI Act. The PFUTP Regulations define fraud broadly, enumerate specific prohibited practices (market manipulation, front-running, spoofing), and empower SEBI to investigate and take enforcement action. For SEBI Law Officer aspirants, PFUTP is one of the highest-weightage regulatory frameworks — tested across all paper formats.

1. Legislative Background

Year / Development	Significance
1992 — Harshad Mehta Scam	₹5,000 crore securities fraud exposed complete absence of anti-fraud regulatory framework
1995 — SEBI (PFUTP) Regulations, 1995	First version of PFUTP regulations — limited scope; did not adequately cover modern market manipulation
2002 — Ketan Parekh Scam	Circular trading, price rigging of technology stocks — exposed gaps in 1995 Regulations
2003 — SEBI (PFUTP) Regulations, 2003	Comprehensive revision — expanded definitions; broader coverage; aligned with IOSCO principles
2012 Amendment	Added provisions on misrepresentation, pump-and-dump, and market access fraud
2019 Amendment	Expanded Regulation 3 to cover front-running by connected persons; added digital fraud provisions

2. Statutory Basis — Section 12A of the SEBI Act

Section 12A, SEBI Act: No person shall directly or indirectly — (a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognised stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act; (b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities; (c) engage in any act, practice, course of business which operates or would operate as a fraud or deceit upon any person in connection with the issue, dealing in securities; (d) engage in insider trading; (e) deal in securities while in possession of material or non-public information; (f) communicate or counsel or procure directly or indirectly any person to deal in securities of any body corporate on the basis of unpublished price-sensitive information.

Section 12A is the primary statutory prohibition. The PFUTP Regulations give detailed content to the prohibitions in Section 12A(a), (b), and (c) — defining what constitutes 'manipulative or deceptive device', 'fraud', and 'unfair trade practice' in the securities market context.

3. Preamble & Object of PFUTP Regulations 2003

Preamble: In exercise of the powers conferred by Section 30 of the SEBI Act, 1992, to protect the interests of investors in securities and to promote the development of and to regulate the securities market, SEBI hereby makes these regulations to prohibit fraudulent and unfair trade practices relating to the securities market.

The PFUTP Regulations have three interconnected objects:

Prohibit fraud in securities markets: Prevent misrepresentation, deceit, and fraudulent devices in connection with the purchase or sale of securities.
Prohibit market manipulation: Prevent artificial price movements through coordinated trading, circular trading, price rigging, and similar manipulative practices.
Prohibit unfair trade practices: Prohibit practices that may not be 'fraudulent' in the strict legal sense but are unfair to investors — such as front-running, churning, and misleading research reports.

4. Structure of PFUTP Regulations 2003

Regulation	Subject Matter
Regulation 1	Short title, commencement and application
Regulation 2	Definitions — 'fraud', 'fraudulent practice', 'connected persons', 'misleading appearance'
Regulation 3	Prohibition of dealings by connected persons in securities on the basis of unpublished price-sensitive information
Regulation 4	Prohibition of manipulative, fraudulent and unfair trade practices
Regulation 5	Investigation — SEBI's power to appoint investigating authority
Regulation 6	Powers of investigating authority
Regulation 7	Obligations during investigation
Regulation 8	Submission of report by investigating authority
Regulation 9	Action on investigation — SEBI's options
Regulation 10	Recovery of amounts — disgorgement

5. Scope — Who Does PFUTP Apply To?

The PFUTP Regulations apply to all persons — individuals, companies, partnerships, HUFs, foreign entities — dealing in securities listed or proposed to be listed on a recognised stock exchange in India. Specifically:

Issuers — companies issuing securities.
Intermediaries — stock brokers, investment advisers, merchant bankers, research analysts.
Investors — both institutional and retail.
Market operators — persons coordinating circular trading or price manipulation.
Tippers and tippees — persons in possession of material non-public information.
Technology intermediaries — algorithmic traders, platform operators.

6. PFUTP and IOSCO Principles

The 2003 revision aligned PFUTP Regulations with IOSCO (International Organization of Securities Commissions) Principles for market manipulation and fraud prevention:

IOSCO Principle 28: Regulation should ensure securities market manipulation and fraud are prohibited.
IOSCO Principle 29: Regulation should ensure proper management of large exposures and defaults.
India's PFUTP Regulations incorporate IOSCO's broad definition of fraud — encompassing manipulative devices, misrepresentations, and unfair practices not limited to common law fraud.

7. Relationship between PFUTP and Other SEBI Regulations

Regulation	Overlap / Distinction with PFUTP
SEBI (PIT) Regulations, 2015	PIT governs insider trading (UPSI-based). PFUTP Regulation 3 also prohibits trading on unpublished price-sensitive information by 'connected persons'. Overlap in scope; SEBI typically invokes BOTH in insider trading cases.
SEBI (SAST) Regulations, 2011	Takeover violations can also be PFUTP violations if acquisition involves fraudulent concealment of the acquirer's identity or intent.
SEBI (Research Analysts) Regulations	Misleading research reports or front-running based on research reports = PFUTP Regulation 4 violation.
SEBI Act Section 12A	PFUTP implements Section 12A(a)-(c). Section 12A(d)-(f) (insider trading) is implemented by PIT Regulations.

8. Model Examination Questions

Q1. What is the object and scope of the SEBI (PFUTP) Regulations, 2003? What is their statutory basis?

PFUTP Regulations 2003 — Object, Scope & Statutory Basis

Model Answer — The SEBI (PFUTP) Regulations, 2003 were enacted by SEBI under Section 30 of the SEBI Act, 1992 to give detailed content to the prohibition in Section 12A of the SEBI Act. Section 12A prohibits manipulative devices, fraudulent schemes, and deceptive practices in connection with securities. The PFUTP Regulations define 'fraud' (Regulation 2), enumerate specific prohibited practices (Regulations 3-4), and empower SEBI to investigate and take action (Regulations 5-10). Legislative background: the 1995 PFUTP Regulations were inadequate — the Ketan Parekh scam (2002) exposed their limitations, leading to the comprehensive 2003 revision. Object: three-fold — (i) prohibit fraud in securities; (ii) prohibit market manipulation; (iii) prohibit unfair trade practices. Scope: all persons dealing in listed or proposed-to-be-listed securities in India — issuers, intermediaries, investors, market operators. Statutory basis: Section 30 SEBI Act (regulation-making); Section 12A SEBI Act (primary prohibition). The PFUTP Regulations are aligned with IOSCO Principles for market integrity. PFUTP and PIT Regulations overlap in insider trading cases — SEBI typically invokes both.

🎯 EXAM POINTERS — Topic 35: PFUTP Regulations 2003 Introduction

PFUTP 2003 enacted under Section 30 SEBI Act — regulation-making power. Statutory prohibition: Section 12A SEBI Act.
Section 12A: prohibits (a) manipulative devices; (b) fraudulent schemes; (c) fraud/deceit practices; (d)-(f) insider trading.
PFUTP implements Section 12A(a)-(c). PIT Regulations implement Section 12A(d)-(f).
1995 Regulations → Ketan Parekh scam 2002 → comprehensive 2003 revision → 2012 + 2019 amendments.
Structure: Regulation 2 (definitions) → Regulation 3 (connected persons) → Regulation 4 (manipulation/fraud/unfair) → Regulations 5-10 (investigation + enforcement).
PFUTP applies to ALL persons dealing in listed or proposed-to-be-listed securities.
Three objects: (i) prohibit fraud; (ii) prohibit market manipulation; (iii) prohibit unfair trade practices.
IOSCO alignment: PFUTP 2003 incorporates IOSCO Principles 28 and 29 on market integrity.
PFUTP + PIT often invoked together in insider trading enforcement — regulatory overlap.
Penalty for PFUTP violation: Section 15HA SEBI Act — ₹25 crore OR 3× profit (whichever higher). Plus Section 24 criminal prosecution.

← Topic 34: Fungibility & Free Transferability | Next → Topic 36: PFUTP Definitions — Fraud, Manipulation [Regulation 2]

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