Regulatory Framework and Market Conduct
This domain tests the statutory and regulatory architecture governing Indian securities markets and the conduct standards enforced within it. Questions often test which regulator or regulation applies, the threshold for a disclosure or open offer, and the applicable penalty provision.
Framework
- SEBI Act, 1992: establishment, powers, investigation and adjudication; appeals to the Securities Appellate Tribunal.
- Securities Contracts (Regulation) Act, 1956: exchange recognition, contracts and derivatives.
- Depositories Act, 1996: dematerialisation and depository records.
- Companies Act, 2013: issue, allotment, buy-back, delisting and governance.
- FEMA: foreign investment and repatriation.
Conduct rules
- SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003: manipulation, misleading statements, front running.
- SEBI (Prohibition of Insider Trading) Regulations, 2015: UPSI, connected persons, trading window and disclosures.
- SEBI (SAST) Regulations, 2011: 5% disclosure, 25% open offer threshold, creeping acquisition.
- SEBI (LODR) Regulations, 2015: listing obligations and continuous disclosure.
Worked example
A CFO sells shares after learning of an undisclosed quarterly loss before the board meeting. The information is UPSI; the CFO is a connected person; trading is prohibited. If the sale avoided a loss of ₹40 lakh, the penalty ceiling under Section 15G of the SEBI Act is the higher of ₹25 crore or three times the profit, with a minimum of ₹10 lakh. Three times ₹40 lakh is ₹1.2 crore, so the maximum remains ₹25 crore.
Traps
- Confusing the 5% SAST disclosure with the 25% open offer threshold.
- Treating information known to a few analysts as generally available.
- Assuming PIT applies only to directors; it covers connected persons and tippees.
- Forgetting that an open offer also arises on acquisition of control, even below 25%.