Fraud
Also written Fraud (PFUTP) · Fraud (Regulation 2(1)(c))
Under SEBI PFUTP Regulations, 2003: any act, expression, omission or concealment committed to induce another person or his agent to deal in securities, whether or not anyone gains or avoids a loss.
In plain language
In everyday speech fraud means cheating someone for money. The securities-law meaning is wider, and the workbook's point is exactly that width.
Under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, fraud includes any act, expression, omission or concealment committed to induce another person or his agent to deal in securities.
Two features make it wide. First, it covers silence as well as speech. An omission or concealment can be fraud. Second, nobody has to profit. There may or may not be a wrongful gain or an avoided loss, and the workbook says that is inconsequential in deciding whether fraud was committed.
What makes it fraud is the purpose: getting someone to deal in securities on the strength of what was said, done or hidden.
For the Social Stock Exchange this is not abstract. SSE instruments are securities issued on a stock exchange segment. Much of the SSE machinery, including independent assessment and disclosure, exists so that donors can trust claims about social impact. Chapter 2 notes that the transparency of Development Impact Bonds can help donors overcome their fear of giving to fraudulent or ineffective service providers.
How it works
The definition (Chapter 11, 11.5). Fraud is inclusive of any act, expression, omission or concealment committed to induce another person or his agent to deal in securities.
The instances the workbook cites:
| Instance | What it catches | |
|---|---|---|
| (a) | A wilful misrepresentation of the truth, or concealment of a material fact, so that another person may act to his detriment | Lies and hiding what matters |
| (b) | A suggestion as to a fact which is not true, by one who does not believe it to be true | Hinting at something you know is false |
| (c) | An active concealment of a fact by a person having knowledge or belief of the fact | Covering up what you know |
| (d) | A promise made without any intention of performing it | Empty promises |
| (e) | A representation, whether true or false, made in a reckless and careless manner | Carelessness, even when the statement turns out true |
The gain test that is not a test. Whether the person gained anything, or avoided a loss, does not decide the question.
Where it sits in the rulebook. The SEBI Act, 1992 prohibits fraudulent practices, insider trading and unfair trade practices (11.1). The PFUTP Regulations, 2003 prohibit fraudulent, unfair and manipulative trade practices in securities and carry the definition (11.5). The PMLA, 2002 is a separate law about laundering the proceeds of crime (11.4).
A worked example
An illustrative case; the organisation and figures are made up.
Sahyog Gramin Trust plans a ₹60 lakh ZCZP issue on an SSE for drinking-water units in 40 villages of Barmer. Its fundraising document and a webinar for donors say three things:
- "Our last project reached 12,000 households." Its own records show 3,100. This is (a), a wilful misrepresentation, made so that donors subscribe.
- "We have a signed commitment from the district administration to maintain the units." No such commitment exists, and the trustees never meant to seek one. This is (d), a promise made with no intention of performing it.
- A trustee quotes a groundwater figure from a WhatsApp forward without checking it. The figure happens to be right. It can still fall under (e): a representation, whether true or false, made recklessly.
Donors subscribe ₹60 lakh in total. None of it goes into the trustees' pockets; all of it is spent on water units.
Is it still fraud? Yes. The statements were made to induce people to deal in securities, and the workbook is explicit that wrongful gain, or its absence, is inconsequential. The fact that every rupee reached the project does not cure the misrepresentation.
Why NISM asks about it
Chapter 11 (Key Regulations, 5% weightage) defines fraud under the PFUTP Regulations in 11.5 and lists the five instances. It also notes, in 11.1, that the SEBI Act prohibits fraudulent practices. Chapter 2 links transparent Development Impact Bond structures to donors' fear of fraudulent service providers, and a Chapter 8 case study lists fear of fraud in digital transactions as a barrier to financial inclusion. Chapter 11's second sample question makes you separate PMLA record-keeping from the PFUTP Regulations. Expect definition and "which of these is fraud" questions, especially on the gain point and the reckless-representation instance.
Common exam traps
- No gain needed. "It is not fraud because nobody profited" is wrong. The workbook calls gain or avoided loss inconsequential.
- True statements can qualify. Instance (e) covers a representation "whether true or false" made recklessly and carelessly.
- Silence can be fraud. Omission, concealment of a material fact and active concealment are all covered.
- An unkept promise is not automatically fraud. Instance (d) needs the promise to be made without any intention of performing it.
- PFUTP, not PMLA. Record-keeping for five years is a PMLA duty. The fraud definition is in the PFUTP Regulations, 2003.
- The regulation's name. The chapter heading calls them the SEBI "Prevention of Fraudulent and Unfair Trade Practices Regulations", but the text gives the full title as "Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market". The regulations prohibit; use "Prohibition".
Check yourself
1._______ stipulates that every reporting entity has to maintain a record of all transactions.
- a)SEBI (Stock Broker) Regulation, 1992
- b)Prevention of Money-Laundering Act, 2002
- c)SEBI Prevention of Fraudulent and Unfair Trade Practices Regulations, 2003
- d)SEBI (Prohibition of Insider Trading) Regulations, 2015
Show the answer
Answer: (b) Prevention of Money-Laundering Act, 2002
Section 12 of the PMLA, 2002 requires reporting entities to maintain records of all transactions so individual transactions can be reconstructed, for five years from the date of transaction.
The PFUTP Regulations deal with fraud in securities dealings. The other two options are not the source of this duty in the workbook.
2.An adviser conceals a material fact he knows, so that a client buys a security. The client happens to make a profit. Under the PFUTP Regulations, as described in the workbook:
- a)It is not fraud, since the client made no loss
- b)It is fraud; whether there was wrongful gain or avoidance of loss is inconsequential
- c)It is fraud only if the adviser made a gain
- d)It is not fraud, since silence is not an act
Show the answer
Answer: (b) It is fraud; whether there was wrongful gain or avoidance of loss is inconsequential
Fraud includes any act, expression, omission or concealment committed to induce another to deal in securities. Active concealment by someone who knows the fact is one of the listed instances. The workbook adds that there may or may not be wrongful gain or avoidance of loss — that is inconsequential.
Options A and C wrongly make the outcome decisive. Option D ignores that omission and concealment are in the definition.
3.In the E-Diksha case, which of the following is a limitation of the assessment rather than a challenge faced by stakeholders?
- a)Staff of formal financial institutions or banks not being supportive and empathetic
- b)Difficulty in using formal financial products due to more documentation and longer time
- c)Difficulty in understanding financial concepts and terms due to lack of education
- d)Accurate data on non-formal financial sources is limited
Show the answer
Answer: (d) Accurate data on non-formal financial sources is limited
"Accurate data on non-formal financial sources is limited" is a limitation of the assessment. It restricts what the assessor can measure about moneylenders and chit funds. The other two limitations are participants being unable to communicate their learnings, and the difficulty of separating E-Diksha's impact from other financial inclusion efforts.
Options A, B and C are challenges faced by stakeholders: unsupportive bank staff, heavy documentation, and difficulty understanding financial terms. The list also includes fear of digital fraud and lack of trust in formal institutions.
Where this is taught
- Series XXI-B · Chapter 11: Regulatory, Governance and Ethical Aspects of Portfolio Managersintroduced here
- Series XXIII · Chapter 11: Key Regulationsintroduced here
- Series III-A · Chapter 8: SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003introduced here
Related terms
- Insider trading code of conductThe comprehensive code SEBI requires listed companies, intermediaries and fiduciaries to maintain under the PIT Regulations, 2015 — a compliance officer, insider disclosures and mandatory reporting of violations.
- PFUTP RegulationsSEBI's 2003 regulations banning fraudulent, unfair and manipulative trade practices in the securities market, including a specific list of dealings deemed fraudulent regardless of actual gain or loss.
- PMLAThe Prevention of Money Laundering Act, 2002 — the core of India's legal framework against money laundering, in force from 1 July 2005, binding banks, financial institutions and intermediaries.
- Development Impact BondA results-based structure in which a risk funder finances an NPO up front and an outcome funder repays, with a small return, only if pre-agreed social metrics are independently verified.
- Zero Coupon Zero Principal (ZCZP) instrumentA listed security issued only by an NPO registered on an SSE for a specific project; it pays no interest and returns no principal, promising the funder a social return instead.
- Fraud under PFUTP RegulationsAny act, statement or hidden fact used to induce someone to deal in securities, as SEBI's 2003 fraud regulations define it — whether or not actual gain or loss results.