Fraud under PFUTP Regulations
Any 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.
In plain language
Securities law does not wait for someone to lose money before calling something fraud. The intent to induce a person to deal is enough on its own.
SEBI has a rule for this. It is called the Prevention of Fraudulent and Unfair Trade Practices Regulations, 2003, usually shortened to PFUTP. It bans fraudulent, unfair and manipulative practices in the securities market.
The rule defines fraud widely. A lie counts. A false suggestion counts. Even a promise made with no real plan to keep it counts.
Did the person actually gain? Did the victim actually lose money? Neither question decides whether fraud happened. The rule is written this way on purpose. It closes off the defence of 'but nobody lost anything'.
How it works
The PFUTP Regulations, 2003, list several instances that count as fraud. Among them: a wilful misrepresentation of the truth or concealment of a material fact, to induce another person to act to their detriment; a suggestion of a fact that is not true, made by someone who does not believe it is true; active concealment of a fact by someone who knows it; a promise made with no intention of ever performing it; and a representation, true or false, made in a reckless or careless manner.
The regulation explicitly states that wrongful gain or avoidance of loss need not actually occur for fraud to be established — the act, and the intent behind it, are what matter.
A worked example
An investment adviser tells a client that a particular small-cap stock is 'guaranteed to double in a year,' a claim the adviser has no real basis for believing. The client invests Rs 5,00,000 on the strength of that assurance.
Whether the stock later doubles, halves, or stays flat is irrelevant to whether this was fraud under the PFUTP Regulations — the reckless, baseless representation, made to induce the client to invest, is itself the violation, the moment it was made.
Why NISM asks about it
Chapter 18 (Key Regulations), section 18.3 (SEBI Prevention of Fraudulent and Unfair Trade Practices Regulations, 2003), lists the five instances of fraud given above. Expect a question naming a scenario and asking whether it fits the regulation's definition of fraud, or one testing whether actual loss is a required element.
Common exam traps
- Actual wrongful gain or loss is not required for fraud to be established under PFUTP — this is the single most tested point in the section.
- A reckless or careless representation counts as fraud, even if the person making it did not deliberately intend to deceive — recklessness alone is enough under the regulation's own wording.
- Do not confuse PFUTP with insider trading regulations, which deal specifically with trading on unpublished price-sensitive information, a separate SEBI regime.
Where this is taught
Free preparation for NISM Series X-ARelated terms
- Front runningUsing non-public knowledge of a substantial impending order to trade ahead of it in the same or related securities or derivatives, expecting the price to move once the order becomes public.
- SCORESSEBI's centralised web-based system for processing investor complaints, on which the company or intermediary must upload an Action Taken Report and the investor can watch the status online.
- FraudUnder 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.
- Investors Grievance DivisionThe department of a stock exchange that investors approach to resolve complaints against its trading members, working with the member and the complainant before any escalation to SEBI SCORES.
- 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.