"Fraud, Manipulation and
Insider Trading in the Indian Securities Market
Sandeep Parekh
Publisher: CCH, a Wolters
Kluwer business
Price: 795
Speak to average retail investors and they talk about the stock
market with some bits of awe mixed with desire and fear. Awe, because smart
looking people in movies seem to do complicated deals and get very rich. Desire,
because of all the stories of the roulette-like stockmarket, that has the
potential to make you seriously rich very quickly. You just need the right tip
and do the trade. Fear, because of the frequent news stories about fraud and
manipulation on the markets. How true are these stories? Is our stock market
really a den of thieves as popular folk lore has it?
Those looking for answers may do well to read Sandeep Parekh’s book
titled Fraud, Manipulation and Insider Trading in the Indian Securities Market.
A racy Michael Lewis read this is not since the book is about regulations in
the securities market, their evolution and the role of the regulator. The
text-bookish treatment of the subject and the text-book like design feel will
put off a casual reader, but for students of finance, would-be securities
market lawyers, and other participants in the market will do well to invest
time to read the book. Financial planners will find it useful as well,
specially the chapter on ‘Mis-selling and Unsuitability’. Heavy reading the
book may be, but persist and get rewarded with gems such as: “..the purpose of
modern securities regulations is not to remove stupidity from the capital
markets – only ignorance.” You chance upon another one while reading about how
market upticks and bubbles are fertile grounds for fraud: “the beta of the
market hides the negative alpha of frauds.”
The key focus of the book is how fraud, manipulation and insider
trading is defined by regulators and how it is dealt with. In fact, stock
markets have been in operation much longer than regulations and people have been
defrauding each other since the beginning of time. It isn’t as if till the anti
fraud regulations came into being there was no legal recourse for a person who
felt cheated or defrauded in the market. Even before written law, fraud has
been prohibited under common law, or “law as decided without statutes and
passed on and evolved from generations through court decided cases”. Read
through the Sebi (Prohibition of Fraudulent and Unfair Trade practices relating
to Securities Market) Regulations 2003 (FUTP Regulations) and the use of common
law principles of fraud show up clearly. The bedrock for anti-fraud regulations
is the tort of deceit. Writes Parekh: “Since Pasley v Freeman in 1789, it has
been the rule that A is liable in tort to B if he knowingly or recklessly makes
a false statement to B with intent that it shall be acted upon by B, who does
act upon it and thereby suffers damage.” The six ingredients that make up the
common law fraud are intention, materiality, mis-representation of fact,
transaction, loss and damage. Financial sector regulation and the appellate
bodies have the delicate task of deciding ‘intent’ and that means either
getting into somebody’s head or using circumstantial evidence to prove it.
Though the book is about the securities market and the regulations
to prevent fraud and manipulation are about stocks, the book is relevant for
those preparing for the future of Indian finance according to the road map laid
down by the Financial Sector Legislative Reforms Commission (FSLRC). The draft
Indian Financial Code envisages a collapse of the current multiple regulators
into one United Financial Agency (UFA). Given the roots of current security
market regulation from common law fraud, other regulators like the Irda, PFRDA
and RBI must begin to use the common law fraud to think about fraud in their
areas. The Rs 1.5 trillion of loss caused to individual investors in bundled
life insurance products over seven years fits the five step definition of
common law fraud to a T.
Ideally I would like Parekh to write a non-text book next, where he
writes about securities market regulation for the interested, but lay reader.
The glimpses of story in an otherwise dry book (and it needs to be dry because
it deals with actual regulation) are fascinating. And the average reader would
understand markets much better, lifting the veil of high finance and its
seeming complication.
Monika Halan works in the
area of financial literacy and financial intermediation policy and is a
certified financial planner. She is editor, Mint Money, Yale World Fellow 2011
and on the board of FPSB India. She can be reached at expenseaccount@livemint.com"
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