top of page

PFUTP (Second Amendment) Regulations 2020 - Why it is a game changer

Updated: Nov 22, 2020

Adarsh Vijayakumaran is a 3rd year B.A. LL.B. (Hons.) student at the National University of Advanced Legal Studies, Kochi

On October 19, 2020, Securities Exchange Board of India ("SEBI"), in the exercise of its powers conferred under Section 30 of the SEBI Act issued a notification that retrospectively amended Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 ("PFUTP)" thereby including fudging of accounts of listed companies as a fraudulent practice related to the securities market. The journey to arrive at this juncture has been a tedious one as the market regulator for a long time was under the impression that it did not have the power to regulate the activities that are beyond the trading arena. This blog post will first discuss the concept of securities fraud relating to account fudging as practiced in the USA. It will then examine the background of the present amendment. And finally, it will discuss the implications of the amendment.


Securities fraud or Investment fraud refers to deceptive practices in the stock or commodities market whereby the fraudsters induce the gullible investors to make trading decisions based on false information resulting in either huge losses or gross violation of securities laws. In its wide ambit securities fraud encompasses concepts like embezzlement by stockbrokers, stock manipulation, misstatement on a public company's financial reports, accounting frauds, insider trading and other illegal acts relating to securities.

In the United States, some of the infamous cases of securities fraud include Enron scam, where the officials of a Houston-based company cheated investors and enriched themselves by overvaluing assets to boost cash flow and earnings statements until it declared bankruptcy in December 2001, prompting FBI officials to convict almost all of its executive management. In the Tyco scam, through improper accounting practices and schemes involving transactions with no economic substance to overstate its reported financial results, Tyco defrauded investors of more than 1 billion dollars leading finally to a civil injunctive action by the SEC in 2005. Whereas, in the WorldCom scam, the WorldCom company defrauded investors by overstating its financial statements by 9 billion dollars violating US securities laws.

The most peculiar feature of all these cases is that the US securities regulator, the Securities and Exchange Commission has shown an apparent interest in its jurisdiction to try and investigate these frauds. However, the scene in India was different all this long.


SEBI's tussle with its jurisdiction to regulate activities of companies that were beyond the trading arena came as early as the infamous Satyam scam of 2009 wherein the company founder Ramalinga Raju—the Kingpin publicly admitted trumping up the company’s books to tune a scam of larger than Rs 7800 cr. In a debaculous altercation that pursued SEBI imposed a two-year ban on Price Waterhouse ("PwC") the auditing firm that allegedly engaged in the scam of Satyam from auditing any listed company in India. However, in the same year, the Securities Appellate Tribunal ("SAT") quashed the SEBI's order by partly allowing a disgorgement of fee of Rs 13 crore. The Tribunal in its order noted that only the Institute of Chartered Accountants of India (ICAI) can take any action against auditors and that frauds cannot be proved based on negligence in auditing. In 2019, when the case went to the Apex court, a bench comprising Justices Arun Mishra and Indira Banerjee stayed the order of SAT and issued a notice against SAT—thus leading the doubts about SEBI's powers to try cases beyond trading arena to a loop of uncertainty.

From there on, SEBI has been on a challenging journey to redefine its boundaries in thwarting corporate frauds. In its proposals dated march 2019, SEBI has stated that there is a need to create an obligation on an individual to not alter, destroy, mutilate, conceal or falsify the records to hamper the investigation and all such acts should have to be treated as 'fraudulent' and actionable under the securities laws. In another proposed amendment SEBI has said that no person should employ or assist in employing any device, scheme or artifice to manipulate books of accounts or financial statements of a listed company to directly or indirectly manipulate the share price or to hide the diversion, siphon off the funds or assets or earnings of a listed firm or a proposed-to-be-listed company. While until the recent amendment, the responsibility to monitor the books of accounts of companies was directly under the Ministry of Corporate Affairs; SEBI's proposals suggested that it wanted the power to directly act in cases where books of accounts of public companies had been cooked.


PFUTP second amendment provides that "any act of diversion, misutilisation or siphoning off of assets or earnings of a company whose securities are listed or any concealment of such act or any device, scheme or artifice to manipulate the books of accounts or financial statement of such a company that would directly or indirectly manipulate the price of securities of that company" shall be deemed to be considered as manipulative, fraudulent and unfair trade practice in the securities market under regulation 4, in sub-regulation (1).

The significant implication of this amendment is that SEBI will no longer have an arbitrary pick and choose practice in enforcing its jurisdiction on cases where any malcontent in financial disclosure would impact the trading of securities. SEBI has been for over decades practised a system of pick and choose based on Disclosure and Investor Protection (DIP) Guidelines that were codified into SEBI (Listing Obligations and Disclosure Requirements Regulations), 2015. While these agreements mandated necessary disclosures while listing, the answer to the question, i.e. if SEBI had the power to look into the account fudging, still remained under oblivion. This state of precariousness allowed SEBI, in past, to alternate inconsistently on its jurisdiction over the matters of account fudging. However, the present amendment brings with it, a clarity respect to SEBI’s jurisdiction in accounts manipulation cases.

Moreover, the present amendment is far-reaching in its ambit as it is added as an explanation to Regulation 4(1) and thus could retrospectively cover five categories of cases that were hitherto not regulated by SEBI explicitly. Now, diversion, misutilisation or siphoning off of assets or earnings in a listed company, concealment as well as manipulating the books of accounts or financial statements have been included as securities fraud. This means SEBI will have jurisdiction on issuers of securities and will not be limited to the trading arena concerning merely mutual fund and broking players.


PFUTP is an excellent step in protecting investors and booking shonky listed entities. It has removed a large boulder in SEBI's enforcement powers in tackling financial fudging. SEBI can now try offences related to fudging of accounts in listed entities. With the retrospective power, it will be easier for SEBI to impose fines on companies that hitherto dodged SEBI. Moreover, with the express articulation of this regulation, SEBI is now statutorily bound to try these offenders, and it will be interesting to see how these changes play out in the coming days.

All views expressed herein are of the Guest Contributor, the Securities Blawg does not endorse any views herein.

796 views0 comments


bottom of page