Sebi's Enforcement Powers And Mechanisms
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Category: Corporate & Insolvency
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SEBI'S ENFORCEMENT POWERS AND MECHANISMS
Shan Sharan, Amity University, Noida
ABSTRACT
Within the sphere of Indian capital markets, which underwent rapid changes with the advancement of technology and globalization, there arose a need for proper legislation to regulate these markets. As a result, a regulatory body was established, the Securities and Exchange Board of India (SEBI). The chapter tries to explain the dynamic nature of the SEBI Act and gives an indepth analysis of the enforcement actions taken by SEBI. The research aims to combine legal analysis with public policy evaluation of SEBI's enforcement actions, which are extensive actions that comprise all the executive and judicial measures taken by the government. An Evaluation Policy achieves leverage by exposing issues of effectiveness, efficiency, or consequence of activity or resource use.
It seeks to explain the practical results of legislation or administrative processes undertaken while their intent is political. A general review of legislation about enforcement actions shows some form of legislative instruction; however, there is a wide gap between the intent and effect of such legislation. Most rules designed to protect private-sector investors are filled with opportunities for fraud. Keywords: SEBI, capital markets, enforcement mechanisms, SEBI Act 1992, quasi-judicial powers, PFUTP Regulations, market surveillance, insider trading, algorithmic trading, investor protection, artificial intelligence in regulation, whistleblower mechanisms, financial misconduct, regulatory technology, securities fraud, data analytics, cross-border enforcement, Securities Appellate Tribunal, RegTech, global financial regulation
1. Legal and Statutory Framework
The regulatory journey of the Securities and Exchange Board of India (SEBI)1 traces back to its establishment in 1988 as a non-statutory body formed to regulate and develop the Indian securities market. However, its transformation into a full-fledged statutory regulator came with the enactment of the SEBI Act, 1992. This law was a big thing for India's financial system as it officially gave SEBI the power to act independently and manage the working of the stock markets. Before all this, things were different or looser, but now SEBI could step in and make rules, stop wrong practices and now have the authority to do something about it. The main part of this law is Section 11 of the SEBI Act, 1992. 2 It says that SEBI can take whatever steps it feels necessary to protect the investors and ensure the markets grow in an organized and fair manner.
This was a broad power, which means SEBI isn't stuck to a fixed set of actions now. It can now investigate when things look fishy, give strict orders to the brokers or companies, and even temporarily stop trading activities if it suspects something is wrong. Then there is Section 11B3, which makes SEBI even stronger. This part lets SEBI tell any person or group of persons who are involved in the market, to stop doing things that could mess with investor trust or hurt how the market runs. So now SEBI doesn't have to wait until something bad already happens. It can step in early and stop shady stuff before it gets worse, and make sure the market stays clean and fair to everyone The legal framework is reinforced by Sections 15A through 15HA, which establish a comprehensive penalty regime.
These provisions specify monetary penalties for a wide range of securities law violations including non-disclosure of material information, insider trading, and fraudulent or manipulative trading4. The structure of these penalties reflects a principle of proportionality, ensuring that enforcement responses are tailored to the gravity of the infraction and the degree of investor harm. To operationalize and detail these statutory mandates, SEBI formulated the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003;
1 SEBI, 'About SEBI' (SEBI, 2023) https://www.sebi.gov.in/about-sebi.html
2 Securities and Exchange Board of India Act 1992, s 11.
3 Securities and Exchange Board of India Act 1992, s 11B.
4 Securities and Exchange Board of India Act 1992, ss 15A–15HA
commonly known as the PFUTP Regulations. 5 These regulations serve as the foundational framework for identifying, investigating, and prosecuting various forms of market manipulation. Practices such as circular trading, pump-and-dump schemes, artificial price rigging, and dissemination of false or misleading statements fall squarely within their scope. Importantly, the PFUTP Regulations are worded broadly, offering regulatory flexibility to encompass modern tactics including digital misinformation campaigns and algorithmic manipulation. The PFUTP Regulations also confer upon SEBI the procedural power to launch in-depth investigations, summon documents and witnesses, and initiate adjudication or settlement proceedings6.
This investigatory apparatus allows SEBI to keep pace with sophisticated market misconduct that evolves alongside financial innovation and technological advancement, such as high-frequency trading, flash crashes, and rogue algorithmic strategies that may distort fair market operations. Despite possessing a wide array of statutory and regulatory tools, SEBI's enforcement orders are not insulated from challenge. Its decisions are often appealed before the Securities Appellate Tribunal (SAT) and, in some cases, reviewed by High Courts and the Supreme Court under writ or appellate jurisdiction. 7 These judicial forums play a pivotal role in testing SEBI's actions against constitutional and administrative law standards.
While this judicial oversight is indispensable for preserving the rule of law and ensuring procedural integrity, it can sometimes lead to delays or the reversal of regulatory actions, thereby affecting the efficacy of market deterrence. Thus, the legal and statutory framework governing SEBI presents a dual character: it is at once robust, empowering the regulator to respond assertively to manipulation, and yet accountable, subject to judicial checks that uphold fairness and legality. This delicate balance between regulatory autonomy and judicial control lies at the heart of India's financial market regulation and will be critically examined in the ensuing sections of this study. 5 SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations 2003, regs 3–4. 6 SEBI, 'Master Circular on Surveillance of Securities Market' (SEBI, 2023) https://www.
sebi. gov. in/legal/mastercirculars/mar-2023/master-circular-on-surveillance-of-securities-market_69244. html 7 Securities Appellate Tribunal, 'Orders' (Securities Appellate Tribunal, 2024) https://satweb. sat. gov. in/orders
2. Investigative Powers and Adjudicatory Mechanism of SEBI
A central pillar of SEBI's regulatory framework lies in its power to investigate and adjudicate market offences, enabling the regulator to respond effectively to both conventional and emerging threats to market integrity. Even though SEBI has a lot of power, its not like it can just use it the way it likes. Laws, procedures actually tie down these powers and the court interpretations to make sure everything is done fairly and with proper rules. The legal part that gives SEBI its investigation powers is the Section 11C of the SEBI Act,
19928. This section comes into play when SEBI has a solid reason to think something illegal is
going on like market manipulation, insider trading or fraud. If SEBI feels there is something actually wrong, it can officially start investigation. It can call people in for questioning under oath, ask for documents, and even check or take records that it thinks are important to the case. These powers are kind of like what a civil court has under the Code of Civil Procedure, 1908 9 which means that SEBI works like a mini court during investigations. Also, because today's market tricks can be rally technical like using the algorithms or fake data as said earlier, SEBI doesn't do all this alone. It brings in experts from outside like the forensic auditors, tech specialists or the people who understand how high-speed trading works so that they can go deeper and help solving the complicated things.
10 This is particularly crucial in uncovering sophisticated schemes involving automated trading, use of bots, collusive trading across platforms, and social media-driven misinformation campaigns, which require specialized forensic analysis and data tracking tools. The ability to collaborate with domain experts ensures that SEBI's investigations are not only factually robust but also technologically responsive. After SEBI finishes its investigation, the next step is deciding if the person or company actually broke the rules this is called adjudication. There's a proper set of rules for this, under the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995. 11 These rules basically say how the whole
8 Securities and Exchange Board of India Act 1992, s 11C
9 Code of Civil Procedure 1908, s 30; SEBI Act 1992, s 11C (8)
10 SEBI, ‘Master Circular on Surveillance of Securities Market’ (2023) https://www.sebi.gov.in/legal/mastercirculars/mar-2023/master-circular-on-surveillance-of-securities-market_69244.html
11 SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules 1995.
https://www. sebi. gov. in/legal/rules/jan-2022/securities-and-exchange-board-of-india-procedure-for-holdinginquiry-and-imposing-penalties-rules-1995-last-amended-on-december-31-2021-_55412. html process should go. SEBI picks an Adjudicating Officer (AO) who goes through all the evidence, holds hearings, and decides if a penalty is needed. It is a kind of a court process and has to be fair with both sides getting a chance to speak and proper reasons given in the final decision. But there is another problem that keeps coming up. Since SEBI is doing both the investigating and the judging, some people think that's a bit of a conflict. Like can the same group fairly decide something they already looked into? Some critics say it could feel biased. Courts have mostly supported SEBI's way of doing things, since it's a special agency with expertise.
But they've also said SEBI has to make sure things are fair and transparent, so people trust the process. Now, in urgent situations, SEBI can also pass ex-parte interim orders, meaning SEBI can give orders without informing the person first. like, if someone's doing illegal in the market and it needs to be stopped immediately. So, these orders help stop it quickly, but the courts have also said SEBI needs to be careful. If it uses this power, it must give the other side a chance to respond soon after to keep things fair and in line with natural justice. Adding to its enforcement toolkit, SEBI can opt for settlement proceedings under the SEBI (Settlement Proceedings) Regulations, 2018, most recently amended in August 2023. These regulations allow individuals or entities accused of violations to settle administrative or civil proceedings upon payment of a prescribed settlement amount.
The settlement mechanism is designed to streamline dispute resolution, reduce the burden on enforcement infrastructure, and encourage early compliance. The 2023 amendments have introduced stricter timelines, enhanced disclosure requirements, and refined the criteria for eligibility, thereby seeking to improve both efficiency and transparency in the process. SEBI's investigative and adjudicatory architecture reflects a careful blend of statutory authority, procedural rigor, and regulatory agility.
2.1. Process of SEBI
In instances where initial surveillance flags potential violations, SEBI's Market Surveillance and Investigation Department may recommend the matter for a formal investigation, and in certain scenarios involving broader economic or criminal implications, the case may also be escalated to the Enforcement Directorate (ED) or Financial Intelligence Unit-India (FIU-IND). Such multi-agency collaboration allows SEBI to deal more effectively with cases involving complex layering, use of shell entities, money laundering, or cross-border financial flows. Additionally, coordination with stock exchanges, custodians, depositories, and forensic auditors enhances the credibility and comprehensiveness of the evidence gathered. The legitimacy and scope of SEBI's investigatory powers have been judicially affirmed in landmark rulings such as Sahara India Real Estate Corporation Ltd v SEBI.
12 In this case, the Supreme Court of India underscored SEBI's statutory mandate to protect the interests of investors and uphold the transparency of the securities market, even when dealing with influential or high-profile corporate actors. Nevertheless, despite its statutory robustness, SEBI's investigatory process has not been immune from criticism. SEBI has started putting out more information—like posting its interim and final orders online, sharing updates through press releases, and making an effort to be a bit more open with its actions. That's definitely a step in the right direction. But even now, these updates aren't always consistent or detailed, and sometimes they come too late to make any real difference. So, there's still a lot of scope for SEBI to improve how it communicates and keeps the process transparent across the board.
2.2. Surveillance Powers of SEBI
The Securities and Exchange Board of India (SEBI) is not just a regulator that responds to issues; it is a proactive and vigilant body, with strong powers to investigate and monitor the market. These powers help SEBI maintain the integrity of the market and build investor confidence. They enable SEBI to spot problems early, take action before they become major issues, and prevent widespread harm to investors. SEBI keeps a close eye on trading patterns, market fluctuations, price movements, and unusual transactions across stock exchanges. It uses both human judgment and automated systems to do this. Tools like the Integrated Market Surveillance System (IMSS) and the Data Warehousing and Business Intelligence System (DWBIS) are crucial for analyzing data in real-
12 Sahara India Real Estate Corporation Ltd v SEBI (2013) 1 SCC 1
time and after trades. These systems help SEBI detect suspicious activities such as insider trading. SEBI works closely with stock exchanges like the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), that act as the first line of defense. These exchanges run their own surveillance systems and are required to inform SEBI about any unusual trades. Once SEBI gets such alerts, it can investigate further and take necessary action. The Surveillance and Investigation Department within SEBI ensures that there is a smooth transition from monitoring to enforcement allowing SEBI to act quickly when needed. SEBI also issues Circulars, which provide updates to market participants on new measures like margining systems, restrictions on risky stocks, and surveillance mechanisms.
These circulars help prevent manipulative trading activities by alerting market participants and acting as early warnings. Additionally, SEBI is actively involved in global regulatory cooperation. It works with international organizations like the International Organization of Securities Commissions (IOSCO) to share information and coordinate surveillance across borders. This is important because financial activities often span multiple countries, and fraud can cross international boundaries. 2. 3. Use of Technology in Market Surveillance As financial markets begin to experience high speed, high frequency transactions, along with sophisticated algorithms, technology begins to play a vital role in regulatory surveillance.
In understanding this shift, the Securities and Exchange Board of India (SEBI) has significantly updated its technological systems for improved market surveillance to be more accurate, efficient, and proactive. Central to SEBI's technological system are IMSS and DWBIS - Integrated Market Surveillance System and Data Warehousing and Business Intelligence System. These platforms perform the function of gathering, consolidating, and performing systems analysis of large volumes of transactional data in equity, derivatives, mutual funds, and commodities markets in near real time. The IMSS is powered with advanced algorithms for pattern recognition along with alert generation that enable SEBI to get alerts on unusual market movements such as indicators of insider trading or activities suggestive of manipulation.
In contrast, the DWBIS13 functions as an advanced level data analysis and visualization engine. It captures both historical and live data, assisting investigators in building trading linkages, recognizing connections between market participants, and detecting behavioral anomalies. Through the application of data mining and artificial intelligent concepts, the SEBI can now detect manipulative activities with a level of detail that was previously hard to achieve. In the 2021 Axis Mutual Fund front-running incident14, we can see one of SEBI's multifaceted technological skills as one of the mutual fund's managers underwent pre-arranged trading with dealers which SEBI's algorithmic surveillance tools were able to spot.
SEBI took prompt corrective action by stopping mandates based on deal order placement, volume, and sequencing across accounts, which clearly showed discrepancies during deal execution. The inquiry entailed imposition of financial fines, barring the accessing of fund management services by the concerned individuals, and increased vigilance on mutual funds. This showed the importance of monitoring technology in today's financial crime prevention. SEBI's partnerships with other stock exchanges improves its surveillance capability even further. The NSE and BSE stock exchanges also use their own surveillance systems to identify abnormalities. They utilize STRs and UARs and send them to SEBI. With this layered approach, possible infractions are identified at the two tiers – micro (exchange level) and macro (level of SEBI) and ensure prompt investigation and action.
Moreover, SEBI has shown keen interest in integrating emerging technologies such as machine learning (ML) and natural language processing (NLP) to process unstructured data from social media, online forums, and news sources. These capabilities are increasingly crucial in identifying "pump-and-dump" schemes, rumor-based trading, and information-based manipulation, where perpetrators exploit digital platforms to influence retail investors. While SEBI's technology-driven surveillance model marks a significant step forward in regulatory modernization, challenges remain. The rapid pace of innovation in financial technology (FinTech), the growing complexity of algorithmic trading strategies, and the
13 Securities and Exchange Board of India, 'Integrated Market Surveillance' (17 May 2005).
https://www.sebi.gov.in/sebi_data/docfiles/16155_t.html 14 Securities and Exchange Board of India, 'Interim Order-cum-Show Cause Notice in the matter of Front Running of the Trades of Axis Mutual Fund' (28 February 2023). https://www.sebi.gov.in/enforcement/orders/feb- 2023/interim-order-cum-show-cause-notice-in-the-matter-of-front-running-of-the-trades-of-axis-mutualfund_68546.html expansion of decentralized finance (DeFi) require constant recalibration of regulatory tools and technical expertise. Additionally, there is an ongoing need to balance technological intrusiveness with privacy rights and due process, particularly when automated alerts trigger enforcement action.
2.4. Handling of Whistleblower Inputs and Complaints
An important consideration in SEBI's enforcement strategy is the management of whistleblower information and complaints. Understanding the importance of insiders and other stakeholders in market malpractice detection, SEBI has developed comprehensive procedures aimed at reporting market abuse without revealing personal details or compromising the whistleblowers' safety and interests. SEBI's whistleblower policy is anchored on the SEBI Complaints Redress System known as SCORES. This online system enables investors, market participants and even electronic whistleblowers to lodge complaints relating to market offences such as market manipulation, insider trading, and other forms of abuse by market agents. This system not only automates the filing of grievances but also guarantees resolution within set periods thus enhanced trust and confidence in the whistleblowing procedures.
Along with SCORES, SEBI brought out the 'Informant Mechanism' in 2019 under the Prohibition of Insider Trading (PIT) Regulations15. Informants who report credible insider trading violations are compensated under this mechanism. Financial rewards are offered to whistleblowers for relevant information that can lead to a change, and these rewards depend on the level of infraction as well as the accuracy of the information provided. Also, guarantee of non-retaliation in the form of termination, ill-treatment, or legal action is what makes this scheme effective and sturdy. The impact of these frameworks is clearly visible in notable enforcement cases.
For instance, the Informant Mechanism provided vital information through tips that was critical in the NSE co-location case16, in which the whistleblower evidence enabled SEBI to figure out a 15 Securities and Exchange Board of India, 'Submission of Information to the Office of Informant Protection' (24 December 2019). https://www. sebi. gov. in/media/press-releases/dec-2019/submission-of-information-to-theoffice-of-informant-protection_45443. html 16 'NSE Co-location scam: SC seeks response from NSE, former MDs', The Economic Times (11 October 2023). Available at: https://economictimes. indiatimes. com/news/india/nse-co-location-scam-sc-seeks-response-fromnse-former-mds/articleshow/104318657. cms sophisticated interplay of systemic irregularities involving high-frequency traders and market manipulators who abused co-location facilities.
The case resulted in heavy fines and increased exchange oversight, proving the critical importance of whistleblowers to market integrity. While enabling these reporting channels, SEBI ensures that whistleblowers and insiders are protected, thus increasing responsive enforcement. This fosters proactive responsibility, which empowers people within the financial system to join the battle against market abuse in a way that ensures their safety from retaliation.
3. Quasi-Judicial Powers of SEBI
With both administrative and quasi-judicial powers, the Securities and Exchange Board of India (SEBI) embodies a dualistic regulatory structure that permits the institution to act not only as a guardian of the market but also an adjudicator on infractions of securities laws. This flexibility provides SEBI the ability to preserve the sanctity of markets by curtailing market abuse using direct powers of investigation and sanctions together with a wide regulatory framework that attempts to ensure such problems do not occur in the first place. SEBI is empowered under the SEBI Act of 1992, which sanctions him quasi-judicial powers that permit him to make orders, impose sanctions and undertake other adjudicatory functions, therein. Such powers make it possible for SEBI to act in ways which will be legally binding in the same manner made by a court of law, but not in a law court.
The justification within the SEBI Act helps the body combat directly with cases of abuse that take place in the capital markets in time. The enforcement of the rules of the market will be greatly reduced in cases where there is clear and instant proof of breach of securities regulations, which is balanced with adherence to the basic norms of justice has been set. An example would be the verification of additional documentation for the violation which allows the administrator who also acts as a judge to bypass lengthy and complex procedures of seeking permission from other legal entities to fully sanction the rapid use of judicial means and immediate deceit for the achievement of justice objectives.
3.1. Nature and Scope of Quasi-Judicial Authority
SEBI's exercise of powers of a judicial nature constitutes one of the most important facets of its quasi-judicial functions and regulatory remit within SEBI which permits intervention in breaches of the laws relating to securities in order to enforce legal compliance with minimal delay. This authority stems from many clauses in the Securities and Exchange Board of India Act, 1992 (SEBI Act), particularly, Section 11, Section 11B, and Section 15I which allow SEBI to take appropriate actions to safeguard the interests of the investors and also ensure the regulated growth of the market. i. Section 1117 empowers SEBI to take any steps consider necessary for the protection of the investors and orderly development of the securities market.
This expansive provision, along with regulatory powers, enables SEBI to take steps such as giving directions to participants of the market so that there is no infringement of rules and the market is not rendered unproductive. ii. Section 11B18 grants SEBI the power to give directives, which include commands that are to be observed and carried out, to any person or organization involved in the securities market to perform or desist from engaging in any particular act that would hurt the stability of the market and the protection of investors. iii. Section 15I19 gives SEBI the power to delegate to other persons, the power of SEBI which include confessors of an inquiry and may impose penalty for breach of the acentric proformas of the ACT of 1992.
These provisions allow SEBI to function with powers akin to a civil court, giving it the authority to summon individuals, enforce the production of documents, and conduct detailed inquiries. While SEBI is not a formal judicial body, its quasi-judicial decisions have substantial legal consequences and are subject to review by the Securities Appellate Tribunal (SAT) and higher judicial forums. This enables SEBI to perform its regulatory functions effectively while ensuring accountability and fairness.
3.2. Imposition of Penalties and Regulatory Orders
The SEBI Act of 1992 grants SEBI jurisdiction to administer draconian fines for breaches of the laws regarding securities. The Chapter VI-A of the Act has been devoted to the penalties
17 Securities and Exchange Board of India Act 1992, s 11.
18 Securities and Exchange Board of India Act 1992, s 11B.
19 Securities and Exchange Board of India Act 1992, s 15I.
for various offenses including, inter alia, fraudulent and unfair trade practices. Section 15HA20 of the Act, for instance, provides that perpetrators of unscrupulous dealings in securities may incur punitive damages of up to twenty-five crores rupees or triple the value of the profit accrued, whichever amount exceeds. An illustrative example for SEBI's enforcement power would be the case of PACL Ltd. 21 wherein PACL SEBI robustly executed actions commensurate with the directive by the Supreme Court. SEBI set up a committee headed by Justice (Retd. ) R. M. Lodha which aimed at liquidating PACL's holdings and compensating the investors who sustained losses as a result of the illegal activities perpetrated by the company.
This landmark case exemplifies SEBI's fierce enforcement of investor protection policies and enforcement policies within the context of prevailing expansive systematic breaches.
3.3. Principles of Natural Justice and Procedural Fairness
While exercising its quasi-judicial authority, SEBI is obliged to follow the guidelines of natural justice. This includes the provision of a fair hearing, which is defined as audi alteram partem, and the reasons for which judgments were reached are provided. These factors are very important in preserving the integrity and fairness of SEBI'S adjudicative mechanisms. i. Right to Fair Hearing: SEBI must allow the legally affected individuals enough time to articulate their positions, which essentially requires informing the parties about the violation in question and letting them present a defense before taking any punitive measures. ii. Reasoned Orders: SEBI must give orders built on logic and precise language that guarantees accountability and frankness. In regard to the above subdivisions, some parties have criticized SEBI for lacking of these principles of rational justice.
Such as in some cases, removal of documents without appropriate hearing opportunity poses undue hearing constraints on disadvantaged parties which have also led to unsubstantiated
20 Securities and Exchange Board of India Act 1992, s 15HA.
21 SEBI, 'Constitution of Committee - In the matter of PACL Ltd. Vs SEBI and other connected matters' (Press Release No. 025/2016, 17 February 2016) https://www.watchoutinvestors.com/Press_Rel-T/sebi/2016025.asp legislative scrutiny resulting in annulment of SEBI decisions. 22 These instances are crucial in underlining the importance of losing in applying going beyond fairness and balancing on law.
3.4. Judicial Review and Significant Case Law
The quasi-judicial decisions made by SEBI are subject to judicial review to ensure that they align with established legal standards and respect the principles of fairness and justice. The role of the Securities Appellate Tribunal (SAT) and higher courts is critical in reviewing SEBI's decisions and ensuring that regulatory actions are carried out in a just and lawful manner. i. Sahara India Real Estate Corp. Ltd. & Ors. v. SEBI & Anr. 23 In this landmark case, the Supreme Court upheld SEBI's authority to order the refund of monies collected by Sahara India from investors, even in the absence of prior regulatory approval. The Court emphasized SEBI's role in safeguarding investor interests and maintaining the integrity of the securities market. ii. Price Waterhouse v.
SEBI 24 On the other hand, SAT cancelled SEBI's order against Prince Waterhouse, an auditing firm, citing lack of evidence. This case illustrates the SEBI's need to provide credible evidence in order to substantiate claims prior to executing sanctions or fines. The SAT's ruling further strengthened the need to pay attention to the facts which govern the related actions and think about the reason why SEBI takes the actions it does.
4. Enforcement Tools and Sanctions
The Securities and Exchange Board of India (SEBI) possesses the supreme jurisdiction to conduct surveillance and evaluation of the operations of capital markets in India for the purposes of maintaining order and ensuring efficiency in their systems. In fulfilling these responsibilities of regulation, SEBI maintains a complex and expanding arsenal of enforcement 22 SEBI, 'Non-compliance of SEBI directions seriously compromise regulatory framework; leniency in penalty would defeat intent of Section 15-HB SEBI Act: SEBI' (SCC Times, August 2018) https://www.scconline.com/blog/post/2018/08/25/non-compliance-of-sebi-directions-seriously-compromiseregulatory-framework-leniency-in-penalty-would-defeat-intent-of-section-15-hb-sebi-act-sebi/ 23 Sahara India Real Estate Corp.Ltd. & Ors. v. Securities & Exch. Board of India & Anr. AIRONLINE 2012 SC
24 Price Waterhouse v. SEBI (2020) SAT Appeal No. 52 of 2019.
actions and penalties which, in many cases, allows them to deal, quite successfully, with the retaliations of offenders, prevent other violations, and restore the trust of investors. Such measures are designed simultaneously with other remedies and actions which are framed within legal boundaries under the SEBI Act of 1992 together with its subordinate legislation rules and regulations and the parent law is accompanied by strong legal backing.
4.1. Investigative Authority
The Securities and Exchange Board of India (SEBI) possesses strong legal authority to initiate and investigate possible or alleged violations of securities laws. This authority in investigatory capacity is predominantly given by Section 11C of the SEBI Act, 1992, which allows SEBI to act whenever there are reasonable grounds for believing that any person has contravened, or is likely to contravene any provision of the Act or any of the regulations made thereunder. This provision has enabled SEBI to act and intervene without unnecessary delays during severe misconduct in the markets like insider trading, front running, circular trading, and other fraudulent activity which jeopardizes the openness of the market and trust of the investors. When SEBI undertakes an investigation, it has been given powers similar to those of a civil court under the Civil Procedure Code of 1908.
These include the ability to summon and enforce the attendance of any person, examine them on oath, compulsion to produce any books or records and other documents relevant or important, and the right to seize evidence if so warranted. These tools are fundamentally important for constructing an enforcement oriented factual matrix that is as symmetrical as possible. Either at their own discretion, or as a consequence of receiving complaints, surveillance alerts, or information from other regulators, SEBI may start an investigation. A relevant illustration in regard to SEBI's powers of Investigation is the case in February 2024 about the dubious trading activities associated with stock calls on television.
SEBI undertook a remarkable investigation regarding one ring of individuals and companies who were believed to be engaging in what is popularly known as 'pre-arranged trading' based on prior access to stock recommendations from guest speakers on the Zee business channel25. In SEBI's investigation, they concluded that several companies profiting from the markets, some market 25 SEBI holds guest experts in violation of SEBI regulations for insider trading nexus in stock recommendations on Zee Business (SCC Times, 14 February 2024) https://www. scconline. com/blog/post/2024/02/14/sebi-holdszee-business-guest-experts-traders-violation-sebi-regulations-legal-news/ makers and a few journalists were conspiring to issue prefabricated recommendations which would manipulate prices of select securities to facilitate unlawful profits at the expense of unsuspecting retail traders.
Through this investigation, several entities and individuals were barred through ex parte ad interim orders from participating in the securities market. These actions by SEBI sent strong signals about enhancing market oversight and the growing mood surrounding explorations of what is deemed latent forms of market abuse which use media appeal and asymmetric information to manipulate markets. The orders issued were not merely punitive but preventive in nature aimed at halting active perpetration of violations and safeguard the integrity of the mark. This case exemplifies SEBI's actions and how they target new types of wrongdoing in the context of technologically driven media and traded markets. As financial markets develop, the need for an advanced investigative framework that is proactive and well equipped with technology is essential.
The context of asserting Section 11C illustrates the commanding position in the governance hierarchy of the detection, inquiry, and dismantlement of mechanisms that, without such vigilance, might fundamentally undermine public confidence in Indian securities markets.
4.2. Cease and Desist Orders
Cease and desist orders form a vital part of SEBI's enforcement arsenal, acting as preemptive tools to restrain ongoing or imminent market abuse. Section 11D of the Securities and Exchange Board of India Act, 1992 empowers SEBI to issue such directives to individuals or entities suspected of engaging in activities that are detrimental to the integrity and orderly functioning of the securities market. These orders are particularly significant in situations where immediate intervention is necessary to prevent further damage before a full-fledged investigation or adjudication can be concluded. The primary aim of a cease-and-desist order is to serve as a preventive rather than punitive measure. By halting questionable activities at an early stage, SEBI not only contains the potential fallout but also preserves investor confidence and systemic stability.
These orders may be passed either Suo motu or upon receiving credible evidence of misconduct, and they often function as the first step in a broader enforcement continuum that may later include monetary penalties or criminal prosecution. Example: action against fraudulent trading practices A notable instance exemplifying SEBI's resort to this enforcement mechanism occurred in March 2021. SEBI initiated action against eight entities that were involved in fraudulent and manipulative trading in the shares of PMC Fincorp Ltd. The investigation revealed that these entities executed coordinated trades that created a misleading appearance of active trading and induced artificial price movement in the stock.
Over a sustained period, the entities allegedly placed buy orders at progressively higher prices, thereby generating an illusion of rising demand and inflating the market price without any corresponding improvement in the company's fundamentals. 26 SEBI concluded that such orchestrated trades amounted to a deliberate scheme to mislead the investing public and distort market signals. In response, SEBI imposed a cumulative monetary penalty of ₹80 lakh on the involved parties and issued cease and desist directions to halt their manipulative conduct. The regulatory action underscored SEBI's zero-tolerance stance towards market manipulation and its capacity to act decisively in defense of market integrity.
4.3. Monetary Penalties
The imposition of monetary penalties constitutes a crucial component of SEBI's enforcement framework, functioning as both a punitive and deterrent mechanism against market misconduct. Under Chapter VI-A of the Securities and Exchange Board of India Act, 1992, SEBI is vested with the authority to levy financial sanctions for a wide array of violations. Among these, Section 15HA empowers SEBI to impose substantial penalties on any person who indulges in fraudulent and unfair trade practices relating to the securities market. These practices may include front-running, price manipulation, and dissemination of false or misleading information intended to distort market behavior.
In cases where the violation is not specifically addressed under other provisions, Section 15HB provides SEBI with residual authority to penalize erring parties, ensuring that regulatory breaches do not escape consequences simply due to legislative silence. 26 SEBI pulls up entities for fraudulent trading practices: Imposes ₹80 lakh fine (SCC Times, 8 March 2021) https://www. scconline. com/blog/post/2021/03/08/fraudulent-trading-practices/ Monetary policies of SEBI are severe and not symbolic in nature. In some cases, punishments are allocated according to the level of the offence and perpetrator's profit. Penalties of up to ₹25 crores or triple the profit for specific transgressions are capped reinforcing SEBI's intention to deprive these profits and avert future transgressions through financial incentives.
These penalties are normally given with other measures such as cease and desist orders, trading rights suspension, or recovery orders for unjust profits. Case study: Penalties for Non-disclosure of shareholding A case from April in the year 2024 highlights an example of the application of these provisions.
SEBI has inflicted a penalty of ₹16 lakh on four entities for not disclosing increases in their shareholding which had surpassingly overstepped the threshold limit of 5% (as required under the Substantial Acquisition of Shares and Takeovers Regulations of 2011). Even within the context of the law, this omission of reporting changes in shareholding contravenes the law's disclosure obligations and prevents the transparency. in corporate control a key tenet in safeguarding informed investor decision-making. 27 Reportedly, SEBI noted that the parties concerned had purchased shares of the public listed companies in increments which resulted in cumulative holdings greater than five percent. However, requisite disclosures within timelines were not made, thereby violating clauses 29(1) of the SAST Regulations.
SEBI's adjudication officer noted that such lack of compliance impacts the information provided in the market and may lead to the misrepresentation of control dynamics of the firm to other investors or potential acquirers. For these reasons, it was felt that in relation to the imposition of monetary sanctions, this approach was required to not only punish the culprits but also highlight the need for greater ruling guidance focused on protective measures in relations to reporting and disclosure stipulations of the market. 4. 4. Suspension and Cancellation of Registration With a view to preserve calmness and proper behavior within the country's securities markets, SEBI has the power to suspend or cancel the registration of market intermediaries who breach the regulatory policies.
This enforcement, outlined within Section 12(3) of the Securities and 27 SEBI imposes penalties on 4 entities for non-disclosure of shareholding breaching 5% threshold (Moneylife, 23 April 2024) https://www. moneylife. in/article/sebi-imposes-penalties-on-4-entities-for-nondisclosure-ofshareholding-breaching-5-percentage-threshold/74007. html Exchange Board of India Act, 1992, serves primarily as an enforcement mechanism to limit the market only to liquidity-adequate, financially healthy, and legally compliant organizations that operate within ethical boundaries. Suspension or cancellation of registration acts as a powerful regulatory tool—preventive and corrective. It allows SEBI to swiftly isolate non-compliant actors whose continued presence in the market could endanger investor interests, erode market integrity, or undermine the fair operation of the financial system.
Unlike monetary penalties that primarily have a deterrent effect, this measure directly impacts the ability of the intermediary to participate in market activities, often leading to wider reputational and operational consequences. Example: action against Metropolitan Stock Exchange of India Ltd. A telling example of SEBI's use of this enforcement power occurred in August 2023, when the regulator imposed a penalty of ₹12 lakh on the Metropolitan Stock Exchange of India Ltd. (MSEI), along with its Managing Director and Chief Financial Officer, for breaches related to the Securities Contracts (Regulation) Rules, 1957. The infractions included significant lapses in financial reporting obligations and failure to adhere to prescribed regulatory standards governing stock exchanges.
28 While SEBI stopped short of suspending MSEI's registration in this instance, the order served as a stern warning and demonstrated the regulatory body's readiness to impose financial sanctions while holding top executives accountable. Such actions are emblematic of SEBI's evolving supervisory posture—one that prioritizes accountability at the highest levels of management and demands unwavering compliance with regulatory frameworks from every registered market participant. 4. 5. Prosecution and Imprisonment While civil and administrative enforcement mechanisms form the backbone of SEBI's regulatory framework, the authority to initiate criminal prosecution stands out as its most severe punitive instrument. Under Section 24 of the Securities and Exchange Board of India
28 SEBI fines MSEI, its MD, CFO for flouting Securities Contracts rules (Moneycontrol, 1 August
2023)https://www. moneycontrol. com/news/business/sebi-fines-msei-its-md-cfo-for-flouting-securitiescontracts-rules-11076531. html Act, 1992, SEBI is empowered to prosecute individuals or entities found guilty of willful and serious violations of securities laws. After being convicted, criminals may face imprisonment for up to ten years, and a monetary fine of twenty-five crore rupees; or both, depending on the severity of the crime. This shows SEBI's authority in moving from a breach in regulation to complete criminal proceedings at their discretion. Violations viewed as extreme in the domain of futures trading, including the manipulation of markets, insider trading schemes, or any fraudulent activity undermining economic growth that threaten the trust investors put into a nation's economy are collectively defined as insider trading.
The availability of criminal sanctions serves as a formidable deterrent, especially in instances where monetary penalties or civil actions may fall short of delivering justice or curbing deeprooted misconduct. One prominent example of SEBI's strict enforcement actions is the NSE Co-location Scam—a scandal which revealed shocking lapses within one of India's leading stock exchanges. The dispute focused on claims that certain brokers were provided with preferential access to NSE's co-location servers, which allowed them to complete trades before other market participants. This practice provided an undue speed advantage and compromised the fairness and transparency of the trading ecosystem.
Case study: NSE co-location Scam In April 2019, SEBI took decisive action against the National Stock Exchange, directing it to disgorge over ₹625 crore, along with interest, to be transferred to the Investor Protection and Education Fund. NSE was also prohibited from accessing the securities market for a period of six months. Additionally, former senior officials, including the then Managing Director and CEO, were penalized and barred from holding any position of responsibility in listed companies or market intermediaries for several years. 29 This example illustrates SEBI unmasking in detail a sophisticated technology-enabled manipulation scheme, and strengthens its resolve to protect market integrity. Additionally, the
29 NSE co-location scam (Wikipedia) https://en.wikipedia.org/wiki/NSE_co-location_scam
regulator's strong action sent an equally strong message to all market stakeholders that no institution and no executive, no matter how highly positioned, will escape examination and responsibility. 4. 6. Disgorgement of illicit Gains SEBI can order the disgorgement of ill-gotten gains obtained through unlawful activities. This tool ensures that offenders do not benefit from their misconduct and serves to compensate affected investors. Example- settlement in trading violations case In January 2025, ten entities settled a case with SEBI by agreeing to pay Rs5. 96 crore over allegations of trading violations. The entities were accused of trading based on non-public information from stock recommendations on a television channel.
As part of the settlement, they also agreed to a voluntary six month ban from trading in the securities marked, highlighting the effectiveness of disgorgement as an enforcement tool. 30
5. Effectiveness and challenges
The effectiveness of SEBI's enforcement powers is a matter of ongoing scrutiny, both in academic and policy circles. While SEBI is endowed with a robust legal framework and an array of enforcement tools, questions persist around the practical efficacy of its actions in deterring market misconduct. This selection critically assesses SEBI's enforcement outcomes, using empirical data, regulatory performance reports, and judicial feedback, to explore systemic and operational challenges. 5. 1. Measuring enforcement outcomes SEBI's enforcement statistics provide insight into its regulatory activities in the fiscal year 2022-23. SEBI completed 120 investigations and passed 320 enforcement orders under various provisions of the SEBI Act and associated regulations. Monetary penalties totaling over Rs135 30 Ten entities settle SEBI case for ₹5.
96 crore over trading violations (Business Standard, 16 January 2025)https://www. business-standard. com/markets/news/ten-entities-settle-sebi-case-for-rs-5-96-crore-overtrading-violations-125011601574_1. html crore were imposed during this period. 31 However, effectiveness cannot be gauged merely by numbers. The deterrent value of these actions depends significantly on how swiftly and conclusively they are executed. In many instances, protracted adjudication dilutes the perceived severity of penalties. Moreover, SEBI's recovery rates especially in high-profile scams remain underwhelming, further diminishing public confidence in its enforcement machinery. 32 5. 2. Procedural delays and backlogs One of the most pressing issues faced by SEBI is procedural delay. The average time taken from initiating an investigation to passing a final adjudication order can span several years.
This gap weakens the impact of the enforcement and allows violators to continue operating in the market during the pendency of proceedings. 33 The situation is exacerbated by the backlog of appeals pending before the Securities Appellate Tribunal (SAT). Despite statutory provisions allowing SEBI to act swiftly, administrative bottlenecks and lack of judicial infrastructure often prolong resolution. This delay creates a regulatory lag, which is particularly detrimental in the fast-moving landscape of financial markets. 34 5. 3. Regulatory Arbitrage and Jurisdictional Conflicts SEBI shares enforcement responsibilities with other financial regulators like the Reserve Bank of India (RBI), Insurance Regulatory and Development Authority of India (IRDAI), and Ministry of Corporate Affairs (MCA).
This fragmented regulatory ecosystem often leads to jurisdictional confusion and regulatory arbitrage, where companies manipulate overlapping frameworks to evade scrutiny. 35 For example, financial instruments such as hybrid securities or collective investment schemes sometimes fall in grey zones between SEBI and RBI or MCA, leading to enforcement delays. 31 Securities and Exchange Board of India, Annual Report 2022–23 (SEBI, 2023) https://www. sebi. gov. in/mediaand-notifications/press-releases/aug-2023/sebi-annual-report-2022-23_74992. html
32 Ibid.
T
K Viswanathan, Report of the Committee on Fair Market Conduct (SEBI,
2018) https://www.sebi.gov.in/sebi_data/attachdocs/aug-2018/1533810314407.pdf
34 Ibid
35 Ibid
There is a need for clearly demarcated regulatory boundaries or a coordinated inter-agency task force to handle such issues efficiently.
6. Role of Technology in Enforcement
The Technologies Employed by SEBI work hand in hand with advanced tech surveillance and algorithmic monitoring. As per the latest guidelines of regulatory technology, SEBI or The Securities and Exchange Board of India has dynamically changed its enforcement procedures. Capture of high-frequency trading practices are made easier with modern surveillance tools paired with big data as they improve decision making in a fraction of a second. It has now become increasingly easier to hide and perform trade manipulation due to the traditional methods of surveillance failing to keep up with modern technology. With the new world tech, SEBI directly deals with market abuse by adapting different modernized tools in their technological framework.
Through adjusting their weapons of surveillance, SEBI is now able to rapidly act on identified trades that are out of bounds or highly flag suspicious under set laws and regulations. The automated security systems put in place capture unexplainable suspicious trading activities and SEBI handles them in real time that ranges from seconds to minutes. Sophisticated computing paired with big data does not only capture the out of the norm price inflations or deflation coupled with unusual volume spikes, it does so within nanoseconds signaling towards possible manipulation in the market. With the growing complexity of the modern world, people have turned to algorithm-based solutions. With shifts comes challenges, and traditional supervision is one of the faces of those challenges. This was perfectly illustrated by the Price Waterhouse v SEBI decision on the SAT appeal.
In this matter, SEBI's order punishing the audit firm for purportedly actively participating in the Satyam fraud was quashed because there was insufficient evidence proving the firm's direct involvement in market manipulation. 36 This illustrates that there is a reasonable expectation to guard against the erosion of evidential standards as well as legal mechanisms which are fundamental to upholding legal justice.
36 Ibid
6. 1. Integrated Market Surveillance System (IMSS) and Data Warehousing Sebi uses the Integrated Market Surveillance System (IMSS) to monitor trading activities over multiple exchanges. It helps detect anomalies such as price manipulations and insider trading through the analysis of huge amounts of data. Along with IMSS, SEBI has also designed a Data Lake project focused on employing new features to improve analytics. The focus of this initiative is on the analysis of unstructured data which allows the regulator to discover patterns revealing abuse of the markets. 37 6. 2. Use of AI and machine learning Sebi introduced Artificial Intelligence (AI) and Machine Learning (ML) into their investigation process and with these technologies it assists in identification of complex trading patterns and violations by analyzing large datasets very efficiently.
SEBI officials have acknowledged the use of AI in investigations to enhance transparency and curb malpractices. 38 Furthermore, SEBI has proposed amendments to assign responsibility to regulated entities for the use of AI tools, ensuring accountability and compliance with data privacy and security standards. 39 6. 3. Future Outlook SEBI's future enforcement strategies involve deeper integration of Regulatory Technology (RegTech) and Supervisory Technology (SupTech). Plans include the adoption of blockchain for record-keeping and enhanced natural language processing for reviewing disclosures. SEBI's chairperson has emphasized the regulator's commitment to leveraging AI and technological advancements to safeguard capital markets. 40 37 SEBI, 'SEBI Annual Report 2020–21' https://economictimes. indiatimes.
com/markets/stocks/news/sebi-tospend-big-on-ai-ml-to-boost-surveillance-investigation-capability/articleshow/85058158. cms? from=mdr
38 'SEBI eyes AI, machine learning to fix market manipulation' (The Hindu, 23 January 2020)
https://www. thehindu. com/business/sebi-eyes-ai-machine-learning-to-fix-marketmanipulation/article30636862. ece 39 Cyril Amarchand Mangaldas, 'SEBI’s Proposed New Amendments on Usage of AI Tools by Regulated Entities' (India Corporate Law, 13 November 2024) https://corporate. cyrilamarchandblogs. com/2024/12/sebis-proposednew-amendments-on-usage-of-ai-tools-by-regulated-entities/ 40 'SEBI Chief highlights AI integration and tech-driven reforms in capital markets regulation' (ET LegalWorld, January 2025) https://legal. economictimes. indiatimes. com/news/regulators/sebi-chief-highlights-aiintegration-and-tech-driven-reforms-in-capital-markets-regulation/117272016 6. 4.
Challenges in Enforcement and Regulatory Gaps Despite the significant strides made by the Securities and Exchange Board of India (SEBI) in strengthening its enforcement capabilities, the regulatory body faces several challenges that hinder its ability to fully address the evolving dynamics of the financial markets. While SEBI has implemented proactive measures, including advanced technological tools and enhanced market surveillance systems, it continues to grapple with both internal and external factors that complicate its enforcement efforts. The challenges that SEBI faces are multifaceted and encompass legal, procedural, and operational issues, as well as more complex global concerns tied to market manipulation and evolving financial technologies.
This section delves deeper into these challenges, shedding light on the regulatory gaps and the hurdles SEBI must overcome to strengthen its enforcement framework.
6.5. Legal and Procedural Constraints
The provisions concerning the trading of securities often seem inadequate or outdated, as contemporary market abuse practices develop at an accelerated rate. It takes time to set up investigations, carry out detailed inquiries, and adjudicate cases which often results in procedural backlog. There is a significant gap between the identification of market abuse and the consequent action taken to eliminate it, and for most violators, this gap is just in time to avoid complete regulatory scrutiny. To illustrate, in cases that include complicated financial products or advanced market strategies, sophisticated legal interpretation may hinder evidence collection. Even with jurisdictional evidence within reach, deep legal analysis may stall, pushing SEBI's jurisdiction to enforce sanctions beyond acceptable limits.
The absence of clear stipulations governing emerging conventions of trading only makes matters worse. Furthermore, the lack of comprehensively written provisions for advanced financial instruments like digital assets and algorithms means that more perverse strategies can be devised by manipulators when strict regulations are absent. The need emerges in the form of reforms which enable rules and policies that are not pre-defined. 41 41 Rajeev Gupta, 'Why SEBI has failed to check stock market manipulations? ' (Times of India, 4 March 2023) https://timesofindia. indiatimes. com/blogs/myview/why-sebi-has-failed-to-check-stock-market-manipulations/
6.6. Resource Limitations and Expertise Deficit
As financial markets evolve, the requirements on how to regulate them evolve as well. To maintain market regulations and oversight transparency, SEBI needs to have skills in forensic accounting, data analytics, financial engineering, information technology, and IT, among other things. With all the gaps in its regulatory framework, however, SEBI has considerable difficulty in retaining and attracting professionals with these skills. The private sector which is more financially rewarding has been able to target and acquire augmentees that SEBI needs. Compounding the issue is that SEBI has to compete with private sector firms that offer much higher salaries and substantial fringe benefits. This talent drain may seriously pose a threat to SEBIs enforcement efficiency.
Without skilled advanced surveillance mechanisms, capable in devising sophisticated untangleable financial instruments, SEBIs ability to confront new dangers in the financial world will be severely weakened. This concern can be managed by devising a tailor-made strategic human resource development plan that addresses all target objectives head-on. This target objectives can be categorized into target area differences, between SEBI and the target goals. These goals can include the enhancement of monitoring, advanced manipulation, and effective sophisticated inventory analysis. For enabling SEBI to carry out emerging directional shift studies, industry compliance protocols to guide emerging capture changes are needed.
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