Introduction
Economic offenses represent a modern form of crime that was not explicitly recognized in earlier studies and legal literature. Traditionally, the term “white-collar crime” was used to distinguish non-violent, high-status occupational and professional offenses from conventional, violent crimes typically associated with lower socio-economic groups. However, with advancements in technology, evolving social perceptions, and shifting moral values, criminal methodologies have continuously adapted. This transformation led to the emergence of the term “economic offenses”, which specifically refers to financially driven crimes that impact individuals, society, national security, and the economy, with monetary gain as the primary motive.
The Report of Santhanam Committee (“Report”) categorised the socio-economic offenses for the first time in India[1]. According to the Report, the “offenses calculated to prevent or obstruct the economic development of country and endanger its economic health” is the broad definition of Socio-Economic Offenses.
Post liberalisation and with continued efforts of the government, India has become a corporate hub with easy setting up of businesses. The index which measures the easy entry and exit of a business in a country is called as ‘Ease of Doing Business’ Index. Governments all over the world strive to improve this index to invite MNCs to set up businesses in their country and contribute to its economic growth. Every company desire to get listed on the public bourses, as the capital market promises unfathomable amount to these companies to carry out its expansion programmes.
In India, Securities and Exchange Board of India (“Regulator”) regulates the Indian capital market and takes proactive steps to protect its integrity. This article will establish a strong case to categorise securities related offenses as socio economic offenses and in the later part argues the need to revamp the Regulator.
Background and Importance of Securities Market
The advent of joint stock companies in India began with the East India Company in the 1600s. Joint stock companies are business entities whose ownership is sold in the market in form of shares and every shareholder is an owner. These shares are one of the securities as defined under the Securities and Contract Regulation Act, 1956[2].
The Indian securities market has evolved over two centuries, shaped by economic events, legislative developments, and investor participation. It traces its roots to the late 18th century, with trading in East India Company loan securities[3]. By the 1830s, bank shares were actively traded, and a small group of brokers emerged in Mumbai, initially operating under a Banyan tree near the Town Hall (now Horniman Circle)[4]. The enactment of the Companies Act in 1850, which introduced limited liability, significantly boosted trading activity and paved the way for modern joint-stock companies[5].
The American Civil War (1861–1865) created a speculative bubble in Indian securities, driven by the soaring demand for cotton exports. The sudden influx of wealth led to frenzied investment, with shares commanding exorbitant premiums. However, when the war ended, prices collapsed, leaving investors with unsellable shares[6]. This crisis underscored the need for a structured securities market. Brokers, whose numbers had surged to 250 during the boom, consolidated in 1875 to form the Native Share and Stock Brokers’ Association, laying the foundation for the Bombay Stock Exchange (BSE). The expansion of industries such as textiles, jute, tea, and coal led to the establishment of regional exchanges, including the Ahmedabad Stock Exchange (1894) and the Calcutta Stock Exchange (1908)[7].
Government regulation of capital markets began in 1943 under the Defence of India Rules, which sought to channel resources for the war effort. After independence, the Capital Issues (Continuance of Control) Act, 1947, continued regulating capital raising. The Securities Contracts (Regulation) Act, 1956, was later enacted to provide oversight of stock exchanges and securities trading. These legal frameworks have played a crucial role in ensuring market stability and investor protection[8].
Despite periodic booms and busts, the securities market remains a vital pillar of economic growth, enabling capital formation and investment. Its evolution reflects the resilience of financial markets and their ability to adapt to changing economic landscapes[9].
Socio Economic Landscape and Securities Frauds
- Harshad Mehta Scam
The Harshad Mehta scam of 1992 had a far-reaching impact on India’s financial and economic landscape, exposing deep-rooted structural weaknesses in the country’s banking and capital markets. The scam revealed widespread irregularities in financial institutions, particularly the misuse of Bankers’ Receipts, which created artificial liquidity in the stock market and fueled speculative trading. As a result, when the fraudulent practices were uncovered, the stock market collapsed, leading to massive investor losses and a sharp decline in market confidence[10].
The scandal also triggered significant political and corporate fallout. Several high-profile politicians and banking executives were implicated, with Commerce Minister P. Chidambaram resigning and allegations surfacing that Prime Minister P.V. Narasimha Rao had accepted a ₹10 million bribe.Foreign banks such as ANZ Grindlays, Citibank, and Standard Chartered faced scrutiny, with senior executives being dismissed and regulatory authorities imposing penalties. In response, the Reserve Bank of India (RBI) and the government implemented reforms to strengthen oversight, leading to the empowerment of the Securities and Exchange Board of India (SEBI) as a regulatory body for capital markets[11].
Beyond the financial sector, the scam had broader economic and policy implications. The revelations of corruption and collusion between financial institutions, brokers, and political entities created a backlash against economic liberalization, slowing down the pace of reforms as opposition parties criticized deregulation policies as enablers of financial fraud. The scandal also increased awareness of financial misconduct and the need for stronger corporate governance, risk management, and internal controls in banks and financial institutions. Ultimately, while the Harshad Mehta scam led to significant financial losses and reputational damage, it also served as a wake-up call, prompting long-overdue regulatory changes aimed at improving transparency and accountability in India’s financial system[12].
- Ketan Parekh’s Securities Scam
Ketan Parekh, one of the mentees of Harshad Mehta indulged in Stock price manipulation leading to the 2001 securities scam. Parekh employed a circular trading scheme to artificially inflate the price of the scrips. Parekh used non-public information about major buy or sell orders. He matched the price and quantity of the buy orders with his own sell orders and vice versa leading to an artificial increase in trading volume of the scrips. He engaged more brokers to conduct similar transactions leading to further increase in volume and price of the scrip. Along with circular trading, Parekh was also involved in various instances of insider trading by colluding with the promoters and banking frauds. This manipulation was uncovered through a complaint by ICICI bank for loan default leading to investigation in his financial activities. Parekh was banned from Securities market for 14 years, the longest ever ban by SEBI.
The uncovering of Ketan Parekh Scam caused a major stock market crash. This stock market crash caused the retail investors to lose all their hard-earned savings. Such losses often push the retail investors to near insolvency and many a times, suicides[13].
Recently SEBI once again uncovered Ketan Parekh’s front running scam. Parekh used to obtain Non-Published Information (NPI) from Rohit Salgaocar, a Singapore based trader and timed trades of a US based fund with his network of front runners by using various illegal trading strategies. leading to artificial increase in value of the scrip. The front runners then used to square off profits at any point of time during the day and earned large amounts of unjust profits. These abnormal levels of trading attracted the keen eyes of SEBI. SEBI analysed the trading data, WhatsApp messages as well as call records of Ketan Parekh which led to uncovering of the whole scam[14].
The Need for Categorisation
As outlined earlier in this article that securities related offenses share likes of socio economic offenses, but the need to recognise them as such is urgent. At present, the SEBI related offenses are glamorised and do not attract public attraction as other socio-economic offenses. Narcotics related offenses bring bad name to the offender which creates a stir in the society, the sheer idea of public shaming acts as a deterrent. Recognising securities related offenses would bring these offenses at par with other socio economic offenses.
While there is a need to recognise these offenses as SEOs, it must be kept in mind that the adjudication process remains as it is. This is because SEBI is specialised in understanding the patterns which a common person cannot figure out. But there is a need to reform SEBI’s adjudication process while ensuring that securities-related offenses are recognized as socio-economic offenses. The Supreme Court’s decision in Vishal Tiwary v. Union of India underscored the significance of maintaining specialized expertise in adjudicating securities violations, while also emphasizing the broader economic impact of such offenses. By categorizing securities fraud as a socio-economic offense, it acknowledges the systemic risk posed to financial markets, investor confidence, and economic stability.
Conclusion
Recognizing securities fraud as a socio-economic offense is crucial for upholding financial integrity and economic stability. Unlike conventional white-collar crimes, securities-related offenses have a direct and far-reaching impact on the entire economy, affecting investors, financial institutions, and market confidence. Elevating these crimes to the status of socio-economic offenses would not only enhance deterrence but also promote stringent regulatory scrutiny and public accountability. While SEBI plays an essential role in market regulation, its adjudicatory function must be restructured to include specialized expertise and stronger mechanisms to detect and penalize financial misconduct effectively. The implementation of a dedicated tribunal system, as emphasized in Vishal Tiwary v. Union of India, could be a pivotal step in reinforcing the credibility and effectiveness of securities law enforcement.
[1] Report of Santhanam Committee, pg 53-54, para 7.3.
[2] Section 2(h), Securities Contracts (Regulation) Act, 1956, No. 42 of 1956, India Code (1993), available at https://www.indiacode.nic.in/bitstream/123456789/1721/1/A1956-42.pdf.
[3] S.S. Tarapore, Indian Securities Market: A Historical Perspective, 37 ECON. & POL. WKLY. 2324 (2002).
[4] Editor, “From Banyan Tree to BSE,” Mumbai Mirror (Aug. 31, 2012), https://mumbaimirror.indiatimes.com/from-banyan-tree-to-bse/articleshow/15996087.cms.
[5] Companies Act, No. 1 of 1850 (India).
[6] G.N. Bajpai, A Historical Perspective of the Securities Market Reforms, Securities and Exchange Board of India (SEBI) (Mar. 12, 2004), https://www.sebi.gov.in/media/speeches/mar-2004/a-historical-perspective-of-the-securities-market-reforms_2882.html.
[7] Id
[8] Id
[9] Shaktikanta Das, Evolution of the Financial System in India: Charting the Future, Bank for International Settlements (BIS) Review (Apr. 9, 2024), https://www.bis.org/review/r240409a.pdf.
[10] Sucheta Dalal & Debashis Basu, The Scam: Who Won, Who Lost, Who Got Away (1993).
[11] Id
[12] Id
[13] Securities and Exchange Board of India, Final Order in the Matter of Front Running of Orders of Quest Investment Advisors Private Limited by Ketan Bhupendra Parekh and Bhupendra Jasvantrai Parekh (Feb. 10, 2023), https://www.sebi.gov.in/enforcement/orders/feb-2023/final-order-in-the-matter-of-front-running-of-orders-of-quest-investment-advisors-private-limited-by-ketan-bhupendra-parekh-and-bhupendra-jasvantrai-parekh_67984.html.
[14] Id.