2026 INSC 585 REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. _4015 OF 2020

RELIANCE INDUSTRIES LIMITED & ORS. ...APPELLANT(S)

Versus

THE SECURITIES AND EXCHANGE

BOARD OF INDIA ...RESPONDENT

WITH

CIVIL APPEAL NO. OF 2026

(@ DIARY NO. 4723 OF 2024)

J U D G M E N T

Civil Appeal No. 4015 of 2020 Page 1 of 135

J.B. PARDIWALA, J.

For the convenience of exposition, this judgment is divided into the following

parts:

INDEX

A. FACTUAL MATRIX ............................................................................. 3

B. DECISION OF THE SAT .................................................................... 10

C. SUBMISSIONS BY THE PARTIES ................................................... 22

D. ISSUES FOR DETERMINATION ..................................................... 75

E. ANALYSIS ............................................................................................ 76

i. Relevant provisions of law ............................................................. 76

ii. Agency agreements between the appellant no. 1 and

12 entities ......................................................................................... 82

iii. Cornering of the positions in RPL November 2007 futures

segment by the appellant no. 1 ...................................................... 89

iv. “Fraud” under the PFUTP Regulations ....................................... 94

v. Whether valid hedges in the futures segment constitute

manipulative cornering in the present case? ............................. 113

vi. Sale of 1.95 crore RPL shares in the cash segment during the last

10 minutes on 29.11.2007 ............................................................. 120

F. DETERMINATION OF THE ISSUES ............................................ 126

G. CONCLUSION ................................................................................... 134

Civil Appeal No. 4015 of 2020 Page 2 of 135

1. Since the issues raised in both the captioned appeals are the same, those were

taken up for hearing analogously and are being disposed of by this common

judgment and order.

2. The two statutory appeals arise from the judgment and order dated

05.11.2020 and 04.12.2023 respectively passed by the Securities Appellate

Tribunal, Mumbai (“SAT”). For the purposes of this exposition, we shall

consider the facts in the Civil Appeal No. 4015 of 2020, which arises from

the order of the SAT dated 05.11.2020, wherein by a 2:1 majority, the

Tribunal dismissed the appeal filed by the appellant no. 1 herein against the

order of the Whole Time Member (“WTM”) of the Securities and Exchange

Board of India (“SEBI”), essentially on the ground that the appellant no. 1

made an illegal and undue gain of Rs. 447.27 crore while trading in the

shares of Reliance Petroleum Ltd. (“RPL”) by manipulating the prices

thereof to profit in the futures segment, in violation of the Securities

Contracts (Regulation) Act, 1956 (the “SCRA”) and the Securities and

Exchange Board of India (Prohibition of Fraudulent and Unfair Trade

Practices relating to Securities Market), 2003 (the “PFUTP Regulations”)

respectively.

Civil Appeal No. 4015 of 2020 Page 3 of 135

A. FACTUAL MATRIX

3. It is an undisputed fact that the RPL was a 75% subsidiary of the appellant

no. 1 herein in 2007. The initial public offering of the shares of RPL in May

2006 was at Rs. 60 per share.

4. The appellant no. 1 in a board meeting held on 29.03.2007 passed a

resolution authorizing two of its officials to take steps to raise Rs. 87,000

crore for its projects through various means, including divestment/sale of

investments. This meant that the RPL shares in which the appellant no. 1

held a 75% stake could also be divested in furtherance of the said board

resolution.

5. Accordingly, it was decided that 5% of the appellant no. 1’s holdings in the

RPL would be divested, i.e., a quantum of 22.50 crore shares was sought to

be sold in the market. This decision was taken in context of the history of

the price of the RPL shares which has been described thus:

Month and Year Price of RPL shares

(per share)

May 2006

(Initial Public Offer Price)

Rs. 60

March 2007 Rs. 66-74

September 2007 Rs. 150

October 2007

29.10.2007

30.10.2007

31.10.2007

Rs. 223

Rs. 238

Rs. 247.90

Civil Appeal No. 4015 of 2020 Page 4 of 135

Therefore, within a span of seventeen months since its issue, the price of the

RPL shares had quadrupled.

6. This exceedingly bullish trend was studied by several analysts including

Goldman Sachs, Morgan Stanley and Kotak Institutional Equities, who

reported that the RPL stock was amongst the costliest refining stocks in the

world. The price of the shares was overpriced and difficult to justify. Such

reports caused an impression that there may be a price correction in the stock

of RPL and it would consequently decrease in value.

7. It is in these circumstances as referred to above that the decision to divest

5% of the appellant’s holding in RPL was taken i.e, 22.50 crore shares held

by the appellant no. 1. However, notably, the board resolution dated

29.03.2007 was not passed specifically in respect of the intended sale of the

RPL shares in the cash segment or for hedging in the derivatives market.

The board resolution accorded broad powers to two officials of the appellant

no. 1 to take steps as necessary to raise Rs. 87,000 crore.

8. It was noted by the appellant no. 1 that the liquidity in the November 2007

futures segment of the RPL stock during 24.10.2007 and 31.10.2007

respectively was very high. The traded quantity in the said segment was

109.90 crore shares as against only 29.46 crore shares in the cash segment,

Civil Appeal No. 4015 of 2020 Page 5 of 135

i.e., nearly four times higher. Therefore, it was decided that RIL would take

up sale positions in the futures segment (“short futures positions”) while

placing sell orders of the RPL shares in the cash segment.

9. In doing so, the appellant no. 1 entered into agreements with twelve (12)

independent entities so as to take up sale positions of 9.92 crore RPL shares

in the November 2007 futures segment for the said stock between

01.11.2007 and 06.11.2007, on a one-month basis. The settlement period for

the November 2007 futures was till 29.11.2007. As per the terms of these

agreements, all the profits were to be transferred to the appellant no. 1 while

these entities only earned commission. The agreements inter alia provided

the following:

a) Clause 1.2 provided that the sale of investments was supposed to be

undertaken by the agents only in accordance with the instructions of the

principal, that is the appellant no. 1 herein.

b) Clause 3.2 provided that all profits and losses arising out of the

transactions of the agent in terms of the agreement shall be to the account

of the appellant no. 1.

10. Out of the 9.92 crore short futures positions, the appellant no. 1 squared off

1.95 crore positions before the settlement date (29.11.2007) by taking ‘buy’

positions (“long future positions”) for an equal number of shares.

Civil Appeal No. 4015 of 2020 Page 6 of 135

Therefore, there remained only 7.97 crore outstanding short futures

positions as on the settlement date and the same were automatically closed

by the National Stock Exchange (“NSE”) at the ‘settlement price’. The

settlement price is the last half an hour weighted average price of the RPL

share in the cash segment on the settlement date, i.e, 29.11.2007.

11. Meanwhile, a total of 20.29 crore shares of RPL were sold in the cash

segment at the prevailing market price in a phased manner over the course

of the month of November 2007. These sales were followed by physical

delivery of the RPL shares to the purchasers. Out of the total shares sold in

the cash segment, 1.95 crore shares were sold in the last 8 minutes 20

seconds on 29.11.2007 on the NSE.

12. Therefore, the appellant no. 1 realized an aggregate of Rs. 5,013 crore from

the sale of the RPL shares in the cash segment as well as the settlement of

the short positions in the futures segment. The appellant no. 1 realized Rs.

4,500 crore from sales in the cash segment and Rs. 513 crore from the trades

made by the twelve independent entities in the November 2007 futures

segment. Rs. 513 crore was the gain between the price at which the 9.92

crore short futures positions were taken and the price at which these

positions were squared off (1.95 crore shares) and closed out by the NSE

(7.97 crore shares) respectively.

Civil Appeal No. 4015 of 2020 Page 7 of 135

13. A show cause notice came to be issued to the appellant no. 1 by the

respondent on 29.04.2009, which was modified by the corrigendum dated

08.10.2009. Both these notices were later superseded by the fresh show

cause notice issued by the respondent on 16.12.2010 (“SCN”). The

allegations under the said SCN are recorded and summarized by the minority

judgment of the SAT and reads thus:

“14. The allegations in the Show Cause Notice are

summarized as under:-

(a) RIL took massive short positions through the 12 named

entities in November 2007 RPL Futures, in breach of the

position limits prescribed in circulars issued by SEBI, NSE

and National Securities Clearing Corporation Limited

(NSCCL) with the knowledge of the impending sales in the

cash market. This was a well-planned, fraudulent,

manipulative trading scheme and unfair trade practice

violating PFUTP Regulations .

(b) RIL' s trades in the F&O segments are illegal and

invalid under Section 18A of the Securities Contracts

(Regulations) Act, 1956 (SCRA), which provides

conditions for contracts in derivative to be legal and valid.

(c) RIL depressed the settlement price of futures by

dumping large number of shares in the last 10 minutes of

trading in the cash segment on November 29, 2007 and

thereby earned an unjust profit of Rs 513.12 Cr.

(d) The futures transactions carried out by the 12 Named

Entities are benami transactions and thus illegal and

void.”

Civil Appeal No. 4015 of 2020 Page 8 of 135

14. Subsequently, after perusing the materials submitted by the appellant no. 1

in compliance of the SCN, the Whole Time Member (“WTM”) held that

action under the PFUTP regulations was made out against the appellant no.

1 due to the following reasons:

a) The appellant no. 1 by employing twelve agents to take separate position

limits of open interest on its behalf by executing separate agreements

with the said entities, cornered 93.63% of the open interest in November

Futures of the RPL stock. It was held that by entering into principal-agent

relationship with the 12 entities to violate position limits, the appellant

no. 1 had acted in a fraudulent manner.

b) The appellant no. 1 manipulated the Futures & Options segment through

12 of its agents by allowing them to hold the futures contracts till the

settlement date. It was held that the appellant no. 1, by letting the futures

positions settle on 29.11.2007 at the weighted average price, engaged in

a pre-planned fraudulent practice and the same cannot be held to be mere

breach of position limits by the appellants herein.

c) An analysis of the trading strategy adopted by the appellant no. 1 in the

cash segment during the month of November 2007 and specifically on

29.11.2007 which was the settlement date for the contracts in question,

showed that there had been manipulation of the settlement price that was

Civil Appeal No. 4015 of 2020 Page 9 of 135

decided on the basis of the weighted average price of the trades done in

the last half an hour on the said day.

d) It was held that the actions of the appellants herein constituted a violation

of the provisions under Section 12A of the Securities and Exchange

Board of India Act, 1992 (“SEBI Act”) read with Regulations 3, 4(1) and

4(2)(e) of the PFUTP Regulations. It was held that the appellants had also

violated the provisions of the SEBI circular No. SMDRP/DC/CIR-10/01

dated 02.11.2001 (“2001 SEBI Circular”) and the NSE circular No.

NSE/CMPT/2982 dated 07.11.2001 (“2001 NSE Circular dated”).

e) On the basis of the aforesaid reasoning, it was held that the appellant had

made unlawful gains of Rs. 513 crore in the futures segment, by

fraudulent and manipulative means. Therefore, the trade of 7.97 short

futures of the RPL stock was held to be invalid under Section 18A of the

Securities Contracts (Regulations) Act, 1956 (“SCRA”).

15. Aggrieved with the order of the WTM, the appellant filed an appeal before

the SAT challenging the observations therein. The decision of the SAT came

to be delivered on 05.11.2020 with a majority of 2:1. The majority opinion

therein is impugned before us, hence, the present two statutory appeals.

Civil Appeal No. 4015 of 2020 Page 10 of 135

B. DECISION OF THE SAT

16. The perusal of the order delivered by the SAT indicates that the members

addressed themselves on the following broad questions:

• Whether the twelve entities were independent traders or agents/front

entities of the appellant no. 1 in which case the client-wise position limits

under the SEBI Circular dated 02.11.2001 would be attracted?

• Whether the agency agreements between the appellant no. 1 and the

twelve entities constituted a fraudulent and manipulative device to

circumvent the regulatory framework governing the derivatives

segment?

• Whether the transactions of the appellants in the futures segment

constituted valid hedge transactions?

• Whether the appellant no. 1 had attempted to amass illegal profits in the

futures segment by depressing the price of the underlying RPL stock

through the dump of 1.95 shares in the cash segment in the last 10

minutes of the futures settlement date – 29.11.2007?

• Whether there was any element of fraud and manipulation in the

transactions in question such that penalties under Regulation 3 (b) of the

PFUTP Regulations would attracted?

Civil Appeal No. 4015 of 2020 Page 11 of 135

• Whether the SAT, in exercise of its appellate jurisdiction, had the power

to modify, substitute, supplement, or provide additional reasons in place

of those recorded by the WTM?

17. As regards the issue whether the twelve entities were independent entities or

agents of the appellant no. 1, the following was observed:

Majority opinion: Minority opinion

a) The majority observed that the

appellant no. 1’s argument that

the SEBI Circular dated

02.11.2001 did not prohibit

positions taken in ‘aggregation’

or by ‘acting in concert’ unlike

the 1999 Circular of the SEBI for

Index futures, was a simplistic

and patently erroneous

submission. It was held that

position limits could not be

circumvented by splitting trades

amongst multiple entities acting

for a single beneficiary as that

would have the effect of grossly

undermining the regulatory tool

of position limits and defeating

a) The minority, after having

perused the agreements entered

into between the appellant no. 1

and the other appellants,

observed that the twelve entities

were acting on behalf of the

appellant no. 1 as all transactions

needed the prior approval of the

principal and the twelve

companies had no independent

discretion. Further, the profits

and losses accruing on account

of the transactions in the futures

segment were supposed to be

transferred to the appellant no. 1

and the twelve entities would get

a fixed commission.

Civil Appeal No. 4015 of 2020 Page 12 of 135

the objective of the SEBI

circulars in this regard.

b) It was further held that reliance

placed upon the 1999 SEBI

Circular was misplaced after the

2001 SEBI Circular came into

operation with a well-defined

client-level position limit for

single-stock futures. Since the

disputed transactions were

executed in 2007, they were

governed by the SEBI Circular

2001 and NSE Circular 2001,

therefore the appellants could not

invoke provisions relating to the

1999 SEBI Circular.

c) Therefore, it was held that the

trades done by the twelve entities

were on behalf of the appellant

no. 1 and accordingly, the

appellant no. 1 was liable for any

illegality committed in the said

transactions.

b) It was held that Section 226 of

the Indian Contract Act, 1872,

squarely applied to the set of

facts in question meaning

thereby that the acts of the

twelve entities had such legal

effect as if done by the principal

(appellant no. 1 ) itself.

c) It was observed that the 12

entities individually, had taken

valid positions within the

restricted position limits as

provided in the 2001 SEBI

Circular. Further, the said

Circular placed no onus on the

clients/customers to disclose

whether they were acting in

concert with other

clients/customers. However, the

principal-agent relationship

between the appellant no. 1 and

the twelve entities allowed the

appellant no. 1 to exploit a

loophole in the 2001 SEBI

Circular. It was held that since

the appellant no. 1 could not

have crossed the position limits

Civil Appeal No. 4015 of 2020 Page 13 of 135

in its individual capacity, it

could not cross the same through

its agents as well. In holding so,

the minority opinion emphasized

the principle that “what could

not be done directly, could not be

done indirectly”. Therefore, the

aggregation of the position limits

taken by all twelve entities on

behalf of the appellant no. 1

violated the 2001 SEBI Circular.

18. As regards the issue whether the agency agreements between the appellant

no. 1 and the twelve entities, to take aggregate positions in excess of the

position limits was a fraudulent and manipulative device, the following was

observed:

Majority opinion: Minority opinion

a) The majority opinion held that

the agency agreements between

the appellant no. 1 and the twelve

entities were a pre-planned

strategy to evade the position

limits stipulated for a

client/customer in the 2001 SEBI

Circular. It was found that the

a) Though the minority opinion

held that employing twelve

agents to circumvent individual

position limits was a violation of

the 2001 SEBI Circular, yet the

same could not be said to be a

Civil Appeal No. 4015 of 2020 Page 14 of 135

twelve entities acted solely as

agents of the appellant no. 1.

b) It was held that with the help of

the twelve entities, the appellant

no. 1 managed to capture a

significant share in the futures

segment with a view to evade the

detection by the stock exchange

surveillance system.

c) It was held that the appellant no.

1 by employing twelve agents,

had attempted to corner the

market by gaining a large share

of the open interests in the

November 2007 futures. Such a

cornering of the market is a fraud

on the system and the market as a

whole thereby impacting all the

participants in the RPL counters

and would spill on to the rest of

the markets.

d) In such view of the matter, it was

held that the agency agreements

amounted to a fictitious and

fraudulent scheme to manipulate

the market as per the provisions

fraudulent or manipulative

device.

b) It was opined that the breach of

the position limits could, at best,

attract penalties under Section

9(3) of the SCRA.

c) It was observed that there was no

onus on the appellant no. 1 to

disclose the agreements with the

twelve agents in the 2001 SEBI

Circular. Once the disclosure

was required by way of the SCN,

the appellant no. 1 promptly did

so and the discovery of the

agency agreements was not a

result of SEBI’s independent

investigation.

d) Though the object of position

limits was to prevent

concentration of positions that

would enable the holder thereof

to manipulate the market yet, it

could not be said that

concentration by itself would

automatically amount to fraud. It

was held that a separate act of

Civil Appeal No. 4015 of 2020 Page 15 of 135

under Section 12A of the SEBI

Act and Regulations 3 and 4 of

the PFUTP Regulations.

manipulation was required to be

cogently proved.

e) Therefore, even if the open

positions of all twelve entities

aggregated breached the position

limits as provided in the 2001

SEBI circular, the same would

not by itself could not attract the

PFUTP Regulations.

19. As regards the issue whether the transactions in the futures segment

constituted genuine hedge transactions, the following was observed:

Majority opinion: Minority opinion

a) While addressing the submission

of the appellant no. 1 that the

open positions held in the futures

segment were to hedge the risk

exposure of the appellant no. 1 in

the cash segment, the majority

opinion observed that

manipulation cannot be disguised

under the cover of hedging.

Though hedging was a valid

instrument for mitigating risk,

yet it was susceptible to abuse

a) The minority opinion rejected

the respondent’s reliance on the

Gujarat High Court’s decision in

Pankaj Oil Mills v. CIT,

reported in 1976 SCC OnLine

Guj 33. It was held therein that

in a genuine and valid hedging

contracts of sales, the total of

such transactions should not

exceed the total stocks of the

underlying commodity exposed

to risk. In the present case, the

Civil Appeal No. 4015 of 2020 Page 16 of 135

and was therefore, supposed to be

done within regulatory

parameters.

b) It was observed that the appellant

no. 1 had cornered 61% to 93%

of the market-wide open interest

in the November 2007 RPL

futures which was too high to

reasonable justify a genuine

hedging strategy for the proposed

sale of the 22.5 crore RPL shares

in cash segment.

c) It was held that once the

appellant no. 1 had already sold

almost 18 crore shares in the cash

segment by 23.11.2007, there

was no requirement to leave all

the remaining future positions

open. Therefore, the appellant

intentionally kept its futures

positions much larger than the

number of shares left to be sold in

the cash segment thereby,

deliberately creating a “naked

hedge”.

minority opined that reliance

upon the aforesaid decision was

misplaced because the hedge

positions of 9.92 crore shares

was taken to mitigate the risk

exposure of 22.5 crore shares in

the cash segment, which meets

the requirement set out in

Pankaj Oil Mills (supra).

b) It was observed that the

appellant no. 1 was going to be

placing sell orders for 22.5 crore

RPL shares in the cash segment

which may cause a substantial

price decline even in a phased

manner. Hence, mitigating this

risk by entering into 9.92 futures

positions qualifies as a valid

hedge transaction.

c) Further, if physical delivery of

shares was allowed at the time

when the appellant no. 1 took

positions in the futures segment

i.e, November 2007, there would

be no question of an invalid

hedge. The argument that there

Civil Appeal No. 4015 of 2020 Page 17 of 135

d) The appellant no. 1, by retaining

the ‘naked hedge’ of 7.97 crore

positions in RPL futures till their

expiry on 29.11.2007, sought to

benefit from the difference

between the locked-in price and

the final settlement price. This

clearly showed the intention of

the appellant no. 1 to manipulate

the market.

e) Therefore, it was held that the

transactions done in the futures

segment did not amount to a valid

hedge but rather constituted

fraudulent and manipulative

practices under Section 12A of

the SEBI Act and Regulations 3

and 4 of the PFUTP Regulations.

f) The majority opinion

accordingly directed for the

disgorgement of the profits

earned by the appellant no. 1 in

the futures segment.

was an imperfect hedge which

caused suspicions of fraud arose

because of the cash settlement

system prevailing at the time by

way of which the appellant no. 1

could have booked profits

without parting with the

underlying stocks.

d) The appellants’ positions in the

futures segment were imperfect

hedges but that would not mean

that such transactions would be

invalidated on the said count.

This is because a perfect hedge is

possible in the system where

physical delivery of shares is

allowed. Therefore, there was no

requirement to match the closing

of open interest with the sale of

shares in the cash segment.

e) It was further held that the lack

of hedging policy, specific board

resolutions in respect of hedging

or accounting standards, would

not have the effect of nullifying

the transactions because no such

Civil Appeal No. 4015 of 2020 Page 18 of 135

legal requirement existed in

2007. Such policies came into

existence only in 2016.

20. As regards the issue whether the appellant no. 1 had attempted to depress

the price of the RPL share by dumping 1.95 crore shares in the cash segment

in the last 10 minutes of futures settlement date, the following was observed:

Majority opinion: Minority opinion

a) The majority rejected the

submission canvassed by the

appellants that they entered the

market in the last 10 minutes only

to mobilize more funds and

sought to sell the RPL shares at a

reasonably high price in the cash

segment.

b) It was observed that the appellant

no. 1 had not sold any shares in

the cash segment after

23.11.2007 till the last 10

minutes on 29.11.2007 which

was the settlement date of the

7.97 crore open positions in the

futures segment. It was noted that

a) The minority opinion observed

that the respondent’s assertion

that huge amount of shares were

dumped in the last 10 minutes of

the settlement date with the

motive of amassing illegal

profits in the futures segment,

was not supported by cogent

evidence and was based on

surmises and conjectures.

b) It was held that intentions,

motives and suspicions could not

be the basis to attribute

fraudulent character to a

transaction. It was necessary to

establish the manipulation of the

Civil Appeal No. 4015 of 2020 Page 19 of 135

such offloading was done so as to

depress the price of the

underlying RPL stock so as to

ensure greater profits in the

futures market where the

appellant no. 1 had significant

holdings.

c) The majority reasoned that the

appellant no. 1 sought to depress

the price of the RPL shares in the

last 10 minutes as twelve out of

seventeen sell orders were placed

below the Last Traded Price

(“LTP”) and that no rational

investor would be willing to sell

crore of shares much below the

LTP in the absence of an

intention to decrease the share

price of the stock in question.

share price and the burden to

prove so lies on the respondent,

which failed to discharge the

same.

c) It was further held that there was

no law, regulation or circular

that barred a trader from dealing

in securities in the last 10

minutes of a trading day,

including the settlement date of

such trader’s futures holdings.

21. As regards the issue whether there was any element of fraud and

manipulation in the transactions in question which would attract Section

12A of the SEBI Act and the PFUTP Regulations, the following was

observed:

Civil Appeal No. 4015 of 2020 Page 20 of 135

Majority opinion: Minority opinion

a) The majority opined that Section

18A of the SCRA was introduced

to confer validity on such

derivatives transactions that

would otherwise be considered to

be wagering contracts. However,

such validity was provided only

when the rules of exchange

trading and clearing house

settlement were followed. It was

inferred from this that any trades

that did not follow the

stipulations of the stock

exchanges or the provisions of

the SCRA, SEBI Act and the

rules and regulations thereunder,

would be vitiated by illegality

and fraud.

b) It was observed that treating the

conduct of the appellant no. 1 as

merely a violation of the 2001

NSE Circular or 2001 SEBI

Circular would result in adverse

impact on the derivatives market

a) On the other hand, the minority

judgment opined that the

respondent authority had failed

to establish an element of fraud

and a higher degree of proof is

required than the one relied upon

by the WTM.

b) Reference to this Court’s

decision in SEBI v. Kanhaiya

Lal Baldevbhai Patel, reported

in (2017) 15 SCC 1 was made to

hold that fraud under the PFUTP

Regulations can be established

only when the impugned conduct

induces others to deal in the

securities market. It was noted

that neither manipulation nor

inducement was cogently

established in the WTM’s order,

hence, the allegation of fraud

could not be sustained merely on

the basis of motive.

c) It was observed that in the

absence of the essential element

of inducement in terms of

Civil Appeal No. 4015 of 2020 Page 21 of 135

and the securities market in

general.

c) It was observed that the

intentional principal-agent

agreements entered into by the

appellant no. 1 was a pre-planned

scheme to control a substantial

portion of the market to distort

trading conditions which induced

other participants to deal with a

vitiated market.

d) Accordingly, it was held that the

conduct of the appellant no. 1

attracted penalties under Section

12A of the SEBI Act and

Regulations 3 and 4 of the

PFUTP Regulations. Therefore,

the order of disgorgement of the

profits gained in the futures

segment was sustained and

upheld.

Regulation 4(2)(d) of the PFUTP

Regulations, the allegations of

fraud would fail to stand even if

there were large sell orders at

prices below the LTP in the last

10 minutes of the settlement

date.

d) With inducement being the sine

qua non of any allegation of

fraud under the PFUTP

Regulations, any absence of the

same means that the transactions

in question were valid hedges.

e) It was further reiterated that even

though there was a breach of

position limits by the appellant

no. 1 through the use of indirect

means, such breach by itself

could not constitute fraudulent

misrepresentation under

Regulation 3(b) of the PFUTP

Regulations.

f) Therefore, the order of

disgorgement of the profits

Civil Appeal No. 4015 of 2020 Page 22 of 135

gained in the futures segment

was liable to be set aside.

C. SUBMISSIONS BY THE PARTIES

a. Submissions on behalf of the appellant no. 1

22. Mr. Harish Salve, the learned senior counsel appearing on behalf of the

appellants, submitted that the trades by the 12 entities in the November 2007

RPL Futures were bona fide hedges and not some pre-planned fraudulent

scheme to make unlawful and illegal gains.

23. He submitted that although the appellant no. 1 was aware of its proposal to

sell 22.50 crore shares in the cash segment, such knowledge could at best

create an expectation that the price of RPL shares might decline; it did not

establish with certainty that the prices would fall when large quantities of

shares are sold. This, he submitted, was demonstrated by the fact that

although analysts consistently reported for over two months that the RPL

shares were overpriced, their price continued to rise against expectations.

24. He further submitted that a charge of fraud could be leveled only if the

respondent could prove that the appellant no. 1 had a deliberate and pre-

arranged strategy to depress the price of RPL shares by activities such as

engaging in circular trades in connivance with one or more parties with the

Civil Appeal No. 4015 of 2020 Page 23 of 135

intention of creating a false market by undertaking artificial trades, and

inducing investors to buy or sell RPL shares in order to make unlawful gains.

According to the learned senior counsel, none of the ingredients set out in

the definition of ‘fraud’ as per Regulation 2(1)(c) of the PFUTP Regulations

were present in the appellant no. 1’s trades in the cash segment or in the

trades of the 12 entities in the November 2007 RPL Futures, for those to be

called ‘fraud’ ab-initio.

25. He further contended that there was not even a whisper of an allegation that

the appellant no. 1 was responsible for the fall in the price of RPL shares in

either the cash segment or the November 2007 RPL Futures between

06.11.2007 and 29.11.2007, except the allegation relating to the last 8

minutes and 20 seconds of trading on 29.11.2007 involving the sale of 1.95

crore shares, which was stated to have been demonstrated by the appellant

no. 1 to be baseless.

26. Accordingly, on the strength of the abovementioned arguments, the learned

senior counsel submitted that the allegations of fraud and manipulation

cannot stand and that SEBI’s case is devoid of any factual or legal basis and

fails at the threshold.

Civil Appeal No. 4015 of 2020 Page 24 of 135

27. As regards the issue of hedging, Mr. Salve further submitted that the trades

by the 12 entities in the November 2007 RPL Futures were bona fide hedges

and that such hedge positions are valid in law.

28. Mr. Salve submitted that the appellant no. 1 had proposed to sell and deliver

22.50 crore RPL shares in the cash segment. While the appellant no. 1

expected that such sale might lead to a fall in the price of RPL shares, it was

aware that this was only a possibility and not a certainty. In this background,

the appellant no. 1 decided to hedge the underlying exposure arising from

the proposed sale of 22.50 crore RPL shares and the attendant risk of adverse

price movement. This decision was taken considering reports of analysts

which indicated that the RPL share was overvalued. According to the

learned senior counsel, a hedge is intended to mitigate the risk of price

movement, whether upward or downward, and is not undertaken with a view

to gain profit.

29. To demonstrate what is a hedge and why the futures market is introduced,

the attention of this Court was drawn to the L. C. Gupta Committee Report,

the relevant parts of which are reproduced hereinbelow:

“The test of whether a futures transaction is for hedging

or for speculation hinges on whether there already exists

a related commercial position which is exposed to risk of

loss due to price movement.

Civil Appeal No. 4015 of 2020 Page 25 of 135

[***]

The Committee strongly favours the introduction of

financial derivatives in order to provide the facility for

hedging in the most cost efficient way against market risk.

This is an important economic purpose. At the same time,

it recognizes that in order to make hedging possible, the

market should also have speculators who are prepared to

be counter parties to the hedgers. A derivative market only

or mostly consisting of speculators is unlikely to be a

sound economic institution. A soundly based derivatives

market requires the presence of both hedgers and

speculators.

[***]

Hedging will not be possible if there are no speculators.”

30. In this abovementioned context, the learned senior counsel submitted that

the futures market was introduced to create a mechanism for hedging, and

that speculation is an inherent and necessary part of the derivatives market.

31. He further argued that the fact that the 12 entities took sale positions in

respect of only 9.92 crore RPL shares as against the proposed sale of 22.50

crore shares, i.e., approximately 50 per cent of the underlying exposure,

demonstrates that the positions were bona fide hedges and not speculative

trades undertaken to profiteer. These positions were taken through 12

entities since the position limits as per the 2001 SEBI Circular did not apply

cumulatively to ‘persons acting in concert’ (“PAC”).

Civil Appeal No. 4015 of 2020 Page 26 of 135

32. Mr. Salve argued that the 12 entities took sale positions in respect of 9.92

crore RPL shares at an average price of Rs. 265.67 per share, representing

approximately 50 per cent of the proposed sale of 22.50 crore shares. Since

the appellant no. 1 was uncertain about the future movement in the price of

RPL shares and apprehended the risk of a decline, these positions were taken

as bona fide hedges. If the price rose, losses in the futures segment would be

offset by higher realisation in the cash segment; if the price fell, gains in the

futures segment would compensate for lower realisation in the cash segment.

It was therefore submitted that the cash and futures transactions were

integrated trades, and that SEBI erred in examining the futures trades in

isolation.

33. It is submitted that the following facts were raised before the SAT but were

entirely ignored by the majority.

I. the appellant no. 1 never sold RPL shares below ₹208 in the cash

segment.

II. After 26.11.2007, the RPL share price consistently remained

below ₹208, except for occasional spurts.

III. the appellant no. 1’s last sale was on 23.11.2007 at ₹209.62 per

share (since 24.11.2007 & 25.11.2007 was a weekend).

IV. Between 26.11.2007 and 28.11.2007, the price remained below

₹208.

Civil Appeal No. 4015 of 2020 Page 27 of 135

V. On 29.11.2007, the price stayed below ₹200 throughout the day,

before suddenly rising at 3:00 p.m., reaching ₹224.70 at 3:21:40.

34. It was submitted that there was no allegation of any price manipulation by

the appellant no. 1 in the cash market between 06.11.2007 and 29.11.2007,

except in relation to the sale of 1.95 crore shares during the last 8 minutes

and 20 seconds of trading on 29.11.2007.

35. It was further submitted that, at the relevant time, physical delivery was not

permitted in the F&O segment and all trades had to be compulsorily cash-

settled. According to the learned senior counsel, had physical delivery been

permitted in November 2007, the 12 entities would have delivered the shares

against the sale positions and realised the average price of Rs. 265.67 per

share on the 9.92 core sale positions, leaving no question of any undue or

illegal gains.

36. The bona fides of the hedge, it was submitted, are further evident from the

fact that the sale positions (except for the subject 1.95 crores) were taken at

the beginning of the settlement period on 01.11.2007 and 06.11.2007, were

substantially held throughout the period despite opportunities for larger

profits. Ultimately, the positions were closed at the end of the settlement

period, through cash settlement, which was the only permissible mode of

settlement at the relevant time.

Civil Appeal No. 4015 of 2020 Page 28 of 135

37. Mr. Salve submitted that the Majority Judgment erroneously rejected the

hedge transactions on the grounds that analysts’ reports could not justify the

hedge, the arrangement with the 12 entities amounted to circumvention of

the position limits under the SEBI circulars, the appellant no. 1 had no

hedging policy or compliance with accounting and regulatory requirements,

and the futures positions were not closed simultaneously with the sale of

shares in the cash segment. Mr. Salve submitted that the aforesaid findings

are unsustainable since:

a) There is no legal basis to hold that promoters cannot act upon

analysts’ reports;

b) There is no legal protocol to be followed for a transaction to be a

‘hedge’ under law. Hedging is a commercial tool for de-risking

and not a legal instrument for trading. There is no law prescribed

for hedging. A breach of position limit can happen while hedging

or while speculating. For breach of position limits, penalties have

been prescribed under the SCRA and the circulars. In this

conspectus, to hold that if position limits are exceeded (while the

appellant no. 1 does not admit that position limits have been

exceeded), a hedge ceases to be a valid hedge and is illegal and

fraudulent cannot stand.

Civil Appeal No. 4015 of 2020 Page 29 of 135

c) The finding that there needs to be a pre-existing policy (backed

by a board resolution) to hedge, erroneously conflates a legal

structure with a commercial motive underlying a set of

transactions. To hedge, there is no requirement of any policy,

unless it is mandated by statute. The statutory mandate, which is

in place now, has come at a much later point in time, and not in

the time frame which this present matter deals with.

d) SEBI erroneously proceeded on the expectation that every hedge

must be a “perfect” hedge, despite physical delivery not being

permissible in the F&O segment and simultaneous closure of

positions in the cash and futures segments being commercially

impracticable. According to the learned senior counsel, the

concept of a “perfect hedge” is unknown to law or policy.

Moreover, in the present case, the excess open positions of 3.51

crore RPL shares (i.e. 7.97 crore - 4.46 crore) cannot even be

called as ‘speculation’ since the appellant no. 1 is also entitled to

hedge against its inventory of balance RPL shares. The concept of

a ‘perfect hedge’ is a new construct of WTM/SAT- a search of

any such concept in law or policy would be in vain.

38. Mr. Salve submitted that the appellant no. 1’s explanation that it could have

earned substantially higher profits by closing the futures positions earlier,

Civil Appeal No. 4015 of 2020 Page 30 of 135

had its intention been speculative profiteering, was rejected by the SAT

Majority without discussion. It was contended that the SAT Majority failed

to examine whether the futures transactions constituted a genuine

commercial hedge against the likely fall in the price of RPL shares and

summarily rejected all submissions demonstrating that the appellant no. 1’s

conduct was consistent with a bona fide hedge and not with any intent to

profiteer or manipulate prices, merely observing that “simulation exercises”

cannot alter facts, though such exercises only reflected the actual market

conditions against which the allegations of fraud and manipulation were

required to be tested.

39. Regarding the issue of alleged cornering of position limites and consequent

fraud, it was submitted that there was no “cornering” of the November 2007

RPL Futures market and, in any event, such alleged cornering could not

amount to “fraud” under the PFUTP Regulations.

40. Mr. Salve submitted that the appellant no. 1 observed exceptionally high

liquidity in the November 2007 RPL Futures segment between 24.10.2007

and 31.10.2007, with traded quantities being nearly four times that of the

cash segment, even before the appellant no. 1 commenced sale of RPL

shares. It was in this background that the 12 entities took sale positions in

the November 2007 RPL Futures, which constituted only a small percentage

Civil Appeal No. 4015 of 2020 Page 31 of 135

of the total trades in the F&O segment on the relevant trading days.

According to the learned senior counsel, the allegation that such small

percentage of trades by 12 entities induced other market participants to

purchase RPL shares or resulted in cornering of position limits is wholly

baseless.

41. It was submitted that the high demand for RPL Futures existed

independently of the trades of the 12 entities and that market participants

would have purchased irrespective of the identity of the sellers. Moreover,

the trades of the 12 entities constituted only about 8 per cent of the total

trades, their open positions increased to 61.2 per cent merely because other

participants had closed their positions.

42. The learned senior counsel assailed the findings of SEBI regarding alleged

‘cornering’ and ‘manipulation’ as baseless on the following grounds:

a) SEBI incorrectly calculated the position limits only with reference to

the November 2007 RPL Futures, whereas the applicable market-wide

and client-level position limits extended across all futures and options

categories in RPL shares.

b) It was further submitted that the 9.92 crore positions of the 12 entities

constituted only 44.08 per cent of the total market-wide position limit,

leaving substantial positions available to other market participants.

Civil Appeal No. 4015 of 2020 Page 32 of 135

The very fact that positions were still available but there were no

takers, demonstrates that there was no “cornering” of the market by

the 12 entities.

c) The 12 entities did not take any further positions from 07.11.2007

onwards. In fact, 1.95 crore shares were purchased by the 12 entities

between 07.11.2007 and 26.11.2007 and the open positions were

reduced to 9.97 crore shares on the morning of 29.11.2007.

d) Subsequent increase in the percentage of open positions held by the

12 entities was solely due to other market participants squaring off

their positions and not due to any positive act on the part of the 12

entities.

e) SEBI misrepresented the scenario by calculating position limits only

with reference to the November 2007 RPL Futures instead of the

market-wide limits across all categories.

f) Merely retaining open sale positions while other participants were

closing their positions could not amount to “cornering the market” in

the absence of any overt manipulative act.

g) Position limits are prescribed merely to deter concentration of

positions and possible market manipulation, and that concentration by

itself does not amount to manipulation unless accompanied by

manipulative conduct affecting market prices. Even breach of

Civil Appeal No. 4015 of 2020 Page 33 of 135

prescribed limits attracts only the penalties contemplated under the

SEBI and NSE circulars and cannot, by itself, constitute fraud or

manipulation. “Cornering” per se is not illegal unless undertaken as

part of a manipulative scheme intended to disrupt market in an

impermissible manner.

h) Even assuming there was a breach of the prescribed caps, the same

would at best constitute a regulatory infraction and not fraud or

manipulation, particularly in the absence of any evidence that the

alleged concentration resulted in manipulation of prices or market

demand.

i) Furthermore, there is no evidence whatsoever that the alleged

concentration resulted in manipulation of prices or demand. Absent

such evidence, the allegation that concentration of position (while

denying the appellant no. 1 cornered the positions) amounts to

manipulation and fraud has no basis.

43. Regarding breach of positions limits and PAC, Mr. Salve submitted that

SEBI and the SAT Majority proceeded on the basis that the appellant no. 1,

through 12 alleged agents, breached position limits, effectively cornered the

market in November 2007 RPL Futures, and created concentration of

positions. This, according to SEBI, constituted a non-disclosed principal–

Civil Appeal No. 4015 of 2020 Page 34 of 135

agent arrangement amounting to a pre-planned fraudulent scheme, rendering

the concept of “persons acting in concert” irrelevant.

44. Mr. Salve submitted that by taking this position, SEBI has lost sight of the

evolution of the derivatives regime through circulars issued since 1999,

which reflects distinct pattern:

a) The 1999 Circular introducing index futures neither prescribed

position limits nor prevented taking positions through persons

acting in concert. Rather, the 1999 Circular only required self-

disclosure where persons acting in concert together owned 15% or

more of the open interest.

b) The 2001 SEBI and NSE Circulars introducing single stock futures

(single scrip futures) prescribed client-level and market-wide

position limits but did not prohibit trading through persons acting

in concert or require any such disclosure, and made no reference

to the concept of PAC. Concept of PAC is a well-recognised

principle in securities law, based on common intent and objective

rather than the nature of inter se legal relationships, and where such

concert exists, the actions are treated as that of a single

coordinating mind. SEBI has long recognised this concept,

including under the 1994 Takeover Regulations where it triggers

Civil Appeal No. 4015 of 2020 Page 35 of 135

open offer obligations, and even in the 1999 Index Futures Circular

which required disclosure of persons acting in concert.

c) Omission of any disclosure requirement or prohibition relating to

persons acting in concert in the 2001 SEBI Circular with respect to

single stock futures was an intentional regulatory decision,

demonstrating SEBI’s position that mere concentration does not

amount to manipulation. Therefore, at the relevant time under the

said Circular, there was no prohibition on the appellant no. 1 from

appointing 12 entities as PACs, each qualifying as a separate client

entitled to prescribed position limits. In fact, at the very first

inquiry by SEBI, the appellant no. 1 had disclosed about its

appointment of the 12 entities along with the contracts entered into

by it.

d) Therefore, merely because the positions were taken through 12

independent entities instead of subsidiaries could not, by itself,

justify aggregation of limits or lead to allegations of fraud or

manipulation, particularly when the positions and ultimate gains

would have remained the same even if captured through

subsidiaries under the control of the appellant no. 1.

45. The learned senior counsel further argued that SEBI’s contention that the

concept of “persons acting in concert” becomes meritless once alleged

Civil Appeal No. 4015 of 2020 Page 36 of 135

principal-agent relationship is established, cannot stand. According to him,

SEBI’s contention baseless particularly when neither the 2001 SEBI

Circular required disclosure of PAC arrangements nor the NSE (F&O)

Trading Regulations permitted disclosure of client identity. There was no

regulatory mandate obligating the appellant no. 1 to disclose its intention to

sell shares before taking positions in the F&O segment, and therefore the

allegation of concealment is wholly misconceived. Hence, Mr. Salve

submitted that the PAC acquiring positions in the F&O segment under a

single directing mind was neither prohibited nor subject to any disclosure

requirement under the SEBI framework. Consequently, such conduct could

neither be treated as a violation of the SEBI Act or the PFUTP Regulations

nor be characterised as “fraud” or “manipulation” under the PFUTP

Regulations.

46. On the strength of the above submissions, it was contended that SEBI and

the SAT Majority failed to appreciate that, at the relevant time, the

regulatory framework did not provide for aggregation of positions held by

persons acting in concert in single stock futures. At best, such conduct could

have warranted subsequent regulatory changes, which SEBI in fact

introduced only in December 2016 by mandating disclosures regarding

concerted action. Therefore, the alleged conduct could not be termed as

fraud or manipulation.

Civil Appeal No. 4015 of 2020 Page 37 of 135

47. Mr. Salve further submitted that the appellant no. 1, by taking sale positions

in the November 2007 RPL Futures through 12 entities, did not breach the

position limit of 1.09 crore position limit per client/customer prescribed

under the 2001 SEBI and NSE Circulars issued under the SCRA.

48. It was submitted that, at the relevant time, the 2001 SEBI Circular applied

position limits individually to each client/customer and neither prohibited

nor required disclosure of persons acting in concert. The arrangements with

the 12 entities were duly disclosed to SEBI at the first instance and therefore

there was nothing covert about the transactions.

49. In arguendo, Mr. Salve contended that even assuming aggregation of

positions, at best it would amount to a breach of position limits warranting

monetary penalty under 2001 circular and could not by itself constitute fraud

or manipulation under the PFUTP Regulations. Mr. Salve argued that

SEBI’s act of imposing penalty on one of the 12 entities for breach of

position limits, in turn indicates that SEBI had itself conceded that such

violations attract only the penalties contemplated under the SCRA, byelaws

and circulars for breach of position limits.

50. Furthermore, he submitted that breach of position limits under the 2001

SEBI Circular was punishable only under Section 23H of the SCRA and not

under the PFUTP Regulations. The learned senior counsel emphasized on

Civil Appeal No. 4015 of 2020 Page 38 of 135

the phrase “this Act” in Section 23H to contend that the provision refers

specifically to the SCRA only and does not extend to the SEBI Act.

However, he further contended that even Section 23H of the SCRA was

inapplicable in the present case since the 2004 Circular itself prescribed a

self-contained penalty of a maximum of Rs. 1 lakh per person for such

breaches.

51. It was submitted that even the SAT Minority held that any breach of the

position limits under the 2001 SEBI Circular could attract only the monetary

penalty prescribed therein. However, the WTM instead prohibited the

Appellants from dealing in equity derivatives in the F&O segment for one

year, which penalty has already been undergone. Therefore, no further

penalty could be imposed.

52. Mr. Salve submitted that futures and options transactions are inherently

speculative in nature and, therefore, even a breach of position limits would

at best amount to speculation beyond the limits prescribed under the SCRA,

attracting only the penalties contemplated therein. Such breach, even if

through PAC, could not by itself metamorphose into fraud or manipulation

under the PFUTP Regulations.

53. It was further contended that the 2001 SEBI Circular having been issued

under the SCRA, any alleged breach thereof could be dealt with only under

Civil Appeal No. 4015 of 2020 Page 39 of 135

the SCRA and the penalties prescribed thereunder. Merely because SEBI

administers both the SCRA and the SEBI Act, violations under one statute

cannot automatically attract the provisions of the other. To support this

contention, reliance was placed on the Minority Judgment of SAT, which

held that violation of position limits cannot attract Regulation 3(b) of the

PFUTP Regulations which has been framed under the SEBI Act. Therefore,

since the SCRA prescribes penalty separately for violation of the position

limits, Regulation 3(b) of the PFUTP is not applicable for violation of

position limits.

54. Regarding the issue of sale of 1.95 crore RPL shares during the last 8

minutes 20 seconds of trading on 29.11.2007, sale of shares below the Last

Traded Price, and the consequent allegation of deliberate depression of the

settlement price amounting to fraud and manipulation, the learned senior

counsel contended that there was no price manipulation by the appellant no.

1 on 29.11.2007. It was submitted that the theory of price manipulation was

wholly baseless, and in support thereof the following grounds were urged

before this Court:

a) the appellant no. 1 never sold RPL shares below Rs. 208 in the cash

segment, including on the last trading day.

b) The ten tranches of sale in the NSE cash segment, aggregating to

18.04 crore shares, were all prior to 26.11.2007, the last sale having

Civil Appeal No. 4015 of 2020 Page 40 of 135

taken place on 23.11.2007, with 24.11.2007 & 25.11.2007 falling

on a weekend.

c) Between 26.11.2007 and 28.11.2007, the price of RPL shares

consistently remained below Rs. 207, except for occasional spurts.

d) On 29.11.2007 the share opened at Rs. 193.80 and rose to Rs.

208.20 by 3:00 p.m., and thereafter to Rs. 224.70 by 3:21 p.m.,

though SEBI failed to examine the reason for such sudden surge in

prices. At that stage, the appellant no. 1 still had approximately 4.46

crore shares left to sell and therefore sold 1.95 crore shares in the

cash segment. The price of Rs. 224 was merely a temporary bubble

which crashed immediately thereafter, and since attempts to sell at

the Last Traded Price were unsuccessful, the shares were offered

below the LTP to effect the sale.

e) The finding that the appellant no. 1 attempted to lower prices by

offering shares at below LTP suffers from a basic lack of

understanding of how online trading functions, since transactions

are ultimately executed at the best available market price. It was

pointed out that several trades offered below the LTP were in fact

executed at higher prices, while in many instances shares offered

below the LTP did not sell at all. Accordingly, the theory that

Civil Appeal No. 4015 of 2020 Page 41 of 135

offering shares below the LTP by itself amounted to market

manipulation was stated to be misconceived.

f) Even when the appellant no. 1 offered shares at its lowest price of

Rs. 210, no sale initially took place until the LTP itself rose to Rs.

210, after which 4.5 lakh out of 5 lakh shares were sold. This

demonstrated that market prices were influenced by trades of other

participants as well, which SEBI failed to investigate, and

selectively attributed price movement solely to the appellant no. 1’s

conduct. SEBI also failed to enquire into the 1.06 crore shares sold

by other market participants at similar prices during the same time

segment.

g) The SAT Minority Judgment had rightly accepted that since other

market participants had sold 1.06 crore shares during the same 8

minutes and 20 seconds before closing, attributing the fall in prices

solely to the appellant no. 1’s sale of 1.95 crore shares was

unsustainable. Whereas, the SAT Majority Judgment had

erroneously ignored the fact that the appellant no. 1 started selling

only at 3:21:40 p.m., after 21 minutes of the last half hour of trading

had already passed, and if the intention was to depress the weighted

average settlement price, the appellant no. 1 would have started

Civil Appeal No. 4015 of 2020 Page 42 of 135

selling at 3:00 p.m. itself when the price stood at Rs. 208.20, a price

at which the appellant no. 1 had earlier sold shares.

h) SEBI’s theory that the appellant no. 1 sold shares at 3:21 p.m. solely

to depress the weighted average settlement price was commercially

impractical, as the appellant no. 1 would be risking losses in the

cash segment for only a marginal and uncertain gain in the futures

segment. The finding regarding manipulation was based merely on

four instances of orders being placed below the LTP, though in an

online trading system transactions are executed at the best available

purchase price, and therefore placing orders below the LTP by itself

could not constitute conclusive proof of manipulation.

i) Therefore, the impugned sales were bona fide cash transactions

involving actual delivery of shares, with no allegation of circular

trading or creation of a false market. Mere sale at a lower price

could not amount to manipulation, particularly when the appellant

no. 1 itself continued to hold nearly 70% of RPL shares and would

also run the risk of suffering from any fall in price.

55. When dealing with the issue of inducement, the learned senior counsel

submitted that despite inducement being an essential ingredient of fraud, it

was neither pleaded nor established in the present case.

Civil Appeal No. 4015 of 2020 Page 43 of 135

56. The attention of this Court was drawn to the definition of “fraud” under the

PFUTP Regulations and its essential ingredients, namely: (a) any act,

expression, omission or concealment, whether in a deceitful or not; (b) by a

person, or by any other person with his connivance, or by his agent; (c) while

dealing in securities; (d) with the object of inducing another person to deal

in securities.

57. It was alleged that SEBI’s reliance on judgment of this court in SEBI v.

Rakhi Trading (P) Ltd., reported in (2018) 13 SCC 753 to contend that

there is no need to establish inducement under Regulation 2(c) of the PFUTP

Regulations was misplaced. It was submitted that in Rakhi Trading (supra),

non-genuine transactions creating an illusion of trading and manipulation

were clearly established, whereas in the present case the SAT Majority

ignored the factual details, trading data and tables produced by the appellant

no. 1 by dismissing them as “simulation exercises”, while simultaneously

alleging manipulation and dispensing with the requirement of proving

inducement. Reliance was also placed on SEBI v. Kanaiyalal Baldevbhai

Patel., reported in (2017) 15 SCC 1 wherein this Court held that inducement

is a sine qua non for establishing fraud under the PFUTP Regulations.

58. It was submitted that SEBI failed to establish that any of the transactions

undertaken by the appellant no. 1 and the 12 entities were non-genuine or

Civil Appeal No. 4015 of 2020 Page 44 of 135

fraudulent trades, since all transactions were genuine and executed on the

stock exchange at prevailing market prices between unrelated

counterparties. There was no finding regarding inducement by way of

engagement of 12 entities and merely engaging them could not amount to

inducement to deal in securities. There is no violation of position limits and

even assuming a breach, the same could not by itself constitute inducement

to deal in securities.

59. Mr. Salve submitted that none of the ingredients of “fraud” under Regulation

2(c) of the PFUTP Regulations, including misrepresentation, false

suggestion, or active concealment of material facts, could be established in

the trades undertaken by the appellant no. 1 and the 12 entities, and that other

ingredients set out in (4) to (9) of Regulation 2(1)(c) of the PFUTP

Regulations were wholly irrelevant to the present case.

60. The attention of this Court was drawn to Regulations 3 and 4 of the PFUTP

Regulations to contend that mere violation of a statutory provision does not

ipso jure constitute fraud unless it induces another person to deal in

securities. It was submitted that the reference to “provisions of the Act or the

rules or the regulations made thereunder” in Regulations 3 is a clear

reference to the SEBI Act, as defined in Section 2(a) of the PFUTP

Regulations, and not the SCRA or circulars issued thereunder. Therefore,

Civil Appeal No. 4015 of 2020 Page 45 of 135

any alleged breach of position limits under the SCRA framework could not

automatically amount to a violation of the PFUTP Regulations. It was

further contended that Regulation 4(2) of the PFUTP Regulations itself

provides that dealing in securities shall be deemed to be a “fraudulent” or an

“unfair trade practice” only when it involves “fraud”, which by definition

requires inducement, and none of the acts enumerated therein were

applicable to the present case.

61. Mr. Salve argued that SEBI’s allegation that the appellant no. 1 and the 12

entities executed a pre-planned fraudulent scheme for cornering positions

and manipulating the November 2007 RPL Futures was perverse and

unsustainable, as SEBI failed to establish inducement, any ingredient of

fraud, or that PACs taking positions in the F&O segment violated the SEBI

Act or PFUTP Regulations. He contended that even any alleged breach of

position limits could at best attract penalties under the SCRA and could not,

by itself, amount to manipulation or fraud under the PFUTP Regulations.

62. Mr. Salve further assailed the Majority Judgment of the SAT as being

unreasoned and failing to consider the submissions on facts and law. It was

submitted that the Majority proceeded on a preconceived premise that the

appellant no. 1 had committed fraud and consequently rejected the defence

and explanations offered by the appellant no. 1 without proper reasoning.

Civil Appeal No. 4015 of 2020 Page 46 of 135

63. He submitted that the SAT Majority Judgment rejected the appellant no. 1’s

contention regarding absence of any provision for aggregation of positions

held by persons acting in concert under the 2001 SEBI Circular by merely

terming it as being “too simplistic, patently erroneous and gravely

mischievous”, without providing any clear legal basis. The SAT Majority

failed to identify any legal requirement obligating the appellant no. 1 to

disclose its arrangement with the 12 entities and nevertheless characterised

the arrangement as manipulative without any factual or legal basis.

Majority’s finding of fraud and manipulation was ultimately based on

hypothetical reasoning rather than substantive analysis.

64. Majority Judgment erroneously concluded that the appellant no. 1’s futures

transactions were not hedges but fraudulent and manipulative, ignoring the

appellant no. 1’s trading data, statistics, and detailed submissions. It was

contended that the findings rested on vague notions of “regulatory

principles” and assumed that hedging required a prescribed policy or

documentation, though no such legal requirement existed. The observations

characterizing hedging as a “wild dream” and treating absence of a hedging

policy as indicative of fraud were stated to be unsupported in law or facts

and reflected a substitution of conjecture for evidence while disregarding the

actual market conduct and execution of trades by the appellant no. 1.

Civil Appeal No. 4015 of 2020 Page 47 of 135

65. It was submitted that despite Tables 1 to 15 being placed to demonstrate

absence of manipulation in the last 10 minutes of trading on 29.11.2007, the

SAT Majority Judgment rejected the entire analysis without examining the

tables and relied solely on two observations- (i) that “simulation exercises”

had no merit , and (ii) that 12 out of 17 orders were placed below LTP,

including significant deviations, leading to an inference of non-rational

trading intent.

66. To bolster his submission, the learned senior counsel placed reliance on the

SAT Minority Judgment, which on a detailed factual analysis held that no

manipulation was made out against the appellant no. 1 in the last 10 minutes

of trading. It had observed that both the appellant no. 1 (1.95 crore shares)

and other market participants (1.06 crore shares) traded during the same

period, and therefore the appellant no. 1 could not be solely blamed for the

price fall. The SAT Minority further held that SEBI failed to discharge the

burden of proving manipulation and noted that even sell orders placed below

LTP did not establish price depression, especially when not all such orders

were executed and similar patterns by others were not examined. It was also

found that the appellant no. 1’s trades were genuine and constituted a

conscious business decision to sell at higher prevailing prices, not to depress

settlement price.

Civil Appeal No. 4015 of 2020 Page 48 of 135

67. It was pointed out that the WTM’s finding treating all 9.92 crore trades as

fraudulent, along with disgorgement of only Rs. 447 crores out of Rs. 513

crore alleged gains, itself showed that profits on 1.09 crore shares were

treated as lawful, thereby indicating that at best the case involved breach of

position limits and not fraud warranting disgorgement. The SAT Minority

accepted this and held disgorgement for excess positions was impermissible

under Section 11B of the SEBI Act. In contrast, the SAT Majority Judgment

rejected this submission by merely stating that the concession regarding the

1.09 crore position limit was erroneous and based on a wrong notion,

without engaging with the underlying legal implication.

68. On the issue of inducement as an essential ingredient of fraud, the SAT

Minority Judgment held that in the absence of any finding that the appellant

no. 1 induced other market participants, the burden of establishing fraud was

not discharged, and further held that the decision in Price Waterhouse & Co.

vs SEBI reported in (2019 SCC OnLine SAT 165) was squarely applicable.

In contrast, the SAT Majority treated Price Waterhouse (supra) as

distinguishable, holding that inducement need not be separately proved once

manipulation is inferred, thereby dispensing with independent proof of

inducement. The SAT Minority, however, in a clear and reasoned analysis

of facts and law, set aside the WTM’s order holding that no fraud or

Civil Appeal No. 4015 of 2020 Page 49 of 135

manipulation was made out and that the PFUTP Regulations were not

attracted.

69. It was submitted that SEBI is, in effect, “barking up the wrong tree”, as it

pursued an allegation of fraudulent trading by the appellant no. 1 contrary

to the facts and evidence, without examining the reasons for (i) unusually

high activity in the November 2007 RPL Futures from 24.10.2007 to

06.11.2007; (ii) the sharp rise in RPL futures price from Rs. 172.50 on

22.10.2007 to Rs. 280.50 on 06.11.2007 despite analyst reports indicating

overvaluation; and (iii) the sudden price spurt in the cash segment on

29.11.2007 from Rs. 208.10 at 3:00 p.m. to Rs. 224.70 at 3:21:40 p.m.

70. The findings of SEBI and the SAT Majority were further assailed on the

ground that the order of disgorgement under Section 11B of the SEBI Act

was premised on alleged violations of the PFUTP Regulations, whereas the

statutory explanation is confined to gains arising from contravention of the

SEBI Act or regulations made thereunder and cannot be extended to alleged

breaches of SCRA circulars. It was further contended that even assuming a

breach of position limits, Section 11B could not be invoked.

71. The essence of “fraud” under the PFUTP Regulations is inducement to deal

in securities, which must be strictly construed given its penal consequences.

Even if position limits are breached, there is no legal fiction treating such

Civil Appeal No. 4015 of 2020 Page 50 of 135

breach as per se market manipulation. Excess acquisition at market price

may at best be a regulatory violation, not fraud. Conversely, conduct within

limits can still amount to fraud if the ingredients of the definition of fraud

under the PFUTP Regulations are met. Conflating the position-limit breach

with fraud or manipulation is a clear misdirection in law.

72. The learned senior counsel contended that SEBI’s argument that Sections 9

and 18A of the SCRA do not limit SEBI’s power to initiate action for fraud

and manipulation under the PFUTP Regulations is incorrect. He submitted

that even if derivative trades must comply with exchange rules and bye-laws,

breach of position limits does not render such contracts illegal or void.

Section 9(3)(a) and (b) empowers exchanges to treat certain violations as

void or impose penalties, and position-limit breaches are, in fact, only

subject to penalties under bye-laws/circulars. If the legislature intended such

breaches to constitute manipulation or attract harsher consequences, it would

have expressly provided so. Section 18A must be read harmoniously with

Sections 9(2) and 9(3), as held by the SAT Minority, whereas the SAT

Majority rejected the argument without reasoning, terming it “spurious and

devious.”

73. He further submitted that the SAT Majority’s finding, that futures

transactions in excess of position limits are void, is untenable in law. A

Civil Appeal No. 4015 of 2020 Page 51 of 135

bilateral contract is not rendered void merely because one party breaches a

regulatory cap unknown to the opposite party. SEBI’s view leads to absurd

consequences, allowing parties to evade losses by later alleging illegality. It

would also unsettle all market transactions involving inadvertent breaches

of caps, requiring their wholesale unwinding. Moreover, the stock

exchanges’ own practice contradicts the “void transaction” theory, as only

squaring-off of excess positions and nominal penalties are imposed, treating

contracts as valid. Even profits from such square-offs are treated as lawful,

showing that the transactions are not void.

74. On the crucial issue of whether the facts and figures in the data available to

the WTM, it was submitted that Tables 1 to 15 placed before SAT contained

actual trading data on positions, prices, and sales, which demonstrated that

SEBI’s inferences were not borne out by facts. Yet the SAT Majority

Judgment failed to engage with the material and dismissed the entire data as

“simulation exercises”. This, despite the figures being factual and not

hypothetical, amounts to an egregious error of law for not addressing a

material submission.

75. Mr. Salve also addressed SEBI’s contention that no substantial question of

law arises under Section 15Z of the SEBI Act and relied on the judgment of

this court in Securities and Exchange Board of India v. Mega Corporation

Civil Appeal No. 4015 of 2020 Page 52 of 135

Limited, reported in 2022 SCC OnLine SC 361. In this regard, he submitted

that the expression “question of law” under Section 15Z is not confined to

abstract legal issues divorced from facts, but rather a substantial question

arises where there is erroneous application of law to admitted facts or

violation of settled legal principles, as held by this court in Chandrabhan v.

Saraswati, reported in 2022 SCC OnLine SC 1273 and Angadi

Chandranna v. Shankar, reported in 2025 INSC 532. Accordingly, Mr.

Salve submitted that the reliance placed by the SAT Majority on Mega

Corporation (supra) was misplaced, as that decision turned on its own facts

where no substantial legal issue or statutory misinterpretation was involved.

76. Thus, Mr. Salve reiterated that the SAT Majority findings were deeply

flawed in law on the following grounds:

a) It misconstrued SEBI Regulations and SCRA by conflating position

limits with fraud and manipulation

b) It erred in holding that fraud could be made out without establishing

inducement, relying on generalised allegations of cornering and

presumed motives.

c) It misdirected itself in rejecting hedging as a motive merely due to

absence of a written hedging policy.

Civil Appeal No. 4015 of 2020 Page 53 of 135

d) It failed to consider the mandatory requirement of inducement

under PFUTP, with no finding that the appellant no. 1 induced any

market participant.

e) It ignored material factual issues by dismissing trading data as

“simulations”.

f) It wrongly treated non-existent requirements like board resolutions

as necessary to prove hedging intent.

g) It failed to address the core question of law regarding persons acting

in concert in F&O markets and whether such conduct constitutes

fraud under PFUTP and violation under SCRA.

77. Mr. Salve continued to submit that the WTM and SAT have failed to address

the fundamental fact that the 12 entities were alleged to be PACs. SEBI’s

stand that once a principal–agent relationship is found, the doctrine of

persons acting in concert becomes irrelevant is contradictory and legally

untenable. SEBI cannot simultaneously aggregate positions of independent

entities to allege concentration and cornering while disowning the very

doctrine that alone permits such aggregation. This amounts to an

impermissible approbation and reprobation and introduces a post-hoc, non-

existent principal-centric aggregation standard not present in the 2007

regulatory framework, which was in fact introduced only in December 2016.

Civil Appeal No. 4015 of 2020 Page 54 of 135

78. It was submitted by Mr. Salve that dealing in futures through agents does

not amount to fraud. A breach of SCRA position limits cannot, by itself,

constitute “fraud” under the PFUTP Regulations. SEBI itself accepts that if

the appellant no. 1 had taken excess positions in its own name, it would only

attract a monetary penalty under the SCRA framework and not allegations

of fraud.

79. The appellant no. 1 engaged 12 entities as its agents, and the agreements

were disclosed to SEBI upon inquiry, not discovered through investigation.

The concept PAC was not applied to single stock futures at the relevant time,

though it was recognised in other contexts like index futures and takeover

regulations, with mandatory disclosures. PAC transactions were not

prohibited and cannot be treated as fraudulent or dishonest. At worst, even

if PAC aggregation is assumed, it would only amount to a violation of

SCRA, not fraud under PFUTP Regulations.

80. He vehemently submitted that all the subject transactions were on the stock

exchange at market-determined prices, were genuine arm’s length trades,

and not between connected counterparties, and were ultimately squared off

at prevailing prices in cash.

81. He submitted that Regulation 3 of PFUTP Regulations prohibits fraudulent

dealing in securities, and “fraudulent” must be read in line with the defined

Civil Appeal No. 4015 of 2020 Page 55 of 135

meaning requiring inducement. Regulation 3(b) bars manipulative or

deceptive devices, and Regulation 3(c) prohibits schemes to defraud; neither

applies absent inducement or deception. Regulation 3(d) also does not apply,

as a mere regulatory violation does not ipso jure amount to fraud unless it

induces another to trade. The reference to “Act or Regulations” is confined

to the SEBI Act and rules, not SCRA circulars, making SEBI’s attempt to

treat breach of position limits as violation of PFUTP regulations legally

untenable. Regulation 4(2) deems dealing in securities fraudulent or an

unfair trade practice only if it involves “fraud”, which necessarily requires

inducement. It also lists illustrative acts, none of which are applicable to the

present case.

82. Regarding the issue of person acting in concert, it was submitted that, the 12

entities were agents of the appellant no. 1 and acted on its direction,

satisfying the “common mind” test for persons acting in concert. SEBI

circulars did not impose any reporting or aggregation requirement for PACs

in single stock futures, unlike takeover regulations which expressly

aggregate holdings. The 1999 index futures circular only required reporting

where PACs together exceeded threshold of 25%, showing PACs were

recognized but not prohibited.

Civil Appeal No. 4015 of 2020 Page 56 of 135

83. He submitted that the 2001 single stock futures circular contains no

reference to PACs, and SEBI introduced a specific undertaking on non-

concert action only in 2016, indicating the absence of such a requirement

earlier. The SEBI circular aims to deter concentration of positions and

potential manipulation, but concentration itself is not manipulation. If SEBI

intended to treat breach of limits as fraud or manipulation per se, it would

have expressly provided so. Markets cannot be governed by hindsight-based

interpretations.

84. Mr. Salve submitted that SEBI’s contention that persons dealing with the 12

entities were induced by lack of knowledge of common control is untenable.

Futures trades are driven by market forces, and fraud requires causation—

i.e., but for the alleged act, the trade would not have occurred—which is not

established. Regulation 4.5.3(j) of NSE (F&O) rules also prohibited

disclosure of client identity beyond the exchange, proving that no such

inducement can be inferred.

85. Mr. Salve went on to submit that SEBI’s contention that the appellant no. 1,

through 12 entities, “cornered” the market and that such concentration itself

constitutes manipulation is baseless. Mere concentration, without use for

price or demand manipulation, does not amount to fraud. SEBI itself permits

Civil Appeal No. 4015 of 2020 Page 57 of 135

PAC structures, undermining its claim that market participants were

unaware of common control.

86. Mr. Salve submitted that a related basis on which SEBI relies under the

PFUTP Regulations is the allegation that (a) the appellant no. 1 cornered

9.92 crore futures positions in RPL November 2007, rising from 63% to 93%

of the market, and (b) the proposed sale of 22.5 crore RPL shares in the cash

segment was not disclosed and would have impacted prices, amounting to

concealment. However, he argues that such allegations levelled by SEBI are

fundamentally erroneous on the following grounds.

a) the appellant no. 1, through the entities, initially held 63% of open

interest; the remaining 37% was available but not taken by others.

b) the appellant no. 1 did not further acquire positions; the increase

to 93.63% resulted from exit of other market participants.

c) Sale of shares in the cash segment and taking futures positions are

independent transactions unless linked by intent to depress prices.

d) the appellant no. 1’s sale decision was part of a capital-raising

strategy in an overvalued RPL market; futures positions were

taken at prevailing prices during 01.11.2007–06.11.2007.

e) SEBI regulations do not require disclosure of intent to sell shares

at the time of taking futures positions.

Civil Appeal No. 4015 of 2020 Page 58 of 135

87. Mr. Salve submitted that the allegations ignore the core market reality that

RPL was widely considered overvalued by independent analysts, making the

SAT Majority’s dismissal of such material incomprehensible. The appellant

no. 1 took futures sale positions at the prevailing average price of Rs. 265.67,

at which other market participants willingly took corresponding buy

positions anticipating price movement. SEBI failed to investigate possible

manipulation on the buy side that may have driven prices upward. Further,

the appellant no. 1 did not exit positions when prices fell, but held them till

maturity, which is inconsistent with any profit-driven manipulation strategy

focused solely on futures.

88. While addressing the issue of hedging he submitted that, the law does not

prohibit trading in futures for profit; such transactions are inherently profit-

driven. In the absence of fraud or deception, the motive behind entering

futures trades is irrelevant.

89. The appellant no. 1 explained that it acted pursuant to a board-approved plan

to raise Rs. 80,000 crore, with RPL shares, being overvalued, identified for

sale in tranches. Two senior employees, tasked with execution, hedged this

exposure by taking corresponding futures sale positions to protect against

expected price correction. There is no rule that requires a board resolution

for sale of shares in the market. Between 01.11.2007 and 23.11.2007, 18.04

Civil Appeal No. 4015 of 2020 Page 59 of 135

crore shares were sold in the cash segment at no price below an average of

Rs. 208. The appellant no. 1 did not close positions at the lowest price of Rs.

192.55 despite higher profit opportunity, showing absence of speculative

intent. A portion of shares remained unsold as prices stayed below Rs. 208

and only sold when prices spiked sharply on the last day amid volatility,

which SEBI failed to investigate. Futures positions were held throughout

and settled at the exchange-determined average price since delivery was not

permitted. The positions were taken at one time at the outset, retained despite

favourable price movement, and closed only at expiry in cash, consistent

with the regulatory structure of hedging and inconsistent with any

speculative or manipulative intent. Thus, the acquisition of positions and

doing so by engaging 12 agents was in no way fraudulent or manipulative.

90. Mr. Salve submitted that hedging was not a legal defence but an explanation

of the appellant no. 1’s commercial motive for entering futures transactions.

The SAT Majority wrongly rejected it by assuming that a legal framework

or prior board-approved policy is required, conflating commercial intent

with legal form. It also failed to examine whether the futures positions

functioned as an imperfect hedge against expected price correction in an

overvalued scrip. The notion of a “perfect hedge” is not recognised in law

or policy and is a new construct of SEBI/SAT.

Civil Appeal No. 4015 of 2020 Page 60 of 135

91. Regarding the issue of alleged price manipulation on 29.11.2007, Mr. Salve

argued that SEBI did not examine the actual transaction data and instead

relied on broad, inferential allegations. The SAT Majority, when confronted

with detailed trading tables inconsistent with its theory, dismissed them as

“simulation exercises” without addressing their evidentiary value.

92. Mr. Salve address SEBI’s argument that during the last 8 minutes 20 seconds

on 29.11.2007, the appellant no. 1 sold 1.95 crore shares below LTP in

several instances to depress the settlement price and profit on 7.97 crore

futures positions. Mr. Salve argued that this narrative posed by SEBI ignores

material facts that (i) the appellant no. 1 had already sold 18.26 crore shares

between 07.11.2007 and 23.11.2007 at or above Rs. 208; (ii) trading paused

during the 24.11.2007-25.11.2007 weekend; (iii) no sales were made on 26

November due to price volatility; and (iv) on 27.11.007-28.11.2007 prices

remained below Rs. 208. In fact, on 29 November, sales were made only

after prices recovered, with the last tranche realising an average of Rs.

213.09, above the Rs. 208 threshold, while the market closed at Rs. 209 and

the 30-minute settlement average remained Rs. 215.60, rendering the

allegation of short-window manipulation untenable.

93. Mr. Salve points out that SEBI does not allege that the disgorgement amount

of Rs. 447 crore was actually earned during the last 8 minutes 20 seconds.

Civil Appeal No. 4015 of 2020 Page 61 of 135

To establish any such gain, SEBI would have had to analyse

contemporaneous market-wide trading, including sales by others during the

same period, quantify any actual price impact attributable to the appellant

no. 1’s trades despite sales above its own cut-off of Rs. 208, assess the

consequent effect on the 30-minute settlement average used for futures

pricing, and then compute net gains after adjusting for cash segment

outcomes from share sales. However, all these facts were ignored by the

SAT Majority.

94. The learned senior counsel submitted that SEBI’s allegation that the

appellant no. 1 sold below last traded price is misleading and ignores the

mechanics of live trading. Orders are matched based on buyer and seller

price priority, and in the absence of buyers at the last traded price, sellers are

compelled to revise orders downward. The record shows instances where

even below-LTP orders had no takers, and other market participants also

placed below-LTP orders without any allegation or investigation of

manipulation.

95. In light of the aforesaid submissions, the appellant no. 1 prayed this court

that Appeal Nos. 4015 of 2020 and 4723 of 2024 be allowed and SEBI be

directed to refund :

Civil Appeal No. 4015 of 2020 Page 62 of 135

A. Rs. 250 crore deposited by the appellant under the interim order

dated 17.12.2023 of this Court;

B. Rs. 25 crore deposited by the appellant under the SAT order dated

04.12.2023.

96. The appellant annexed the following details in the tabular form:

b. Submissions on behalf of the respondent

97. Mr. Arvid P. Datar, the learned senior counsel appearing on behalf of the

respondent, submitted that position limits aim to prevent concentration and

risk, including through aggregation or persons acting in concert. As all the

12 agents acted for the appellant no. 1, aggregation applies and rejecting it

Civil Appeal No. 4015 of 2020 Page 63 of 135

would defeat the purpose of position limits in derivatives markets since what

cannot be done directly, cannot also be done indirectly. He submitted that in

the present case, both the SAT Majority and the Minority have held that the

creation of 12 entities was improper and violates the position limits imposed

by the 2001 SEBI Circular. Since the appellant no. 1 could not cross the

position limit itself, it was also not permissible for it have employed 12

entities to do so for its benefit, as indicated by Clause 1.2 and Clause 3 of

the agency agreements.

98. He argued that the 1999 SEBI Circular on index futures cannot be relied

upon for single stock futures introduced under the 2001 framework. The

coordinated use of agents by the appellant no. 1 to corner 62%–93% of

market-wide position limits in November futures reflects a pre-planned

manipulative scheme by a single directing mind and squarely attracts the

PFUTP Regulations. Such conduct cannot be reduced to a mere position

limit violation but constitutes market manipulation by a single entity.

99. As regards the issue of hedging, Mr. Datar argued that although hedging is

a permitted risk-mitigation tool, it cannot be used through devices that

corner position limits and distort market integrity. The appellant no. 1 being

the promoter of RPL, offloaded shares worth more than Rs.5,000 crores, and

the derivative market cannot absorb such huge exposure. Position limits

Civil Appeal No. 4015 of 2020 Page 64 of 135

exist to preserve fairness, and such large-scale promoter offloading cannot

be hedged through a single futures contract. Any such attempt, if structured

to corner positions, amounts to serious PFUTP violations rather than

legitimate hedging.

100. It was submitted by the learned senior counsel that even if the hedging theory

is accepted, the exposure in the cash segment and positions held by the

appellant no. 1 in the futures segment crossed on 15.11.2007, however, the

latter were not reduced proportionately thereafter. Instead, the appellant no.

1 retained 7.97 crore shares as a “naked hedge” from 16.11.2007 till expiry

on 29.11.2007 to benefit in the derivatives segment. This was done to reap

benefits in the derivatives segment; therefore, the scheme hatched by the

appellants together was clearly a fraudulent and manipulative scheme as

defined under Section 12 of the SEBI Act, 1992 and Regulations 3 and 4 of

the PFUTP Regulations respectively. Once manipulation is established, no

separate proof of inducement is required, as its consequences are inherent in

the violation. Similarly, once fraud is made out through an artificial device,

the question of position limit breach becomes irrelevant.

101. It was submitted that the appellant no. 1’s intention must be assessed

holistically. its alleged cornering of the derivatives segment shows that the

position limits were breached and cannot be treated as a mere technical

Civil Appeal No. 4015 of 2020 Page 65 of 135

violation of the 2001 SEBI Circular. The appellant no. 1 deliberately

maintained excessive open positions even after substantial cash market

sales, rendering the so-called hedge “naked.” This was not due to

unavoidable circumstances under the RBI Circular relied upon by the

appellant no. 1 and therefore, cannot be justified as a permissible hedge.

102. Mr. Datar further submitted that the appellant no. 1’s claim, that it entered

the market in the last 10 minutes on 29.11.2007 solely to mobilise funds

through planned cash sales at high prices is devoid of merit for the following

reasons.

a) The respondent alleged that the appellant no. 1 used a scheme/device

to corner the market, noting no cash market sales from 23–29

November until the final minutes of 29.11.2007, when positions

were allowed to expire at market settlement.

b) In the last 10 minutes, the appellant no. 1 offloaded 1.95 to 2.24

crore shares worth about Rs. 480 crores—disproportionately high

compared to earlier daily averages of under Rs. 400 crores over the

preceding 11 days.

c) It is further alleged that 12 out of 17 trades were placed below the

LTP, including instances significantly below the prevailing prices,

Civil Appeal No. 4015 of 2020 Page 66 of 135

which SEBI treats as indicative of intent to depress price and

settlement value.

d) The respondent argued that no rational seller would repeatedly place

below-LTP orders; instead, a calibrated, longer-term sale strategy

aligned with hedge positions would have been expected.

e) On this basis, the WTM’s finding that there was a frantic effort to

influence the last-minute price is defended and not shown to be

erroneous.

103. The appellant no. 1’s simulation exercise was found to be without merit as

hypothetical profit scenarios based on alternative trading days cannot

displace actual market conduct or findings of manipulation. The respondent

submitted that even if such assumptions were considered, they do not negate

the alleged scheme of building a net short position of 9.92 crore shares

through 12 front entities. Further, the appellant no. 1 failed to explain why

it maintained an open short position of 7.97 crore shares until expiry on

29.11.2007, despite its stated hedging requirement being only 4.45 crore

shares from 16.11.2007, which according to SEBI indicates a devious and

manipulative scheme.

104. The appellant no. 1 also failed to explain the urgency in selling RPL shares

in November 2007, despite a decision taken in March 2007, especially when

Civil Appeal No. 4015 of 2020 Page 67 of 135

such a sale could have been spread over several months. The respondent

noted that the first valuation report came only in September 2007, yet the

appellant no. 1 did not act earlier despite funds being intended to be raised

over two years. Instead, it suddenly sold 22.5 crore shares (about 5%) and

simultaneously took short positions under the guise of hedging. It was

submitted that these facts and circumstances indicate that the hedge

argument provided by the appellant no. 1 is an afterthought. The respondent

further submitted that since the position limit breach was achieved through

a manipulative scheme or device, it attracts the SEBI Act and PFUTP

Regulations, and cannot be treated as a mere technical violation.

105. Mr. Datar submitted that, this appeal being under Section 15Z of the SEBI

Act, 1992 is confined to questions of law, and the concurrent findings of fact

by the WTM and SAT are not ordinarily open to interference. Both the

Majority and Minority have held that the use of 12 entities to bypass position

limits under the 2001 SEBI Circular was improper, affirming the principle

that what cannot be done directly cannot be done indirectly. Since the

appellant no. 1 could not have breached position limits itself, it could not do

so through intermediaries, and on this factual finding alone, the respondent’s

case of fraudulent and unfair trade practice stands established.

Civil Appeal No. 4015 of 2020 Page 68 of 135

106. The 12 entities were allegedly created solely to circumvent position limits

and were admittedly controlled by the appellant no. 1, acting on its

instructions under Clause 1.2 of the agency agreements. Clause 3.2 further

provided that all profits would be passed on to the appellant no. 1, indicating

that the arrangement was structured from the outset to enable illegal gains

through an artificial trading mechanism.

107. As regards the issue of hedging, it was submitted that, the defence of hedging

is an afterthought, as there was no Board Resolution that authorized such

hedging transactions. It was implausible that 12 newly created entities with

no prior experience in futures trading, acting on the appellant no.1’s

instructions and substantially breaching position limits, were engaged

merely to mitigate risk.

108. Under the 2001 SEBI Circular, open positions in derivatives cannot exceed

the higher of 1% of free-float market capitalisation or 5% of open interest in

the relevant contract. In RPL’s case, the permissible limit was 1.01 crore

shares, whereas the 12 entities together built positions of 9.92 crore shares,

with concentration ranging from 62% to 93% of open interest. This

substantial breach shows that the defence of hedging is untenable and liable

to be rejected.

Civil Appeal No. 4015 of 2020 Page 69 of 135

109. If the appellant no. 1’s submissions are accepted, the position limits under

the 2001 SEBI Circular can be easily circumvented by creating multiple

entities under the guise of hedging. The agreement itself provides for

transfer of profits to the appellant no. 1 (Clause 3.2), which is inconsistent

with any genuine risk-mitigation purpose. The respondent therefore

submitted that the arrangement was aimed at earning illegal profits rather

than hedging risk.

110. The appellant no. 1’s position in RPL November 2007 futures on the date of

settlement, was twice its cash segment exposure, which according to the

respondent was inconsistent with any genuine hedging structure. No bona

fide hedge would be structured to generate disproportionate gains in

derivatives rather than through actual cash market sales. The appellant no. 1

retained a short position of 7.97 crore shares until expiry, despite a stated

hedging requirement of only 4.45 crore shares from 16.11.2007, which

indicated a devious scheme rather than a valid hedge.

111. Mr. Datar relied on the Judgment of the Supreme Court of Canada in

Ontario (Minister of Finance) v. Placer Dome Canada Ltd., reported in

2006 SCC OnLine Can SC 20 and Gujarat High Court in Pankaj Oil Mills

v. CIT reported in 1976 SCC OnLine Guj 33, to submit that hedging must

have a clear correlation with the underlying risk. On settled legal principles,

Civil Appeal No. 4015 of 2020 Page 70 of 135

the use of 12 entities to breach prescribed limits cannot qualify as hedging

and instead constitutes a fraudulent device to maximise profits. In any event,

even a genuine hedging strategy cannot justify crossing regulatory position

limits.

112. As regards the issue of breach of position limits, it was submitted that the

appellant no.1’s reliance on the absence of an express reference to ‘persons

acting in concert’ (“PAC”) in the 2001 SEBI Circular, unlike the 1999 SEBI

Circular, is misplaced. The 1999 Circular relates to index futures, and its

PAC framework cannot be extended to single stock futures governed by the

2001 SEBI Circular.

113. On the other hand, the 2001 SEBI Circular introduced position limits for

single stock futures in respect of individual customers/clients, and its

objective was to deter the concentration of positions and prevent market

manipulation. Therefore, its scope is distinct from the 1999 SEBI Circular,

and the ambit of both circulars cannot be treated as identical.

114. The 12 entities were created solely to bypass position limits. It was

submitted that the said entities had no prior derivatives activity and existed

only to circumvent regulation. The respondent submitted that such indirect

violation was impermissible, and lack of PAC disclosure cannot justify such

Civil Appeal No. 4015 of 2020 Page 71 of 135

structuring. The arrangement created information asymmetry and

constituted fraudulent market manipulation intended to earn undue gains.

115. The respondent submitted that the WTM and SAT correctly proceeded on

the basis of a principal–agency relationship, wherein all 12 entities were

acting as agents of the appellant no. 1 and that their actions were attributable

to the appellant no. 1 through the contractual terms and the common link of

Mr. Sandeep Agarwal. On this basis, the violation of position limits was

attributable to the appellant no. 1 itself. The appellant no. 1 was found to

have made unlawful gains of Rs. 513 crore, with disgorgement computed at

Rs. 447.27 crore after adjusting for permissible open interest limits under

the 2001 SEBI Circular.

116. As regards the issue of the amount of penalty, the appellant no. 1’s

submission that any breach of position limits would attract only penalty of

Rs. 1 lakh under the SCRA circulars and that PFUTP Regulations were

inapplicable on the instant facts, is liable to be rejected. The creation of 12

entities, coupled with the agency arrangements and systematic breach of

position limits, indicated a coordinated scheme to earn substantial profits in

the derivatives segment alongside cash market sales.

117. The learned senior counsel drew the attention of this Court to the definition

of “fraud” under Regulation 2(1)(c) of the PFUTP Regulations, which is

Civil Appeal No. 4015 of 2020 Page 72 of 135

inclusive and covers deceitful acts committed by a person or through agents.

The creation of 12 entities solely to breach position limits, without

disclosure, amounted to concealment and misrepresentation of material

facts, leaving the market unaware of the concentration of nearly 90% open

interest with the appellant no. 1-linked entities. This created a false

impression of market position and price expectations. Further, the sale of

1.95 to 2.24 crore shares in the last minutes of trading with the intent to

influence the settlement price forms part of the fraudulent scheme under the

PFUTP Regulations.

118. It was submitted that the appellant no. 1 violated Regulation 3 of the PFUTP

Regulations, as the creation of 12 entities was part of a fraudulent

arrangement and the sale of 1.95 crore RPL shares in the last 10 minutes, to

secure disproportionate gains fall within Regulations 3(b) and 3(c), and

Regulations 4(1) and 4(2)(d) and (e). Once PFUTP violations are

crystalized, the enforcement action is supposed to be taken under the SEBI

Act and PFUTP Regulations, and not under the SCRA.

119. The WTM’s order as affirmed by SAT directed for disgorgement under

Sections 11 and 11B of the SEBI Act, with the further direction that the

amount be credited to the Investor Protection and Education Fund (IPEF).

Further, the Adjudicating Officer found the appellant no. 1 guilty of

Civil Appeal No. 4015 of 2020 Page 73 of 135

violating the PFUTP Regulations and imposed a penalty of Rs. 25 crores

under Section 15HA of the SEBI Act, which was upheld by SAT, noting that

the matter was already covered by its order dated 05.11.2020.

120. As regards the issue of inducement, the appellant no. 1 submitted that

numerous independent participants traded in the RPL shares and derivatives

in the cash and derivatives segments, with no evidence that any of these

trades were induced by the appellant no. 1. This submission is liable to be

rejected in light of Rakhi Trading (supra) wherein this Court held that in

screen-based trading, inducement may be inferred once market manipulation

is established and no separate proof is required. Accordingly, once

manipulation is found, inducement is presumed and the plea of the appellant

no. 1 is liable to be rejected.

121. The appellant no. 1 cannot plead lack of inducement when it created 12

entities that cornered up to 93% of open interest and allegedly dumped

around 1.95 to 2.24 crore RPL shares in the cash segment to depress the

settlement price. Non-disclosure of these connected entities and their

contractual arrangements with the appellant no. 1 created information

asymmetry, undermining market integrity and giving a false impression of

genuine market positioning. This concealment led the market to believe in a

legitimate short position and likely price decline, enabling the appellant no.

Civil Appeal No. 4015 of 2020 Page 74 of 135

1 to secure disproportionate gains through an artificial and fraudulent

arrangement.

122. As regards trading in the last 10 minutes and alleged manipulation, Mr.

Datar submitted that the appellant no. 1 sold 2.24 crore shares in the last 10

minutes of trading on the expiry day. The settlement price was based on the

last 30 minutes volume-weighted average price in the cash segment. The

appellant no. 1 had taken disproportionately large short positions in the

November RPL futures, with exposure on settlement day being double its

cash market position, thereby creating a situation where it would benefit

from any suppression in the settlement price.

123. The appellant no. 1 held short positions at Rs. 265/- per share and, due to its

large exposure in the November 2007 Futures, it stood to benefit from a

lower settlement price. Th respondent alleged that heavy selling in the last

30 minutes, especially 10 minutes, depressed volume-weighted average

price, with multiple trades below LTP indicating intent to influence price.

The scheme resulted in suppressed settlement price and unlawful gains of

Rs. 513 crores, with the respondent computing disgorgement after applying

open interest limits and adjusting it to Rs. 447.27 crore.

124. In the last, it was submitted that the appellant no. 1’s net gain of Rs. 513

crores arose from the alleged market manipulation through the scheme of

Civil Appeal No. 4015 of 2020 Page 75 of 135

employing 12 entities for circumventing position limits. Therefore, the said

amount of money constitutes unlawful profit. The respondent, while

computing disgorgement, applied the open interest limit of 1.01 crore shares

and determined the disgorgement amount at Rs. 447.27 crore, along with

12% interest from 29.11.2007 till payment, liable to be recovered under

Sections 11 and 11B of the SEBI Act.

D. ISSUES FOR DETERMINATION

125. Having heard the learned counsel appearing for the parties and having gone

through the materials on record, the following questions fall for our

consideration:

i. Whether the agreements entered into by and between the appellant no.

1 and the twelve entities were fraudulent and manipulative device

under the PFUTP Regulations?

ii. Whether the 9.92 crore open positions in the November 2007 futures

segment of the RPL stock, were valid hedges?

iii. Whether the agreements entered into by and between the appellant no.

1 and the twelve entities were used by the appellant no. 1 to corner open

positions in the November 2007 futures segment of the RPL stock for

the purpose of manipulating the futures market?

Civil Appeal No. 4015 of 2020 Page 76 of 135

iv. Whether the sale of 1.95 crore RPL shares in the cash segment during

the last 10 minutes of the trading day on 29.11.2007 was an attempt to

depress RPL share prices to make unlawful profits in the November

2007 futures segment?

E. ANALYSIS

126. Before adverting to the rival submissions canvassed on either side, we must

look into few relevant provisions of law.

i. Relevant provisions of law

127. Derivatives trading i.e., futures and options in both the index and single-

stock market was introduced in the stock exchanges of the country on the

basis of the recommendations made by the L.C. Gupta Committee, 1998

which reads thus:

“The Committee strongly favors the introduction of

financial derivatives in order to provide the facility for

hedging in the most cost efficient way against market risk.

This is an important economic purpose. At the same time,

it recognizes that in order to make hedging possible, the

market should also have speculators who are prepared to

be counter parties to hedgers. A derivative market wholly

or mostly consisting of speculators is unlikely to be a sound

economic institution. A soundly based derivatives market

requires the presence of both hedgers and speculators' and

went further to hold, Hedging will not be possible if there

are no speculators.”

Civil Appeal No. 4015 of 2020 Page 77 of 135

128. As a result of the aforesaid recommendation, Section 18A was introduced in

the SCRA to permit trading in derivatives. Section 18A reads thus:

“18A. Contracts in derivatives.–

Notwithstanding anything contained in any other law for

the lime being in force, contracts in derivative shall be

legal and valid if such contracts are–

(a) traded on a recognised stock exchange;

(b) settled on the clearing house of the recognised stock

exchange; or in accordance with the rules and bye-laws of

such stock exchange.

(c) between such parties and on such terms as the Central

Government may, by notification in the Official Gazette,

specify.”

129. The SEBI introduced position limits for trading in such derivatives in the

index market. The relevant portions of the SEBI Circular No. IES/DC/CIR-

4/99 dated 28.07.1999 on “Risk Containment Measures for the Index

Futures Market” (“1999 SEBI Circular”) read thus:

“5. Position Limits :

1. Customer Level : Instead of prescribing position limits

at the client level, a self-disclosure requirement similar

to that in the take-over regulations is prescribed :

1. Any person or persons acting in concert who

together own 15% or more of the open interest shall

be required to report this fact to the exchange and

failure to do so shall attract a penalty as laid down

by the exchange / clearing corporation / SEBI.

Civil Appeal No. 4015 of 2020 Page 78 of 135

2. This requirement may not be monitored by the

exchange on a real time basis, but if during any

investigation or otherwise, any violation is proved,

penalties can be levied.

3. This would not mean a ban on large open positions

but only a disclosure requirement.”

(Emphasis supplied)

130. Similar to the 1999 SEBI Circular, the SEBI introduced position limits for

trading in futures of single-stocks by way of the SEBI Circular No.

SMDRP/DC/CIR-10/01 dated 02.11.2001 on “Scheme for introduction of

Single Stock Futures and the Risk Containment Measures.” (“2001 SEBI

Circular”). The relevant portions of the said Circular are reproduced below:

“6. Position Limits

On the introduction of index futures contracts, index

options contracts and stock options contracts the trading

member level and the market wide position limits were

prescribed. However, with the introduction of Single Stock

Futures contracts, a customer level position limit is also

prescribed to deter and detect concentration of positions

and market manipulation. The market wide position in the

case of stock specific derivative contract (both stock

options and Single Stock Future) shall be applicable on the

cumulative open positions in derivative contracts on that

that stock at an Exchange. The volumes in the derivative

markets are growing steadily and therefore, position limits

shall be reviewed by the Advisory Committee on

Derivatives from time to time and also the Advisory

Committee shall be empowered to weed out any

operational issue in implementation of the position limits.

Civil Appeal No. 4015 of 2020 Page 79 of 135

Client / Customer level position limits:

The gross open position across all derivative contracts on

a particular underlying of a customer/client should not

exceed the higher of

o 1% of the free float market capitalisation (in terms of

number of shares).

or

o 5% of the open interest in the derivative contracts on a

particular underlying stock (in terms of number of

contracts).

This position limits would be applicable on the combine

position in all derivative contracts on an underlying stock

at an exchange.”

(Emphasis supplied)

131. “Fraud” under the PFUTP is defined in Regulation 2(1)(c) thereof and reads

thus:

“2. Definitions.–

(1) In these regulations, unless the context otherwise

requires,–

(…)

(c) "fraud" includes any act, expression, omission or

concealment committed whether in a deceitful manner or

not by a person or by any other person with his connivance

or by his agent while dealing in securities in order to

induce another person or his agent to deal in securities,

whether or not there is any wrongful gain or avoidance of

any loss, and shall also include

(1) a knowing misrepresentation of the truth or

concealment of material fact in order that another person

may act to his detriment;

(2) a suggestion as to a fact which is not true by one who

does not believe it to be true; A

Civil Appeal No. 4015 of 2020 Page 80 of 135

(3) an active concealment of a fact by a person having

knowledge or belief of the fact;

(4) a promise made without any intention of performing it;

(5) a representation made in a reckless and careless

manner whether it be true or false;

(6) any such act or omission as any other law specifically

declares to be fraudulent,

(7) deceptive behaviour by a person depriving another of

informed consent or full participation,

(8) a false statement made without reasonable ground for

believing it to be true.

(9) the act of an issuer of securities giving out

misinformation that affects the market price of the security,

resulting in investors being effectively misled even though

they did not rely on the statement itself or anything derived

from it other than the market price.

And “fraudulent” shall be construed accordingly;

Nothing contained in this clause shall apply to any general

comments made in good faith in regard to-

(a) the economic policy of the government

(b) the economic situation of the country

(c) trends in the securities market or

(d) any other matter of a like nature

whether such comments are made in public or in private;”

132. Chapter II of the PFUTP Regulations prohibit fraudulent and unfair trade

practices in the securities market. Regulations 3 and 4 thereof are reproduced

below:

Civil Appeal No. 4015 of 2020 Page 81 of 135

“3. Prohibition of certain dealings in securities No

person shall directly or indirectly—

(a) buy, sell or otherwise deal in securities in a fraudulent

manner;

(b) use or employ, in connection with issue, purchase or

sale of any security listed or proposed to be listed in a

recognized stock exchange, any manipulative or deceptive

device or contrivance in contravention of the provisions of

the Act or the rules or the regulations made there under;

(c) employ any device, scheme or artifice to defraud in

connection with dealing in or issue of securities which are

listed or proposed to be listed on a recognized stock

exchange;

(d) engage in any act, practice, course of business which

operates or would operate as fraud or deceit upon any

person in connection with any dealing in or issue of

securities which are listed or proposed to be listed on a

recognized stock exchange in contravention of the

provisions of the Act or the rules and the regulations made

there under.

4. Prohibition of manipulative, fraudulent and unfair

trade practices—

(1) Without prejudice to the provisions of regulation 3, no

person shall indulge in a fraudulent or an unfair trade

practice in securities.

(2) Dealing in securities shall be deemed to be a fraudulent

or an unfair trade practice if it involves fraud and may

include all or any of the following, namely:—

(…)

(b) dealing in a security not intended to effect transfer of

beneficial ownership but intended to operate only as a

Civil Appeal No. 4015 of 2020 Page 82 of 135

device to inflate, depress or cause fluctuations in the price

of such security for wrongful gain or avoidance of loss;

(…)

(d) inducing any person for dealing in any securities

for artificially inflating, depressing, maintaining or

causing fluctuation in the price of securities through

any means including by paying, offering or agreeing to pay

or offer any money or money's worth, directly or indirectly,

to any person;

(e) any act or omission amounting to manipulation of the

price of a security including, influencing or manipulating

the reference price or bench mark price of any

securities; (…)”

(Emphasis supplied)

ii. Agency agreements between the appellant no. 1 and 12 entities

133. It is undisputed by either of the parties in the present matter that the

agreements entered into by and between the appellant no. 1 and the twelve

entities create a principal-agent relationship. This is clear from the perusal

of the said agreements. The relevant clauses of the agreements that are

identical in language and scope, read thus:

“1.2 All investment will be made by the Agent based on

prior instructions of the Principal. In case the Agent

recommends any proposals, the Agent shall execute the

transactions only after the proposal has been evaluated

and approved by the Principal and investment instructions

are thereafter communicated to the Agent. Sale of all

investments will also be done by the Agent. only based on

prior instructions of the Principal.

Civil Appeal No. 4015 of 2020 Page 83 of 135

3.⁠ ⁠AGENCY

3.1 In executing all transactions of investment and sale act

as agent of the principal.

3.2 During the Course of executing transactions, the Agent

is permitted to execute transactions in its own name. It is,

however, understood that all such transactions will be

done by the Agent for and on behalf of the Principal and

all profits and losses arising out of such transactions shall

be to the account of the Principal.”

(Emphasis supplied)

134. The appellant no. 1 has contended before us that the aforesaid agency

agreement makes the appellant no. 1 and the 12 entities “persons acting in

concert” for the purposes of entering 9.92 crore positions in the November

2007 RPL futures segment. The appellant no. 1 relied upon a comparative

reading of the 1999 SEBI Circular and the 2001 SEBI Circular to contend

that the position limits were applicable on persons acting in concert in the

former only. However, the 2001 SEBI Circular provided for no such

restriction which was understood by the appellant no. 1 to mean that for

persons acting in concert in respect of the single-stock futures, there were

no prescriptions as regards position limits.

135. In our considered view, this is a hyper-literal interpretation of the 2001 SEBI

Circular without any reference to the objective sought to be achieved by the

said Circular. Position limits in the futures market help in preventing or

Civil Appeal No. 4015 of 2020 Page 84 of 135

minimizing market manipulation and preserving the integrity of price

discovery. They also reduce systemic risks that accompany large

concentrated positions thereby preventing market crashes. To say that these

objectives apply to individual clients/customers but not to persons acting in

concert is erroneous.

136. We say so because even though individual clients/customers, who are acting

together, may be well within the client/customer level position limits, yet

the effect of their coordinated transactions may have adverse impact on the

market and participants.

137. We note that the 1999 SEBI Circular places only disclosure requirements

and advises the clients/customers that such position limits do not constitute

a ban on taking positions that may cross the stipulated limits. Similarly, the

language of the 2001 SEBI Circular indicates that at the time the transactions

in question were made, there were only disclosure requirements placed on a

client/customer who wanted to enter positions higher than the prescribed

limit. The relevant portion of the 2001 Circular reads thus:

“At present the trading system of the exchange requires

that client ID should be provided for each trade. However,

this client ID is assigned by the trading member is not

unique to a client across the market. At present the

exchange monitors the trading member level position

limits however, the client wise limit is not monitored by the

Civil Appeal No. 4015 of 2020 Page 85 of 135

exchange and is a requirement of disclosure by the client

to the trading member and to the Exchange. (…)”

(Emphasis supplied)

138. A holistic reading of the stipulations as regards position limits in the 2001

SEBI Circular indicates that there was no ban on taking positions greater

than the mandated limits, rather the client/customer was only supposed to

disclose the fact that its positions would be in excess of the prescribed limits.

Therefore, the provision of penalty in the 2001 SEBI Circular was for not

complying with disclosure requirements rather than breach of position

limits.

139. The materials placed on record by the parties show that the appellant no. 1

withheld information in respect of its agreements with the twelve entities so

as to take positions in RPL futures significantly higher than the limits

stipulated in the 2001 Circular. In our considered view, the present matter is

squarely covered by the legal principle that what cannot be done directly,

cannot be done indirectly [See: Firm of Pratapchand Nopaji v. Firm of

Kotrike Venkatta Shetty, reported in (1975) 2 SCC 208 and Jagir Singh v.

Rambir Singh, reported in AIR 1979 SC 381].

140. The appellant no. 1 attempted to capitalize on the absence of position limits

for ‘persons acting in concert’ in the 2001 SEBI Circular by establishing

agency relationships with 12 entities. The same may have been permissible

Civil Appeal No. 4015 of 2020 Page 86 of 135

had the appellant no. 1 disclosed the said fact. However, it failed to do so.

In such view of the matter, we are of the considered view that the appellant

no. 1 cannot shield its actions behind the argument that the 2001 SEBI

Circular did not provide any position limits for ‘persons acting in concert’.

We say so because the very stipulation of position limits in the Circular

creates an implicit duty to disclose such trades that may be in breach of such

limits.

141. Therefore, there is no gainsaying that the appellant no. 1 violated the

disclosure requirement stated in the 2001 Circular and hence, is liable to be

penalized for the same under the said Circular. This, we say so, irrespective

of whether the act of the appellant amounts to fraud or manipulation as

contemplated under the provisions.

142. We may address a small submission of the respondent that the futures

positions taken by the appellants cannot be considered to be valid

transactions as Section 18A of the SCRA mandates that a contract in

derivatives shall be legal and valid only if such contracts are traded on a

recognized stock exchange and settled on the clearing house of such

exchange, in accordance with the rules and by-laws of such stock exchange.

Since the 2001 NSE Circular also stipulated position limits, it is the

contention of the respondent that the breach of position limits by the

Civil Appeal No. 4015 of 2020 Page 87 of 135

appellant no. 1 would render its trades in the November 2007 RPL futures

segment as invalid for violation of rules and by-laws of the NSE.

143. In our considered opinion, Section 18A of the SCRA is required to be read

with Sections 9(1) and 9(2) respectively of the same. Section 9(1) and (2)

read thus:

“9. Power of recognised stock exchanges to make bye-laws

(1) Any recognised stock exchange may, subject to the

previous approval of the Securities and Exchange Board

of India, make bye-laws for the regulation and control of

contracts.

(2) In particular, and without prejudice to the generality

of the foregoing power, such bye-laws may provide for

(…)”

144. What can be discerned from the aforesaid is that the 2001 NSE Circular must

be within the four corners of the provisions present in the 2001 SEBI

Circular. As discussed in the earlier parts of this judgment, the 2001 SEBI

Circular mandates the disclosure of such positions as may have been taken

in excess of the limits set out therein. The logical inference that may be

derived from this, upon a simultaneous reading of the 1999 SEBI Circular,

is that there was no ban on exceeding the position limits. The only

requirement was to disclose.

Civil Appeal No. 4015 of 2020 Page 88 of 135

145. The 2001 SEBI Circular nowhere provides that the transgression of the

position limits would have the effect of voiding the contract in derivatives

taken above and beyond such limits. The only consequence provided for is

that there would be a penalty in the form of fine, expulsion of membership,

suspension from membership for a particular period or any other penalty not

in the nature of payment of money. Nowhere in the Circular has it been

stated that the effect of breach of the position limits would void the

infringing trades. What is not expressly stated to be a consequence of a

violation, cannot be read into the Circular by implication. In other words, if

the intention of the Circular was to nullify the effect of the futures contracts

for violation of position limits, the respondent authority would have

expressly said so, more particularly, when penalties had already been

prescribed.

146. Therefore, in our considered view, the submission of the respondent that the

excess position limits would be invalidated in terms of Section 18A of the

SCRA is liable to be rejected.

147. However, we find it apposite to clarify at the outset that the agency

agreements entered into between the appellant no. 1 and the 12 entities may

or may not be considered to be a fraudulent or manipulative device

depending on the circumstances surrounding the said agreements.

Civil Appeal No. 4015 of 2020 Page 89 of 135

iii. Cornering of the positions in RPL November 2007 futures segment

by the appellant no. 1

148. The respondent herein has submitted that the appellant no. 1, by way of

agency agreements with the 12 entities, had pre-planned the cornering of

open positions in the November 2007 futures segment of the RPL stock to

gain unlawful profits therein. Therefore, the breach of position limits

through the use of such principal-agent relationship attracted the application

of the PFUTP Regulations.

149. We find it apposite to note that the respondent’s claim that the appellant no.

1 cornered 61.15% of the open positions on 06.11.2007 and increased the

same to 93.60% on the settlement date i.e., 29.11.2007, is in respect of the

one-month settlement of futures position i.e., only in November 2007 futures

segment.

150. In our considered view, the aforesaid assertion is not valid in terms of the

2001 SEBI Circular which specifically states that the positions limits as

stated therein, are applicable on the combined positions in all derivative

contracts on an underlying stock at a particular stock exchange. The relevant

portion reads thus– “This position limits would be applicable on the combine

position in all derivative contracts on an underlying stock at an exchange.”

Civil Appeal No. 4015 of 2020 Page 90 of 135

151. What is discernible from the aforesaid is that position limits are applicable

on all derivatives be it futures or options. Further, there is no distinction

between one-month, two-months or three-months futures series insofar as

the position limits under the 2001 SEBI Circular are concerned. Therefore,

calculating client/customer specific positions merely on the basis of the total

open positions in the November 2007 futures of RPL is erroneous. Rather,

the open position of that stock, in that exchange, across all derivatives ought

to have been considered.

152. We say so because calculating open positions per a singular series would

create a loophole by way of which a trader could accumulate a dominant

position by spreading its holdings across several series while staying within

the 5% open positions limit under the 2001 SEBI Circular. We may illustrate

this apprehension in the following manner:

If position limit are per series only The problem created

A client/customer holds 4.9% open

interest in the May 2026 futures of a

particular underlying stock–

Then this would be considered to

be just within the limit prescribed

under the 2001 SEBI Circular.

A client/customer holds 4.9% open

interest in the June 2026 futures of a

particular underlying stock–

Then this would be considered to

be just within the limit prescribed

under the 2001 SEBI Circular.

Civil Appeal No. 4015 of 2020 Page 91 of 135

A client/customer holds 4.9% open

interest in the July 2026 futures of a

particular underlying stock–

Then this would be considered to

be just within the limit prescribed

under the 2001 SEBI Circular.

Combined position across all series–

1-month (May 2026), 2-months (June

2026) and 3-months (July 2026)

series–

This would lead to enormous share

in the combined derivatives

market and may end up effectively

cornering across all series.

153. Therefore, it makes regulatory sense to calculate open interests of a

client/customer on the basis of its positions across all derivatives and not on

the basis of a particular series. It is this very regulatory intention that has

been underscored in the 2001 SEBI Circular.

154. We say without any manner of doubt in our minds that the respondent ought

to have calculated the percentage of open positions of the appellant no. 1

(through the 12 entities) on the basis of the total open positions across (i)

November 2007 RPL futures, (ii) December 2007 RPL futures, (iii) January

2008 RPL futures, and (iv) options position in the underlying RPL stock.

155. The appellant no. 1 submitted that even though its total open interest in the

futures segment, was in the one-month series to be settled at the end of

trading in November 2007, yet such total open interest was supposed to be

calculated on the aggregate of total open positions across all derivatives of

the underlying RPL stock. In furtherance of this submission, the appellant

Civil Appeal No. 4015 of 2020 Page 92 of 135

no. 1 provided calculations of its futures positions across all derivatives that

has not been refuted by the respondent.

Date Respondent’s calculations

(basis of open positions in

the November 2007 RPL

futures)

Appellant no. 1’s

calculations

(basis of open positions

across all derivatives)

06.11.2007 61.15% 48.60%

07.11.2007 63.82% 53.60%

08.11.2007 No calculation provided 56%

09.11.2007 No calculation provided 56.30%

12.11.2007 No calculation provided 57.90%

13.11.2007 No calculation provided 58.50%

14.11.2007 No calculation provided 59.30%

15.11.2007 No calculation provided 59.70%

16.11.2007 No calculation provided 60.30%

19.11.2007 No calculation provided 59.70%

20.11.2007 No calculation provided 59.50%

21.11.2007 No calculation provided 59.50%

22.11.2007 No calculation provided 57%

23.11.2007 78.95% 58.10%

26.11.2007 No calculation provided 45%

27.11.2007 No calculation provided 46.90%

28.11.2007 No calculation provided 47.20%

29.11.2007 93.60% 40.10%

156. The aforesaid makes it clear that the difference in calculation basis has a

significant impact on the percentage result. Though the appellant no. 1’s

calculation of its open positions as on 29.11.2007 i.e., 40.10% is still

considerably higher than the position limits prescribed in the 2001 SEBI

Civil Appeal No. 4015 of 2020 Page 93 of 135

Circular, yet it is not as grave as shown by the respondent’s calculations that

have been based on a singular series’ open interest.

157. There is no gainsaying that the appellant no. 1 had a dominant position in

the futures market even when calculated for all derivatives, however such

dominant position must be viewed in the context of its avowed purpose of

sale of 5% RPL shares in the cash segment.

158. The appellant no. 1 sought to raise monies for its projects by way of selling

5% RPL shares in the cash segment, i.e., 22.50 crore shares. The exceedingly

bullish price trend of the RPL share is an undisputed fact. The appellant no.

1 had apprehensions on the basis of analyst reports that the RPL share may

face price correction and would start following a bearish trend. In our

considered opinion, such apprehension was not misplaced. This is especially

so considering that the appellant no. 1 sought to sell 22.5 crore shares in the

cash segment which may also bring down the prices albeit in a phased

manner. The appellant no. 1, after taking all of these factors into account,

found it fit to hedge its risk by locking in prices as on 01.11.2007 to

06.11.2007 for 9.92 crore positions in the November 2007 futures segment.

159. We find it apposite to note that though 9.92 crore futures positions were

significantly above the position limits prescribed under the 2001 SEBI

Circular, yet they counted for less than half of the underlying 22.5 crore

Civil Appeal No. 4015 of 2020 Page 94 of 135

shares that were exposed to the risk of price movements in the cash segment.

To say that the 2001 SEBI Circular prohibits the breach of position limits

and allows hedging only up to such a limit would be an erroneous reading

of the same. As discussed above, a client/customer was only supposed to

disclose their positions over and above the position limits and there was no

ban per se on the crossing of such limits. We find that such reading is

necessary in scenarios such as in the present matter where hedging only to

the extent of position limits, would have been equivalent to no hedging at

all.

160. In the same breath, we recognize that 40.10% of open interest is a significant

share in the futures market and there is no gainsaying that a decrease in

prices would greatly benefit the appellant no. 1. However, whether the

factum of cornering by itself would constitute a fraudulent act under the

PFUTP Regulations remains to be seen.

iv. “Fraud” under the PFUTP Regulations

161. “Fraud” under the PFUTP Regulations has been defined under Regulation

2(1)(c) thereof. For the purposes of this exposition, we may only refer to the

limited portion of the said definition as reproduced below:

“(c) "fraud" includes any act, expression, omission or

concealment committed whether in a deceitful manner or

not by a person or by any other person with his connivance

Civil Appeal No. 4015 of 2020 Page 95 of 135

or by his agent while dealing in securities in order to

induce another person or his agent to deal in securities,

whether or not there is any wrongful gain or avoidance of

any loss”

(Emphasis supplied)

162. A bare textual reading of the aforesaid definition indicates that–

• First, a mala fide intention is not necessary for an act, expression,

omission or concealment to fall under the definition,

• Secondly, inducing another person to deal in securities is a necessary

ingredient to constitute fraud,

• Lastly, there is no requirement to prove injury to the persons who would

have been adversely impacted by the fraud played upon them. This

means that an act, expression, omission or concealment would amount

to fraud irrespective of whether the person attempting to manipulate

the market, achieved their end result.

163. We may refer to few rulings of the SAT as well as of this Court to understand

the ambit of the aforesaid definition. In Pyramid Saimira Theatre Ltd. v.

Securities and Exchange Board of India, reported in 2010 SCC OnLine

SAT 146, it was observed that under the PFUTP Regulations, any

manipulative or deceptive device or contrivance put into play by a person

does not require further proof of mala fide state of mind or intention, as long

Civil Appeal No. 4015 of 2020 Page 96 of 135

as the device is manipulative in itself. The relevant portion of the judgment

reads thus:

“9. (…) A bare reading of Regulation 3(b) would make it

clear that it does not import any concept of fraud at all and

the words “any manipulative or deceptive device or

contrivance” do not require any state of mind. As long as

the device or contrivance is manipulative in itself, no

further state of mind or intention is required. Regulation

3(c), on the other hand, imports the concept of fraud but

fraud as defined in Regulation 2(1)(c) of the Regulations

(…)

It is clear from this definition that any act, omission or

concealment to be a fraud within the meaning of the

Regulations need not be committed in a deceitful manner.

The words “whether in a deceitful manner or not” are

significant and clearly indicate that intention to deceive is

not an essential requirement of the definition of fraud as

given in the Regulations. In other words, mens rea or

criminal intent is not an essential ingredient to establish

fraud. Even making a false statement without believing it

to be true is by itself an act of fraud. (…)”

(Emphasis supplied)

164. On the other hand, in Ketan Parekh v. Securities & Exchange Board of

India, reported in 2006 SCC OnLine SAT 221, the SAT observed that

intention of the parties involved in manipulation of the market is key to

establishing whether a particular ‘synchronised’ or negotiated deal is illegal

or not. Further, a list of factors, albeit not exhaustive, was provided that may

Civil Appeal No. 4015 of 2020 Page 97 of 135

enable the respondent authority and the courts to gauge the intention of the

party who is allegedly involved in the fraudulent activity. These include:

a) Nature of the transaction executed,

b) the frequency with which such transactions are undertaken,

c) the value of the transactions,

d) whether they involve circular trading and whether there is real change

of beneficial ownership, and

e) the conditions then prevailing in the market.

The relevant portion of the judgment in Ketan Parekh (supra) reads thus:

“20. (…) As already observed ‘synchronisation’ or a

negotiated deal ipso facto is not illegal. A synchronised

transaction will, however, be illegal or violative of the

Regulations if it is executed with a view to manipulate the

market or if it results in circular trading or is dubious in

nature and is executed with a view to avoid regulatory

detection or does not involve change of beneficial

ownership or is executed to create false volumes resulting

in upsetting the market equilibrium. Any transaction

executed with the intention to defeat the market mechanism

whether negotiated or not would be illegal. Whether a

transaction has been executed with the intention to

manipulate the market or defeat its mechanism will depend

upon the intention of the parties which could be inferred

from the attending circumstances because direct evidence

in such cases may not be available. The nature of the

transaction executed, the frequency with which such

transactions are undertaken, the value of the transactions,

whether they involve circular trading and whether there is

real change of beneficial ownership, the conditions then

Civil Appeal No. 4015 of 2020 Page 98 of 135

prevailing in the market are some of the factors which go

to show the intention of the parties. This list of factors, in

the very nature of things, cannot be exhaustive. Any one

factor may or may not be decisive and it is from the

cumulative effect of these that an inference will have to be

drawn.”

(Emphasis supplied)

165. In SEBI v. Kanhaiyalal Baldevbhai Patel, reported in (2017) 15 SCC 1,

this Court observed that the definition of fraud under Regulation 2(1)(c) of

the PFUTP Regulations is inclusive and must be given a broad and

expansive understanding. The following was observed:

i) First, an expansive definition would mean that acts, expressions,

omissions or concealments that were not done deceitfully are also

covered by the definition. In this sense, the first part of the definition

of fraud may be termed as a catch all provision while the second part

delineates certain situations in which fraud would be made out.

However, this does not change the fact that the definition is not

exhaustive and may include situations which are not covered by the

second part.

ii) Secondly, it was held that emphasis must be placed on whether

another person(s) was induced to deal in securities as a result of the

fraudulent or manipulative device or misrepresentation of the person

Civil Appeal No. 4015 of 2020 Page 99 of 135

allegedly committing the fraud. This was held to be the necessary

condition for PFUTP Regulations to be applicable.

iii) The relevant portions of the judgment in Kanhaiyalal Baldevbhai

Patel (supra) read thus:

“30. The definition of “fraud” under clause (c) of

Regulation 2 has two parts; first part may be termed as

catch all provision while the second part includes specific

instances which are also included as part and parcel of

term “fraud”. The ingredients of the first part of the

definition are:

1. includes an act, expression, omission or concealment

whether in a deceitful manner or not;

2. by a person or by any other person with his connivance

or his agent while dealing in securities;

3. so that the same induces another person or his agent to

deal in securities;

4. whether or not there is any wrongful gain or avoidance

of any loss.

---xxx---

54. The definition of “fraud”, which is an inclusive

definition and, therefore, has to be understood to be broad

and expansive, contemplates even an action or omission,

as may be committed, even without any deceit if such act

or omission has the effect of inducing another person to

deal in securities. Certainly, the definition expands beyond

what can be normally understood to be a “fraudulent act”

or a conduct amounting to “fraud”. The emphasis is on the

act of inducement and the scrutiny must, therefore, be on

the meaning that must be attributed to the word “induce”.

---xxx---

56. A person can be said to have induced another person

to act in a particular way or not to act in a particular way

Civil Appeal No. 4015 of 2020 Page 100 of 135

if on the basis of facts and statements made by the first

person the second person commits an act or omits to

perform any particular act. The test to determine whether

the second person had been induced to act in the manner

he did or not to act in the manner that he proposed, is

whether but for the representation of the facts made by the

first person, the latter would not have acted in the manner

he did. This is also how the word “inducement” is

understood in Criminal law. The difference between

inducement in Criminal law and the wider meaning thereof

as in the present case, is that to make inducement an

offence the intention behind the representation or

misrepresentation of facts must be dishonest whereas in

the latter category of cases like the present the element of

dishonesty need not be present or proved and established

to be present. In the latter category of cases, a mere

inference, rather than proof, that the person induced would

not have acted in the manner that he did but for the

inducement is sufficient. No element of dishonesty or bad

faith in the making of the inducement would be required.

---xxx---

62. To attract the rigour of Regulations 3 and 4 of the 2003

Regulations, mens rea is not an indispensable requirement

and the correct test is one of preponderance of

probabilities. Merely because the operation of the

aforesaid two provisions of the 2003 Regulations invite

penal consequences on the defaulters, proof beyond

reasonable doubt as held by this Court in SEBI v. Kishore

R. Ajmera is not an indispensable requirement. The

inferential conclusion from the proved and admitted facts,

so long the same are reasonable and can be legitimately

arrived at on a consideration of the totality of the

materials, would be permissible and legally justified.”

(Emphasis supplied)

Civil Appeal No. 4015 of 2020 Page 101 of 135

166. What is discernible from the aforesaid is that this Court provided a liberal

interpretation to the definition of fraud under Regulation 2(1)(c) of the

PFUTP Regulations as regards the requirement of deceitful intention. In

other words, the respondent authority is not required to prove that it was the

intention of the person to commit fraud.

167. On the other hand, in SEBI v. Kishore R. Ajmera, reported in (2016) 6 SCC

368, another two-Judge Bench of this Court observed that in the dearth of

direct evidence to the effect, the intention of a person to manipulate or

defraud the markets may be gauged from immediate and proximate facts and

circumstances surrounding the events on the basis of which allegations are

founded to reach a reasonable conclusion. Such inference has to be drawn

using the standard of preponderance of probabilities in cases of civil

liability. Like in Ketan Parekh (supra), this Court provided a list of factors

that may be utilised to determine whether fraudulent intention is reasonably

made out or not. The list includes the following:

a) volume of the trade effected;

b) the period of persistence in trading in the particular scrip;

c) the particulars of the buy and sell orders, namely, the volume thereof;

d) the proximity of time between the two, and

e) such other relevant factors.

Civil Appeal No. 4015 of 2020 Page 102 of 135

The relevant portions of the judgment in Kishore R. Ajmera (supra) read

thus:

“26. It is a fundamental principle of law that proof of an

allegation levelled against a person may be in the form of

direct substantive evidence or, as in many cases, such

proof may have to be inferred by a logical process of

reasoning from the totality of the attending facts and

circumstances surrounding the allegations/charges made

and levelled. While direct evidence is a more certain basis

to come to a conclusion, yet, in the absence thereof the

Courts cannot be helpless. It is the judicial duty to take

note of the immediate and proximate facts and

circumstances surrounding the events on which the

charges/allegations are founded and to reach what would

appear to the Court to be a reasonable conclusion

therefrom. The test would always be that what inferential

process that a reasonable/prudent man would adopt to

arrive at a conclusion.

---xxx---

30. It has been vehemently argued before us that on a

screen-based trading the identity of the 2nd party be it the

client or the broker is not known to the first party/client or

broker. According to us, knowledge of who the 2nd

party/client or the broker is, is not relevant at all. While

the screen-based trading system keeps the identity of the

parties anonymous it will be too naive to rest the final

conclusions on said basis which overlooks a meeting of

minds elsewhere. Direct proof of such meeting of minds

elsewhere would rarely be forthcoming. The test, in our

considered view, is one of preponderance of probabilities

so far as adjudication of civil liability arising out of

violation of the Act or the provisions of the Regulations

framed thereunder is concerned. Prosecution under

Section 24 of the Act for violation of the provisions of any

Civil Appeal No. 4015 of 2020 Page 103 of 135

of the Regulations, of course, has to be on the basis of

proof beyond reasonable doubt.

31. The conclusion has to be gathered from various

circumstances like that volume of the trade effected; the

period of persistence in trading in the particular scrip; the

particulars of the buy and sell orders, namely, the volume

thereof; the proximity of time between the two and such

other relevant factors. The fact that the broker himself has

initiated the sale of a particular quantity of the scrip on

any particular day and at the end of the day approximately

equal number of the same scrip has come back to him; that

trading has gone on without settlement of accounts i.e.

without any payment and the volume of trading in the

illiquid scrips, all, should raise a serious doubt in a

reasonable man as to whether the trades are genuine. The

failure of the brokers/sub-brokers to alert themselves to

this minimum requirement and their persistence in trading

in the particular scrip either over a long period of time or

in respect of huge volumes thereof, in our considered view,

would not only disclose negligence and lack of due care

and caution but would also demonstrate a deliberate

intention to indulge in trading beyond the forbidden limits

thereby attracting the provisions of the FUTP

Regulations.”

(Emphasis supplied)

168. The aforesaid expositions of law indicate that there is no consensus on

whether or not intention plays a role in the determination of a fraudulent act.

However, if we are to read these observations with the plain language of

Regulation 2(1)(c) of the PFUTP Regulations, we may be tempted to

observe that the meaning fraud in the securities market is unfettered by the

Civil Appeal No. 4015 of 2020 Page 104 of 135

requirement of intention. This observation may as well make the definition

“omnipotent”.

169. However, what is noteworthy is that the first part of the definition of ‘fraud’

under Regulation 2(1)(c) requires no proof of intent. On the other hand, the

second part of the same definition that uses the word ‘inducement’ which

expression partakes an intentional act directed towards inducement, quietly

brings in the requirement of ‘intention’. This creates an internal

contradiction in the definition, causing confusion.

170. In our considered opinion, the plain language of the Regulation 2(1)(c) ought

not to be read in a strict sense. We say so because the requirement of

‘deceitful intention’ being non-essential to the definition runs counter to the

third element of the first part of the definition of fraud. As discussed

hereinabove, the language of the Regulation 2(1)(c) places no requirement

to prove wrongful gain or avoidance of loss. Rather, it only requires the

proof of inducement by which a third party is misled to deal in securities,

which is evident from the circumstances included in the extended part of the

definition. This means that an act, expression, omission or concealment

would amount to fraud irrespective of whether the person attempting to

manipulate the market achieved their end result.

Civil Appeal No. 4015 of 2020 Page 105 of 135

171. Reading these two ‘non-essentials’ together shows that minimal weightage

has been given to both ‘deceitful mens rea’ as well as ‘injurious actus reus’.

Before we proceed further, we find it apposite to clarify that the terms mens

rea and actus reus, though used ordinarily in criminal sense, make

explanation simpler for the purposes of this exposition. We only refer to

them as concepts and nothing more.

172. Regulation 2(1)(c) in our opinion, is an illustration of inelegant legislative

drafting. We say so because any imputation of wrong doing is founded either

on unlawful mindset or unlawful action or both. Unfortunately, Regulation

2(1)(c) deprives us of both by making them irrelevant for the purposes of

establishing fraudulent conduct. We have no choice but to ask ourselves the

question– what exactly is the basis for someone to fall under the definition

of fraud because at the moment, anything and everything in the stock market

that may induce someone to deal in securities, could very well be termed as

fraud by the respondent.

173. At this juncture, we find it apt to quote Sandeep Parekh’s “Fraud,

Manipulation and Insider Trading in the Indian Securities Market” that in

light of the broad definition of fraud under Regulation 2(1)(c), it is

mathematically possible to prove that even walking, jogging and cycling are

securities frauds.

Civil Appeal No. 4015 of 2020 Page 106 of 135

174. There is no gainsaying that the definition is so broad and vague that there is

a high possibility of false positives i.e., an activity may be incorrectly

classified as fraudulent when it is actually legitimate. The consequences of

such errors include reputational damage for the person alleged to have

committed fraud, increased operational costs for such a person and potential

loss of customers and business partners. It would also be relevant to take

note of Regulations 3 and 4 of the PFUTP Regulations respectively,

wherein, prohibitions are prescribed. A reading of both the Regulations

would reveal that the prohibited act should be directed towards manipulating

the market and indulge in the act of fraud for many purposes including to

make a gain or to avoid a loss. Though, it appears that there is a contradiction

between the definition and Regulations 3 and 4, yet a closer scrutiny and

harmonious reading would throw clarity. We find that, in enactments having

drastic effect on the economy, there should be no room for doubts and

misinterpretation.

175. We agree with the observation in Kanhaiyalal Baldevbhai Patel (supra) that

fraud is jurisprudentially very difficult to define. However, such difficulty

should not result in such a legislation that would cover every act, expression,

omission or concealment under the sky. In our opinion, it cannot be the

intention of the PFUTP Regulations to give unfettered powers to the

respondent authority to decide the question of fraud. We find it apposite to

Civil Appeal No. 4015 of 2020 Page 107 of 135

purposively interpret Regulation 2(1)(c). In our considered view, both mens

rea and actus reus cannot be made into irrelevant factors for deciding fraud.

Therefore, we may outline the following scenarios for a more purposive

approach to Regulation 2(1)(c):

i) In situations where injury due to wrongful act is established, i.e,

inducement to deal in securities has caused the other person to be

adversely affected and allowed the party accused of fraud to gain

unlawful profits or avert ordinary losses at the former’s expense, there

would be no requirement on the respondent authority to prove deceitful

intention. In other words, where injury is impossible to be proved, the

requirement of wrongful intention becomes mandatory.

ii) Secondly, similarly, in situations where deceitful or mala fide intention

to defraud and manipulate the securities market is clear from the blatant

misconduct or attending circumstances that cogently establish

wrongful intention, then proving the injury would not be required.

176. We may, with a view to obviate any confusion, clarify that inducing another

person or their agent to deal in securities, remains a strict requirement for

establishing fraud except in such circumstances as may be covered by this

Court’s dictum in SEBI v. Rakhi Trading (P) Ltd., reported in (2018) 13

SCC 753. This Court held therein that once the factum of manipulation was

Civil Appeal No. 4015 of 2020 Page 108 of 135

established, there is no requirement to establish whether other persons were

induced to deal in securities. The relevant portions of the judgment are

reproduced below:

“78. Respondent Rakhi Trading and Kasam Holding on

facts are found to have been engaged in non-genuine

transactions creating appearance of trading. If the factum

of manipulation is established, it will necessarily follow

that the investors in the market have been induced to buy

or sell and that no further proof in this regard is required.

The market, as already observed, is so widespread that it

may not be humanly possible for the Board to track the

persons who were actually induced to buy or sell securities

as a result of manipulation and the Board cannot be

imposed with a burden which is impossible to be

discharged.

79. In the context of the 1995 Regulations, old Regulation

4(2)(a), SAT, observing that if the factum of manipulation

is established, it will necessarily follow that the investors

in the market had been induced to buy and sell and no

further proof is required in this regard, in Ketan Parekh

case [Ketan Parekh v. SEBI, 2006 SCC OnLine SAT 221]

, held as under: (SCC OnLine SAT para 12)

“12. … The stock exchange is also a platform for the

fair price discovery of a scrip based on the market forces

of demand and supply. Securities market is so

widespread and in a system of screen based trading

various potential investors who track the scrips through

the screens of the exchanges only see whether a

particular scrip is active or not, whether it is trading in

large volumes and whether the price is going up or

down. Having regard to these factors he makes up his

mind to invest or disinvest in the securities. When a

person takes part in or enters into transactions in

Civil Appeal No. 4015 of 2020 Page 109 of 135

securities with the intention to artificially raise or

depress the price he thereby automatically induces the

innocent investors in the market to buy/sell their stocks.

The buyer or the seller is invariably influenced by the

price of the stocks and if that is being manipulated the

person doing so is necessarily influencing the decision

of the buyer/seller thereby inducing him to buy or sell

depending upon how the market has been manipulated.

… In other words, if the factum of manipulation is

established it will necessarily follow that the investors

in the market had been induced to buy or sell and that

no further proof in this regard is required. The market,

as already observed, is so widespread that it may not be

humanly possible for the Board to track the persons who

were actually induced to buy or sell securities as a result

of manipulation and law can never impose on the Board

a burden which is impossible to be discharged. This, in

our view, clearly flows from the plain language of

Regulation 4(a) of the Regulations.””

(Emphasis supplied)

177. A perusal of the aforesaid exposition indicates that the requirement to prove

inducement when the factum of manipulation is established, is similar to the

second requirement placed by us in paragraph 175 of this judgment. We say

so because the logical conclusion of giving the requirement of inducement

a go bye, is that injury also need not be proved once manipulation is

sufficiently and cogently established. It is such determination of

manipulation that provides a conclusive insight into the intention of the party

seeking to defraud the market.

Civil Appeal No. 4015 of 2020 Page 110 of 135

178. As has been discussed in Kanaiyalal Baldevbhai Patel (supra) and Kishore

R. Ajmera (supra), the test for establishing such manipulation is normally

considered to be the test of preponderance of probabilities. However, in

situations envisaged under Rakhi Trading (supra) where the mandatory

ingredient of inducement itself is done away with, it is imperative to ensure

that the factum of manipulation is established cogently with all attending

circumstances pointing towards the direction that the person so alleged, must

have committed fraud.

179. In the recent judgment in M/s Alupro Building Systems Pvt. Ltd. v.

Commissioner of Central Excise Bangalore-II, Civil Appeal No. 8030 of

2010, this Court, while relying on Bater v. Bater, reported in [1951] P. 35,

observed that the test of preponderance of probabilities is not exercisable as

a straitjacket formula, rather, it includes within itself varying degrees of

probability depending on the mind of the reasonable man who is considering

the particular subject matter. The relevant portions of the judgment are

reproduced below:

“91. In circumstances referred to above, there is no doubt

that the standard of proof to be met is that of

preponderance of probabilities. In this regard, it would be

apposite to refer to observations of Lord Denning in Bater

v. Bater, [1951] P. 35, wherein he succinctly expressed the

degrees of probabilities within preponderance of

probabilities. The relevant observations read thus:-

Civil Appeal No. 4015 of 2020 Page 111 of 135

“I do not think that the matter can be better put than it

was by Lord Stowell in Loveden v. Loveden (1810) 2

Hagg. Con. 1, 3. “The only general rule that can be

laid down upon the subject is, that the circumstances

must be such as would lead the guarded discretion of

a reasonable and just man to the conclusion”. The

degree of probability which a reasonable and just man

would require to come to a conclusion — and likewise

the degree of doubt which would prevent him coming

to it — depends on the conclusion to which he is

required to come. It would depend on whether it was a

criminal case or a civil case, what the charge was, and

what the consequences might be; and if he were left in

real and substantial doubt on the particular matter, he

would hold the charge not to be established: he would

not be satisfied about it.

But what is a real and substantial doubt? It is only

another way of saying a reasonable doubt; and a

reasonable doubt is simply that degree of doubt which

would prevent a reasonable and just man from coming

to the conclusion. So the phrase “reasonable doubt”

takes the matter no further. It does not say that the

degree of probability must be as high as 99 per cent.

Or as low as 51 per cent. The degree required must

depend on the mind of the reasonable and just man who

is considering the particular subject-matter. In some

cases 51 per cent. Would be enough, but not in others.

When this is realized, the phrase “reasonable doubt”

can he used just as aptly in a civil case or a divorce

case ns in a criminal case; and indeed it was so used

by my Lord in Davis v. Davis [1950] P. 125 and Gower

v. Gower 66 T. L. R. (Pt. I) 717 to which we have been

referred. The only difference is that, because of our

high regard for the liberty of the individual, a doubt

may be regarded as reasonable in the criminal courts,

which would not be so in the civil courts. I agree

Civil Appeal No. 4015 of 2020 Page 112 of 135

therefore with my brothers that the use of the phrase

“reasonable doubt” by the commissioner in this case

was not a misdirection any more than it was in

Briginshaw v. Briginshaw (1938) 60 C. L. R. 336.”

92. In terms of varying degree of probability that would be

required to establish marketability of respective goods, to

lay down a general rule or rather attempt to define what

circumstances would be sufficient or insufficient to infer

the fact of marketability would be impossible.

93. In the aforesaid context, when we say “degree of

probability”, we mean it vis-à-vis the goods in

consideration. That a commodity may be so rare that even

one instance of it being marketable would be sufficient. On

the other hand, where the commodities are common goods,

the degree of probability would be correspondingly higher.

Thus, the degree of probability is a flexible and calibrated

to the nature, rarity, or character of the goods in question.

94. All that we are trying to convey is that the degree of

probability should be proportionate to the subject matter.

In other words, on an objective perusal of the evidence so

produced, the courts must either believe it to exist or

consider its existence so probable that a reasonable man

ought, under the given circumstances, acts upon the

supposition that it exists.”

(Emphasis supplied)

180. The aforesaid exposition of law is significant as regards the test of

preponderance of probabilities that is to be employed by the respondent

authority and the courts to prove the factum of manipulation. In our

considered view, where the circumstances indicate that no inducement is

Civil Appeal No. 4015 of 2020 Page 113 of 135

present yet fraudulent conduct may have been at play, the standard of proof

to be discharged is a higher degree of the preponderance of probabilities.

v. Whether valid hedges in the futures segment constitute

manipulative cornering in the present case?

181. Having discussed the definition of fraud under the PFUTP Regulations and

ingredients thereof, we may now address ourselves on the issue whether

40.10% open interest of the appellant no. 1 in the derivatives market could

amount to a fraudulent practice. In order to answer the same, we must look

at the attending circumstances surrounding the appellant no. 1’s

transactions.

182. The appellant no. 1 gathered 40.10% open interest in the derivatives market

on the settlement date, i.e., 29.11.2007 during a legal regime wherein futures

were permitted to be settled only by way of the cash settlement system. This

means that there was no onus on the appellant no. 1 to physically transfer

the underlying RPL stock to the person with whom the futures contract was

entered into. Once the position was closed voluntarily, or automatically

settled on the settlement date, the parties to the short futures contract were

required to calculate profits or losses in case the price decreased from the

locked-in price or increased from the locked-in price respectively.

Thereafter, only such profits or losses were required to be transferred to the

other party without actually transferring the underlying shares.

Civil Appeal No. 4015 of 2020 Page 114 of 135

183. In such a legal regime, the mere factum of cornering positions could be

considered to be indicative of price manipulation with no separation between

the two acts. However, this is only so when there are no circumstances that

may justify the open positions in excess of the position limits. In the present

case, we find that the appellant no. 1 was interested in safeguarding itself

from the risk exposure that it faced in the cash segment due to the sale of a

massive portion of its RPL shareholding amounting to 22.5 crore shares. In

our opinion, the position limits prescribed in the 2001 SEBI Circular could

in no way properly hedge the appellant no. 1’s interests. Therefore, it was

necessary for the appellant no. 1 to enter into 9.92 crore futures positions.

This number on the settlement date reduced to 7.97 crore positions.

184. The respondent has contended that the justification of hedging is an

afterthought by the appellant no. 1 and the 7.97 crore positions being

retained till the automatic settlement by the exchange showed that the

appellant no. 1 had a pre-planned scheme for increasing its profits in the

futures market. The respondent submitted that if the appellant no. 1’s

intention was to truly hedge its risk in the cash segment, it should have

closed its futures positions as and when the sell orders in the cash segment

were being fulfilled. The respondent submitted that as on 23.11.2007, the

appellant no. 1 had already sold almost 18 crore shares in the cash segment,

therefore there was no requirement to leave all the remaining future

Civil Appeal No. 4015 of 2020 Page 115 of 135

positions open. The respondent considered the retaining of such positions

that did not correspond to the underlying shares that were exposed to risk,

as ‘naked hedge’ at par with speculation. To buttress its submission, the

respondent has relied on Pankaj Oil Mills (supra).

185. The Gujarat High Court, in Pankaj Oil Mills (supra) held that for a contract

to be considered as a valid hedge, it is necessary that the total of such

transactions should not exceed the total underlying stocks. The relevant

portion of the judgment reads thus:

“Our conclusions are, therefore, as under:

(1) Hedging contracts, in order to be out of speculative

transactions, must be in respect of only raw materials so

far as the manufacturer is concerned though these

contracts may be both with regard to sales and purchases.

(2). Hedging contracts need not succeed the contracts for

sale and actual delivery of goods manufactured, but the

latter may be subsequently entered into, provided they are

within the reasonable time not exceeding generally the

assessment year.

(3) In order to be genuine and valid hedging contracts of

sales, the total of such transactions should not exceed the

total stocks of the raw materials or the merchandise on

hand which would include existing stocks as well as the

stocks acquired under the firm contracts of purchases.”

(Emphasis supplied)

186. In our considered opinion, the reliance placed upon the aforesaid judgment

by the respondent is misplaced. Rather, the decision of the Gujarat High

Civil Appeal No. 4015 of 2020 Page 116 of 135

Court supports the submission of the appellant no. 1 in its submission that

its transactions in the futures segment were to hedge its risk. We say so

because when the appellant no. 1 through the 12 entities took 9.92 crore

positions in the RPL futures segment, it intended to hedge the risk of

underlying 22.5 crore shares that were yet to be sold in the cash segment. As

on 23.11.2007, the appellant no. 1 had already sold about 18 crore shares in

the cash segment, therefore, 4.5 crore shares remained to sold out of the 22.5

crore. It is the contention of the respondent that because the appellant no. 1

retained all 7.97 crore positions in the futures market instead of closing 3.47

crore positions, it indulged in speculation rather than hedging.

187. We are of the view that the aforesaid argument of the respondent is liable to

be rejected. We say so because hedging includes anticipatory hedging as

well. We find it likely that the appellant no. 1 must have believed that the

prices of the RPL shares may face downward pressure after the prices

touched Rs. 190 per share between 26.11.2007 to 29.11.2007 and hence,

found it prudent to hold on to its existing positions as an anticipatory hedge

against drastic decreases in RPL share prices. The very purpose of hedging,

as recognized in law, will otherwise get defeated.

188. Further, there is no legal requirement to ensure a 1:1 ratio of hedges to stock

quantity. While a perfect hedge may be desirable from the point of view of

Civil Appeal No. 4015 of 2020 Page 117 of 135

monitoring whether parties are conducting themselves in a lawful manner,

yet the economics of perfect hedging may not always be sound. This is the

reason for there being no legal mandate regarding the same. Since, the

appellants were not required to perfectly hedge their risks, we find that the

argument of the respondent is liable to be rejected.

189. We may also address the submission of the respondent that there was no

specific board resolution passed by the appellant no. 1 to hedge its risk

exposure in the cash segment as regards the sale of the 22.5 crore shares. We

are inclined towards the minority opinion of the SAT in this regard. Hedging

policies of the SEBI as well as the NSE were introduced in 2016, that is well

after nine years of the inception of this matter. It is worth noting that even

the 2016 policies are in respect of commodity derivatives instead of equity

derivatives.

190. In 2007, no such policies existed, therefore, it was not essential for the

appellant no. 1 to pass a specific board resolution in this regard. As long as

a board resolution that empowered officials of the appellant no. 1 to make

trades in the cash segment and the derivatives segment was in place, there

was no need for the appellant no. 1 to pass another board resolution specific

to the sale of RPL shares.

Civil Appeal No. 4015 of 2020 Page 118 of 135

191. The aforesaid discussion leaves no doubt in our minds that the 9.92 crore

positions in the futures market (out of which 1.95 crore positions were

squared off), were valid hedges.

192. In such view of the matter, could it be said that because the appellant no. 1

had a share of 40.10% of the total open interest in the RPL derivatives

segment, it would amount to cornering with a view to manipulate prices for

unlawful gains? In our considered opinion, the answer to this must be a firm

‘No’.

193. We say so because cornering of positions with the intent to manipulate the

market ought to be patently clear from the conduct and transactions of the

accused person. In a case such as the present matter where the 40.10% share

of the appellant no. 1 in open interests was validly justified by the

consideration of hedging, we may look at the concentration in positions as

only giving the ability to manipulate. It bears no clarification that

concentration by itself cannot be considered to be manipulation.

194. Further, the settlement system for derivatives in 2007 was the cash

settlement system in which no physical delivery of shares was mandatory

after the futures positions were closed. This means that cornering by itself

cannot be considered a fraudulent device to manipulate the market because

the element of inducement is not involved. In the present matter as well, the

Civil Appeal No. 4015 of 2020 Page 119 of 135

appellant no. 1 booked profits that accrued from the futures contracts which

had already been entered into between 01.11.2007 and 06.11.2007. The fall

or rise in price of the RPL share (be it genuine or artificial), did not induce

other traders to deal in securities after the positions had been closed because

no physical delivery of shares was required.

195. In Rakhi Trading (supra), this Court held in paragraph 78 thereof that in

cases where the factum of inducement is not separately established, if the

respondent authority proves the factum of manipulation then it will

necessarily follow that the investors in the market have been induced to buy

or sell in such a manipulated market. Therefore, further proof of inducement

would not be required. However, the factum of manipulation still needs to

be established, which can be garnered only from the effects of the actions

by the person alleged to have defrauded or manipulated the market price or

induced the other party.

196. The aforesaid is as clear as a noon day in its implication that where the

respondent authority is unable to show and prove inducement of third parties

to deal in securities as a result of the alleged fraud played on the market, it

is necessary that the device or tactic which the respondent authority deems

to be manipulative must be such that there could be no other explanation but

that of fraud. To our mind, the observations in Rakhi Trading (supra) place

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a higher burden of proof on the respondent authority to establish

manipulation in cases where inducement is not being proved.

197. Therefore, in the present matter, it was incumbent upon the respondent to

cogently and sufficiently establish a separate act of price manipulation

besides cornering. This is because cornering by itself did not lead to further

inducement of other people to deal in the futures segment. To take forward

its submission that the appellant no. 1 violated Regulations 3 and 4 of the

PFUTP Regulations, the respondent must prove whether price manipulation

was at play in terms of Regulation 4(2)(e).

vi. Sale of 1.95 crore RPL shares in the cash segment during the last

10 minutes on 29.11.2007

198. The respondent in order to discharge its burden to prove price manipulation,

submitted before us that the appellant no. 1 coerced price discovery by

placing sell orders for 1.95 crore RPL shares in the cash segment during the

last 10 minutes of the settlement date, 29.11.2007. The respondent has

contended that the appellant no. 1 made the aforesaid trades because it was

apprehensive that the price of the RPL shares would increase which might

cause it to suffer low profits in the futures segment. It was submitted that the

sale of 1.95 crore shares in the cash segment was a pre-planned strategy to

depress the share price and hence, was found to be fraudulent. Accordingly,

Civil Appeal No. 4015 of 2020 Page 121 of 135

the respondent has prayed for the disgorgement of the profits gained by the

appellant no. 1 in the futures segment.

199. In our considered opinion, the aforesaid submission presents an unlikely

situation. We say so because the appellant no. 1 was the promoter of RPL

with 75% shareholding in the same. Even when the appellant no. 1 decided

to sell 5%, it continued to retain 70% shares. A decrease in the prices of RPL

would naturally lead to a depreciation in the valuation of the 70% that the

appellant continued to hold. Therefore, for a promoter, especially one with

70% holding, it is quite unlikely that it would even allow such decrease in

valuation, let alone actively causing the artificial decrease in prices.

200. Be that as it may, even if we restrict ourselves to narrower considerations

presented to us by the facts in the instant matter, the submission of the

respondent still remains unlikely. We find this to be so because the appellant

no. 1 had sold only around 18 crore shares out of the total 22.5 crore shares

that were planned to be sold initially. A perusal of the pattern of the trades

made by the appellant no. 1 shows that during the period between

13.11.2007 and 23.11.2007, the least price acceptable to the appellant no. 1

to sell the RPL shares was about Rs. 208-209/- per share. The perusal of the

materials placed on record indicates that the prices stayed below Rs. 208/-

per share till 29.11.2007, even decreasing as much as Rs. 190/- per share.

Civil Appeal No. 4015 of 2020 Page 122 of 135

201. If we look at the trades of 1.95 crore shares sold during the last 10 minutes

on 29.11.2007, we find that the lowest price at which the appellant no. 1 had

placed its sell orders was Rs. 210/- per share. The respondent has submitted

that because this figure was less than the LTP, the intention of the appellant

no. 1 could only have been to cause downward pressure on the RPL share

price to gain unlawful profits in the futures market.

202. On the other hand, the appellant no. 1 has submitted that it never sold shares

below the price of Rs. 208 including on the last day, i.e., 29.11.2007. Though

the price of the RPL shares were expected to continue following the bearish

trend, the same unexpectedly rose to Rs. 224.70/- per share at 3:21 PM.

However, when the appellant no. 1 began placing its sell orders for 1.95

crore shares in tranches, it realised that its asked prices were not being met.

Therefore, the appellant no. 1 thought it fit to discount its sell price to ensure

that its order gets fulfilled during the short phase of price hike caused by

unknown factors.

203. It was also submitted by the appellant no. 1 that the respondent has not

inquired into simultaneous 1.06 crore shares sold in the cash segment during

the same time and only pinned the blame of market manipulation on the

appellant no. 1.

Civil Appeal No. 4015 of 2020 Page 123 of 135

204. The aforesaid submissions show that the factum of price manipulation is not

limpid from the facts and circumstances, in the slightest. It bears no further

clarification that the respondent’s case in the present matter hinges entirely

on whether the appellant no. 1 fraudulently manipulated the share price of

RPL to depress the same and such stand is not meted out by material

evidences but rather are founded upon mere suspicion.

205. There is no gainsaying that the facts in the present matter are not starkly

clear like in Rakhi Trading (supra) or Sandeep Paul v. SEBI, reported in

2019 SCC OnLine SAT 82, both of which have been referred to by the

respondent to contend that the appellant no. 1 can be said to have

manipulated the market even if no inducement or injury to others is proved.

We find that reliance on these judgments by the respondent indicates that

there are no circumstances which prove inducement or injury unless and

until the core factum of price manipulation is proved.

206. However, in light of our observations in paragraphs 175, 176 and 179

respectively of this exposition, we find that there is a higher burden of proof

on the respondent to show that price manipulation took place. In the present

case, the totality of facts and circumstances surrounding the appellant no.

1’s transactions in the cash segment during the last 10 minutes on

29.11.2007, show that the appellant no. 1 sold the 1.95 crore shares with a

Civil Appeal No. 4015 of 2020 Page 124 of 135

genuine intent to raise money therefrom and not to depress prices for profits

in the futures segment.

207. We say so because of the following points:

• First, that the appellant no.1’s preferred price was either above or

equivalent to Rs. 210/- per share is evident from its trades on

23.11.2007 when the RPL shares were last sold in the cash segment.

We find it more likely that the appellant no. 1 was trying to sell the

1.95 crore shares at Rs. 210/- at the very least. This is because its

priority was to execute successful sale orders more than waiting for

prices to increase to a more favourable amount. Since the entirety of

the 22.5 crore shares were yet not sold, any price rise was viewed as

an opportunity to place sell orders.

• Secondly, if the intention of the appellant no. 1 was to depress the

prices, it would have placed sell orders at prices lower than Rs. 210/-

per share which would also have been lower than the LTP. In our

considered view, selling huge blocks of shares during the last 10

minutes, though not illegal, is definitely not an ideal circumstance.

However, in the present matter, the attending circumstances show that

price hike was available during the small window of 10 minutes,

Civil Appeal No. 4015 of 2020 Page 125 of 135

therefore, we cannot fault the appellant no. 1 that it took advantage of

the same.

• Thirdly, motives and suspicions can in no way be the only basis for

holding that there was fraudulent intent. The attending circumstances

ought to be very clear in establishing wrongful conduct. For instance,

in the recent judgment delivered in SEBI v. Terrascope Ventures

Ltd., reported in 2026 SCC OnLine SC 403 (wherein one of us, J.B.

Pardiwala, J., was a part), the intention to fraudulently disregard the

object with which preferential shares were sold, was apparent from

the diversion of funds raised from the very first day and the

ratification of the said diversion after the interim orders of the WTM.

It may be said that this is the level of clarity from the surrounding

circumstances that is required to prove the intent to manipulate, which

is not present in the instant case.

• Fourthly, if it had been the intention of the appellant no. 1 to

manipulate prices, then it could have dumped a far larger quantity of

shares to depress the RPL share price as much as possible in order to

make better profit in the futures segment.

• Lastly, stock market is a place with several participants. The

respondent, without checking the trades of other participants who

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were dealing in substantial blocks of RPL shares, put the blame of the

downward pressure on the price of RPL scrip on the appellant no. 1.

The respondent cannot find fault with the appellant no. 1’s conduct

without proper due diligence.

208. In our considered view, the respondent has failed to discharge the burden of

proof to establish price manipulation by the appellant no. 1. Therefore, we

do not find any liability of fraud and manipulation being made out against

the appellant no. 1.

F. DETERMINATION OF THE ISSUES

a. Whether the agreements entered into by and between the appellant

no. 1 and the twelve entities were fraudulent and manipulative device

under the PFUTP Regulations?

209. In our considered opinion, the agreements entered into by and between the

appellant no. 1 and the twelve entities were not a device used for fraud and

manipulation. The 2001 SEBI Circular did not place a ban on the breach of

position limits, rather it only required disclosure when positions were taken

in excess, and penalized only the non-disclosure of the same. We have held

in the aforesaid parts of this judgment that the appellant no. 1 is liable only

to be penalized in terms of the 2001 SEBI Circular and the 2001 NSE

Circular.

Civil Appeal No. 4015 of 2020 Page 127 of 135

210. However, to make out a case for fraud, it was incumbent upon the respondent

to show how the usage of agency relationships could be said to be

manipulative when the 2001 SEBI Circular itself left a loophole in respect

of prescribing position limits for persons acting in concert. A literal

interpretation of the Circular would not even allow us to penalize their

conduct. The only reason for upholding of penalty levied by the SAT and

the WTM is that the respondent attempted to do something indirectly, what

it could not do directly.

211. In our view, the PFUTP Regulations cannot be attracted on the sole

circumstance of the appellant no. 1 using 12 agency agreements to take

excess position limits and it was necessary for the respondent to prove

whether the manner in which these agency agreements were utilised was

fraudulent or not.

b. Whether the 9.92 crore open positions in the November 2007 futures

segment of the RPL stock, were valid hedges?

212. In the context of the facts and circumstances presented to us by the parties

and the materials placed on record, we find that the 9.92 crore positions

taken by the appellant no. 1 in the RPL futures segment were valid hedges.

We have said so because the underlying 22.5 crore RPL shares that were

Civil Appeal No. 4015 of 2020 Page 128 of 135

supposed to be sold in the cash segment were more than half of the futures

positions taken in the November 2007 series.

213. We have found the reliance placed by the respondent on Pankaj Oil Mills

(supra) to be misplaced, since the underlying risk exposure in the cash

segment far exceeded the derivatives positions by way of which the

appellant no. 1 sought to hedge the risk of price decrease.

214. Further, we have found that there is no legal requirement to ensure a perfect

hedge with 1:1 ratio of underlying risk to number of hedge positions.

Therefore, we find no force in the argument of the respondent that the

appellant no. 1’s futures positions from 23.11.2007 onwards were ‘naked

hedges’.

215. Our aforesaid observation is founded on the fact that there were no hedging

policies in place during 2007. The NSE’s hedge policy and SEBI’s position

limits for hedges were introduced 9 years after the facts in the present case

transpired, i.e., in 2016. Furthermore, the 2016 hedging policies were

provided in context of commodity derivatives and till date, there is no such

policy in place for equity derivatives.

c. Whether the agreements entered into by and between the appellant

no. 1 and the twelve entities were used by the appellant no. 1 to corner

Civil Appeal No. 4015 of 2020 Page 129 of 135

open positions in the November 2007 futures segment of the RPL

stock for the purpose of manipulating the futures market?

216. On the basis of the discussion in the aforesaid, the answer to this question

must be a firm ‘No’. We say so because the basis to calculate the percentage

of the appellants’ positions out of all the open positions in the derivatives

market, was flawed. The respondent should have calculated the open interest

of the appellants out of the total open positions across all derivatives and not

just one series. Therefore, the open interest of the appellants would be

calculated on the basis of open positions in (i) November 2007 RPL futures,

(ii) December 2007 RPL futures, (iii) January 2008 RPL futures, and (iv)

options in the RPL stock. On this basis, the percentage of share of the

appellants in the futures market was 40.10% on 29.11.2007 and not 93.60%.

This is a significant difference. However, 40.10% open interest is also in

excess of the position limits stipulated in the 2001 SEBI Circular.

217. Therefore, we have discussed whether in such cases, the open interest of

40.10% would be indicative of the intent to manipulate prices. The facts and

circumstances of the present case compel us to say otherwise. We have

already stated in the aforesaid that the appellant no. 1 faced huge risks in the

cash segment owing to the imminent sale of a large block of RPL shares.

Therefore, the hedging requirements of the appellant no. 1 were

Civil Appeal No. 4015 of 2020 Page 130 of 135

proportionate to the risk even though in absolute terms, it exceeded the

position limits specified in the 2001 SEBI Circular.

218. In our opinion, cornering that includes within itself the intent to manipulate

prices must be patently clear from the conduct and transactions of the

allegedly fraudulent party, which in the present matter, is not the case. This

is because the 40.10% of open interest constituted genuine and valid hedges.

In situations like the one in the instant matter, one may be able to say that

cornering provides the ability to manipulate, however, it cannot be said with

absolute surety that cornering by itself is manipulation.

219. This is more so because in the cash settlement system of settling futures

transactions, no inducement to deal in securities follows the settlement. The

only time a person deals in the security is to enter the derivatives contract.

Even though inducement has been held to be the necessary ingredient for

establishing fraud in Kanhaiyalal Baldevbhai Patel (supra), yet in Rakhi

Trading (supra), this Court has held that inducement need not be proved if

the factum of manipulation is sufficiently and cogently established. This

makes it all the more necessary for the respondent authority to prove

deceitful intention from the beginning that would lead to a pre-planned act

or omission.

Civil Appeal No. 4015 of 2020 Page 131 of 135

220. We have taken this forward by discussing the definition of fraud under

Regulation 2(1)(c) of the PFUTP Regulations and making the following

courses of action necessary in certain situations. The definition of fraud

under the PFUTP Regulations uses the word ‘act’ and not ‘entry’. Though

the definition is wide, it does not mean every expression, omission or

concealment under the sky. This is because the expression ‘inducement’ as

used in the provision is sine qua non to bring a transaction within the ambit

of a fraudulent activity. In our opinion, it cannot be the intention of the

PFUTP Regulations to give unfettered powers to decide the question of

fraud. We find it apposite to purposively interpret Regulation 2(1)(c). In our

considered view, both intention and act cannot be made into irrelevant

factors for deciding fraud. Therefore, we may outline the following

scenarios:

i. in situations where injury due to wrongful act is established, i.e,

inducement to deal in securities has caused the other person to be

adversely affected and allowed the party accused of fraud to gain

unlawful profits or avert ordinary losses at the former’s expense,

there would be no requirement on the respondent authority to prove

deceitful intention. In other words, where injury is impossible to be

proved, the requirement of wrongful intention becomes mandatory.

Civil Appeal No. 4015 of 2020 Page 132 of 135

ii. Secondly, similarly, in situations where deceitful or mala fide

intention to defraud and manipulate the securities market is clear

from the blatant misconduct or attending circumstances that

cogently establish wrongful intention, then injury would not be

required.

221. In the present case, since no inducement pursuant to cornering has been

proved, there was a higher burden of proof to establish a separate act of price

manipulation. Therefore, it cannot be said that the 40.10% of the open

interest was cornering such that the large share of the appellant no. 1 in the

futures market itself indicated towards its fraudulent intent.

d. Whether the sale of 1.95 crore RPL shares in the cash segment during

the last 10 minutes of the trading day on 29.11.2007 was an attempt

to depress RPL share prices to make unlawful profits in the

November 2007 futures segment?

222. The facts and circumstances indicate that there was an unexpected increase

in the price of the RPL scrip in the last 10 minutes of the settlement date.

Therefore, the appellant no. 1 thought it fit to put sell orders for 1.95 crore

shares in the cash segment to capitalize on this price hike. However, the said

factum is being considered by the respondent as an attempt on part of the

Civil Appeal No. 4015 of 2020 Page 133 of 135

appellant no. 1 to coerce price discovery by causing downward pressure on

the price of RPL shares.

223. Upon using the standard of test of preponderance of probabilities, we are of

the considered opinion that the respondent’s submission does not inspire

confidence. We say so because the trends of sales already performed by the

appellant no. 1 in the cash segment till 23.11.2007 show that it did not sell

below Rs. 208-209/- per share and made sales on 23.11.2007 while the

prices were hovering around Rs. 210/- per share. Thereafter, the price of the

RPL scrip decreased further and reached even Rs. 190/- per share. The

appellant no. 1 made no sales at this time, neither did it close any of its

futures positions.

224. It was only in the last 10 minutes of the settlement date, 29.11.2007 that

there was a significant increase in prices due to unknown circumstances and

the appellant no. 1 sought to take advantage of the same. Had it been the

intention of the appellant no. 1 to depress the price, it would have sold far

more shares than 1.95 crore and with prices below Rs. 210/- per share.

Merely because the appellant no. 1 did not place sell orders on the LTP

cannot prove that the appellant no. 1’s intention was to manipulate the price

of the RPL stock.

Civil Appeal No. 4015 of 2020 Page 134 of 135

225. Another reason for us to conclude that it is not likely that the appellant no.

1 would intentionally manipulate prices is because of its majority

shareholding in RPL. Even though 5% out of the shareholding was being

offered for sale in the cash segment, the appellant no. 1 continued to retain

70% of the stake in the company. Any decrease in price would depreciate

the entire 70% holding and adversely impact the valuation of RPL. The

trade-off that the appellant no. 1 would make as regards its 70%

shareholding to gain profits in the futures segment for 7.97 positions, seems

highly unlikely to us.

226. In such view of the matter, there is no manner of doubt in our minds that the

respondent was unable to discharge the higher burden of proof to establish

manipulation. Hence, fraud under the PFUTP Regulations is not made out

against the appellant no. 1 in the present matter.

G. CONCLUSION

227. For all the foregoing reasons, we have reached the conclusion that the SAT

in its majority judgment, committed an egregious error in passing the

impugned judgment insofar as the question of fraud under Regulations 3 and

4 of the PFUTP Regulations respectively, is concerned. However, we concur

with the observations of the SAT in its majority judgment as regards the

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penalty to be levied on the appellant no. 1 for violating the disclosure

requirements under 2001 SEBI Circular in respect of position limits.

228. We are left with no other option but to set aside the impugned judgment and

order dated 05.11.2020 passed by the SAT respectively, insofar as the

finding on fraud under the PFUTP Regulations is concerned. In the result,

the appeals partly succeed and are hereby partly allowed.

229. Accordingly, the order of disgorgement is also set aside. We direct that the

appellant no. 1 be refunded Rs. 250 crore deposited in Investor’s Protection

Fund pursuant to the order of this Court dated 17.12.2020.

230. We uphold the penalty levied by the WTM and SAT in its majority judgment

as regards the violation of the 2001 SEBI Circular.

231. Pending application(s), if any, are disposed of.

…………………………………J.

(J.B. PARDIWALA)

………………………………… .J.

(R. MAHADEVAN)

New Delhi.

29

th

May, 2026.