REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 1969 OF 2011

SECURITIES AND EXCHANGE BOARD OF INDIA ….APPELLANT(S)

VERSUS

RAKHI TRADING PRIVATE LTD. ....RESPONDENT(S)

WITH

CIVIL APPEAL NOS. 3174-3177 OF 2011

AND

CIVIL APPEAL NO. 3180 OF 2011

J U D G M E N T

KURIAN, J.

1.Fairness, integrity and transparency are the hallmarks of

the stock market in India. The Securities and Exchange Board

of India (hereinafter referred to as “SEBI”) is the vigilant

watchdog. Whether the factual matrix justified the

1

watchdog’s bite is the issue arising for consideration in this

case.

2.There are two sets of party respondents – the traders

and the brokers. SEBI proceeded against the traders for

violation of Regulations 3(a), (b) and (c) and 4 (1), (2)(a) and

(b) of the Securities and Exchange Board of India (Prohibition

of Fraudulent and Unfair Trade Practices Relating to Securities

Market) Regulations, 2003 (hereinafter referred to as “the

PFUTP Regulations”). In the case of brokers, the charge is that

they also violated Regulations 7A (1), (2), (3) and (4) of the

Securities and Exchange Board of India (Stock Brokers and

Sub-brokers) Regulations, 1992.

3.As the matter before us involves three traders and three

brokers, for convenience, we have extracted the dates of the

decision of the Adjudicating Officer (hereinafter referred to as

“A.O.”) and the Securities Appellate Tribunal (hereinafter

referred to as “the SAT”) in the table below:

S.No

.

Name of the Party Trader/

Broker

Date of

A.O’s

order

Date of

SAT’s

decision

1. Rakhi Trading

Private Limited

(“Rakhi Trading”)

Trader26.03.20

09

11.10.201

0

2

2. Tungarli Tradeplace

Private Limited

(“Tungarli”)

Trader30.04.20

10

16.11.201

0

3. TLB Securities

Limited

(“TLB”)

Trader16.03.20

09

26.10.201

0

4. Indiabulls

Securities Limited

(“Indiabulls”)

Broker25.02.20

09

26.10.201

0

5. Angel Capital and

Debt Market

Limited (“Angel”)

Broker22.05.20

09

26.10.201

0

6. Prashant Jayantilal

Patel (“Prashant”)

Broker31.08.20

09

26.10.201

0

SAT set aside the decisions of the A.O. in all the

aforementioned cases. Aggrieved, SEBI is before this Court

under Section 15Z of the Securities and Exchange Board of

India Act, 1992 (hereinafter referred to as the “SEBI Act”).

4.Both the facts and the law are complex, and hence, we

shall first analyse the legal framework.

5.The Securities Contracts (Regulation) Act, 1956 was

introduced “… to prevent undesirable transactions in

securities by regulating the business of dealing therein, by

providing for certain other matters connected therewith ”.

Section 18A dealing with contracts in derivatives was

3

introduced with effect from 22.02.2000. The provision reads

as follows:

“18A. Contracts in derivative .—Not-

withstanding anything contained in any

other law for the time being in force,

contracts in derivative shall be legal and

valid if such contracts are —

(a)traded on a recognised stock ex -

change;

(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.”

“Derivative” is defined under Section 2(ac) of the 1956

Act, which read as under:

“2(ac)] “derivative” includes—

(A) a security derived from a debt instrument,

share, loan, whether secured or unsecured,

risk instrument or contract for differences or

any other form of security;

(B) a contract which derives its value from the

prices, or index of prices, of underlying securi-

ties.

4

(C) commodity derivatives; and

(D) such other instruments as may be de -

clared by the Central Government to be deriv-

atives;”

6. “Option in securities” is defined under Section 2 (d) of

the 1956 Act, which reads as under:

“2(d) “option in securities” means a contract

for the purchase or sale of a right to buy or

sell, or a right to buy and sell, securities in fu-

ture, and includes a teji, a mandi, a teji mandi,

a galli, a put, a call or a put and call in securi-

ties.”

7.The term “securities” is defined under Section 2(h) of

the 1956 Act, which reads as under:

“2(h) “securities” include—

(i)shares, scrips, stocks, bonds,

debentures, debenture stock or other

marketable securities of a like nature in

or of any incorporated company or other

body corporate.

xxx xxx

xxx

(ia) derivative;”

8.In 1992, the SEBI Act was introduced “… to provide for

the establishment of a Board, to protect the interest of

5

investors in securities and to promote the development of

and to regulate, the securities market and for matters

connected therewith or incidental thereto”.

9.Section 15HA of the SEBI Act provides for penalty for

fraudulent and unfair trade practices. The provision reads as

under:

“15HA. Penalty for fraudulent and unfair

trade practices.- If any person indulges in

fraudulent and unfair trade practices relating

to securities, he shall be liable to a penalty

which shall not be less than five lakh rupees

but which may extend to twenty-five crore ru-

pees or three times the amount of profits

made out of such practices, whichever is

higher.”

10. Adjudication is provided under Section 15I. Section 15T

provides for appeal to SAT against any order made by an

Adjudicating Officer and Section 15Z provides for an appeal to

Supreme Court against an order passed by the SAT “...on any

question of law arising out of such order..”

11. Under Section 30 of the SEBI Act “….the Board may, by

notification, make regulations consistent with this Act and the

Rules made thereunder to carry out the purposes of this Act.”

The PFUTP Regulations were notified on 17.07.2003.

6

12. Regulation 2(1)(b) of the PFUTP Regulations provides

the definition of “dealing in securities”, which reads as under:

“2(1)(b) “dealing in securities” includes an

act of buying, selling or subscribing pursuant

to any issue of any security or agreeing to

buy, sell or subscribe to any issue of any se-

curity or otherwise transacting in any way in

any security by any person as principal,

agent or intermediary referred to in section

12 of the Act.”

13.Chapter II of the PFUTP Regulations comprising

Regulations 3 and 4 deals with the prohibition of fraudulent

and unfair trade practices relating to securities in the market.

Regulation 3 speaks of prohibition about certain dealings in

securities and Regulation 4 provides for prohibition of

manipulative, fraudulent and unfair trade practices. The

regulations relevant for the purpose of the present case read

as under:

“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

7

proposed to be listed in a recognized

stock exchange, any manipulative or de-

ceptive device or contrivance in contra-

vention of the provisions of the Act or the

rules or the regulations made there un-

der;

(c)employ any device, scheme or artifice to

defraud in connection with dealing in or

issue of securities which are listed or pro-

posed to be listed on a recognized stock

exchange;

(d)engage in any act, practice, course of

business which operates or would oper -

ate 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

insecurities.

(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:—

(a) indulging in an act which creates false or

misleading appearance of trading in the secu-

rities market;

8

(b) dealing in a security not intended to ef-

fect transfer of beneficial ownership but in-

tended to operate only as a device to inflate,

depress or cause fluctuations in the price of

such security for wrongful gain or avoidance of

loss;

xxx xxx

xxx

(e) any act or omission amounting to manip-

ulation of the price of a security;

xxx xxx

xxx

(g) entering into a transaction in securities

without intention of performing it or without

intention of change of ownership of such secu-

rity;

14. The Regulations do not provide a definition for unfair

trade practices but “fraud” and “fraudulent” have been

defined under Regulation 2(1)(c), which reads as under:

“2(1)(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:

9

(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;

(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 behavior 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 accord -

ingly;

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

10

(b)the economic situation of the country

(c)trends in the securities market;

(d)any other matter of a like nature

whether such comments are made in public

or in private;

xxx xxx

xxx

(e) “securities” means securities as defined

in section 2 of the Securities Contracts (Regu-

lation) Act, 1956 (42 of 1956).”

15.The Securities and Exchange Board of India (Stock

brokers and Sub-brokers) Regulations, 1992 in Schedule II

deals with the code of conduct for stockbrokers which reads

as follows:

“SCHEDULE II

Securities and Exchange Board of India

(Stock Brokers and Sub-brokers)

Regulations, 1992

CODE OF CONDUCT FOR STOCK BROKERS

[Regulation 7]

A.General.

11

(1)Integrity: A stock-broker, shall main-

tain high standards of integrity, prompti-

tude and fairness in the conduct of all his

business.

(2)Exercise of due skill and care : A

stock-broker shall act with due skill, care

and diligence in the conduct of all his busi-

ness.

(3)Manipulation : A stock-broker shall

not indulge in manipulative, fraudulent or

deceptive transactions or schemes or

spread rumours with a view to distorting

market equilibrium or making personal

gains.

(4)Malpractices: A stock-broker shall not

create false market either singly or in con-

cert with others or indulge in any act detri-

mental to the investors interest or which

leads to interference with the fair and

smooth functioning of the market. A stock-

broker shall not involve himself in exces-

sive speculative business in the market be-

yond reasonable levels not commensurate

with his financial soundness.

(5)Compliance with statutory require -

ments: A stock-broker shall abide by all

the provisions of the Act and the rules,

regulations issued by the Government, the

Board and the Stock Exchange from time

to time as may be applicable to him.”

12

16.As the facts pertain to transactions involving certain

technical terms, we will have to necessarily deal with their

meaning and content.

17.Derivatives – Derivatives are a form of financial

instruments which are traded in the securities market and

whose values are derived from the value of the underlying

variables like the share price of a particular scrip in the cash

segment of the market or the stock index of a portfolio of

stocks. Derivative trading is governed by Section 18A of the

1956 Act. There are two types of derivative instruments -

‘futures’ and ‘options’. In futures and options, the trading can

either be of individual stocks or of indices like NIFTY, Bank

NIFTY etc.

18.Futures - a future contract is an agreement between two

parties to buy or sell an asset at a certain time in the future at

a certain price agreed upon on the date of the contract. All

the futures contracts are settled in cash.

19.Options – options are contracts between a buyer and the

seller which gives a right, but not an obligation, to buy or sell

the underlying asset at a stated price on or before a specified

date. While a buyer of an option pays the premium and buys

13

his right to exercise his option, the writer of an option is the

one who receives the option premium and is therefore obliged

to sell or buy the asset as per the option exercised by the

buyer.

Options are of two types, ‘Call’ and ‘Put’. Call Option gives the

buyer the right but not the obligation to buy a given quantity

of the underlying asset at a given price on or before a given

future date. Put Option gives the buyer the right, but not

obligation to sell a given quantity of underlying asset at a

given price on or before a given future date.

20.The impugned SAT order in the case of Rakhi Trading has

succinctly dealt with the working of options:

“2. …The seller in an options contract sells a

right to the buyer and since nothing can be

sold without a cost, the former charges an

amount from the latter which is called the

premium. It is this premium which is the only

negotiable element in an options contract that

is negotiated on the trading screen of the

stock exchange. At the beginning of every

trading cycle which is fixed by the concerned

stock exchange, it (stock exchange) prescribes

in the case of stock options a series of strike

rates based upon the prevailing market price

of particular shares that are allowed to be

traded in the F & O segment. In the case of

index options, the strike rates are determined

with reference to the index value in the cash

14

segment. These strike rates are based on the

general market perception both bullish and

bearish. Equal number of strike rates both

upwards and downwards of the prevailing

market price/index value are fixed by the stock

exchange. The stock exchange also fixes the

size of the contracts that are traded in lots.

When an investor chooses to trade in the

options contracts, he has to choose a scrip or

the Nifty, then assess whether the same will

go up or down on the next settlement date

and by how much. That is his gamble.

Accordingly, he will select a strike rate which is

the exercise price. He can then buy or sell a

“call Option” or a “Put Option”. A Call Option is

an option to “buy”, that is, the contract is to

buy the shares on a settlement date at the

selected strike rate. A Put Option is an option

to sell, that is, the contract is to sell the shares

on the settlement date at the selected strike

rate. In case the price of the underlying or the

value of the index in the cash segment goes

below the selected strike rate/exercise price,

the buyer will have no attraction to exercise

his option under the contract and will allow the

contract to lapse and thereby lose whatever

premium was paid by him. Premium amount is

the maximum that the buyer can lose in case

the market moves contrary to his perception.

In case the price of the underlying or the index

value in the cash segment were to go beyond

the selected strike rate/exercise price, the

buyer would certainly exercise his option

under the contract depending upon how high

the price or the stock index has gone after

adjusting the premium amount. These are

some of the motivating factors which weigh

with the investors in the options contracts. It is

a one sided contract where the loss suffered, if

15

any, by the buyer is limited only to the

premium amount whereas the loss which could

be suffered, if any, by the buyer is limited only

to the premium amount whereas the loss

which could be suffered by the writer of the

contract (seller) is limitless. If during the

period of the contract the market perception of

the seller (writer) changes or the market starts

moving contrary to his expectations, he may,

in his anxiety to cap his losses, take a reverse

position. He would then put in an offer or

accept an offer of a higher premium for the

same option and this in effect would result in

his repurchasing the contract at a higher

rate/premium to avoid greater losses.”

(Emphasis

supplied)

21.Index - a stock market index is a measure of the relative

value of a group of stocks in numerical terms. As the stocks

within an index change value, the index value changes. NIFTY

50 is an index on National Stock Exchange which tracks the

behaviour of 50 companies covering different sectors of the

Indian economy.

22.Trading in Index – an investor can trade even the entire

stock market by buying index futures instead of buying

individual securities. The advantages of trading in index

futures are- the contracts are highly liquid, the index futures

provide higher leverage than any other stocks, it requires

16

comparatively low initial capital investment (only the

premium), it has lower risk than buying and holding stocks, it

is just as easy to trade the short side as the long side, the

trader needs to study only one index instead of several stocks

and finally, the contracts are settled in cash in the stock

exchange and therefore, all problems related to bad delivery,

fake or forged certificate etc. can be avoided.

1

23.The case at hand deals, inter alia, with questions related

to synchronised trading. The concept of synchronised trading

has been explained by SAT in Ketan Parekh v. Securities

and Exchange Board of India

2

. To quote:

“20. …. “A synchronised trade is one where

the buyer and seller enter the quantity and

price of the shares they wish to transact at

substantially the same time. This could be

done through the same broker (termed a cross

deal) or through two different brokers. Every

buy and sell order has to match before the

deal can go through. This matching may take

place through the stock exchange mechanism

or off market. When it matches through the

stock exchange, it may or may not be a

synchronised deal depending on the time

when the buy and sell orders are placed. …”

Facts:

1

This information has been extracted from the NSE Handbook on

Derivatives Trading.

2

Appeal No. 2 of 2004 before SAT.

17

24.As mentioned before, this case involves three traders

and three brokers.

Traders:

Rakhi Trading: Rakhi Trading was issued a show cause

notice (hereinafter referred to as “SCN”) on 05.10.2007

alleging execution of non genuine transactions in the Futures

and Options segment (hereinafter referred to as the “F&O

segment”). The trades in question pertain to NIFTY options.

In his decision, the A.O. analysed the trade logs and observed

that the trades executed by Rakhi Trading matched with the

counter-party Kasam Holding Private Limited in a few

seconds. The counter-party to all the trades in the NIFTY

contract was Kasam Holding Pvt. Ltd. and the reversals took

place in a matter of minutes/hours. The A.O. also noted that

on various occasions, when the time was not matched by the

respective parties, the first order was placed at an

unattractive price relative to market price. These transactions

took place on 21.03.2007, 22.03.2007. 23.03.2007 and

30.03.2007 and resulted in a close out difference of Rs 115.79

18

lakhs without any significant change in the value of the

underlying.

Tungarli: The SCN was issued to Tungarli on

05.10.2007. The allegation in the SCN was that through these

synchronized transactions, one party booked profits and the

other party booked losses. The trades pertained to future

scrips. The A.O.’s order notes that the trades were reversed in

all the cases in a matter of few seconds showing significant

difference between the buy and sell trade prices. The change

in positions took place without any significant

change/negligible change in the price of the underlying

security. The trades took place on 12.03.2007, 15.03.2007,

23.03.2007, 26.03.2007 and 28.03.2007 and the total profit

made by Tungarli was Rs 64.52 lakhs.

TLB: The SCN was issued to TLB on 05.10.2007. The

trades pertained to future scrips. As per the A.O.’s order, TLB

traded through stock broker SMC Global Securities Ltd and

the same broker is the counter party broker as well, trading

on behalf of different clients. All the transactions undertaken

19

by TLB resulted in loss to TLB and the total loss was Rs.38.69

lakhs. The trades in question took place on 22.01.2007,

23.01.2007, 31.01.2007, 01.02.2007, 05.02.2007 and

06.02.2007. The A.O.’s order notes that in many cases, the

trades were reversed in a matter of minutes showing

significant difference in prices without any significant change

in value of the underlying. The A.O.’s order notes that during

investigation, it was also seen that when the time was not

matched by the respective parties, the first order that was

placed was at an unattractive price relative to the market

price.

Brokers:

Indiabulls : The case pertains to 23 reverse trades in 21

futures and 2 options on 22 different scrips and one Bank

Nifty futures. The A.O. takes into account the fact, that in

many cases, the reversals took place in a matter of

seconds/minutes without change in the value of the

underlying. The A.O. records that the Indiabulls representative

stated that they could not have known about the intention of

20

the clients, however, the representative admitted that the

trades were non-genuine and should not have taken place.

Angel: In the SCN dated 05.10.2007, the charge is that

as a stock-broker, it executed 56 reversal trades. As per the

A.O., these trades were reversed in a matter of a few minutes/

hours. However, the A.O. noted the positive steps taken by

Angel in curbing such trades (post reversal trades) and

submitted proof of its actions in this regard and therefore, a

lesser penalty was imposed on Angel.

Prashant Jayantilal : The SCN was dated 05.10.2007.

The case pertains to 19 reversal trades wherein the original

trades were closed out during the day at a price which was

significantly above or below the price at which the

first/original transaction was executed.

25. The crux of the allegations in the show cause notices is

that the parties were buying and selling securities in the

derivatives segment at a price which did not reflect the value

of the underlying in synchronised and reverse transactions.

21

26.After affording an opportunity for filing reply to the SCNs

and a personal hearing, the A.O. passed a detailed order

dated 26.03.2009 in the case of Rakhi Trading. Paragraphs 22

to 24 read as follows:

“22. If the individual trades are seen from the

order log provided to the noticee, it is seen

that the time difference between the buy and

sell order is only in seconds. Most of the orders

were matched in a time gap of 1, 2 or 3

seconds and many orders have matched to

the exact second, i.e. time difference is 0

(zero). This is proof enough to establish the

existence of synchronization of trades;

otherwise the trades would not have matched

repeatedly to the exact second in the NIFTY

Contracts which is the most active contract in

the options segment. Hence it overrides the

noticee’s submission that no material or data

has been disclosed to substantiate the said

allegation of “synchronization” of any trades.

23. On analysis of the reversal transactions

undertaken by the noticee, it is seen that the

percentage to market gross is in the range of

30 percent to 50 percent in the 14 contracts

executed by the noticee. In two contracts of

NIFTY, the percentage to market gross

reached 50 percent. This accounts for a

significant percentage of trades on the

concerned days and the traded value was

Rs.95.75 lakhs for those two reversal trades.

The trade quantities are also high. The total

traded value is Rs.503.00 lakh in a matter of

just 4 (four) trading days. As submitted by the

noticee, NIFTY moves constantly. Also, NIFTY is

the most active of the options contracts

22

traded on the exchange and it has contributed

to 92.21 percent of the contracts traded in the

Options segment during March 2007. Further,

the NIFTY options contracts contributed to

99.97 percent of the total Index Options

contracts traded in March 2007 (source: NSE

website). In such a scenario it is seen that the

noticee’s counter party to all the trades in

NIFTY contracts is Kasam Holding Pvt. Ltd.

(trading through the broker Vibrant Securities

Private Limited), this clearly gives an

indication to the existence of a

pre-arrangement/synchronization / matched

trades between the clients. Otherwise it does

seem unrealistic that the orders should match

exactly both quantity and price wise, just as a

matter of coincidence, with the same party

again and again. It is clear that there was an

intention of creating a false or misleading

appearance in the market and also that a

manipulative /deceptive device was used for

synchronization of trades.

24. The trades executed by the noticee in all

NIFTY contracts, matched with the counter

party client, Kasam Holding Pvt. Ltd. in less

than a few seconds. It is pertinent to note here

that the noticee executed all the reversal

trades in a matter of minutes/hours, at a profit

of Rs.107.79 lakh without any significant

change in the value of the underlying security.

This raises doubts about the genuineness of

the transactions. The fact that such

transactions took place repeatedly over a

period of time reinstates the fraudulent nature

of such trades.”

23

Thus, according to the A.O. a manipulative/deceptive

devise was used for synchronization of trades and the trades

were fraudulent/fictitious in nature. It was found that there is

violation of Regulations 3(a), (b) and (c) and 4(1), (2)(a) and

(b) of the PFUTP Regulations, 2003. Consequently, a penalty

of Rs.1,08,00,000/- was imposed under Section 15HA of the

SEBI Act, 1992. Appeal was filed under Section 15T before the

SAT. An appeal was disposed of by order dated 11.10.2010

whereby SAT set aside the order of SEBI. The detailed

consideration is available at paragraphs 5 to 8 of the SAT

order in Rakhi Trading, which read as follows:

“5. Index in a capital market is a statistical

indicator of how the market is functioning and

acts as a barometer for market behaviour. It is

not a product but a measure expressed in

numbers and a benchmark against which

financial or economic performance is

evaluated. Unlike stocks in the cash segment,

it is not traded as such though investors

speculate on market behaviour using index as

the underlying in the F & O segment. Nifty, the

stock index of NSE, is computed using market

capitalization weighted method (share price x

number of outstanding shares) of fifty stocks

being traded in the cash segment of NSE. It is a

well diversified stock index covering 22

different sectors of the Indian economy. The

24

eligibility of a particular stock for being

selected for Nifty index depends on the

liquidity of the stock as well as the floating

stock of the company. Nifty, therefore, is a very

dynamic index which is not constant but

evolves continuously. Obviously, to manipulate

such a diverse and changing portfolio of stocks

in the cash segment is extremely difficult, if not

impossible by trading in the

F & O segment. It is also NSE’s stated position

on its website that “stock index is difficult to

manipulate as compared to stock prices, more

so in India and the possibility of cornering is

reduced. This is partly because an individual

stock has a limited supply which can be

cornered”. It is obvious that when Nifty is

traded in options contracts, the movement of

prices in that segment cannot have any impact

on the price discovery system in the cash

segment which is one of the allegations

brought out in the ad-interim ex-parte order

and the show cause notice. The charge against

the appellant in the show cause notice is that

by executing trades in Nifty options in the F &

O segment “the original trades were closed out

during the day at a price which was

significantly above or below the price at which

the first/original transaction was executed

without significant variations in the traded

price of the underlying security”. The

insinuation is that by executing manipulative

trades in the F & O segment, Nifty index was

sought to be tampered with. This charge

proceeds on the assumption that the

25

movement of Nifty options in the F & O

segment should be in harmony with the

movement of Nifty index in the cash segment.

This assumption is fallacious and we cannot

agree. Movement of index in the cash segment

does influence the index options in the F & O

segment because the strike rate is directly

linked with the index value in the cash

segment. However, the converse is not always

true. While transactions in the cash market are

based on the current market price of the

underlying derived by the principle of demand

and supply and in the case of an index, the

value depends on the performance of the

stocks that constitute it, the pricing in the F &

O segment is based on future expected events

which may or may not happen. Anticipated

future events may not have a discernible effect

on the cash segment today where delivery of

shares is given/taken immediately. Such events

may have a great impact on perceptions in the

F & O market where the investor holds an open

position and a continuous liability during the

currency of the contract which is generally for

one to three months with anticipation of future

events which are always pregnant with all sorts

of possibilities. Again, volatility and potential

for greater losses may trigger movements in

the F & O market without any equivalent cash

market movements. Further, the cash market

may move up today but the prediction for the F

& O market could be that at the end of a

month, two months or three months the

market may move down. Only short term

26

investors like speculators trade in the F & O

market whereas in the cash market long terms

investors also trade. We are, therefore,

satisfied that the movement in the two

segments need not be in tandem. In the instant

case the appellant executed Nifty option

contracts and it must be remembered that

Nifty index is determined by fifty highly liquid

scrips which also vary from time to time and

the index moves on the basis of their

performance in the cash segment. These

movements cannot be in tandem with the

movement of the price of Nifty options in the F

& O segment because Nifty as an index is not

capable of being traded in the cash segment.

What is traded in the cash segment are the

fifty stocks which constitute Nifty. To say that

some manipulative trades in Nifty options in

the F & O segment could influence the Nifty

index is too farfetched to be accepted. The

only way Nifty index could be influenced is

through manipulation of the prices of all or

majority of the scrips in the cash segment that

constitute Nifty. This is extremely difficult, if not

impossible. It is common case of the parties

that the appellant traded only 13 Nifty option

contracts in the F & O segment. Assuming

these trades were manipulative, could these

ever influence the Nifty index. As already

observed, Nifty index is a very large well

diversified portfolio of stocks which is not

capable of being influenced much less

manipulated by the movement of prices in the

F & O segment particularly by the handful of

27

trades executed by the appellant. In this view

of the matter, we have no hesitation to hold

that the 13 trades in Nifty options executed by

the appellant had no impact on the market or

affected the investors in any way nor did these

influence the Nifty index in any manner. The

charge in this regard must fail.

6. Another charge against the appellant is that

its trades in Nifty options were fictitious

transactions which were synchronized and

reversed resulting in the creation of misleading

appearance of trading in those options.

Derivative segment is highly volatile and

involves a complexed form of trading with high

risks and the players in this segment do not

follow the herd mentality as is often noticed in

the cash segment but take decisions based on

their own perception of the market. The

number of persons trading in this segment is

comparatively much less than those in the

cash segment. The Board has found that only

14 contracts executed by the appellant in the

options segment constituted 30 to 50 per cent

of the market gross in that segment though

nifty is the most active of the options contracts

traded on the exchange and contributed 92.21

per cent of the trades during March, 2007. This

is indicative of the fact that the number of

players in the options segment is very less.

Artificial/fictitious trades in the cash segment

do give a false appearance of active trading in

a particular scrip by increasing volumes which

tend to lure the lay investors to invest in that

scrip. The impression given to the investors is

28

that the scrip is highly liquid and much in

demand and this interferes with the price

discovery mechanism of the exchange and it is

for this reason that such trades are held illegal

in the cash segment. This, however, cannot be

the case in the F & O segment. Since all the

trades are executed through the stock

exchange and settled in cash through its

mechanism they cannot be said to be artificial

trades creating a misleading appearance of

trading in the options. The charge is

misconceived.

7. This brings us to the issue of

synchronization of the buy and sell orders in

the Nifty option contracts executed by the

appellant where the counter party in the 13

impugned transactions was the same entity.

Impugned order records that Nifty contracts

which are the most active contracts in the

options segment cannot be traded in the way

the appellant has traded matching its orders to

seconds with the counter party client. This,

according to the adjudicating officer, was a

pre-planned arrangement between the

appellant and its counter party and their

intention was to create a false and misleading

appearance in the market and a manipulative

device was used for synchronizing the trades.

The learned senior counsel appearing for the

appellant did not dispute the fact that the

trades had been synchronized and reversed

but he argued that these did not manipulate

the market and that only the synchronized

trades which manipulate the market are

29

prohibited. He placed reliance on a judgment of

this Tribunal in Ketan Parekh vs. Securities and

Exchange Board of India, Appeal No.2 of 2004

decided on 14.7.2006. He also referred to the

order passed by the Board in the case of ICICI

Brokerage Services Ltd. wherein a similar view

had been taken and strenuously argued that

since the synchronized trades of the appellant

did not manipulate the market, the impugned

order deserves to be set aside. We find merit in

this contention. The fact that the trades

executed by the appellant had been

synchronized with the counter party is not

really in dispute before us. We have already

held that the 13 trades in Nifty options

executed by the appellant had no impact on

the market or affected the investors or the

Nifty index in any manner. In Ketan Parekh’s

case (supra) this Tribunal had observed that

synchronized trades per se are not illegal but

only those which manipulate the market in any

manner are the ones that are prohibited and

violate the Regulations. Relying upon the

observations made by this Tribunal in Nirmal

Bang Securities Pvt. Ltd. vs. Securities and

Exchange Board of India [2004] 49 SCL 421,

the then chairman of the Board while dealing

with the synchronized trades executed by the

appellant therein observed as under:-

“For the above reason, although it

cannot be said that synchronized

deals are pre se illegal, for the

same reason, it cannot be said that

30

all synchronized transactions are le-

gal and permitted. All synchronized

transactions which have the effect

of manipulating the market are

against fair market practices and

hence undesirable and prohibited.”

We have reproduced the observations from the

order of the Board only to highlight that the

Board also understands that the law is that

only such synchronized trades violate the Reg-

ulations which manipulate the market. Since

the impugned trades of the appellant in the F &

O segment had no impact on the market, we

hold that they did not violate the Regulations.

Shri Kumar Desai learned counsel for the re -

spondent was equally emphatic in arguing that

the appellant had not only executed synchro -

nized trades but had also reversed them during

the course of the trading with the same

counter party and, therefore, the trades were

fictitious and non-genuine and that the adjudi-

cating officer was justified in holding so and

imposing the monetary penalty for violating

the Regulations. He placed strong reliance on

the observations of the Tribunal in Ketan

Parekh’s case (supra) wherein it has been held

that reversal of trades between the same par-

ties results in fictitious trades and they are ille-

gal. We are unable to agree with him. The ob-

servations in Ketan Parekh’s case were made

with reference to the trades that were exe -

cuted in the cash segment and we are clearly

of the view that all those observations cannot

apply to the trades executed in the F & O seg-

ment. Reverse trades in the cash segment

have been held to be illegal and violate the

Regulations because there is no “change of

beneficial ownership” in the traded scrip. More-

31

over, in the cash segment the scrip is actually

traded entailing not only “change of beneficial

ownership” but also physical delivery/move -

ment of the traded scrip. When this does not

happen in the cash segment, the trade is de -

scribed as a fictitious trade creating false vol-

umes which manipulates the market. The sce -

nario in the F & O segment, particularly in the

options contracts with which we are concerned

in the present case, is altogether different from

that of the cash segment. In the F & O segment

there is no concept of “change of beneficial

ownership” since what is traded in this seg -

ment are contracts and not the underlying

stock or index and it is only through cash set-

tlement that the trade is concluded and no

physical delivery of any asset is involved. In

this view of the matter, synchronized and re-

versed trades in Nifty options in the F & O seg-

ment can never manipulate the market which,

in the present context, means the value of the

Nifty index in the cash segment. To repeat, we

may again observe that it is almost impossible

to manipulate the Nifty index which consists of

fifty well diversified highly liquid stocks in the

cash segment. Since the trades of the appel-

lant were settled in cash through the stock ex-

change mechanism, they were genuine and

these could not create a false or misleading ap-

pearance of trading in the F & O segment. It is

the Board’s own case that the appellant made

profits in all these transactions and the counter

party suffered losses.

8. When we analyse the nature of the trades

executed by the appellant, we find that it

played in the derivative market neither as a

hedger nor as a speculator and not even as an

32

arbitrageur. The question that now arises is

why did the appellant execute such trades with

the counter party in which it continuously

made profits and the other party booked

continuous losses. All these trades were

transacted in March 2007 at the end of the

financial year 2006-07. It is obvious and, this

fact was not seriously disputed by the learned

senior counsel appearing for the appellant, that

the impugned trades were executed for the

purpose of tax planning. The arrangement

between the parties was that profits and losses

would be booked by each of them for effective

tax planning to ease the burden of tax liability

and it is for this reason that they synchronized

the trades and reversed them. They have

played in the market without violating any rule

of the game. This Tribunal in Viram Investment

Pvt. Ltd. vs. Securities and Exchange Board of

India, Appeal no.160 of 2004 decided on

February 11, 2005 while dealing with a

contention as to whether trades could be

executed through the stock exchange for tax

planning, made the following observations

which are relevant for our purpose:-

“Even if we consider transactions un-

dertaken for tax planning as being

non genuine trades, such trades in or-

der to be held objectionable, must re-

sult in influencing the market one way

or the other. We do not find any evi-

dence of that either in the investiga-

tion conducted by the Bombay Stock

Exchange, copy of which has been an-

33

nexed to the memorandum of appeal

or in the impugned order that there

was any manipulation. ……… Trading

in securities can take place for any

number of reasons and the authorities

enquire into such transactions which

artificially influence the market and in-

duce the investors to buy or sell on

the basis of such artificial transac-

tions.”

The observations even though made in the

context of the cash segment are equally appli-

cable to the F & O segment. We are in agree -

ment with the aforesaid observations and rely-

ing thereon we hold that the impugned trans -

actions in the case before us do not become il-

legal merely because they were executed for

tax planning as they did not influence the mar-

ket. The learned counsel for the respondent

Board drew our attention to Regulation 3(a), (b)

& (c) and Regulation 4(1) and 4(2)(a) & (b) of

the Regulations to contend that the trades of

the appellant were in violation of these provi-

sions. We cannot agree with him. Regulation 3

of the Regulations prohibits a person from buy-

ing, selling or otherwise dealing in securities in

a fraudulent manner or using or employing in

connection with purchase or sale of any secu-

rity any manipulative or deceptive device in

contravention of the Act, Rules or Regulations.

Similarly, Regulation 4 prohibits persons from

indulging in fraudulent or any unfair trade

practices in securities which include creation of

false or misleading appearance of trading in

the securities market or dealing in a security

not intended to effect transfer of beneficial

ownership. Having carefully considered these

provisions, we are of the view that market ma-

34

nipulation of whatever kind, must be in evi -

dence before any charge of violating these

Regulations could be upheld. We see no trace

of any such evidence in the instant case. We

have, therefore, no hesitation in holding that

the charge against the appellant for violating

Regulations 3 and 4 must also fail.”

(Emphasis Supplied)

27.The SAT has also taken a view that the circular dated

10.03.2005 issued by the NSE was not legally binding. The

members were advised to desist from entering

orders/transactions on illiquid securities/contracts where

some set of members/clients executed reversing

transactions/both buy and sell at abnormal price differences

in premiums that had no relevance to the movement in prices

of the underlying. In the said circular, members were also

advised to desist from entering such orders which prima facie

appeared to be non-genuine and further advised to put in

appropriate internal systems for checking such orders. SAT

held that only SEBI-the Regulator can issue and should issue

such directions.

28.SAT, in the case of Tungarli, squarely followed its

decision in Rakhi Trading. In TLB Securities also, after briefly

35

discussing the facts, SAT relied on Rakhi Trading to set aside

the SEBI order.

29.As far as the brokers are concerned, in addition to

relying on its decision in Rakhi Trading, SAT held in Indiabulls

Securities that the brokers must succeed for two additional

reasons. To quote:

“7. The appellant before us which is a stock

broker must also succeed for two additional

reasons as well. The appellant is said to have

executed 23 trades on behalf of its clients

which were reversed between the same

parties. Assuming that these trades were

manipulative and had been executed by the

clients with a premeditated plan, the fact still

remains that the appellant only acted as a

broker and carried out the directions of its

clients which it ought to. Could the appellant

be held liable merely because it acted as a

broker? This question has come up for the

consideration of this Tribunal time and again

and this is what was held in Kasat Securities

Pvt. Ltd. vs. Securities and Exchange Board of

India, Appeal No. 27 of 2006 decided on June

20, 2006 wherein this Tribunal observed as

under:-

“The trades, on the face of it,

appear to be fictitious and we shall

proceed on that assumption. It is

obvious that these trades were

executed by the clients and the

appellant acted only as a broker. If

the appellant knew that the trades

were fictitious then there would be

no hesitation in upholding the

finding of the Board that it aided

36

and abetted the parties to execute

fraudulent transactions. Having

heard the learned counsel for the

parties and after going through the

record we are satisfied that this link

is missing. There is no material on

record to show that the appellant as

a broker knew that the trades were

fictitious or that the buyer and the

seller were the same persons.

Trading was through the exchange

mechanism and was online where

the code number of the broker

alone is known and the learned

counsel for the parties are agreed

that it is not possible for anyone to

ascertain from the screen as to who

the clients were. This is really a

unique feature of the stock

exchange where, unlike other

moveable properties, securities are

bought and sold between the

unknowns through the exchange

mechanism without the buyer or

the seller ever getting to meet.

Therefore it was not possible for the

broker to know who the parties

were. Merely because the appellant

acted as a broker cannot lead us to

the conclusion that it must have

known about the nature of the

transaction. There has to be some

other material on the record to

prove this fact. The Board could

have examined someone from KIL

to find out whether the appellant

knew about the nature of the

transactions but it did not do so. As

a broker, the appellant would

37

welcome any person who comes to

buy or sell shares. The Board in the

impugned order while drawing an

inference that the appellant must

have known about the nature of the

transactions has observed that the

appellant failed to enquire from its

clients as to why they were wanting

to sell the securities. We do not

think that any broker would ask

such a question from its clients

when he is getting business nor is

such a question relevant unless, of

course, he suspects some wrong

doing for which there has to be

some material on the record.”

In Kishor R. Ajmera vs. Securities and

Exchange Board of India, Appeal No. 13 of

2007 decided on February 5, 2008 this

Tribunal again observed as under:-

“Merely because two clients have

executed matched trades, it does

not follow that their brokers were

necessarily a party to the game

plan. On a screen based trading

through the price order matching

mechanism of the exchange, it is

not possible for either of the

brokers (or sub-brokers) to know

who the counter party or his broker

(or sub broker) is and when the

trade is executed, their names or

codes do not appear on the screen.

A unique feature of the stock

exchange is that, unlike other

moveable properties, securities are

bought and sold among the

38

unknowns who never get to meet

and they are traded at prices

determined by the forces of

demand and supply. If the Board is

to hold the broker (or the

sub-broker) responsible for a

matching trade, it has to allege and

establish that the broker (or the

sub-broker) was aware of the

counter party or his broker at the

time when the trade was executed.

There is no such allegation in this

case.”

The aforesaid observations apply with full

force to the facts of the present case because

the trading system is the same, both in the

cash segment as well as in the F&O segment.

As already observed, even if we assume that

the appellant’s clients had executed reverse

trades with the same counter party for some

mischief, we cannot impute knowledge of the

same to the appellant when the anonymity of

the trading system does not allow a broker to

know who the counter party or counter party

broker is. The screen based trading system

provides complete anonymity and the trades

are executed through the price order matching

mechanism. In the instant case, no link other

than broker client relationship between the

appellant and its clients has been established,

let alone any relation with the counter parties

or the counter party brokers. Moreover, the

appellant executed only 23 trades on behalf of

15 clients with a total close out difference of

Rs. 35.44 lacs (positive) which have been

called in question. Having regard to the fact

that the appellant had executed 1,69,71,078

trades for 1,21,306 clients with a turnover of

39

Rs. 1,11,659 crores during the investigation

period we are of the view that in terms of

materiality and substance this miniscule

number of trades done on behalf of 15 clients

were not likely to raise any alarm for the

appellant with a client base of over 4,70,000

clients. In these circumstances, we cannot

hold the appellant liable for the impugned

trades.

8. The other additional reason for which we

cannot hold the appellant liable is that out of

the 23 impugned trades that it executed on

behalf of its clients, 17 were executed directly

by the clients through the Internet. NSE by its

circular of August 24, 2000 has set detailed

guidelines on Internet based trading through

order routing system which route client orders

to the exchange trading system and the

software for this service has to be in

compliance with the parameters set by the

Board. The appellant as a broker has very little

direct control over such trades though it is

recorded as a broker in those trades. Having

regard to the total volume of trades executed

by the appellant and the wide client base that

it has, the learned counsel for the appellant

was right in contending that the appellant

could not be expected to put every single

trade under its scanner on a continuous basis

particularly those executed by the clients

through the Internet and that the impugned

trades being so miniscule, there was no

occasion for the appellant to get a red alert. It

is a fact that the clients had sufficient margins

with the appellant with no credit defaults at

any stage and that all the trades were settled

in cash through the clearing system of the

exchange. In this background, we find no

40

evidence of lack of due diligence on the part of

the appellant while executing the impugned

transactions which could make him guilty of

violating the code of conduct prescribed for

the stock brokers. The charge must, therefore,

fail.”

30.Aggrieved by the SAT orders, SEBI is before us under

Section 15Z of the SEBI Act.

31.We have extensively heard learned senior counsel and

other counsel appearing on both sides. SEBI has assailed the

SAT order on the ground that SAT has misunderstood SEBI’s

case. It is the submission of Mr. Gourab Banerji, learned

Senior Counsel appearing for SEBI, that the stock exchange is

a platform created to facilitate efficient and fair trading.

However, the transactions between the parties were

non-genuine and orchestrated which is prohibited under the

PFUTP Regulations. The Show Cause Notice makes it clear

that the transactions were a misuse of market mechanism as

they were not genuine trades. The non-genuineness of these

transactions is evident from the fact that there was no

commercial basis to suddenly, within a matter of minutes,

41

reverse a transaction when the value of the underlying had

not undergone any significant change.

32.According to SAT, the synchronization and reversal of

trades effected by the parties with a significant price

difference, some in a few seconds and majority, in any case,

on the same day had no impact on the market and it has not

affected the NIFTY index in any manner or induced investors.

SAT has held that such trades are illegal only when they

manipulate the market in any manner and induce investors. It

has also taken a view that there being no physical delivery of

any asset, there is no change of beneficial ownership and

what is traded in the F&O segment are only contracts and

hence, such synchronised and reverse trades in NIFTY

options in the F&O segment “can never manipulate the

market”. It has also held that the trades being settled in cash

through a stock exchange mechanism, are genuine and

therefore cannot create a false or misleading appearance of

trading in the F&O segment. Further, any trade to be

objectionable must result in influencing the market one way

or the other. SAT held that these trades were for the purpose

42

of tax planning which is not violative of any regulation. We are

not inclined to get in to the issue of tax planning as it was not

mentioned in the show cause notices.

33.We find it difficult to appreciate the stand taken by the

SAT which is endorsed by the learned senior counsel

appearing for the respondents. Mr. Chidambaram, learned

senior counsel appearing for Rakhi Trading argues that the

SAT decision is valid and proper. Reliance is also placed on the

case of Ketan Parekh (supra) in which SAT held that

synchronised trades are not per se illegal. As far as reversal of

trades is concerned, the senior counsel has sought to

distinguish Ketan Parekh (supra) as it pertained to dealings

in the cash segment whereas the present case deals with the

F&O segment. The learned senior counsel has strenuously

argued that no rules of the game have been violated.

34.We are unable to agree with the arguments of the

learned senior counsel appearing for Rakhi Trading.

Regulation 4(1) in clear and unmistakable terms has provided

that “no person shall indulge in a fraudulent or an unfair trade

practice in securities”. In Securities and Exchange Board

of India and Ors. v. Shri Kanaiyalal Baldevbhai Patel

43

and Ors.

3

, it has been held by this Court that a trade practice

is unfair if the conduct undermines the ethical standards and

good faith dealings between the parties engaged in business

transactions. To quote:

“31. Although unfair trade practice has

not been defined under the regulation, various

other legislations in India have defined the

concept of unfair trade practice in different

contexts. A clear cut generalized definition of

the ‘unfair trade practice’ may not be possible

to be culled out from the aforesaid definitions.

Broadly trade practice is unfair if the conduct

undermines the ethical standards and good

faith dealings between parties engaged in

business transactions. It is to be noted that

unfair trade practices are not subject to a

single definition; rather it requires adjudication

on case to case basis. Whether an act or

practice is unfair is to be determined by all the

facts and circumstances surrounding the

transaction. In the context of this regulation a

trade practice may be unfair, if the conduct

undermines the good faith dealings involved in

the transaction. Moreover the concept of

‘unfairness’ appears to be broader than and

includes the concept of ‘deception’ or ‘fraud’.

xxx xxx

xxx

60. Coupled with the above, is the

fact, the said conduct can also be

3

2017 SCC Online SC 1148.

44

construed to be an act of unfair

trade practice, which though not a defined

expression, has to be understood

comprehensively to include any act beyond a

fair conduct of business including the business

in sale and purchase of securities. However

the said question, as suggested by my learned

Brother, Ramana, J. is being kept open for a

decision in a more appropriate occasion as the

resolution required presently can be made

irrespective of a decision on the said

question.”

35.Having regard to the fact that the dealings in the stock

exchange are governed by the principles of fair play and

transparency, one does not have to labour much on the

meaning of unfair trade practices in securities. Contextually

and in simple words, it means a practice which does not

conform to the fair and transparent principles of trades in the

stock market. In the instant case, one party booked gains and

the other party booked a loss. Nobody intentionally trades for

loss. An intentional trading for loss per se, is not a genuine

dealing in securities. The platform of the stock exchange has

been used for a non-genuine trade. Trading is always with the

aim to make profits. But if one party consistently makes loss

and that too in preplanned and rapid reverse trades, it is not

45

genuine; it is an unfair trade practice. Securities market, as

the 1956 Act provides in the preamble, does not permit

“undesirable transactions in securities”. The Act intends to

prevent undesirable transactions in securities by regulating

the business of dealing therein. Undesirable transactions

would certainly include unfair practices in trade. The SEBI Act,

1992 was enacted to protect the interest of the investors in

securities. Protection of interest of investors should

necessarily include prevention of misuse of the market.

Orchestrated trades are a misuse of the market mechanism. It

is playing the market and it affects the market integrity.

36.Ordinarily, the trading would have taken place between

anonymous parties and the price would have been

determined by the market forces of demand and supply. In

the instant case, the parties did not stop at synchronised

trading. The facts go beyond that. The trade reversals in this

case indicate that the parties did not intend to transfer

beneficial ownership and through these orchestrated

transactions, the intention of which was not regular trading,

other investors have been excluded from participating in

46

these trades. The fact that when the trade was not

synchronizing, the traders placed it at unattractive prices is

also a strong indication that the traders intended to play with

the market.

37.We also find it difficult to appreciate the stand of SAT

that the rationale of change of beneficial ownership does not

arise in the derivatives segment. No doubt, as in the case of

trade in a scrip in the cash segment, there is no physical

delivery of the asset. However, even in the derivative

segment there is a change of rights in a contract. In the

instant case, through reverse trades, there was no genuine

change of rights in the contract. SAT has erred in its

understanding of change in beneficial ownership in reverse

trades. Even in derivatives, the ownership of the right is

restored to the first party when the reverse trade occurs. In

this context, the discussion in Ketan Parekh (supra)

assumes significance:

“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

47

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

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)

From the facts before us, it is clear that the traders in

question did not intend to transfer beneficial ownership and

therefore these trades are non genuine.

38.Rather than allowing the market forces to operate in

their natural course, the traders repeatedly carried out the

48

impugned transactions which deprived other market players

from full participation. The repeated reversals and

predetermined arrangement to book profits and losses

respectively, made it clear that the parties were not trading in

the normal sense and ordinary course. Resultantly, there has

clearly been a restriction on the free and fair operation of

market forces in the instant case.

39.Regulation 2(1)(c) defines fraud. Under Regulation 2(1)

(c)(2) a suggestion as to a fact which is not true while he

does not believe it to be true is fraud. Under Regulation 2(1)

(c)(7), a deceptive behaviour of one depriving another of

informed consent or full participation is fraud. And under

Regulation 2(1)(c)(8), a false statement without any

reasonable ground for believing it to be true is also fraud. In a

synchronised and reverse dealing in securities, with

predetermined arrangement to book loss or gain between

pre-arranged parties, all these vices are attracted.

40.Regulation 3(a) expressly prohibits buying, selling or

otherwise dealing in securities in a fraudulent manner. Under

Regulation 4(2) dealing in securities shall be deemed to be

fraudulent if the trader indulges in an act which creates a

49

false or misleading appearance of trading in the securities

market. It is a deeming provision. Such trading also involves

an act amounting to manipulation of the price of the security

in the sense that the price has been artificially and apparently

prefixed. The price does not at all reflect the value of the

underlying asset. It is also a transaction in securities entered

into without any intention of performing it and without any

intention of effecting a change of ownership of such

securities, ownership being understood in the limited sense of

the rights in the contract.

41.According to SAT, only if there is market impact on

account of sham transactions, could there be violation of the

PFUTP Regulations. We find it extremely difficult to agree with

the proposition. As already noted above, SAT has missed the

crucial factors affecting the market integrity, which may be

direct or indirect. The stock market is not a platform for any

fraudulent or unfair trade practice. The field is open to all the

investors. By synchronization and rapid reverse trade, as has

been carried out by the traders in the instant case, the price

discovery system itself is affected. Except the parties who

50

have pre-fixed the price nobody is in the position to

participate in the trade. It also has an adverse impact on the

fairness, integrity and transparency of the stock market.

42.We are fortified in our conclusion by the judgment of this

Court in Securities And Exchange Board of India v.

Kishore R. Ajmera

4

, though it is a case pertaining to

brokers, wherein it has been held at paragraph 25:

“25. The SEBI Act and the Regulations

framed thereunder are intended to protect the

interests of investors in the Securities Market

which has seen substantial growth in tune with

the parallel developments in the economy. In-

vestors’ confidence in the capital/securities

market is a reflection of the effectiveness of

the regulatory mechanism in force. All such

measures are intended to pre-empt manipula -

tive trading and check all kinds of impermissi-

ble conduct in order to boost the investors’

confidence in the capital market. The primary

purpose of the statutory enactments is to pro-

vide an environment conducive to increased

participation and investment in the securities

market which is vital to the growth and devel-

opment of the economy. The provisions of the

SEBI Act and the Regulations will, therefore,

have to be understood and interpreted in the

above light.”

In this case it was also held that in the absence of direct

proof of meeting of minds elsewhere in synchronised

transactions, the test should be one of preponderance of

4

(2016) 6 SCC 368

51

probabilities as far as adjudication of civil liability arising out

of the violation of the Act or the provision of the Regulations

is concerned. To quote:

“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…”

We do not think that those illustrations are exhaustive.

There can be several such situations, some of which we have

discussed hereinabove.

43.The traders thus having engaged in a fraudulent and

unfair trade practice while dealing in securities, are hence

liable to be proceeded against for violation of Regulations

3(a), 4(1) and 4(2)(a) of PFUTP Regulations. Appeal

Nos.1969/2011, 3175/2011 and 3180/2011 are hence

allowed. The orders of the Securities Appellate Tribunal are

set aside and that of the SEBI are restored to the extent

indicated above.

44.As far as brokers are concerned, we are of the view that

there is hardly any evidence on their involvement so as to

52

proceed against them for violation of Regulation 7A of the

Brokers Regulations and PFUTP Regulations. Merely because a

broker facilitated a transaction, it cannot be said that there is

violation of the Regulation. SEBI has not provided any

material to suggest negligence or connivance on the part of

the brokers. As held by this Court in Kishore R. Ajmera

(supra), there are several factors to be considered. We would

especially like to refer to the case of Angel Trading wherein

the broker repeatedly wrote to the National Stock Exchange

informing them about trades in the options segment that

were executed at unrealistic prices and requesting them to

put in mechanisms in the Options segment so that these

trades are not allowed to enter the system. In the absence of

any material provided by SEBI to prove the charges against

the brokers, particularly regarding aiding and abetting

fraudulent or unfair trade practices, we are of the opinion that

the orders of SEBI against the brokers should be interfered

with. Accordingly, the appeals filed against the brokers are

dismissed.

53

45.Before concluding, we would like to reiterate the

observations made by this Court in Kishore R. Ajmera

(supra) and Kanaiyalal Patel (supra) regarding the need

for a more comprehensive legal framework governing the

securities market. As the market grows, ingenuous means of

manipulation are also employed. In such a scenario, it is

essential that SEBI keeps up with changing times and

develops principles for good governance in the stock market

which ensure free and fair trading.

46.There shall be no order as to costs.

.......................J.

(KURIAN JOSEPH)

New Delhi;

February 8, 2018.

54

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 1969 OF 2011

SECURITIES AND EXCHANGE BOARD OF INDIA ….APPELLANT(S)

VERSUS

RAKHI TRADING PRIVATE LTD. ....RESPONDENT(S)

WITH

CIVIL APPEAL NOS. 3174-3177 OF 2011

AND

CIVIL APPEAL NO. 3180 OF 2011

J U D G M E N T

R. BANUMATHI, J.

I have gone through the judgment proposed by His Lordship

Justice Kurian Joseph. I am in agreement with the conclusion arrived

at by His Lordship. However, in view of the importance of the issues

involved, I prefer to give my own additional reasonings also for my

concurrence.

2.Since the issues involved in all the appeals are one and the

same, appeals filed by SEBI pertaining to the traders and the brokers

were heard together. For convenience and reference on facts, I have

55

taken up the appeal arising out of Rakhi Trading Pvt. Ltd. as the lead

case.

3.Brief facts of the case are that in 2007, SEBI had examined the

nature of transactions occurring in the derivative segment of the capital

market. Upon examination of the trading data of the Future and Option

Segment (herein after referred as "F & O Segment") on the NSE for

the period January to March, 2007, it was observed that the brokers at

NSE were buying and selling almost equal quantities of contracts

within the day. Moreover, it was noticed that such buy/sell orders were

synchronized [Synchronized trade is one where buy and sell orders

are placed simultaneously for the same volume]. In most of the cases,

the same quantity and in few cases, substantially the same quantity of

the original trade was closed out during the day at a price which was

significantly above or below the price at which the first/original

transaction was executed without significant variations in the traded

price of the underlying security. After preliminary examination into the

trading of F&O contracts, SEBI identified that certain entities including

the respondent-Rakhi Trading operating in the derivative segment had

executed fictitious and non-genuine trades. Exercising its powers

under Section 19 read with Section 11B and 11D of the Securities and

56

Exchange Board of India Act, 1992, (for short 'SEBI Act, 1992') the

Whole Time Member of the Board had passed an ex parte order

directing the respondent and other entities to cease and desist from

indulging in the violations till further orders as they were found

indulging in non-genuine transactions.

4.Meanwhile, in terms of provisions of Rule 4(1) of the Securities

and Exchange Board of India Rules, 1995, the Board issued a show

cause notice to the respondent on 05.10.2007 alleging that the

respondent executed synchronized/matched/reversal trades and

indulged in non-genuine transactions with certain clients/stock brokers

during the period of examination in the F & O Segment by enclosing a

report showing fourteen Options Contracts executed by it in F & O

Segment between 21

st

March to 30

th

March, 2007 with a total close out

difference (COD) of Rs. 1,15,79,312.15/- i.e. net profit of Rs. 115.79

lakhs, thereby violating Regulations 3(a), 4(1) and 4(2)(a) of SEBI

(Prohibition of Fraudulent and Unfair Trade Practices relating to

Securities Market) Regulations, 2003 (for short "PFUTP Regulations").

On the show cause notice, the respondent, inter alia, contended that

the impugned transactions were genuine trades, traded on the screen

in anonymity in compliance with the rules and regulations of the

57

exchange for trading in Options Segment and the said transactions in

no manner undermined price discovery or influenced the market.

5.Upon consideration of the findings in the preliminary enquiry and

submissions of the respondent, the Adjudicating Officer found that

most of the trades i.e. buying and selling of contracts within a gap of

few seconds between the same parties through same set of brokers

matched and found that it is unrealistic that the orders would match

exactly both the quantity and price and with the same party again and

again. The Adjudicating Officer further held that manipulative device

was used for synchronization of trades and the trades were

fraudulent/fictitious in nature. After referring to SAT's judgment in

Ketan Parekh v. SEBI (Appeal No. 2 of 2004) and other judgments, the

Adjudicating Officer found that the respondent has executed

synchronized/reversal trades, in violation of PFUTP Regulations, 2003

and imposed a penalty of Rs.1,08,00,000/- on the respondent in terms

of the provisions of Section 15HA of SEBI Act, 1992.

6.On appeal by the respondent, Securities Appellate Tribunal

(SAT) set aside the order of the Adjudicating Officer and held that

NIFTY is a large well diversified index of stocks which is not capable of

being influenced. SAT further held that the thirteen trades in the

58

NIFTY options executed by the respondent had no impact on the

market and those transactions did not influence the NIFTY index in

any manner. SAT held that the impugned transactions do not become

illegal merely because they were executed for tax planning as they did

not influence the market. Holding that there has been no violation of

any regulation of SEBI, SAT set aside the order of the Adjudicating

Officer. Being aggrieved, SEBI has preferred this statutory appeal

under Section 15Z of SEBI Act, 1992.

RELEVANT PROVISIONS OF THE SEBI ACT AND THE REGULATIONS

7. Section 12-A contained in Chapter V-A of the SEBI Act, 1992

deals with “Prohibition of manipulative and deceptive devices, insider

trading and substantial acquisition of securities or control” and reads

as follows:

12A. Prohibition of manipulative and deceptive devices,

insider trading and substantial acquisition of securities or

control.—No person shall directly or indirectly—

(a) use or employ, in connection with the issue, purchase

or sale of any securities listed or proposed to be listed

on a recognised stock exchange, any manipulative or

deceptive device or contrivance in contravention of

the provisions of this Act or the rules or the

regulations made thereunder;

(b) employ any device, scheme or artifice to defraud in

connection with issue or dealing in securities which

59

are listed or proposed to be listed on a recognised

stock exchange;

(c) engage in any act, practice, course of business which

operates or would operate as fraud or deceit upon

any person, in connection with the issue, dealing in

securities which are listed or proposed to be listed on

a recognised stock exchange, in contravention of the

provisions of this Act or the rules or the regulations

made thereunder;

(d) engage in insider trading;

(e) deal in securities while in possession of material or

non-public information or communicate such material

or non-public information to any other person, in a

manner which is in contravention of the provisions of

this Act or the rules or the regulations made

thereunder;

(f) acquire control of any company or securities more

than the percentage of equity share capital of a

company whose securities are listed or proposed to

be listed on a recognised stock exchange in

contravention of the regulations made under this Act.

8.Section 30 of the SEBI Act reads as follows:-

30. Power to make regulations.- (1) The Board may, with the

previous approval of the Central Government by notification, make

regulations consistent with this Act and the rules made thereunder

to carry out the purposes of this Act.

...........

9. Section 15HA of the Act which deals with penalty for fraudulent

and unfair trade practices, Section 15HB which deals with penalty for

contravention where no separate penalty has been provided and

Section 15J which lays down the factors to be taken into account while

adjudging the quantum of penalty read as follows:

60

15HA. Penalty for fraudulent and unfair trade practices.—If any

person indulges in fraudulent and unfair trade practices relating to

securities he shall be liable to a penalty of twenty-five crore rupees

or three times the amount of profits made out of such practices,

whichever is higher.

15HB. Penalty for contravention where no separate penalty

has been provided.- Whoever fails to comply with any provision of

this Act, the rules or the regulations made or directions issued by

the Board thereunder for which no separate penalty has been

provided, shall be liable to a penalty which may extend to one crore

rupees.

15J. Factors to be taken into account by the adjudicating

officer.—While adjudging the quantum of penalty under Section

15-I, the adjudicating officer shall have due regard to the following

factors, namely—

(a) the amount of disproportionate gain or unfair advantage,

wherever quantifiable, made as a result of the default;

(b) the amount of loss caused to an investor or group of

investors as a result of the default;

(c) the repetitive nature of the default.

10. Section 12A has to be read along with the provisions of the

PFUTP Regulations, 2003, SEBI (Stockbrokers and Sub-Brokers)

Regulations, 1992 and the SEBI (Procedure for Holding Enquiry by

Enquiry Officer and Imposing Penalty) Regulations, 2002. Regulation 3

of the PFUTP Regulations, 2003 deals with "Prohibition of certain

dealings in securities". Regulation 4 deals with "Prohibition of

manipulative, fraudulent and unfair trade practices". Regulation 2 (1)(c)

defines "fraud". For relevant Capital Market Terms, I have made

reference to SEBI Act and K. Sekar's Guide to SEBI, Capital Issues,

Debentures & Listing, Lexis Nexis fourth Edition 2017 and Economics

61

of Derivatives by Cambridge University Press by T.V. Somanathan and

V. Anantha Nageswaran. To avoid repetition, I refrain from referring to

the explanation of the relevant Capital Market Terms.

11.Re-Contention: The impugned trades were normal transactions

traded on the system and not fictitious transactions:- Contention of

the respondent is that the impugned trades were normal transactions

traded on the system maintaining complete anonymity and the trades

were not illegal and the respondent has not violated the provisions of

SEBI Regulations. Respondent-Rakhi Trading Pvt. Ltd. contended that

the trading was done on automated screen based trading and it was

not possible for them to know who the counter party was and

therefore, the synchronization of trade was a mere coincidence. Per

contra, SEBI maintained that the respondent-Rakhi Trading and the

counter party-Kasam Holding Pvt. Ltd. had prior understanding and

have thwarted the checks and balances of the trading system by

executing non-genuine transactions with ulterior purpose.

12.To appreciate the contentious issues raised by the parties, I refer

to the impugned reversal trade transactions:

Trade Date

and Time

Buy Order

Time

Sell Order

Time

Time diff

between

Buy &

Sell

Order

Strike

Price

Trade

Price

Buy

Client

Name

Sell Client

Name

Total

traded

volume

Diff. in

price of 2

legs of

the trade

Close out

Difference

%

Market

Gross

21-Mar-0714:50:2814:50:270:00:013,930.00270.00 KASAM

HOLDING

RAKHI

TRADING

10000 160 40.82

62

14:50:28 PVT. LTD PVT LTD

21-Mar-07

15:06:45

15:06:4215:06:450:00:033,930.00110.00 RAKHI

TRADING

PVT LTD

KASAM

HOLDING

PVT. LTD

10000 1600000

21-Mar-07

11:37:43

11:37:4311:37:370:00:063,730.00112.00 KASAM

HOLDING

PVT. LTD

RAKHI

TRADING

PVT LTD

4750 45 49.74

21-Mar-07

12:04:05

12:04:0512:04:050:00:003,730.0067.00 RAKHI

TRADING

PVT LTD

KASAM

HOLDING

PVT. LTD

4750 213750

21-Mar-07

14:33:19

14:33:1914:33:180:00:01# 120 12.25 SPARK

SECURITI

ES P LTD

RAKHI

TRADING

PVT LTD

80000 10 31.5

21-Mar-07

14:53:18

14:53:1614:53:180:00:02# 120 2.25 RAKHI

TRADING

PVT LTD

SPARK

SECURITI

ES P LTD

80000 800000

21-Mar-07

12:04:51

12:04:5112:04:500:00:013,650.00115.00 RAKHI

TRADING

PVT LTD

KASAM

HOLDING

PVT. LTD

10000 58 49.02

21-Mar-07

12:52:19

12:52:1912:52:180:00:013,650.00173.00 KASAM

HOLDING

PVT. LTD

RAKHI

TRADING

PVT LTD

8000 50

21-Mar-07

13:07:20

13:07:2013:07:190:00:013,650.00165.00 KASAM

HOLDING

PVT. LTD

RAKHI

TRADING

PVT LTD

2000 564000

22-Mar-07

14:02:25

14:02:2514:02:230:00:024,190.00410.00 KASAM

HOLDING

PVT. LTD

RAKHI

TRADING

PVT LTD

11500 125 38.59

22-Mar-07

11:39:28

11:39:2811:39:260:00:024,190.00285.00 RAKHI

TRADING

PVT LTD

KASAM

HOLDING

PVT. LTD

11500 1437500

22-Mar-07

15:02:37

15:02:3715:02:360:00:013,960.00190.00 KASAM

HOLDING

PVT. LTD

RAKHI

TRADING

PVT LTD

11700 89 50

22-Mar-07

15:23:15

15:23:1515:23:150:00:003,960.00101.00 RAKHI

TRADING

PVT LTD

KASAM

HOLDING

PVT. LTD

11700 1041300

Trade Date

and Time

Buy Order

Time

Sell Order

Time

Time diff

between

Buy &

Sell

Order

Strike

Price

Trade

Price

Buy

Client

Name

Sell Client

Name

Total

traded

volume

Diff. in

price of 2

legs of

the trade

Close out

Difference

%

Market

Gross

22-Mar-07

10:15:21

10:15:2110:15:210:00:004,050.00200.00 RAKHI

TRADING

PVT LTD

KASAM

HOLDING

PVT. LTD

10500 85 35.84

22-Mar-07

11:37:08

11:37:0811:37:070:00:014,050.00285.00 KASAM

HOLDING

PVT. LTD

RAKHI

TRADING

PVT LTD

10500 892500

23-Mar-07

10:22:37

10:22:3710:22:370:00:003,880.00190.00 KASAM

HOLDING

PVT. LTD

RAKHI

TRADING

PVT LTD

11600 133 30.05

23-Mar-07

11:14:05

11:14:0511:14:040:00:013,880.0057.00 RAKHI

TRADING

PVT LTD

KASAM

HOLDING

PVT. LTD

11600 1542800

23-Mar-07

13:18:21

13:18:1813:18:210:00:033,930.0032.00 RAKHI

TRADING

PVT LTD

KASAM

HOLDING

PVT. LTD

10500 54 30

23-Mar-07

14:16:36

14:16:3614:16:350:00:013,930.0086.00 KASAM

HOLDING

PVT. LTD

RAKHI

TRADING

PVT LTD

10500 567000

23-Mar-07

13:19:06

13:19:0613:19:050:00:013,960.0063.00 RAKHI

TRADING

PVT LTD

KASAM

HOLDING

PVT. LTD

10700 52 31.6

23-Mar-07

14:17:49

14:17:4914:17:490:00:003,960.00115.00 KASAM

HOLDING

PVT. LTD

RAKHI

TRADING

PVT LTD

10700 556400

23-Mar-07

12:17:02

12:16:5912:17:020:00:034,050.00155.00 RAKHI

TRADING

PVT LTD

KASAM

HOLDING

PVT. LTD

11500 72 41.07

23-Mar-07

13:15:42

13:15:4213:15:410:00:014,050.00227.00 KASAM

HOLDING

PVT. LTD

RAKHI

TRADING

PVT LTD

11500 828000

23-Mar-07

12:17:44

12:17:4412:17:440:00:004,150.00230.00 RAKHI

TRADING

PVT LTD

KASAM

HOLDING

PVT. LTD

11600 72 50

63

23-Mar-07

13:16:19

13:16:1913:16:190:00:004,150.00302.00 KASAM

HOLDING

PVT. LTD

RAKHI

TRADING

PVT LTD

11600 835200

30-Mar-07

11:36:40

11:36:3711:36:400:00:033,810.0080.25 RAKHI

TRADING

PVT LTD

KASAM

HOLDING

PVT. LTD

8950 39.75 49.58

30-Mar-07

11:48:44

11:48:4411:48:440:00:003,810.00120.00 KASAM

HOLDING

PVT. LTD

RAKHI

TRADING

PVT LTD

8950 355762.5

30-Mar-07

14:30:04

14:30:0414:30:040:00:003,550.00270.00 RAKHI

TRADING

PVT LTD

KASAM

HOLDING

PVT. LTD

11900 29 46.21

30-Mar-07

14:43:02

14:43:0014:43:020:00:023,550.00299.00 KASAM

HOLDING

PVT. LTD

RAKHI

TRADING

PVT LTD

11900 345100

13.Synchronized Trading: As per the Oxford dictionary the word

'synchronize' means "cause to occur at the same time; be

simultaneous". A synchronized trade is one where the buyer and seller

enter the quantity and price of the shares they wish to transact at

substantially the same time. This could be done through the same

broker (termed a cross deal) or through two different brokers. [Ketan

Parekh v. SEBI, Manu/SB/0229/2006]

14.Synchronized trade is one wherein 'buy and sell' orders are

placed simultaneously for the same quantity and price they wish to

transact at substantially the same time. Synchronized trades are not

illegal provided that they are executed on the screens of the exchange

in the price and order matching mechanism of the exchanges just like

any other normal trade. As per SEBI's circular No.SMDRP/

POLICY/CIR-32/99 dated 14.09.1999, "All negotiated deals...... shall

be executed only on the screens of the exchanges in the price and

order matching mechanism of the exchanges just like any other

64

normal trade.". In the said circular, it was stated that "The above

decision was taken as negotiated deals avoid transparency

requirements, do not contribute to price discovery and some investors

do not have benefit of the best possible price and militate against the

basic concept of stock exchanges, which are meant to bring together a

large number of buyers and sellers in an open manner.". (Reference:

https://www.sebi.gov.in/legal/circulars/sep-1999/negotiated-deals_186

29. html)

15.In Ketan Parekh v. SEBI Manu/SB/0229/2006, the Securities

Appellate Tribunal (SAT) has considered the circumstances under

which "Synchronized trade" will be legal and held as under:

"There are yet another type of transactions which are commonly

called synchronized deals. The word 'synchronise' according to the

Oxford dictionary means "cause to occur at the same time; be

simultaneous". A synchronized trade is one where the buyer and

seller enter the quantity and price of the shares they wish to transact

at substantially the same time. This could be done through the same

broker (termed a cross deal) or through two different brokers. Every

buy and sell order has to match before the deal can go through. This

matching may take place through the stock exchange mechanism or

off market. When it matches through the stock exchange, it may or

may not be a synchronized deal depending on the time when the buy

and sell orders are placed. There are deals which match off market

i.e., the buyer and the seller agree on the price and quantity and

execute the transaction outside the market and then report the same

to the exchange. These are also called negotiated transactions...... It

has recently issued a circular requiring all bulk deals to be transacted

through the exchange even if the price and quantity are settled

outside the market. When such deals go through the exchange, they

are bound to synchronise. It would, therefore, follow that a

synchronized trade or a trade that matches off market is per se not

illegal. Merely because a trade was crossed on the floor of the stock

65

exchange with the buyer and seller entering the price at which they

intended to buy and sell respectively, the transaction does not

become illegal. A synchronized transaction even on the trading

screen between genuine parties who intend to transfer beneficial

interest in the trading stock and who undertake the transaction only

for that purpose and not for rigging the market is not illegal and

cannot violate the regulations...." [underlining added]

16.A synchronized transaction will become 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 with a view to

manipulate the price or volume of the scrip or with some ulterior

purpose. In Ketan Parekh case, SAT held as under:

"..... A synchronized 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

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." (underlining added)

17.In the present case, all the fourteen transactions (except one)

pertaining to Nifty were synchronized. Be it noted that as pointed out

by SAT in para (7) of its order, the respondent did not dispute the fact

66

that "....trades had been synchronized and reversed....". The

respondent only contended that the impugned "synchronized trade' did

not manipulate the market and that what is prohibited are only the

synchronized trades and that the impugned trades were normal

transactions and the respondent had not violated the provisions of

PFUTP Regulations. In the context of the stand taken by Rakhi

Trading before SAT, it is now not open to respondent Rakhi Trading to

contend that the transactions were not synchronized and reversed.

18.By perusal of details of 'buy and sell', 'volume of trade' and

'timing of trade' of the impugned transactions, it was observed that the

reversal trades were executed almost of the same quantity and the

trade was also within a short gap of few seconds with significant

variation of the price, though, there was no major variation in the

underlying price during that period. Upon examination of the trade

transactions, it was further observed that the respondent in the

impugned transactions had operated through Prashant Jayantilal Patel

as its broker and the counter party Kasam Holding Pvt. Ltd., which

executed those transactions through Vibrant Securities Pvt. Ltd. as its

broker. As pointed out in the tabular column, all reversed/closed out

transactions were executed at prices with significant variation within a

67

short period though there was no major variation in the underlying

price during that period.

19.For instance, let us refer to one of the impugned reversal trades.

On 21.03.2007 at 14:50:27, NIFTY 50 (Strike Price 3930) Options

(Trade volume 10,000) was sold within a second at 14:50:28 at Trade

Price of Rs.270/-. Within a short gap of time, at 15:06:42, the same

NIFTY 50 (Trade Volume 10,000) (Strike Price 3930) was bought by

the respondent within three seconds at Trade Price of Rs.110/- and the

price difference of two legs of the trade being Rs.160/- with COD

Rs.16,00,000/-. The percentage of the gross of the trade on that day

was 40.82%. As seen from the chart, the other reversal trade

transactions were also almost similar within a gap of few seconds,

between 'buy' and 'sell' order, with significant price variation, though no

major price variation in the underlying price. During examination of

those transactions, the Whole Time Member observed that the

synchronized transactions had a definite objective of enabling one

party (Rakhi Trading Pvt. Ltd.) to book profits and the other party

(Kasam Holding Pvt. Ltd.) to book losses in the close out difference.

Thirteen Options Contracts executed by respondent-Rakhi Trading in

the F & O Segment between March 21 and March 30, 2007 with a total

68

Close Out Difference (COD) of Rs.1,15,79,312.15 (Positive) showing a

net profit of Rs.115.79 lakhs to Rakhi Trading Pvt. Ltd. and loss to the

counter party i.e. Kasam Holding Pvt. Ltd.

20.The question whether there was fictitious transactions creating

illegal synchronization has to be gathered from the facts and

circumstances and intention of the parties. Acting in concert is

something about which it is difficult to obtain direct evidence. Proof of

manipulation might depend upon inferences drawn from factual details.

Such inferences could be gathered from pattern of trading data and

the nature of the transactions etc.

21.'By manipulation and synchronization', it is meant that two

parties have pre-meditated; as such a drastic movement in price within

few seconds could have been only through prior understanding

between the parties concerned only to fulfill an unlawful objective

through misuse of the stock exchange. That is, prior arrangement/prior

understanding with each other wherein one will make profit and other

will lose and thereby as soon as one party opens up its trade in the

market, the other party will buy it. Though the trading is shown on the

screen, but prior arrangement is very well possible behind the screen.

This is what has been done in the case in hand. Buy and sell orders

69

were placed at a difference of few seconds/minutes, while 'sell' by

respondent to Kasam Holding at a high price and "buy" by the

respondent from Kasam Holding Pvt. Ltd. at a low price. The

transactions wherein the 'buy and sell' orders entered almost

simultaneously and the transactions matched in time and quantity with

significant price variation and respondent consistently making profit but

Kasam Holding Pvt. Ltd. consistently making loss. Number of reversal

trades between the respondent and Kasam Holding Pvt. Ltd. and such

reversal trade taking place repeatedly over a period of time only

indicates that there was pre-arrangement between the parties before

the trade was executed. The transactions involving only the same two

parties within few seconds with huge difference in 'buy and sell' value,

though there is no difference in the underlying security, can take place

only with prior understanding between the two parties. The Board who

is the regulator of the market, can always lift the veil of such

transactions to show the non-genuineness of such transactions.

22.Buying and selling of equal quantities within the day may not be

wrong but the trades with ulterior purpose are not genuine for sure. In

the present case, every time one party is making profit and other party

is facing loss. Further, there was proximity in the time of sell orders at

70

a high price to the party-Kasam Holding Pvt. Ltd. and the same

quantity being reversed by Kasam Holding Pvt. Ltd. to the same

party-Rakhi Trading Pvt. Ltd. at a low price through the same set of

brokers. As discussed earlier, during March, 2007 thirteen Nifty Option

Contracts got matched between the same parties through the same

brokers. I fail to understand as to why Kasam Holding has made the

transactions repeatedly by incurring losses. It seems improbable that

Kasam Holding which was facing loss in each transaction by trading

with the respondent, was still eager to trade with the same repeatedly

for about four days which is not in consonance with the market trend

and human conduct; more so, when there has not been any major

difference in the underlying price. It is thus difficult to accept that

several such sell and buy orders between the respondent and Kasam

Holding being within a gap of "1", "2" or "3" or few seconds were by

mere coincidence. As contended by the appellant-SEBI, it was too

much of coincidence that there were number of transactions of 'buy

and sell orders' between the same parties with same quantity of stock

with significant variation in price.

71

23.Insofar as synchronized trade involving same set of brokers and

meeting of minds, in Securities and Exchange Board of India v.

Kishore R. Ajmera (2016) 6 SCC 368, this Court held as under:

"29. This will take us to the second and third category of cases i.e.

Ess Ess Intermediaries (P) Ltd., Rajesh N. Jhaveri and Rajendra

Jayantilal Shah (second category) and Monarch Networth Capital

Ltd. (earlier known as Networth Stock Broking Ltd.) (third category).

In these cases the volume of trading in the illiquid scrips in question

was huge, the extent being set out hereinabove. Coupled with the

aforesaid fact, what has been alleged and reasonably established,

is that buy and sell orders in respect of the transactions were made

within a span of 0 to 60 seconds. While the said fact by itself i.e.

proximity of time between the buy and sell orders may not be

conclusive in an isolated case such an event in a situation where

there is a huge volume of trading can reasonably point to some

kind of a fraudulent/manipulative exercise with prior meeting of

minds. Such meeting of minds so as to attract the liability of the

broker/sub-broker may be between the broker/sub-broker and the

client or it could be between the two brokers/sub-brokers engaged

in the buy and sell transactions. When over a period of time such

transactions had been made between the same set of brokers or a

group of brokers a conclusion can be reasonably reached that there

is a concerted effort on the part of the brokers concerned to indulge

in synchronized trades the consequence of which is large volumes

of fictitious trading resulting in the unnatural rise in hiking the

price/value of the scrip(s). It must be specifically taken note of

herein that the trades in question were not “negotiated trades”

executed in accordance with the terms of the Board’s circulars

issued from time to time. A negotiated trade, it is clarified, invokes

consensual bargaining involving synchronising of buy and sell

orders which will result in matching thereof but only as per

permissible parameters which are programmed accordingly.

30. It has been vehemently argued before us that on a

screen-based trading the identity of the 2

nd

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 2

nd

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

72

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 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."[underlining added]

24.In Nirmal Bang Securities Private Ltd. v. The Chairman,

Securities and Exchange Board of India (MANU/SB/0206/2003), SAT

applied the test of price, quantity and time to hold that synchronized

trading in that case was violative of norms of trading in securities and

held as under:-

"249. BEB has been charged for synchronized deals with First

Global. I have examined the data provided by the parties on this

issue. I find many transactions between BEB and FGSB. There are

many instances of such transactions. I find the scrip, quantity and

price for these orders had been synchronized by the counter party

brokers. Such transactions undoubtedly create an artificial market

to mislead the genuine investors. Synchronized trading is violative

of all prudential and transparent norms of trading in securities.

Synchronized trading on a large scale, can create false volumes.

The argument that the parties had no means of knowing whether

73

any entity controlled by the client is simultaneously entering any

contra order elsewhere for the reason that in the online trading

system, confidentiality of counter parties is ensured, is untenable. It

was submitted by the Appellants that it was not possible for the

broker to know who the counter party broker is and that trades were

not synchronized but it was only a coincidence in some cases.

Theoretically this is OK. But when parties decide to synchronize the

transaction the story is different. There are many transactions

giving an impression that these were all synchronized, otherwise

there was no possibility of such perfect matching of quantity price

etc. As the Respondent rightly stated it is too much of a coincidence

over too long a period in too many transactions when both parties

to the transaction had entered buy and sell orders for the same

quantity of shares almost simultaneously. The data furnished in the

show cause notice certainly goes to prove the synchronized nature

of the transaction which is in violation of regulation 4 of the FUTP

Regulations. The facts on record categorically establishes that BEB

had indulged in synchronized trading in violation of regulation 47 of

the FUTP Regulations. In a synchronized trading intention is

implicit."

25.In the quasi-judicial proceeding before SEBI, the standard of

proof is preponderance of probability. In a case of similar synchronized

trading involving same set of brokers emphasizing that the standard of

proof is "preponderance of probability" in paras (26) and (27), in

Kishore R. Ajmera case, this Court held as under:-

"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."

[underlining added]

74

26.There was no possibility of such perfect matching of quantity,

timing, prices etc. between the same parties unless there was prior

meeting of minds or a specific understanding/arrangement between

the parties. After referring to Ketan Parekh and Nirmal Bang cases, in

SEBI v. Accord Capital Markets Ltd. (MANU/SB/0136/2007), SEBI held

as under:-

"4.12 I note that most of the synchronized trades executed by the

Broker were perfectly matched with the counter party orders even

with respect of the price to the extent of two decimal points. The

proximity in placing the orders at the same price and for the same

quantity almost at the same time (in majority of the cases) resulted

in the matching of the aforesaid transactions, with all the

ingredients i.e. quantity, price and the time, required to conclude

the trades. The time difference (between the buy and sell orders) of

majority of the synchronized trades was very less with the price and

quantity matching. The said synchronization cannot take place in

the absence of any specific understanding/arrangement between

the clients at the first instance, especially when the shares of the

company were highly liquid at the time of the trades.

...........

4.24 The proof of manipulation in the circumstances always

depends on inferences drawn from a mass of factual details.

Findings must be gathered from patterns of trading data and the

nature of the transactions etc. Several circumstances of a

determinative character coupled with the inference arising from the

conduct of the parties in a major market manipulation could

reasonably lead to conclusion that the Broker was responsible in

the manipulation. The evidence, direct or circumstantial, should be

sufficient to raise a presumption in its favour with regard to the

existence of a fact sought to be proved. As pointed out by Best in

"Law of Evidence", the presumption of innocence is no doubt

presumption juris; but everyday practice shows that it may be

successfully encountered by the presumption of guilt arising from

circumstances, though it may be a presumption of fact. Since it is

exceedingly difficult to prove facts which are especially within the

knowledge of parties concerned, the legal proof in such

75

circumstances partakes the character of a prudent man's estimate

as to the probabilities of the case. Hon'ble Securities Appellate

Tribunal (SAT) has observed in the matter of Ketan Parekh v.

SEBI:

"...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...."

4.25 Presumption plays a critical role in coming to a finding as to

the involvement or otherwise of a market participant in any

manipulation. For instance, while trading, a lip service can be paid

to a screen based trading system while agreement is reached

beforehand between brokers to effect the transaction. Anonymity

can be a cloak to cover anastomosis of interest. Therefore, the

hackneyed plea based on intentions in the market place cannot

pass muster in all circumstances, more so when such intentions are

in the special/peculiar knowledge of the parties to the transactions.

Also any suggestion attributing innocence to the parties involved in

such transactions would give rise to an untenable situation where

certain other third persons/entities alone would be responsible for

the manipulation and none else."

27.Applying the test laid down in Kishore R. Ajmera case to the

present case, I find that by cumulative analysis of the reversal

transactions between respondent and Kasam Holding, quantity, time

and significant variation of prices, without major variation in the

underlying price of the securities clearly indicate that the respondent's

trades are not genuine and had only misleading appearance of trading

in the securities market, without intending to transfer beneficial

ownership.

76

28.Contention of the appellant is that if the market starts moving or

there is a change in the perception of the market and the anticipated

future performance thereof, then the seller often gets very

apprehensive and may even panic, anticipating a substantial loss and

would want to square off his position to restrict a loss. I find no merit in

this contention. Insofar as the impugned transactions are concerned,

it is seen that the market of underlying shares had remained unmoved

altogether, then there was no question of getting panic. When there

were no other transactions in the market affecting the price of the

underlying shares or F & O Segment and the price in both the

segments had remained static, then there was no reasonable ground

to get apprehensive and panic. Therefore, squaring off the position

appears to adjust the financial results with a view to avoid the tax

incidence through an unfair trade practice or for some ulterior purpose.

29.On behalf of respondent, learned senior counsel Mr. P.

Chidambaram contended that securities like Nifty are vast pools and

Nifty has a dynamic index which evolves continuously and it is too

difficult for a manipulator to affect such prices. Further contention of

the respondent is that whether the impugned trades are synchronized

77

or not had no impact on the market and the respondent cannot be held

to have violated regulations.

30.On behalf of the respondent-Tungarli Tradeplace Pvt. Ltd., Mr.

Mehta learned counsel submitted that a person can be found to have

violated Regulations 3 and 4, he should have indulged in some

fraudulent practice with an intention to manipulate the securities

market and has drawn our attention to Regulation 2(c) of the SEBI

Regulations, 2003 in which 'fraud' has been defined. Learned counsel

submitted that for a person to be held liable for breach of the above

mentioned Regulations, SEBI has to establish the following:- (i) that

the party entered into the transactions with the intention to manipulate

the market; and (ii) that there is evidence that the market was in fact

manipulated.

31.Per contra, learned senior counsel for SEBI contended that SAT

had misconstrued the charge that the impugned synchronized trades

had no effect of manipulating the Nifty index and SAT was not right in

holding that only those synchronized transactions which have the

effect of manipulating the market are undesirable and prohibited. It

was contended that it was never the case of SEBI that Nifty was being

manipulated by the impugned trade executed by the respondent and

78

findings of SAT are not sustainable in law and would have serious

repercussion on the market integrity.

32.The respondent has made the transactions repeatedly by

incurring losses, particularly when there were no transactions made by

any third party in the market. Abnormal difference between the prices

at which the trades were executed without corresponding effect on the

price of the underlying security, shows that the option in which the

party traded was not in demand in the market. It is unusual that the

trades were transacted with such huge profits when there was no

change in the underlying prices. These trade transactions obviously

only aimed at carrying out manipulative objective.

33.Once the reversal transactions are shown to be non-genuine or

shown to be fictitious creating a false or misleading appearance in the

market for ulterior purpose and that the stock market was misused by

such manipulative device, this is in clear violation of the provisions of

PFUTP Regulations, 2003. Regulations 3(a), 4(1) and 4(2)(a) of

PFUTP Regulations prohibit such manipulative trades, unfair trade

practices.

34.SAT mainly proceeded that the impugned reversal trade

transactions had no impact on the market and it could have never

79

influenced the Nifty. After extracting the show cause notice, SAT, inter

alia, recorded the findings:- (i) The insinuation is that by executing

manipulative trades in the F & O segment, Nifty was sought to be

tampered with; (ii) It is a common case of the parties that the

appellant-Rakhi Trading traded only thirteen Nifty option contracts in

the F & O Segment; assuming these trades were manipulative, they

could have never influenced the Nifty; Nifty which consists of fifty well

diversified highly liquid stocks in the cash segment is a very large well

diversified index of stocks which is not capable of being influenced

much less manipulated by the movement of prices; and (iii) thirteen

impugned trades in Nifty options executed by the appellant had no

impact on the market or affected the investors in any way nor did they

influence the Nifty in any manner.

35.Regulation 3 deals with "Prohibition of certain dealings in

securities". Regulation 4 deals with "Prohibition of manipulative,

fraudulent and unfair trade practices". Regulation 4 starts as "Without

prejudice to the provisions of Regulation 3.....". Regulation 4(2) is an

inclusive provision. Regulation 4(2) stipulates that "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.....",

80

instances pointed out thereon. Regulation 4(2)(a) deals with ".....an

act which creates false or misleading appearance of trading in the

securities market". An act to fall within Regulation 4(2)(a), it is not

necessary that the transactions entered into by the party was with

intention to manipulate the market and that the market was in fact

manipulated. Market manipulation is a deliberate attempt to interfere

with the free and fair operation of the market and create artificial, false

or misleading appearances with respect to the price, market, product,

security and currency.

36.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.

81

37.In the context of 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's case (supra), held as under:-

"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 wide spread 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 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 wide spread 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."

38.The smooth operation of the securities market and its healthy

growth and development depends upon large extent on the quality and

integrity of the market. Unfair trade practices affect the integrity and

82

efficiency of the securities market and the confidence of the investors.

Prevention of market abuse and preservation of market integrity are

the hallmark of securities law. In N. Narayanan v. Adjudicating Officer,

Securities and Exchange Board of India (2013) 12 SCC 152, it was

held as under:-

"33. Prevention of market abuse and preservation of market

integrity is the hallmark of securities law. Section 12-A read with

Regulations 3 and 4 of the 2003 Regulations essentially intended to

preserve “market integrity” and to prevent “market abuse”. The

object of the SEBI Act is to protect the interest of investors in

securities and to promote the development and to regulate the

securities market, so as to promote orderly, healthy growth of

securities market and to promote investors’ protection. Securities

market is based on free and open access to information, the

integrity of the market is predicated on the quality and the manner

on which it is made available to market. “Market abuse” impairs

economic growth and erodes investor’s confidence. Market abuse

refers to the use of manipulative and deceptive devices, giving out

incorrect or misleading information, so as to encourage investors to

jump into conclusions, on wrong premises, which is known to be

wrong to the abusers. The statutory provisions mentioned earlier

deal with the situations where a person, who deals in securities,

takes advantage of the impact of an action, may be manipulative,

on the anticipated impact on the market resulting in the “creation of

artificiality”. The same can be achieved by inflating the company’s

revenue, profits, security deposits and receivables, resulting in

price rise of the scrip of the company. Investors are then lured to

make their “investment decisions” on those manipulated inflated

results, using the above devices which will amount to market

abuse."

39.In an interview, Lawrence E. Harris, a former chief economist at

the Securities and Exchange Commission and now a Finance

Professor at the University of Southern California, has stated that the

difficulty in proving manipulation is probably an inherent feature of

83

modern markets. "Because the markets are so complex", he said,

".....It is relatively easy for traders engaged in manipulation to offer

alternative explanations for their behaviour that would make it difficult

to successfully prosecute them". Professor Harris nonetheless said

"when presented with the data suggesting manipulation by firm

proprietary traders, it is reasonable to expect that the S.E.C. would

consider investigation of the matter further". The S.E.C. had no

comment on the researchers' study. [Ref.:www.nytimes.com/2006/

05/07/business/yourmoney/07stra.html]

40.Stock market is regulated mainly by SEBI and to some extent by

the Departments of Economic Affairs and Company Affairs of

Government of India. Market manipulation can occur in a variety of

ways. Manipulations/unfair trade practices reduce the market efficacy.

Section 11 of the SEBI Act, 1992 provides for the functions of the

Board, as per which it shall be the duty of the Board to protect the

interests of the investors in securities and to promote the development

and to regulate the securities market by such measures as it thinks fit.

Main function of SEBI in this regard is to make inquiry, investigation

and to give directions, to promote the orderly and healthy growth of the

securities market. With a view to curb unfair trade practices, market

84

manipulation, price rigging and other frauds in securities market, SEBI

is empowered to make inquiries and inspection.

41.Section 12A of the SEBI Act, 1992 read with Regulations 3 and 4

of the PFUTP Regulations, 2003 are essentially intended to preserve

'market integrity' and to prevent 'market abuse'. The object of the SEBI

Act is to protect the interest of the investors in securities and to

promote the development and to regulate the securities market so as

to promote orderly, healthy growth of securities market and to promote

investor's protection. N. Narayanan case arose in connection with

violation of Section 12A of the SEBI Act as well as the relevant

provisions of PFUTP Regulations, 2003. In N. Narayanan's case, it was

found that the financial results of the company as disclosed to the

stock exchanges were inflated and the manipulation in financial results

of the company resulted in price rise of the scrip of the company and

that they did not represent the true state of affairs of the company and

which has enabled certain shareholders to raise financing of pledging

of shares. The director of the company was restrained in dealing with

the securities for a period of two years and also monetary penalty was

imposed on the appellant thereon which was affirmed by this Court.

The Supreme Court observed that message should go that our country

85

will not tolerate 'market abuse' and that the securities market abuse

and that fraud, deceit artificiality, have no place in the securities market

of the country and held as under:

"1. India’s capital market in the recent times has witnessed

tremendous growth, characterised particularly by increasing

participation of public. Investors’ confidence in the capital market

can be sustained largely by ensuring investors’ protection.

Disclosure and transparency are the two pillars on which market

integrity rests. Facts of the case disclose how the investors’

confidence has been eroded and how the market has been abused

for personal gains and attainments.

.....

11. We would like to demonstrate on the facts of this case as well

as law on the point that “market abuse” has now become a

common practice in the Indian security market and, if not properly

curbed, the same would result in defeating the very object and

purpose of the SEBI Act which is intended to protect the interests of

investors in securities and to promote the development of securities

market. Capital market, as already stated, has witnessed

tremendous growth in recent times, characterised particularly by

the increasing participation of the public. Investor’s confidence in

capital market can be sustained largely by ensuring investors’

protection.

.......

42. SEBI, the market regulator, has to deal sternly with companies

and their Directors indulging in manipulative and deceptive devices,

insider trading, etc. or else they will be failing in their duty to

promote orderly and healthy growth of the securities market.

Economic offence, people of this country should know, is a serious

crime which, if not properly dealt with, as it should be, will affect not

only the country’s economic growth, but also slow the inflow of

foreign investment by genuine investors and also cast a slur on

India’s securities market. Message should go that our country will

not tolerate “market abuse” and that we are governed by the “rule

of law”. Fraud, deceit, artificiality, SEBI should ensure, have no

place in the securities market of this country and “market security”

is our motto. People with power and money and in management of

the companies, unfortunately often command more respect in our

society than the subscribers and investors in their companies.

Companies are thriving with investors’ contributions but they are a

divided lot. SEBI has, therefore, a duty to protect investors,

86

individual and collective, against opportunistic behaviour of

Directors and insiders of the listed companies so as to safeguard

market’s integrity." [underlining added]

The Supreme Court has also emphasized the duties of print and

electronic media, that they should not mislead the public who are

present and prospective investors, in their forecast on the securities

market.

42.The capital market regulator, SEBI has a significant role to play

in safeguarding the interest of investors and to ensure strict

compliance of all the relevant SEBI rules and regulations targeting at

safeguarding the interest of small investors. In order to protect the

interests of the investors and the integrity of the markets, as a

regulator, SEBI has to make the market place efficient and clean,

wherein all the participants play their role diligently and professionally

within the four corners of the system, without there being any scope for

market abuse. Where certain unscrupulous elements are trying to

manipulate the market to serve their own interest, it becomes

imperative on the part of SEBI to intervene and to curb further mischief

and to take necessary action to maintain public confidence in the

integrity of the securities market.

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43.In N. Narayanan's case, Supreme Court expressed a 'word of

caution' that SEBI-the regulator is to ensure stringent enforcement,

and efficacy of cleanliness of the market place; otherwise SEBI will be

failing in their duty to promote orderly and healthy growth of the

securities market. I am conscious as supervisory functionary/

regulating body, SEBI has the duty and obligation to protect ordinary

genuine investors and SEBI is empowered to do so under the SEBI

Act, 1992 so as to make security market a secure and safe place to

carry on the business in securities. At the same time, under the guise

of supervisory intervention, SEBI cannot affect the development of the

market or market oriented creativity. Intense supervision might distort

the path of securities market development; but SEBI cannot be a silent

spectator to unfair trade practices/manipulative market for some

ulterior purpose like tax evasion etc. To find the right balance between

market forces and Regulatory body's intervention, SEBI has to deal

sternly with those who indulge in manipulative trading and deceptive

devices to misuse the market and at the same time ensuring the

development of the market.

44.Before I conclude, it is necessary to refer to the findings of SAT

on 'tax planning'. SAT held that even assuming that non-genuine

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synchronized trades have been entered into for the purposes of tax

planning, such trade could be held objectionable only if they have

resulted in influencing the market in one way or other. For its finding

that every person is entitled to arrange his affairs as to avoid taxation,

SAT relied upon Viram Investment Pvt. Ltd. and Ors. v. Securities and

Exchange Board of India (MANU/SB/0046/2005) decided on

11.02.2005. Contention of the respondents is that transactions which

have been entered into with a view to achieve tax planning are not

illegal and respondents placed reliance upon Viram Investment Pvt.

Ltd. case. The learned counsel for SEBI contended that the market

cannot be manipulated by fictitious transactions either for tax planning

or for some ulterior purposes like money laundering etc.

45.No grounds have been raised in the show cause notice alleging

that the impugned fictitious transactions have been entered into with a

view to avoid payment of tax and was an act of tax planning.

Adjudicating officer also has not gone into this aspect. Hence, I am not

inclined to go into this aspect, whether the impugned transactions

were intended to reduce the brunt of taxation and an act of tax

planning. The correctness of findings of SAT in the case of Viram

Investment Pvt. Ltd. is left open.

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Conclusion:-

46.Considering the reversal transactions, quantity, price and time

and sale, parties being persistent in number of such trade transactions

with huge price variations, it will be too naïve to hold that the

transactions are through screen-based trading and hence anonymous.

Such conclusion would be over-looking the prior meeting of minds

involving synchronization of buy and sell order and not negotiated

deals as per the board's circular. The impugned transactions are

manipulative/deceptive device to create a desired loss and/or profit.

Such synchronized trading is violative of transparent norms of trading

in securities. If the findings of SAT are to be sustained, it would have

serious repercussions undermining the integrity of the market and the

impugned order of SAT is liable to be set aside. On the above

additional reasonings also, I agree with the conclusion allowing the

appeal preferred by SEBI against the traders. I also agree with the

conclusion dismissing the appeal preferred by the SEBI against the

brokers.

.………………………..J.

[R. BANUMATHI]

New Delhi;

February 08, 2018

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