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

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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”)

Trader 26.03.20 09

11.10.201 0

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2. Tungarli Tradeplace  Private Limited (“Tungarli”)

Trader 30.04.20 10

16.11.201 0

3. TLB Securities  Limited (“TLB”)

Trader 16.03.20 09

26.10.201 0

4. Indiabulls  Securities Limited (“Indiabulls”)

Broker 25.02.20 09

26.10.201 0

5. Angel Capital and  Debt Market  Limited (“Angel”)

Broker 22.05.20 09

26.10.201 0

6. Prashant Jayantilal Patel (“Prashant”)

Broker 31.08.20 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

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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.

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(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

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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.  

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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

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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;

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(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:

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(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

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 (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.

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(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.”

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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

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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

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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

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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

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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 India2. 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.

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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

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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

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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

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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.  

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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.”  

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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

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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

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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

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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.  Ajmera4,  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 21st March to 30th 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-07 14:50:28 14:50:27 0:00:01 3,930.00 270.00 KASAM HOLDING

RAKHI TRADING

10000 160 40.82

62

14:50:28 PVT. LTD PVT LTD 21-Mar-07 15:06:45

15:06:42 15:06:45 0:00:03 3,930.00 110.00 RAKHI TRADING PVT LTD

KASAM HOLDING PVT. LTD

10000 1600000

21-Mar-07 11:37:43

11:37:43 11:37:37 0:00:06 3,730.00 112.00 KASAM HOLDING PVT. LTD

RAKHI TRADING PVT LTD

4750 45 49.74

21-Mar-07 12:04:05

12:04:05 12:04:05 0:00:00 3,730.00 67.00 RAKHI TRADING PVT LTD

KASAM HOLDING PVT. LTD

4750 213750

21-Mar-07 14:33:19

14:33:19 14:33:18 0:00:01 # 120 12.25 SPARK SECURITI ES P LTD

RAKHI TRADING PVT LTD

80000 10 31.5

21-Mar-07 14:53:18

14:53:16 14:53:18 0:00:02 # 120 2.25 RAKHI TRADING PVT LTD

SPARK SECURITI ES P LTD

80000 800000

21-Mar-07 12:04:51

12:04:51 12:04:50 0:00:01 3,650.00 115.00 RAKHI TRADING PVT LTD

KASAM HOLDING PVT. LTD

10000 58 49.02

21-Mar-07 12:52:19

12:52:19 12:52:18 0:00:01 3,650.00 173.00 KASAM HOLDING PVT. LTD

RAKHI TRADING PVT LTD

8000 50

21-Mar-07 13:07:20

13:07:20 13:07:19 0:00:01 3,650.00 165.00 KASAM HOLDING PVT. LTD

RAKHI TRADING PVT LTD

2000 564000

22-Mar-07 14:02:25

14:02:25 14:02:23 0:00:02 4,190.00 410.00 KASAM HOLDING PVT. LTD

RAKHI TRADING PVT LTD

11500 125 38.59

22-Mar-07 11:39:28

11:39:28 11:39:26 0:00:02 4,190.00 285.00 RAKHI TRADING PVT LTD

KASAM HOLDING PVT. LTD

11500 1437500

22-Mar-07 15:02:37

15:02:37 15:02:36 0:00:01 3,960.00 190.00 KASAM HOLDING PVT. LTD

RAKHI TRADING PVT LTD

11700 89 50

22-Mar-07 15:23:15

15:23:15 15:23:15 0:00:00 3,960.00 101.00 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

10:15:21 10:15:21 0:00:00 4,050.00 200.00 RAKHI TRADING PVT LTD

KASAM HOLDING PVT. LTD

10500 85 35.84

22-Mar-07 11:37:08

11:37:08 11:37:07 0:00:01 4,050.00 285.00 KASAM HOLDING PVT. LTD

RAKHI TRADING PVT LTD

10500 892500

23-Mar-07 10:22:37

10:22:37 10:22:37 0:00:00 3,880.00 190.00 KASAM HOLDING PVT. LTD

RAKHI TRADING PVT LTD

11600 133 30.05

23-Mar-07 11:14:05

11:14:05 11:14:04 0:00:01 3,880.00 57.00 RAKHI TRADING PVT LTD

KASAM HOLDING PVT. LTD

 11600 1542800

23-Mar-07 13:18:21

13:18:18 13:18:21 0:00:03 3,930.00 32.00 RAKHI TRADING PVT LTD

KASAM HOLDING PVT. LTD

10500 54 30

23-Mar-07 14:16:36

14:16:36 14:16:35 0:00:01 3,930.00 86.00 KASAM HOLDING PVT. LTD

RAKHI TRADING PVT LTD

10500 567000

23-Mar-07 13:19:06

13:19:06 13:19:05 0:00:01 3,960.00 63.00 RAKHI TRADING PVT LTD

KASAM HOLDING PVT. LTD

10700 52 31.6

23-Mar-07 14:17:49

14:17:49 14:17:49 0:00:00 3,960.00 115.00 KASAM HOLDING PVT. LTD

RAKHI TRADING PVT LTD

10700 556400

23-Mar-07 12:17:02

12:16:59 12:17:02 0:00:03 4,050.00 155.00 RAKHI TRADING PVT LTD

KASAM HOLDING PVT. LTD

11500 72 41.07

23-Mar-07 13:15:42

13:15:42 13:15:41 0:00:01 4,050.00 227.00 KASAM HOLDING PVT. LTD

RAKHI TRADING PVT LTD

11500 828000

23-Mar-07 12:17:44

12:17:44 12:17:44 0:00:00 4,150.00 230.00 RAKHI TRADING PVT LTD

KASAM HOLDING PVT. LTD

11600 72 50

63

23-Mar-07 13:16:19

13:16:19 13:16:19 0:00:00 4,150.00 302.00 KASAM HOLDING PVT. LTD

RAKHI TRADING PVT LTD

11600 835200

30-Mar-07 11:36:40

11:36:37 11:36:40 0:00:03 3,810.00 80.25 RAKHI TRADING PVT LTD

KASAM HOLDING PVT. LTD

8950 39.75 49.58

30-Mar-07 11:48:44

11:48:44 11:48:44 0:00:00 3,810.00 120.00 KASAM HOLDING PVT. LTD

RAKHI TRADING PVT LTD

8950 355762.5

30-Mar-07 14:30:04

14:30:04 14:30:04 0:00:00 3,550.00 270.00 RAKHI TRADING PVT LTD

KASAM HOLDING PVT. LTD

11900 29 46.21

30-Mar-07 14:43:02

14:43:00 14:43:02 0:00:02 3,550.00 299.00 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

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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

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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.  

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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 2nd party be it the client or the broker is not known to the first party/client or broker. According to us, knowledge of who the 2nd  party/client or the broker is, is not relevant at all.  While the screen-based trading system keeps the identity of the parties anonymous it will be too naive to rest the final conclusions  on  said  basis  which  overlooks  a  meeting  of  minds elsewhere. Direct proof of such meeting of minds elsewhere would rarely be forthcoming. The test, in our considered view, is one of preponderance of probabilities so far as adjudication of civil liability

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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

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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]

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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

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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.   

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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

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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

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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

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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.....",

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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.  

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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

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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

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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

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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

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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,

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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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