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REPORTABLE      

IN THE SUPREME COURT OF INDIA  CIVIL APPELLATE JURISDICTION  

CIVIL APPEAL NO. 2595 OF 2013  

SECURITIES AND EXCHANGE BOARD OF INDIA      … Appellant(s)  

Versus  

SHRI KANAIYALAL BALDEVBHAI PATEL          … Respondent (s)  

With  

 CIVIL APPEAL NO. 2596 OF 2013  

[SECURITIES AND EXCHANGE BOARD OF INDIA V. SHRI DIPAK PATEL]  

CIVIL APPEAL NO. 2666 OF 2013  [SECURITIES AND EXCHANGE BOARD OF INDIA V. SUJIT KARKERA AND ORS.]  

CIVIL APPEAL NO. 5829 OF 2014  [Pooja Menghani v. SECURITIES AND EXCHANGE BOARD OF INDIA]  

CIVIL APPEAL NO. 11195-11196 OF 2014   [Vibha Sharma and Anr. V. SECURITIES AND EXCHANGE BOARD OF INDIA]  

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J U D G M E N T   

N. V. RAMANA J.  

1. The important question of law, arising in these batch of cases, being  

similar and the facts involved being largely comparable, all the  

appeals were heard together and are being decided by this common  

judgment.   

2. This case revolves round the legality of ‘non-intermediary front-

running’ in security market under the SECURITIES AND EXCHANGE  

BOARD OF INDIA (PROHIBITION OF FRAUDULENT AND UNFAIR TRADE  

PRACTICES RELATING TO SECURITIES MARKET) REGULATIONS, 2003  

[hereinafter ‘FUTP 2003’ for brevity]. As SEBI Appellate Tribunal  

[hereinafter ‘SAT’ for brevity] has taken two different views in  

different cases appealed herein, Securities and Exchange Board of  

India [herein after ‘SEBI’ for brevity] as well as private individuals,  

who are alleged to have been involved in front running, are in appeal  

before us.

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 3. A brief factual background would be necessary before we deal with  

the question of law that has arisen in this case instant. Broadly to  

understand the issue at hand, the facts in CIVIL APPEAL NO. 2595 OF  

2013 AND 2596 OF 2013 (related cases) may be stated in brief. SEBI  

investigated into the activities of Shri Kanaiyalal Baldevbhai Patel  

[herein after ‘KB’ for brevity] an individual trader. During the  

investigation, it was found that KB was putting orders ahead of  

orders placed by Passport India Investment (Mauritius) Ltd. [herein  

after ‘PII’ for brevity]. One Dipak Patel, was the portfolio manager of  

PII, who also happens to be a cousin of KB and one Shri  

Anandkumar Baldevbhai Patel [herein after ‘AB’ for brevity]. It was  

alleged that Dipak Patel provided information to KB and AB  

regarding forthcoming trading activity of the PII. It is to be noted that  

trades were executed using the telephone number registered in the  

name of AB at the common residential address of KB and AB. Taking  

advantage of the information received from Dipak Patel, KB had  

indulged in trading before the PII and consequently squared off the  

position when the order of PII were placed in the market. It was  

estimated that the KB earned a total profit of Rs. 1,56,32,364.01/-

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from the alleged trades. This Court in CIVIL APPEAL NO. 2594 OF  

2013, by order dated 05.04.2017, while remanding the matter back  

to the Appellate Tribunal with respect to AB, held that there is no  

finding or conclusion recorded with respect to AB in the following  

manner-  

Learned counsel for the appellant (SEBI) has  

vehemently urged that such findings are  

recorded in the Adjudication Order and the  

said order has merged with the order of the  

learned Appellate Tribunal. We disagree with  

the aforesaid contention urged by the learned  

counsel for the appellant. In the appeal(s) filed  

by the aggrieved person(s) against the order(s)  

of the Adjudicating Officer, the learned  

Appellate Tribunal was expected to record its  

own independent findings and arrive at its own  

conclusions for holding the respondent liable  

for the penalty imposed. It seems that the  

learned Appellate Tribunal has proceeded on  

the basis that the case of the respondent is  

same and similar to the case of Kanaiyalal  

Baldev Patel and Dipak Patel which, evidently,  

is not.  

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 4. In CIVIL APPEAL NO.2666 OF 2013, Sujit Karkera and Group were  

trading through B.P. Equity Pvt. Ltd. SEBI alleges that they were  

trading ahead of the trades of CITIGROUP Global Markets Mauritius  

Pvt. Ltd.(CGMMPL) on the basis of information provided by Suresh  

Menon (trader of CGMMPL) who was in possession of the orders of   

CGMMPL for 6 scrip days. SEBI in its investigation had found that  

there were several calls made between Suresh Menon and his family  

friend Sujit Karkera during this time period of 6 days.  In these  

telephonic conversations, it was alleged that there was exchange of  

information related to scrip name, order quantity, order timing, and  

order price of the orders placed by Suresh Menon for CGMMPL. Sujit  

Karkera utilized the information provided by Suresh Menon to trade  

thereby making huge profits.  

5. In CIVIL APPEAL NO.11195-96 OF 2014, Jitendra Kumar Sharma was  

an equity dealer employed by the Central Bank of India. His  

responsibilities entailed preparation of charts for the chief equity  

dealer and placing of orders based on instructions of the chief equity  

dealer. Vibha Sharma, who is the wife of Jitendra Kumar Sharma,

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was a regular trader in the stock market and this fact was disclosed  

to Central Bank of India as a good practice of making disclosure to  

the employer. It is the allegation of SEBI that Vibha Sharma engaged  

herself in front running Central Bank of India’s large scale orders  

allegedly with the knowledge obtained from her husband. Further the  

SEBI had alleged that Vibha Sharma’s trades substantially matched  

with the trades of the bank during the relevant period thereby  

violating regulations 3(a), (b), (c), (d) and 4(1) of FUTP 2003.  

6. In CIVIL APPEAL NO. 5829 OF 2014, facts of the case are that  

appellant used to trade in scrips of four companies namely Amtek  

Auto Ltd., Amtek India Ltd., Monnet Ispat Ltd. and Ahmednagar  

Forgings Ltd. through Religare Securities Ltd., ISF Securities Ltd.,  

India Infoline Securities Ltd. and Narayan Securities Private Ltd. It is  

alleged against the appellant that, she had bought and sold equal  

quantities of shares in large volume in these four scrips by utilizing  

the information provided by Deepak Khurana who was privy to  

certain confidential information of Religare. SEBI conducted an  

investigation in the trading of appellant from June 1, 2008 to

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January 12, 2009. During the investigation, SEBI noticed  

irregularities in her dealings in the scrips of above mentioned four  

companies. A general trend of trading was noticed which further  

revealed that the appellant was indulged in Front Running. It was  

found that the appellant’s sell orders (quantity and price)  

substantially matched with the buy orders (quantity and price) of  

other traders and that her sell order limit price was always above the  

sell LTP but was same or very close to the buy limit price of other  

traders. Moreover the selling price, quoted by her, was close to the  

highest price reached on market on those days.  

7. With this factual background, a reference needs to be made to the  

scheme of FUTP 2003. SEBI, by a notification under Section 30 of  

the SEBI Act, 1992, dated 17.07.2003, formulated FUTP 2003.   

 8. Indisputably, the object and purpose of this regulation (FUTP 2003)  

is to safeguard the investing public and honest businessmen. The  

aim is to prevent exploitation of the public by fraudulent schemes  

and worthless securities through misrepresentation, to place  

adequate and true information before the investor, to protect honest

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enterprises seeking capital by accurate disclosure, to prevent  

exploitation against the competition afforded by dishonest securities  

offered to the public and to restore the confidence of the prospective  

investor in his ability to select sound securities.  

 9. FUTP 2003 has three chapters, namely ‘preliminary’, ‘prohibition of  

fraudulent and unfair trade practices relating to securities market’  

and ‘investigation’. Regulation 1 contains the short title and  

commencement. Regulation 2 consists of certain definitions. Clause  

(b) of regulation 2 defines ‘dealing in securities’ which 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  

security or otherwise transacting in any way in any security by any  

person as principal, agent or intermediary referred to in Section 12 of  

the SEBI Act. Clause (c) of regulation 2 defines fraud in the following  

manner-  

 c) "fraud" includes any act,  

expression, omission or  

concealment committed whether in  

a deceitful manner or not by a

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person or by any other person with  

his connivance or by his agent while  

dealing in securities in order to  

induce another person or his agent  

to deal in securities, whether or not  

there is any wrongful gain or  

avoidance of any loss, and shall also  

include-  

(1) a knowing misrepresentation of  

the truth or concealment of material  

fact in order that another person  

may act to his detriment;  

(2) a suggestion as to a fact which is  

not true by one who does not believe  

it to be true;  

(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;

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(6) any such act or omission as any  

other law specifically declares to be  

fraudulent,  

(7) deceptive behaviour by a person  

depriving another of informed  

consent or full participation.  

(8) a false statement made without  

reasonable ground for believing it to  

be true.  

(9) The act of an issuer of securities  

giving out misinformation that  

affects the market price of the  

security, resulting in investors  

being effectively misled even though  

they did not rely on the statement  

itself or anything derived from it  

other than the market price.  

And "fraudulent" shall be construed  

accordingly;  

Nothing contained in this clause  

shall apply to any general comments  

made in good faith in regard to   

(a) the economic policy of the  

government

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(b) the economic situation of the  

country  

(c) trends in the securities market  

or  

(d) any other matter of a like nature  

whether such comments are made  

in public or in private  

10. Regulation 3 prohibits certain dealings in securities, whereas  

regulation 4 prohibits manipulative, fraudulent and unfair practices.  

Regulation 5 deals with the power of the board to order investigation.  

Regulation 6 elaborates on the power of the investigating authority.  

11. It is important to note that SEBI has amended the regulation, a  

number of times, to keep up with the technology and times. A  

reference may be made to the amendments carried out to the  

regulation -  

Table No.1- comparison of relevant provisions  

FUTP 1995 FUTP 2003 (APPLICABLE REGULATION)  AMENDMENT OF  

2013

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R E

G U

L A

T IO

N    2

( C )  (D

E F

IN IT

IO N

S )  

“Fraud” includes any of the  following acts committed by a  party to ac contract, or with his  connivance, or by his agent, with  intent to decive another party  thereto or his agent, or to induce  him to enter into the contract:-  (1.) The suggestion, as to a fact,  

of that which is not true, by  one who does not believe it to  be true;  

(2.) The active concealment of a  fact by one having knowledge  or belief of the fact;  

(3.) A promise made without  any intention of performing it;  

(4.) Any other act fitted to  deceive;  

(5.) Any such act or omission  as the law secially declares to  be fraudulent;  

(6.) And “fraudulent” shall be  construed accordingly  

R E

G U

L A

T IO

N  2

( C )  (D

E F IN

IT IO

N S )  

“fraud” includes any act, expression,  omission or concealment  committed  whether  in  a  deceitful  manner  or   not  by  a  person  or  by  any  other  person  with  his  connivance  or by  his agent while dealing in securities  in order to induce another person or  his agent to deal in securities,  whether or not there is any wrongful  gain or avoidance of any loss, and  shall also include-  (1) A knowing misrepresentation of  

the truth or concealment of  material fact in order that  another person may act to his  detriment;  

(2) A suggestion as to a fact which is  not true by one who does not  believe it to be true;  

(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 or 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 then the  market price.  

No  amendments to  

Section 2(c)

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R E

G U

L A

T IO

N  3

( P ro

h ib

it io

n  o

f  c e rt

a in

d e a li

n g s  i

n  s

e c u ri

ti e s )  

No person shall buy, sell or  otherwise deal in securities in a  fraudulent manner.  

R E

G U

L A

T IO

N  3

( P ro

h ib

it io

n  o

f  c e rt

a in

d e a li

n g s  i

n  s

e c u ri

ti e s )  

Prohibition of certain dealings in  securities  No person shall directly or indirectly-  (a)buy, sell or otherwise deal in  securities in a fraudulent manner;   (b)use or employ, in connection with  issue, purchase or sale of any  security listed or  proposed to be  listed in a recognized stock   exchange, any manipulative or  deceptive device  or contrivance in  contravention of  the  provisions  of  the Act or the rules or the regulations  made there under;   (c) employ any device, scheme or  artifice to  defraud in connection with  dealing in or issue of securities which  are listed or proposed to be listed on a  recognized stock exchange;   (d)engage in any act, practice, course  of  business  which operates or would  operate as fraud or  deceit upon any  person in connection with any   dealing in or issue of securities which  are listed or proposed to be listed on a  recognized stock exchange in  contravention of the provisions of  the  Act or the rules and the regulations  made there under.   

No  amendments to  

Section 3(c)

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R E

G U

L A

T IO

N  4

( P

R O

H IB

IT IO

N  A

G A

IN S T

M A

R K

E T

M A

N IP

U L A

T IO

N S )  

No person shall-  (a) Effect, take part in, or enter  

into, either directly or indirectly,  transactions in securities, with the  intention of artificially raising or  depressing the prices of securities,  with the intention of artificially  raising or depressing the prices of  securities and thereby inducing the  sale or purchase of securities by  any person;  (b) Indulge in any act, which is  

calculated to create a false or  misleading appearance of trading  on securities market;  (c) Indulge in any act which in  

reflection of prices of securities  based on transactions that are not  genuine trade transactions;  (d) Enter into a purchase or  

sale of any securities, not intended  to effect transfer of beneficial  ownership but intended to operate  only as a device to inflate, depress,  or cause fluctuations in the market  price of securities;  (e) Pay, offer or agree to pay or  

offer, directly or indirectly, to any  person any money or money’s  worth for inducing another person  to purchase or sell any security  with the sole objection of inflating,  depressing, or causing fluctuations  in the market price of securities.  

R E

G U

L A

T IO

N  4

( P

R O

H IB

IT IO

N  A

G A

IN S T

M A

N IP

U L A

T IV

E ,  

F R

A U

D U

L E

N T

A N

D  U

N F

A IR

T R

A D

E  P

R A

C T

IC E

S ) (1) Without prejudice to the  

provisions of regulation 3, no  person shall indulge in a fraudulent  or an unfair trade practice in  securities.  

(2) Dealing in secuties 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 a act which  creates false or misleading  appearance of trading in  the securities market;  

(b.) Dealing in a security not  intended to effect transfer  of beneficial ownership but  intended 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;  …  

(e.) Any act or omission  amounting to  manipulation of the price  of a security;  …  

(q.)   An intermediary buying or  selling securities in  advance of a substantial  client order or whereby a  futures or option position  is taken about an  impending transaction in  the same or related  futures or options  contract.  

Explanation.-  For the  purposes of this  sub- registration, for  the removal of  doubt, it is  clarified that  the acts or  omissions listed  in this sub- regulation are  not exhaustive  and that an act  or omission is  prohibited if it  falls within the  purview of  regulation 3  notwithstandin g that it is not  included in this  sub-regulation  or is described  as being  committed only  by a certain  category or  persons in this  sub-regulation’  

12. Although aforesaid amendments are made to the regulation, yet  

such amendments sometimes fail to live up to human ingenuity and  

growth of technology. Usurpation of reprehensible profits by  

fraudsters, who are not entitled to them, must be made answerable

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by this Court as per established tenants of rule of law without  

leaving incentives for fraudulent practices, based on creativity of  

disingenuous, to survive the legal gambits. Before embarking upon  

the necessary discussions, I would like to record my views on a  

somewhat unclear picture that emerge from undefined concepts  

contained in the Act and the Regulations framed there under, a  

comprehensive legislation can bring about more clarity and certainty  

on these aspects.  

13. Submissions of Mr. K. T. S. Tulsi, learned senior advocate,  

appearing on behalf of the appellant in CIVIL APPEAL NO. 5829 OF  

2014.  

� The finding with regard to the appellant being guilty of fraud  

under regulations 3 and 4 of FUTP 2003 is contrary to the  

definition of fraud as contained in Regulation 2(1)(c) of the said  

Regulations.  

� Sub-clauses (i), (j), (l), (m), (p), (o) and (q) of clause (2) of  

regulation 4 expressly make themselves applicable only to the  

case of intermediaries and not to individual buyers or sellers.

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The rest of the sub-clauses being part of the scheme which  

seeks to regulate the conduct of intermediaries, will be deemed  

on their face, to pertain to activities undertaken by  

intermediaries. Thus, the whole of Regulation 4 seems to be  

inapplicable to the case of the applicant.  

 Submissions of Mr. Arvind P. Datar, learned senior advocate,  

appearing on behalf of SEBI-  

 � That the ambit of FUTP regulations has been substantially  

increased from 1995 to 2003.  

� That inclusion of specific prohibition of front-running with  

respect to intermediaries under Regulation 4 (2)(q) should not  

whittle the scope of regulation 4 of the FUTP 2003.  

� Moreover, ‘Expressio Unius Est Exclusio Alterius’ may not be a  

safe principle to oust the liability for non-intermediary front-

running.  

14. Other learned counsels appearing for parties have either  

adopted the submissions made by the above named advocates or

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provided alternative reasons for the conclusions reached by the  

abovementioned advocates.  

15. The question which has arisen for our consideration is whether  

‘front running by non-intermediary’ is a prohibited practice under  

regulations 3 (a), (b), (c) and (d) and 4(1) of FUTP 2003?  

16. As this case involves practice of ‘front-running’ in security  

market, a reference may be made to various definitions and  

meanings of front-running-  

 Major Law  

Lexicon by P.  

Ramanatha  

Aiyar (4th Ed.  

(2010)  

FRONT RUNNING.- Buying or selling  

securities ahead of a large order so as  

to benefit from the subsequent price  

move.  

This denotes persons dealing in the  

market, knowing that a large  

transaction will take place in the near  

future and the parties are likely to  

move in their favour.  

The illegal private trading by a broker  

or market maker who has prior  

knowledge of a forthcoming large

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movement in prices  

The Black’s Law  

dictionary (9th  

Ed.)  

Front running, n. Securities. A  

broker’s or analyst’s use of non-public  

information to acquire securities or  

enter into options or futures contracts  

for his or her own benefit, knowing  

that when the information becomes  

public, the price of the securities will  

change in a predictable manner. This  

practice is illegal. Front-running can  

occur in many ways. For example, a  

broker or analyst who works for a  

brokerage firm may buy shares in a  

company that the firm is about to  

recommend as a strong buy or in  

which the firm is planning to buy a  

large block of shares.  

Nancy Folbre1   

In the world of financial trading, a front-

runner is someone who gains an unfair  

advantage with inside information  

                                              1 Nancy Folbre, The Front-Runners of Wall Street, 07.04.2014 (The New York Times).

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17. SEBI has defined front-running in one of its circular2 in the  

following manner-  

Front-running; for the purpose of  

this circular, front running means  

usage of non public information to  

directly or indirectly, buy or sell  

securities or enter into options or  

futures contracts, in advance of a  

substantial order, on an impending  

transaction, in the same or related  

securities or futures or options  

contracts, in anticipation that when  

the information becomes public; the  

price of such securities or contracts  

may change.  

18. Further a consultative paper3 issued by SEBI had grouped front  

running to be an undesirable manipulative practice in the following  

manner-  

 ‘However, SEBI Act does not  

prescribe or specify as to which  

practice would be considered to be  

                                              2 Circular CIR/EFD/1/2012, dated 25.05.2012.  3 Consultative Paper issued by SEBI, pursuant to a Press release No. 34/95 dated March 16, 1995.

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fraudulent and unfair trade  

practices. While the fraudulent and  

unfair trade practices are commonly  

understood, it would be desirable if  

these practices are defined  

specifically.  

..this will bring about clarity among  

the intermediaries, issuers,  

investors and other connected  

persons in the securities markets  

about the practices that are  

prohibited, fraudulent and unfair.  

…The draft defines fraudulent and  

unfair trade practices. These  

regulations seek to cover market  

manipulation on the stock  

exchanges also. Practices like  

wash sales, front-running, price  

rigging, artificial increasing or  

decreasing the prices of the  

securities are brought within the  

ambit of the regulations’  

(emphasis added)  

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19. In actuality, front-running is more complicated than these  

definitions suggest. It comprises of at least three forms of conduct.  

They are: (1) trading by third parties who are tipped on an impending  

block trade ("tippee" trading); (2) transactions in which the owner or  

purchaser of the block trade himself engages in the offsetting futures  

or options transaction as a means of "hedging" against price  

fluctuations caused by the block transaction ("self-front-running");  

and (3) transactions where a intermediary with knowledge of an  

impending customer block order trades ahead of that order for the  

intermediary's own profit ("trading ahead"). In this batch of appeals  

we are concerned with the first and the last types of trade i.e., tippee  

trading and trading ahead. It is important to note that trading ahead  

has been explicitly recognized under regulation 4(2)(q) of FUTP 2003.   

20. A word on interpretation would be appropriate before I take up  

legal aspects of this case. Mr. K.T.S. Tulsi, learned senior counsel,  

states that penal laws have to be strictly construed. He places  

reliance on Govind Impex Pvt. Ltd. v. Income Tax Department4,  

                                              4 (2011) 1 SCC 529.

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Krishi Utpadan Mandi Samiti v. Pilibhit Pantnagar Beej Ltd.5  

Although strict construction is well established principle when  

interpreting a penal provision, but such interpretation should not  

result in incongruence when compared with the purpose of the  

regulation. In SEBI v. Kishore R. Ajmera, this Court observed that-  

the SEBI Act and the Regulations framed  

there under 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.  

Investors' confidence in the  

Capital/Securities Market is a reflection of  

the effectiveness of the regulatory  

mechanism in force. All such measures are  

intended to preempt manipulative trading  

and check all kinds of impermissible  

conduct in order to boost the investors'  

confidence in the Capital market. The  

primary purpose of the statutory  

enactments is to provide an environment  

conductive to increased participation and  

investment in the securities market which  

                                              5 (2004) 1 SCC 391.

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is vital to the growth and development of  

the economy. The provisions of the SEBI  

Act and the Regulations will, therefore,  

have to be understood and interpreted in  

the above light.6  

21.  The object and purpose of FUTP 2003 is to curb “market  

manipulations”. Market manipulation is normally regarded as an  

“unwarranted” interference in the operation of ordinary market forces  

of supply and demand and thus undermines the “integrity” and  

efficiency of the market.7 This Court in N. Narayanan v.  

adjudicating Officer, SEBI8, has laid down that-  

Prevention of market abuse and  

preservation of market integrity is the  

hallmark of Securities Law. Section  

12A read with Regulations 3 and 4 of  

the Regulations 2003 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  

                                              6 SEBI v. Kishore R. Ajmera, (2016) 6 SCC 368  7 Palmer’s Company Law, 25th Edition (2010), Volume 2 at page 11097; Gower & Davies – Principles of Modern  Company Law, 9th Edition (2012) at page 1160.  8 (2013) 12 SCC 152

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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’.  

25  

 22. From the line of decisions cited herein above, it can be inferred  

that as a matter of principle, while interpreting this regulation, the  

court must weigh against an interpretation which will protect unjust  

claims over just, fraud over legality and expediency over principle.  

Once this rule is clearly established, individual cases should not  

pose any problem.  

23. It is equally well settled that in interpreting a statute, effort  

should be made to give effect to each and every word used by the  

Legislature. The Courts should presume that the Legislature inserted  

every part for a purpose and the legislative intention is that every  

part of the statute should have effect. It must be kept in mind that  

whenever this Court is seized with a matter which requires judicial  

mind to be applied for interpreting a law, the effort must always be  

made to realize the true intention behind the law.   

24. Before dealing with the legal issue we are seized with, it would  

be important to observe certain definition as occurring under the  

regulations. The definition of ‘dealing in securities’ acquires some

26  

importance as charge under regulation 3 completely depends on the  

aspect whether the tippee was dealing in securities in the first  

instant or not. For a transaction to be termed as dealing in  

securities, following ingredients need to be satisfied-  

1. includes an act of buying, selling or subscribing  

pursuant to any issue of any security, or   

2. Agreeing to buy, sell or subscribe to any issue of  

any security, or;  

3. Otherwise transacting in any way in any security  

by any person as principal, agent or intermediary  

referred to in Section 12 of the Act.  

 25. The definition of ‘dealing in securities’ is broad and inclusive in  

nature. Under the old regime the usage of term ‘ to mean’ has been  

changed to ‘includes’, which prima facie indicates that the definition  

is broad. Moreover, the inclusion of term ‘otherwise transacting’ itself  

provides an internal evidence for being broadly worded so as to  

include situations such as the present one.  

26. There is no dispute as to the fact that fraud is jurisprudentially  

very difficult to define or cloth it with particular ingredients. A  

generalized meaning may be difficult to be attributed, as human

27  

ingenuity would invent ways to bypass such behaviour. It is to be  

noted that fraud is extensively used in various regulatory framework  

which mandates me to take notice of the conceptual and definitional  

problem it brings along. Fraud is among the most serious, costly,  

stigmatizing, and punitive forms of liability imposed in modern  

corporations and financial markets. Usually, the antifraud provisions  

of the security laws are not coextensive with common-law doctrines  

of fraud as common-law fraud doctrines are too restrictive to deal  

with the complexities involved in the security market, which is also  

portrayed by the changes brought in through the 2003 regulation to  

the 1995 regulation.  

27. On a comparative analysis of the definition of "fraud" as existing  

in the 1995 regulation and the subsequent amendments in the 2003  

regulations, it can be seen that the original definition of "fraud"  

under the FUTP regulation, 1995 adopts the definition of "fraud"  

from the Indian Contract Act, 1872 whereas the subsequent  

definition in the 2003 regulation is a variation of the same and does  

not adopt the strict definition of "fraud" as present under the Indian

28  

Contract Act. It includes many situations which may not be a "fraud"  

under the Contract Act or the 1995 regulation, but nevertheless  

amounts to a "fraud" under the 2003 regulation.   

28. The definition of ‘fraud’ under clause (c) of regulation 2 has two  

parts; first part may be termed as catch all provision while the  

second part includes specific instances which are also included as  

part and parcel of term ‘fraud’. The ingredients of the first part of the  

definition are-  

1. includes an act, expression, omission or  

concealment whether in a deceitful  

manner or not;  

2. By a person or by any other person with  

his connivance or his agent while dealing  

in securities;  

3. So that the same induces another person  

or his agent to deal in securities;  

4. Whether or not there is any wrongful gain  

or avoidance of any loss.  

The second part of the definition includes specific instances-  

29  

(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

30  

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.  

29. Although unfair trade practice has not been defined under the  

regulation, various other legislations9 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  

                                              9 Monopolies and Restrictive Trade Practices Act, 1969, Section 36A; The Consumer Protection Act, 1986, Section  2(1)(r); The Competition Act, 2002, Section 3; The Food Security and Standards Act, 2006, Section 24(2); Specific  Relief Act, 1963, Section 20; Usurious Loans Act, 1918, Section 3.  

31  

transaction. Moreover the concept of ‘unfairness’ appears to be  

broader than and includes the concept of ‘deception’ or ‘fraud’.  

30. Although learned counsel for SEBI has admitted that there is no  

difference between fraud and unfair trade practice under regulation 4  

(1), but we are of the opinion that such submission may not be  

conclusive. As these cases do not require further investigation, the  

question regarding the scope of prosecution for unfair trade practice  

is kept open.   

 31. Regulation 3 prohibits a person from committing fraud while  

dealing in securities. A reading of the aforesaid provision describes  

the width of the power vested with the SEBI to regulate the security  

market. In our view, the words employed in the aforesaid provisions  

are of wide amplitude and would therefore take within its sweep the  

inducement to bring about inequitable result which has happened in  

this case instant.  

32. Regulation 4 prohibits manipulative, fraudulent and unfair  

trade practices. It is to be noted that the regulation 4 (1) starts with

32  

the phrase ‘without prejudice to the provisions of regulation 3’. This  

phrase acquires significance as it portrays that the prohibitions  

covered under the regulation 3 do not bar the prosecution under  

regulation 4 (1). Therefore regulation 4 (1) has to be read to have its  

own ambit which adds to what is contained under regulation 3.   

33. Regulation 4 (2)(q) of FUTP 2003 states that-  

(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:-  

  …  

q) an intermediary buying or selling  

securities in advance of a substantial  

client order or whereby a futures or  

option position is taken about an  

impending transaction in the same or  

related futures or options contract.  

Under the provisions of regulation 4(2)(q), only intermediary trading  

on the information of substantial client order, if it involves fraud then  

the dealing in securities will be deemed to be fraudulent.

33  

 34. An argument has been introduced by the Mr. K.T.S. Tulsi,  

learned senior counsel, that sub-clause (q) of regulation 4(2) includes  

only front-running by the intermediaries, by implication it means  

that any persons other than intermediaries are excluded from the  

rigors of law. In our opinion such submission cannot be sustained in  

the eyes of law as the intention of the legislation was to provide for a  

catchall provision and the deeming provision under sub-clause (q) of  

regulation 4(2) was specifically provided as the intermediary are in  

fiduciary relationship with the clients. There is no dispute as to the  

fact that a fiduciary must act in utmost good faith; he should not act  

for his own benefit or benefit of any third party without the informed  

consent of his client. The essential irreducible core of fiduciary duty  

is the duty of loyalty10. Such heightened standard demanded a  

deeming provision under the FUTP 2003.   

35. The reliance on ‘expressio unius est exclusio alterius’ may not be  

appropriate in this case instant as the intention of the regulation is  

apparent in this case. Moreover, it has been well established that  

                                              10 SEBI (Stock Brokers and Sub-brokers) Regulations, 1992, Schedule II.

34  

‘expressio unius est exclusio alterius’ is not a rule of law but a tool of  

interpretation which must be cautiously applied.11 In light of the  

above discussion, this rule of interpretation does not help the case of  

the violators.   

 36. A crucial aspect which needs to be observed at this point is the  

element of causation which is embedded under regulation 2(1)(c)  

read with regulations 3 and 4. In order to establish the aforesaid  

charges in this case, it is required by the SEBI to establish that the  

harm was induced by the materialization of a risk that was not  

disclosed because of the tippee’s fraudulent practice. Further the  

charges under the FUTP 2003 needs to be established as per the  

applicable standards rather than on mere conjectures and surmises.  

37. It should be noted that the provisions of regulations 3 (a), (b),  

(c), (d) and 4(1) are couched in general terms to cover diverse  

situations and possibilities. Once a conclusion, that fraud has been  

committed while dealing in securities, is arrived at, all these  

provisions get attracted in a situation like the one under  

                                              11 Colquhoun v. Brooks, (1887) 19 Q.B.D. 400; Lowe v. Darling & Sons, (1906) 2 K. B. 772

35  

consideration. We are not inclined to agree with the submission that  

SEBI should have identified as to which particular provision of FUTP  

2003 regulations has been violated. A pigeon-hole approach may not  

be applicable in this case instant.  

38. Before we conclude, it would be useful to have a look at  

American jurisprudence which has developed around Title 17, Code  

of Federal Regulations, Part 240, Rule 10b-5 (Prohibition of use of  

manipulative or deceptive devices or contrivances with respect  

to certain securities exempted from registration). It is to be noted  

that much of Indian securities laws have similar provisions and a  

brief survey of jurisprudence might be useful for the discussion  

herein. The complexity of the subject we are dealing is reflected even  

in the American jurisprudence as the U.S Supreme Court seems to  

have accepted the aforesaid provision to be the most litigated ones.12  

In David Carpenter, Kenneth P. Felis and R. Foster Winans, v.  

United States13, the United States Supreme Court dealt with the  

                                              12 Securities and Exchange Commission vs. National Securities, Inc., et al., 393 U.S. 453 (1969)  

‘Although section 10(b) and 10 b-5 may well be the most litigated provisions in the federal securities  laws, this is the first time this Court has found it necessary to interpret them. We eneter the virgin  territory cautiously…’  

13 484 U.S. 19.

36  

matter of fraud under section 10(b). In this case, the Petitioner, who  

was a co-author in a Journal’s investment advice column, entered  

into a deal with a stock broker wherein he provided pre-publication  

information on the content of the column. Further the stockbroker  

bought and sold shares based on such information and shared the  

profits made therein with the Petitioner.  The Court, while convicting  

the Petitioner, elaborated the meaning of fraud in following manner –   

We cannot accept petitioners' further  

argument that Winans' conduct in  

revealing prepublication information was  

no more than a violation of workplace  

rules and did not amount to fraudulent  

activity that is proscribed by the mail  

fraud statute. Sections 1341 and 1343  

reach any scheme to deprive another of  

money or property by means of false or  

fraudulent pretenses, representations, or  

promises. As we observed last Term in  

McNally, the words “to defraud” in the  

mail fraud statute have the “common  

understanding” of “ ‘wronging one in his  

property rights by dishonest methods or  

schemes,’ and ‘usually signify the

37  

deprivation of something of value by  

trick, deceit, chicane or overreaching.’ ”  

483 U.S., at 358, 107 S.Ct., at 2881  

(quoting Hammerschmidt v. United States,  

265 U.S. 182, 188, 44 S.Ct. 511, 512, 68  

L.Ed. 968 (1924)). The concept of “fraud”  

includes the act of embezzlement, which  

is “ ‘the fraudulent appropriation to one's  

own use of the money or goods entrusted  

to one's care by another.’ ” Grin v. Shine,  

187 U.S. 181, 189, 23 S.Ct. 98, 102, 47  

L.Ed. 130 (1902).  

Elaborating on the fiduciary relationship between the employee of a  

firm to safeguard the confidential information owned by the firm, the  

court observed as under-   

The District Court found that Winans'  

undertaking at the Journal was not to  

reveal prepublication information about  

his column, a promise that became a  

sham when in violation of his duty he  

passed along to his coconspirators  

confidential information belonging to the  

Journal, pursuant to an ongoing scheme  

to share profits from trading in

38  

anticipation of the “Heard” column's  

impact on the stock market. In Snepp v.  

United States, 444 U.S. 507, 515, n. 11,  

100 S.Ct. 763, 768, n. 11, 62 L.Ed.2d  

704 (1980) (per curiam), although a  

decision grounded in the provisions of a  

written trust agreement prohibiting the  

unapproved use of confidential  

Government information, we noted the  

similar prohibitions of the common law,  

that “even in the absence of a written  

contract, an employee has a fiduciary  

obligation to protect confidential  

information obtained during the course of  

his employment.” As the New York courts  

have recognized: “It is well established, as  

a general proposition, that a person who  

acquires special knowledge or  

information by virtue of a confidential or  

fiduciary relationship with another is not  

free to exploit that knowledge or  

information for his own personal benefit  

but must account to his principal for any  

profits derived therefrom.” Diamond v.  

Oreamuno, 24 N.Y.2d 494, 497, 301  

N.Y.S.2d 78, 80, 248 N.E.2d 910, 912

39  

(1969); see also Restatement (Second) of  

Agency §§ 388, Comment c, 396(c) (1958).  

We have little trouble in holding that the  

conspiracy here to trade on the Journal's  

confidential information is not outside  

the reach of the mail and wire fraud  

statutes, provided the other elements of  

the offenses are satisfied. The Journal's  

business information that it intended to  

be kept confidential was its property; the  

declaration to that effect in the employee  

manual merely removed any doubts on  

that score and made the finding of  

specific intent to defraud that much  

easier. Winans continued in the employ  

of the Journal, appropriating its  

confidential business information for his  

own use, all the while pretending to  

perform his duty of safeguarding it. In  

fact, he told his editors twice about leaks  

of confidential information not related to  

the stock-trading scheme, 612 F.Supp.,  

at 831, demonstrating both his  

knowledge that the Journal viewed

40  

information concerning the “Heard”  

column as confidential and his deceit as  

he played the role of a loyal employee.   

39. In Vincent F. Chiarella v. United States14, the United States  

Supreme Court was seized of the matter relating to securities fraud  

under section 10b of the Securities Exchange Act, 1934. The  

Petitioner therein was a printer of some corporate takeover bids.  

Despite attempts by the companies to conceal the names of the  

takeover targets, Chiarella was able to deduce, and he traded shares  

of the companies he knew were involved. Consequently he was  

convicted by the lower forum as he traded in target companies  

without informing its shareholders of his knowledge of proposed  

takeover. The Supreme Court while reversing his conviction,  

observed as under-  

“the Petitioner employee could not be  

convicted on theory of failure to disclose  

his knowledge to stockholders or target  

companies as he was under no duty to  

                                              14 445 U.S. 222 (1980).

41  

speak, in that he had no prior dealings  

with the stockholders and was not their  

agent or fiduciary and was not a person  

in whom sellers had placed their trust  

and confidence, but dealt with them only  

through impersonal market  

transactions.”  

On the issue of “General Duty between all participants (Tippee’s), the  

Court stated that:  

“Formulation of a general duty between  

all participants in market transactions for  

forego actions based on material,  

nonpublic information, so as to give rise  

to liability under section 10(b) of  

Securities Exchange Act for failure to  

disclose, would depart radically from  

established doctrine that a duty arises  

from a specific relationship between two  

parties and should not be undertaken  

absent some explicit evidence of  

congressional intent. Securities Exchange  

Act of 1934, § 10(b) as amended 15  

U.S.C.A. § 78j(b).”

42  

40. Although excessive reliance on foreign jurisprudence may not  

be necessary as we have starkly deviated in many aspects from  

American jurisprudence, but we need to keep in mind the  

developments which other countries have undertaken regarding this  

issue.  

41. Now we come back to the regulations 3 and 4 (1) which bars  

persons from dealing in securities in a fraudulent manner or  

indulging in unfair trade practice. Fairness in financial markets is  

often expressed in terms of level playing field. A playing field may be  

uneven because of varied reasons such as inequalities in information  

etc. Possession of different information, which is a pervasive feature  

of markets, may not always be objectionable. Indeed, investors who  

invest resources in acquiring superior information are entitled to  

exploit this advantage, thereby making markets more efficient. The  

unequal possession of information is fraudulent only when the  

information has been acquired in bad faith and thereby inducing an  

inequitable result for others.  

43  

42. The law of confidentiality has a bearing on this case instant.  

“Confidential information acquired or compiled by a corporation in  

the course and conduct of its business is a species of property to  

which the corporation has the exclusive right and benefit, and which  

a court of equity will protect through the injunctive process or other  

appropriate remedy.”15  The information of possible trades that the  

company is going to undertake is the confidential information of the  

company concerned, which it has absolute liberty to deal with.  

Therefore, a person conveying confidential information to another  

person (tippee) breaches his duty prescribed by law and if the  

recipient of such information knows of the breach and trades, and  

there is an inducement to bring about an inequitable result, then the  

recipient tippee may be said to have committed the fraud.  

43. Accordingly, non-intermediary front running may be brought  

under the prohibition prescribed under regulations 3 and 4 (1), for  

being fraudulent or unfair trade practice, provided that the  

ingredients under those heads are satisfied as discussed above. From  

                                              15 3 W. Fletcher, Cyclopedia of Law of Private Corporations § 857.1, p. 260 (rev. ed. 1986)

44  

the above analysis, it is clear that in order to establish charges  

against tippee, under regulations 3 (a), (b), (c) and (d) and 4 (1) of  

FUTP 2003, one needs to prove that a person who had provided the  

tip was under a duty to keep the non-public information under  

confidence, further such breach of duty was known to the tippee and  

he still trades thereby defrauding the person, whose orders were  

front-runned, by inducing him to deal at the price he did.  

44. Taking into consideration the facts and circumstances of the  

case before us and the law laid down herein above and SEBI v.  

Kishore R. Ajmera (Supra) can only lead to one conclusion that  

concerned parties to the transaction were involved in an apparent  

fraudulent practice violating market integrity. The parting of  

information with regard to an imminent bulk purchase and the  

subsequent transaction thereto are so intrinsically connected that no  

other conclusion but one of joint liability of both the initiator of the  

fraudulent practice and the other party who had knowingly aided in  

the same is possible. Consequently, Civil Appeal Nos. 2595, 2596  

and 2666 of 2013 are allowed. At the same time, for the same reason,

45  

Civil Appeal Nos. 5829 of 2014 and 11195-11196 of 2014 are  

dismissed.  

............................J.  (N. V. RAMANA)  

NEW DELHI  SEPTEMBER 20, 2017  

1  

REPORTABLE  

IN THE SUPREME COURT OF INDIA  

CIVIL APPELLATE JURISDICTION  

CIVIL APPEAL NO. 2595 OF 2013  

SECURITIES AND EXCHANGE BOARD   

OF INDIA               ...APPELLANT(S)  

    VERSUS  

KANAIYALAL BALDEVBHAI   

PATEL                 ...RESPONDENT(S)  

WITH  

CIVIL APPEAL NO.2596 OF 2013  

[S.E.B.I. VS. DIPAK PATEL]  

CIVIL APPEAL NO.2666 OF 2013  

[S.E.B.I. VS. SUJIT KARKERA & ORS.]  

CIVIL APPEAL NO.5829 OF 2014  

[POOJA MENGHANI VS. S.E.B.I.]  

CIVIL APPEAL NOS. 11195-11196 OF 2014  

[VIBHA SHARMA AND ANR. VS. S.E.B.I.]  

J U D G M E N T  

RANJAN GOGOI,J.   

1.  I have had the privilege of going  

through the very erudite judgment of my  

learned brother Ramana, J.  I can only

2  

agree with the trend of reasoning that my  

learned brother has chosen to adopt to  

arrive at his ultimate conclusions.  

However, I am of the view that the present  

case is capable of resolution within a  

very narrow spectrum of law and on an  

interpretation of the relevant provisions  

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 “2003  

Regulations”).  I, therefore, propose to  

record my own views in the matter.  

2.  The relevant provisions of the  

2003 Regulations which would require  

consideration of this Court has been set  

out in extenso by my learned brother and,  

therefore, I need not burden this order  

with a repetition of the same.  All that I

3  

consider necessary to point out is that it  

is the provisions of Regulation 2(c),(3)  

and (4) of the 2003 Regulations which  

would require a consideration from the  

limited stand point of whether the actions  

attributable to the respondents in Appeal  

Nos.2595 of 2013, 2596 of 2013 and 2666 of  

2013 and appellants in Appeal Nos.5829 of  

2014 and 11195-11196 of 2014 come within  

the four corners of fraudulent or unfair  

trade practice as contemplated by the  

aforesaid provisions of the 2003  

Regulations.  

3.  The gravamen of the allegations  

which can be culled out from the facts in  

Civil Appeal No.2595 of 2013 is that one  

Dipak Patel (respondent in Civil Appeal  

No.2596 of 2013), who was holding a  

position of trust and confidence in one  

M/s Passport India Investment (Mauritius)

4  

Limited (hereinafter referred to as “M/s  

Passport India”), was privy to  

privileged/confidential information that  

M/s Passport India would be making  

substantial investments in particular  

scrips through the stock exchanges.    

Dipak Patel is alleged to have parted the  

said information to his cousins Kanaiyalal  

Baldevbhai Patel [respondent in Civil  

Appeal No.2595 of 2013] and Anandkumar  

Baldevbhai Patel [respondent in  Civil  

Appeal No.2594 of 2013 (disposed of on 5th  

April, 2017)] who on various dates placed  

orders for purchase of scrips a few  

minutes before the bulk orders in respect  

of the same scrips were placed on behalf  

of M/s Passport India by Dipak Patel.  The  

bulk order/orders, because of the sheer  

volume, naturally had the effect of  

pushing up the prices of the particular  

scrips and no sooner the prices had

5  

increased, Kanaiyalal Baldevhai Patel and  

Anandkumar Baldevbhai Patel had traded the  

said scrips thereby earning substantial  

profits.  The large volume of the shares  

traded in the above manner; the several  

number of days on which such trading took  

place; and the close proximity of time  

between the sale and purchase of the  

shares i.e. before and after the  bulk  

purchases, were alleged by the appellant -  

Securities and Exchange Board of India  

(“SEBI” for short) to be amounting to  

fraudulent or unfair trade practice  

warranting imposition of penalty and  

visiting the offending individuals with  

other penal consequences.     

4. The adjudicating authority held the  

respondents liable.  The Securities  

Appellate Tribunal (“Appellate Tribunal”  

for short) before whom appeals were filed

6  

by the aggrieved persons (respondents  

herein) interfered with the orders passed  

by the adjudicating authority primarily on  

the ground that on a reading of Regulation  

2(c),(3) and Regulation(4) of the 2003  

Regulations it does not transpire that the  

acts attributable amount to fraudulent or  

unfair trade practice warranting the  

findings recorded by the Adjudicating  

authority and the imposition of penalty in  

question on that basis.    

5.  If Regulation 2(c) of the 2003 was  

to be dissected and analyzed it is clear  

that any act, expression, omission or  

concealment committed, whether in a  

deceitful manner or not, by any person  

while dealing in securities to induce  

another person to deal in securities would  

amount to a fraudulent act.  The emphasis  

in the definition in Regulation 2(c) of

7  

the 2003 Regulations is not, therefore, of  

whether the act, expression, omission or  

concealment has been committed in a  

deceitful manner but whether such act,  

expression, omission or concealment  

has/had the effect of inducing another  

person to deal in securities.  

6.  The definition of 'fraud', which  

is an inclusive definition and, therefore,  

has to be understood to be broad and  

expansive, contemplates even an action or  

omission, as may be committed, even  

without any deceit if such act or omission  

has the effect of inducing another person  

to deal in securities.  Certainly, the  

definition expands beyond what can be  

normally understood to be a 'fraudulent  

act' or a conduct amounting to 'fraud'.  

The emphasis is on the act of inducement  

and the scrutiny must, therefore, be on

8  

the meaning that must be attributed to the  

word “induce”.  

7. The dictionary meaning of the word  

“induced” may now be taken note of.  

BLACK’S LAW DICTIONARY, EIGHTH  

EDITION, defines ‘inducement’ as “the  

act or process of enticing or  

persuading another person to take a  

certain course of action.”  

Merriam-Webster Dictionary  

defines ‘inducement’ as “a motive or  

consideration that leads one to action  

or to additional or more effective  

actions.”   

8. A person can be said to have induced  

another person to act in a particular way or  

not to act in a particular way if on the basis  

of facts and statements made by the first  

person the second person commits an act or  

omits to perform any particular act.  The test  

to determine whether the second person had  

been induced to act in the manner he did or  

not to act in the manner that he proposed, is

9  

whether but for the representation of the  

facts made by the first person, the latter  

would not have acted in the manner he did.   

This is also how the word inducement is  

understood in criminal law.  The difference  

between inducement in criminal law and the  

wider meaning thereof as in the present case,  

is that to make inducement an offence the  

intention behind the representation or  

misrepresentation of facts must be dishonest  

whereas in the latter category of cases like  

the present the element of dishonesty need not  

be present or proved and established to be  

present.  In the latter category of cases, a  

mere inference, rather than proof, that the  

person induced would not have acted in the  

manner that he did but for the inducement is  

sufficient.  No element of dishonesty or bad  

faith in the making of the inducement would be  

required.   

9. While Regulation 3(a) of the 2003  

Regulations prohibits a person to buy,

10  

sell or otherwise deal in securities in a  

fraudulent manner, Regulation 4 declares  

that no person shall indulge in a  

fraudulent or an unfair trade practice in  

securities.  Sub-regulation (2) of  

Regulation 4 enumerates different  

situations in which dealing in securities  

can be deemed to be a fraudulent or an  

unfair trade practice.  Regulation 4 being  

without prejudice to the provisions of  

Regulation 3 of the 2003 Regulations would  

operate on its own without being  

circumscribed in any manner by what is  

contained in Regulation 3.    

10.  Adverting to the facts of the  

present case, if the information with  

regard to acquisition of shares by M/s  

Passport India was parted with by Dipak  

Patel to Kanaiyalal Baldevbhai Patel and  

Anandkumar Baldevbhai Patel and the latter

11  

had transacted in huge volume of shares of  

the particular company/scrip mentioned by  

Dipak Patel a little while before the bulk  

order was placed by M/s. Passport India  

and the said persons had sold the same a  

short-while later at an increased price,  

such increase being a natural consequence  

of a huge investment made in the  

particular scrip by M/s Passport India,  

surely, it can be held that by the conduct  

of Dipak Patel,  Kanaiyalal Baldevbhai  

Patel and Anandkumar Baldevbhai Patel were  

induced to deal in securities.  A natural  

and logical inference that would follow is  

that the aforesaid two latter persons  

would not have entered into the  

transactions in question, had it not been  

for the information parted with by Dipak  

Patel.  The track record of earlier  

trading of the concerned two persons does  

not indicate trading in such huge volumes

12  

in their normal course of business.  Such  

an inference would be a permissible mode  

of arriving at a conclusion with regard to  

the liability, as held by this Court in  

Securities and Exchange Board of India   

Vs. Kishore R. Ajmera1  referred to by my  

learned brother Ramana, J.  The volume;  

the nature of the trading and the timing  

of the transactions in question can leave  

no manner of doubt that  Kanaiyalal  

Baldevbhai Patel and Anandkumar Baldevbhai  

Patel had acted in connivance with Dipak  

Patel to encash the benefit of the  

information parted with by Dipak Patel to  

them and, therefore, they are parties to  

the 'fraud' committed by Dipak Patel  

having aided and abetted the same.    

11.  If the parting of information by  

Dipak Patel to Kanaiyalal Baldevbhai Patel  

                                                1  (2016) 6 SCC 368

13  

and Anandkumar Baldevbhai Patel amounts to  

'fraud' within the meaning of Regulation  

2(c) of the 2003 Regulations, we do not  

see as to how the transactions entered  

into by Kanaiyalal Baldevbhai Patel and  

M/s Passport India  through Dipak Patel  

both in regard to purchase and sale of the  

shares would not be hit by the provisions  

of Regulation 3(a) and Regulation 4(1) of  

the 2003 Regulations in question.    

12.  Coupled with the above, is the  

fact, the said conduct can also be  

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,

14  

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.  

13.  On the conclusions that has been  

reached, as indicated above, whether the  

deemed provisions contained in Regulation  

4(2)(q) of the 2003 Regulations would be  

attracted to the facts of the present case  

and the scope, effect and contours of the  

explanation to Regulation 4 inserted by  

Securities and Exchange Board of India  

(Prohibition of Fraudulent and Unfair  

Trade Practices relating to Securities  

Market) (Amendment) Regulations, 2013  

would hardly require any specific notice  

of the Court.    

14.  To attract the rigor of  

Regulations 3 and 4 of the 2003

15  

Regulations, mens rea is not an  

indispensable requirement and the correct  

test is one of  preponderance of  

probabilities.  Merely because the  

operation of the aforesaid two provisions  

of the 2003 Regulations invite penal  

consequences on the defaulters, proof  

beyond reasonable doubt as held by this  

Court in Securities and Exchange Board of  

India  Vs. Kishore R. Ajmera(supra) is not  

an indispensable requirement.  The  

inferential conclusion from the proved and  

admitted facts, so long the same are  

reasonable and can be legitimately arrived  

at on a consideration of the totality of  

the materials, would be permissible and  

legally justified.  Having regard to the  

facts of the present cases i.e. the volume  

of shares sold and purchased; the  

proximity of time between the transactions  

of sale and purchase and the repeated

16  

nature of transactions on different dates,  

in my considered view, would irresistibly  

lead to an inference that the conduct of  

the respondents in Appeal Nos.2595 of  

2013, 2596 of 2013 and 2666 of 2013 and  

appellants in Appeal Nos.5829 of 2014 and  

11195-11196 of 2014 were in breach of the  

code of business integrity in the  

securities market.  The consequences for  

such breach including penal consequences  

under the provisions of Section 15HA of  

the SEBI Act must visit the concerned  

defaulters for which reason the orders  

passed by the Appellate Tribunal impugned  

in Civil Appeal Nos.2595 of 2013, 2596 of  

2013 and 2666 of 2013 are set aside and  

the findings recorded and the penalty  

imposed by the Adjudicating Officer are  

restored.   

15.  Consequently and in view of the

17  

above Civil Appeal Nos. 5829 of 2014 and  

11195-11196 of 2014 are dismissed and  

Civil Appeal Nos. 2595, 2596 and 2666 of  

2013 are allowed.  

 ..............,J.  

                (RANJAN GOGOI)  

NEW DELHI  

SEPTEMBER 20, 2017