SECURITIES AND EXCHANGE BOARD OF INDIA versus RAKHI TRADING PRIVATE LTD. on 8 February 2018

[2018] 1 S.C.R. 937

SECURITIES AND EXCHANGE BOARD OF INDIAv.

RAKHI TRADING PRIVATE LTD.

(Civil Appeal No. 1969 of 2011)

FEBRUARY 08, 2018

[KURIAN JOSEPH AND R. BANUMATHI, JJ.]

SEBI (Prohibition of Fraudulent and Unfair Trade Practicesrelating to Securities Market) Regulations, 2003: Regns 3(a), (b),(c) and 4(1), (2)(a), (b) – Synchronized trading – Synchronizationand reversal of trades, some in few seconds and majority, in anycase on the same day, without any significant change in the valueof underlying – As a result one party booking gains and the otherparty booking a loss – In the show cause notice, allegation wasthat the parties-traders were buying and selling securities in thederivatives segment in synchronized and reverse transactions at aprice which did not reflect the value of the underlying – AssessingOfficer held that there was intention of creating false or misleadingappearance in the market and also that a manipulative/deceptivedevice was used for synchronization of trades and trades werefictitious in nature, amounting to violation of Regns 3(a), (b), (c)and 4(1), (2)(a), (b) of the PFUTP Regulations – Securities AppellateTribunal (SAT) set aside the order of Assessing Officer holding thatin the Futures and Options (F & O) segment, there is no concept of“change of beneficial ownership” since what is traded in thissegment are contracts and not the underlying stock or index and itis only through cash settlement that the trade is concluded and nophysical delivery of any asset is involved and in this view of thematter, synchronized and reversed trades in Nifty options in F & Osegment can never manipulate the market which in the presentcontext means the value of Nifty index in cash segment – It furtherheld that since the trades were settled in cash through stockexchange mechanism, they are genuine and did not create a falseand misleading appearance of trading in F & O segment – Appealby SEBI – Held: Trading is always with aim to make profits – But ifone party consistently makes loss and that too in preplanned andrapid reverse trades, it is not genuine and would amount to an unfairtrade practice – In the instant case, through reverse trades, there

A

B

CDEFGH

Awas no genuine change of rights in the contract – SAT erred in itsunderstanding of change in beneficial ownership in reverse trades– Even in derivatives, the ownership of the right is restored to thefirst party when the reverse trade occurs – The traders in questiondid not intend to transfer beneficial ownership – Rather thanallowing the market forces to operate in their natural course, theBtraders repeatedly carried out the impugned transactions whichdeprived other market players from full participation – The repeatedreversals and predetermined arrangement to book profits and lossesrespectively, made it clear that the parties were not trading in thenormal sense and ordinary course – Resultantly, there has clearlyCbeen a restriction on the free and fair operation of market forces inthe instant case – The stock market is not a platform for anyfraudulent or unfair trade practice – The field is open to all theinvestors – By synchronization and rapid reverse trade, as wascarried out by the traders in the instant case, the price discoverysystem itself was affected – The traders, thus, having engaged in aDfraudulent and unfair trade practice while dealing in securities,are liable to be proceeded against for violation of Regns 3(a), 4(1)and 4(2)(a) of PFUTP Regulations. (Kurian Joseph, J.)

SEBI (Prohibition of Fraudulent and Unfair Trade Practicesrelating to Securities Market) Regulations, 2003: Regns. 3(a), (b),E(c) and 4(1), (2)(a), (b) – Fictitious transactions creating illegalsynchronization – Modus operandi – The question whether therewas fictitious transactions creating illegal synchronization has tobe gathered from the facts and circumstances and intention of theparties – Acting in concert is something about which it is difficult toFobtain direct evidence – Proof of manipulation might depend uponinferences drawn from factual details – Such inferences could begathered from pattern of trading data and the nature of thetransactions etc. – ‘By manipulation and synchronization’, it is meantthat two parties have pre-meditated; as such a drastic movement in price within few seconds could have been only through priorGunderstanding between the parties concerned only to fulfill anunlawful objective through misuse of the stock exchange – That is,prior arrangement/prior understanding with each other whereinone will make profit and other will lose and thereby as soon as oneparty opens up its trade in the market, the other party will buy it –H

Though the trading is shown on the screen, but prior arrangementis very well possible behind the screen – This was done in the casein hand – Buy and sell orders were placed at a difference of fewseconds/minutes, while ‘sell’ by respondent was at a high price and“buy” by the respondent was at a low price – The transactionswherein the ‘buy and sell’ orders entered almost simultaneously andthe transactions matched in time and quantity with significant pricevariation and respondent consistently making profit but the otherparty consistently making loss – There was no possibility of suchperfect matching of quantity, timing, prices etc. between the sameparties unless there was prior meeting of minds or a specificunderstanding/arrangement between the parties – Applying the testlaid down in Kishore R. Ajmera case to the instant case, bycumulative analysis of the reversal transactions, quantity, time andsignificant variation of prices, without major variation in theunderlying price of the securities indicate that the respondent’s tradesare not genuine and had only misleading appearance of trading inthe securities market, without intending to transfer beneficialownership. (Banumathi, J.)

Securities and Exchange Board of India (Stock Brokers andSub-brokers) Regulations, 1992: Regns. 7A, (2), (3), (4) –Synchronization and reversal of trades by brokers on behalf oftheir clients, some in few seconds and majority, in any case on thesame day, without any significant change in the value of underlying– As a result one party booking gains and the other party bookinga loss – SAT held that merely because appellant acted as a brokerwould not mean that it knew about the nature of transaction andthat there was no evidence of lack of due diligence while executingthe impugned transactions which could make the brokers guilty ofviolating the code of conduct prescribed for the stock brokers –Held: There was no evidence of involvement of brokers so as toproceed against them for violation of Regn 7A of the BrokersRegulations and PFUTP Regulations – Merely because a brokerfacilitated a transaction, it cannot be said that there is violation ofthe Regulation – SEBI did not provide any material to suggestnegligence or connivance on the part of the brokers – In the absenceof any material provided by SEBI to prove the charges against thebrokers, particularly regarding aiding and abetting fraudulent or AB

C

DE

F

G

H

Aunfair trade practices, the orders of SEBI against the brokers shouldbe interfered with – Securities Contracts (Regulation) Act, 1956 –s.18A, 3(ac), 2(d). (Kurian Joseph, J.)

Securities and Exchange Board of India (Stock Brokers andSub-brokers) Regulations, 1992: Regns. 7A, (2), (3), (4) – FictitiousBtransactions creating illegal synchronization – Allegation of SEBIwas that the traders and brokers at NSE were buying and sellingalmost equal quantities of contracts within the day and that suchbuy/sell orders were synchronized – Held: Considering the reversaltransactions, quantity, price and time and sale, parties beingpersistent in number of such trade transactions with huge priceCvariations, it will be too naive to hold that the transactions arethrough screen-based trading and hence anonymous – Suchconclusion would be over-looking the prior meeting of mindsinvolving synchronization of buy and sell order and not negotiateddeals as per the board’s circular – The impugned transactions areDmanipulative/deceptive device to create a desired loss and/or profit– Such synchronized trading is violative of transparent norms oftrading in securities – If the findings of SAT are to be sustained, itwould have serious repercussions undermining the integrity of themarket and the impugned order of SAT is liable to be set aside – Onthis additional reasonings also, conclusion allowing the appealEpreferred by SEBI against the traders is upheld – The conclusiondismissing the appeal preferred by the SEBI against the brokers isalso upheld – SEBI Act, 1992 – ss.12A, 15HA. (Banumathi, J.)

Stock Exchange: Need for comprehensive legal frameworkgoverning the securities market – As the market grows, ingenuousFmeans of manipulation are also employed – In such a scenario, it isessential that SEBI keeps up with changing times and developsprinciples for good governance in the stock market which ensurefree and fair trading – The observations made in Kishore R. Ajmeraand Kanaiyalal Patel regarding need for more comprehensive legalGframework governing the securities market, reiterated – SEBI Act,1992. (Kurian Joseph, J.)

Stock Exchange: Circumstances under which synchronizedtrade become illegal – Held: A synchronized transaction will becomeillegal or violative of the Regulations if it is executed with a view toHmanipulate 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 thescrip or with some ulterior purpose. (Banumathi, J.)

Stock Exchange: Manipulation of market – If the factum ofmanipulation is established, it will necessarily follow that theinvestors in the market have been induced to buy or sell and thatno further proof in this regard is required – The market is sowidespread that it may not be humanly possible for the Board totrack the persons who were actually induced to buy or sell securitiesas a result of manipulation and the Board cannot be imposed with aburden which is impossible to be discharged. (Banumathi, J.)

Stock Exchange: Prevention of market abuse – The smoothoperation of the securities market and its healthy growth anddevelopment depends upon large extent on the quality and integrityof the market – Unfair trade practices affect the integrity andefficiency of the securities market and the confidence of the investors– Prevention of market abuse and preservation of market integrityare the hallmark of securities law. (Banumathi, J.)

Stock Exchange: Role of SEBI – Object of SEBI Act – Held:The object of the SEBI Act is to protect the interest of the investorsin securities and to promote the development and to regulate thesecurities market so as to promote orderly, healthy growth ofsecurities market and to promote investor’s protection – In order toprotect the interests of the investors and the integrity of the markets,as a regulator, SEBI has to make the market place efficient andclean, wherein all the participants play their role diligently andprofessionally within the four corners of the system, without therebeing any scope for market abuse – Where certain unscrupulouselements are trying to manipulate the market to serve their owninterest, it becomes imperative on the part of SEBI to intervene andto curb further mischief and to take necessary action to maintainpublic confidence in the integrity of the securities market.(Banumathi, J.)

Evidence: In the quasi-judicial proceeding before SEBI, thestandard of proof is preponderance of probability – Stock Exchange.(Banumathi, J.)

Words and phrases: Synchronize, Synchronized Trading –Meaning of, discussed.(Banumathi, J.)

AB

C

D

E

F

G

H

942SUPREME COURT REPORTS

ADisposing of the appeals, the CourtHELD:

Per Kurian Joseph, J.

HELD: 1. Regulation 4(1) in clear and unmistakable termsBprovided that “no person shall indulge in a fraudulent or an unfairtrade practices in securities” Having regard to the fact that thedealings in the stock exchange are governed by the principles offair play and transparency, one does not have to labour much onthe meaning of unfair trade practices in securities. Contextuallyand in simple words, it means a practice which does not conformCto the fair and transparent principles of trades in the stock market.In the instant case, one party booked gains and the other partybooked a loss. Nobody intentionally trades for loss. An intentionaltrading for loss per se, is not a genuine dealing in securities. Theplatform of the stock exchange has been used for a non-genuineDtrade. Trading is always with the aim to make profits. But if oneparty consistently makes loss and that too in preplanned and rapidreverse trades, it is not genuine; it is an unfair trade practice.Securities market, as the Securities Contracts (Regulation) Act,1956 provides in the preamble, does not permit “undesirabletransactions in securities”. The Act intends to preventEundesirable transactions in securities by regulating the businessof dealing therein. Undesirable transactions would certainlyinclude unfair practices in trade. The SEBI Act, 1992 was enactedto protect the interest of the investors in securities. Protectionof interest of investors should necessarily include prevention ofmisuse of the market. Orchestrated trades are a misuse of theFmarket mechanism. It is playing the market and it affects themarket integrity. [Paras 34, 35] [976-D-E; 977-D-G]

Ketan Parekh v. Securities and Exchange Board ofIndia Appeal No.2 of 2004 before SAT – referred to .

G2. Ordinarily, the trading would have taken place betweenanonymous parties and the price would have been determinedby the market forces of demand and supply. In the instant case,the parties did not stop at synchronised trading. The facts gobeyond that. The trade reversals in this case indicate that theparties did not intend to transfer beneficial ownership and throughH

these orchestrated transactions, the intention of which was notregular trading, other investors have been excluded fromparticipating in these trades. The fact that when the trade wasnot synchronizing, the traders placed it at unattractive prices isalso a strong indication that the traders intended to play with themarket. [Para 36] [977-H; 978-A-B]

3. The stand of SAT that the rationale of change of beneficialownership does not arise in the derivatives segment is also notcorrect. No doubt, as in the case of trade in a scrip in the cashsegment, there is no physical delivery of the asset. However,even in the derivative segment there is a change of rights in acontract. In the instant case, through reverse trades, there wasno genuine change of rights in the contract. SAT has erred in itsunderstanding of change in beneficial ownership in reverse trades.Even in derivatives, the ownership of the right is restored to thefirst party when the reverse trade occurs. In the instant case, itis clear that the traders in question did not intend to transferbeneficial ownership and therefore these trades are non genuine.Rather than allowing the market forces to operate in theirnatural course, the traders repeatedly carried out the impugnedtransactions which deprived other market players from fullparticipation. The repeated reversals and predeterminedarrangement to book profits and losses respectively, made it clearthat the parties were not trading in the normal sense andordinary course. Resultantly, there has clearly been a restrictionon the free and fair operation of market forces in the instant case.[Paras 37, 38] [978-B-C; 979-A-C]

4. Regulation 2(1)(c) defines fraud. Under Regulation2(1)(c)(2) a suggestion as to a fact which is not true while hedoes not believe it to be true is fraud. Under Regulation 2(1)(c)(7),a deceptive behaviour of one depriving another of informedconsent or full participation is fraud. And under Regulation2(1)(c)(8), a false statement without any reasonable ground forbelieving it to be true is also fraud. In a synchronised andreverse dealing in securities, with predetermined arrangementto book loss or gain between pre-arranged parties, all these vicesare attracted. Regulation 3(a) expressly prohibits buying,selling or otherwise dealing in securities in a fraudulent manner.

A

B

C

D

E

F

G

H

AUnder Regulation 4(2) dealing in securities shall be deemed tobe fraudulent if the trader indulges in an act which creates a falseor misleading appearance of trading in the securities market. Itis a deeming provision. Such trading also involves an actamounting to manipulation of the price of the security in the sensethat the price has been artificially and apparently prefixed. TheBprice does not at all reflect the value of the underlying asset. It isalso a transaction in securities entered into without any intentionof performing it and without any intention of effecting a changeof ownership of such securities, ownership being understood inthe limited sense of the rights in the contract. [Paras 39, 40]C[979-C-G]

5. According to SAT, only if there is market impact onaccount of sham transactions, could there be violation of thePFUTP Regulations. The proposition is not convincing. SATmissed the crucial factors affecting the market integrity, whichDmay be direct or indirect. The stock market is not a platform forany fraudulent or unfair trade practice. The field is open to all theinvestors. By synchronization and rapid reverse trade, as hasbeen carried out by the traders in the instant case, the pricediscovery system itself is affected. Except the parties who havepre-fixed the price nobody is in the position to participate in theEtrade. It also has an adverse impact on the fairness, integrity andtransparency of the stock market. The traders thus havingengaged in a fraudulent and unfair trade practice while dealing insecurities, are hence liable to be proceeded against for violationof Regulations 3(a), 4(1) and 4(2)(a) of PFUTP Regulations. As Ffar as brokers are concerned, there is hardly any evidence ontheir involvement so as to proceed against them for violation ofRegulation 7A of the Brokers Regulations and PFUTPRegulations. 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 orGconnivance on the part of the brokers. In the absence of anymaterial provided by SEBI to prove the charges against thebrokers, particularly regarding aiding and abetting fraudulent orunfair trade practices, the orders of SEBI against the brokersshould be interfered with. [Paras 41, 43, 44] [979-G-H; 980-A-B;H981-B; C, D-F]

6. There is need for more comprehensive legal frameworkgoverning the securities market. As the market grows,ingenuous means of manipulation are also employed. In such ascenario, it is essential that SEBI keeps up with changing timesand develops principles for good governance in the stockmarket which ensure free and fair trading. [Para 45] [981-G]

Securities And Exchange Board of India v. Kishore R.Ajmera (2016) 6 SCC 368 : [2016] 1 SCR 1118 ;Securities and Exchange Board of India and Ors. v.Shri Kanaiyalal Baldevbhai Patel and Ors. 2017 SCCOnline SC 1148– relied on.

Per Banumathi, J. (Supplementing)

1. Synchronized Trading: As per the Oxford dictionary theword ‘synchronize’ means “cause to occur at the same time; besimultaneous”. A synchronized trade is one where the buyer andseller enter the quantity and price of the shares they wish totransact at substantially the same time. This could be done throughthe same broker (termed a cross deal) or through two differentbrokers. Synchronized trade is one wherein ‘buy and sell’ ordersare placed simultaneously for the same quantity and price theywish to transact at substantially the same time. Synchronizedtrades are not illegal provided that they are executed on thescreens of the exchange in the price and order matchingmechanism of the exchanges just like any other normal trade. Asynchronized transaction will become illegal or violative of theRegulations if it is executed with a view to manipulate the marketor if it results in circular trading or is dubious in nature and witha view to manipulate the price or volume of the scrip or withsome ulterior purpose. [Paras 13, 14, 16] [989-A-C; 990-D-E]

Ketan Parekh v. SEBI, Manu/SB/0229/2006 – referred to.

2. The question whether there was fictitious transactionscreating illegal synchronization has to be gathered from the factsand circumstances and intention of the parties. Acting in concertis something about which it is difficult to obtain direct evidence.Proof of manipulation might depend upon inferences drawn fromfactual details. Such inferences could be gathered from pattern A

B

C

DE

F

G

H

Aof trading data and the nature of the transactions etc. ‘Bymanipulation and synchronization’, it is meant that two partieshave pre-meditated; as such a drastic movement in price withinfew seconds could have been only through prior understandingbetween the parties concerned only to fulfill an unlawful objectivethrough misuse of the stock exchange. That is, priorBarrangement/prior understanding with each other wherein onewill make profit and other will lose and thereby as soon as oneparty opens up its trade in the market, the other party will buy it.Though the trading is shown on the screen, but prior arrangementis very well possible behind the screen. This is what has beenCdone in the case in hand. Buy and sell orders were placed at adifference of few seconds/minutes, while ‘sell’ by respondent toKasam Holding was at a high price and “buy” by the respondentfrom Kasam Holding Pvt. Ltd. was at a low price. The transactionswherein the ‘buy and sell’ orders entered almost simultaneouslyand the transactions matched in time and quantity with significantDprice variation and respondent consistently making profit butKasam Holding Pvt. Ltd. consistently making loss. Number ofreversal trades between the respondent and Kasam Holding Pvt.Ltd. and such reversal trade taking place repeatedly over a periodof time only indicates that there was pre-arrangement betweenEthe parties before the trade was executed. The transactionsinvolving only the same two parties within few seconds with hugedifference in ‘buy and sell’ value, though there is no difference inthe underlying security, can take place only with priorunderstanding between the two parties. The Board who is theregulator of the market, can always lift the veil of such transactionsFto show the non-genuineness of such transactions. [Paras 20, 21][992-D-H; 993-A-B]

3. In the present case, every time one party is makingprofit and other party is facing loss. Further, there was proximity in the time of sell orders at a high price to the party-KasamGHolding Pvt. Ltd. and the same quantity being reversed by KasamHolding Pvt. Ltd. to the same party-Rakhi Trading Pvt. Ltd. at alow price through the same set of brokers. During March, 2007thirteen Nifty Option Contracts got matched between the sameparties through the same brokers. There is no reason toHunderstand as to why Kasam Holding has made the transactions repeatedly by incurring losses. It seems improbable that KasamHolding which was facing loss in each transaction by trading withthe respondent, was still eager to trade with the same repeatedlyfor about four days which is not in consonance with the markettrend and human conduct; more so, when there has not been anymajor difference in the underlying price. It is thus difficult toaccept that several such sell and buy orders between therespondent and Kasam Holding being within a gap of “1”, “2” or“3” or few seconds were by mere coincidence. It was too muchof coincidence that there were number of transactions of ‘buyand sell orders’ between the same parties with same quantity ofstock with significant variation in price. [Para 22] [993-C-F]

4. In the quasi-judicial proceeding before SEBI, thestandard of proof is preponderance of probability. It was held inKishore R. Ajmera case that it is the judicial duty to take note ofthe immediate and proximate facts and circumstances surroundingthe events on which the charges/allegations are founded and toreach what would appear to the Court to be a reasonableconclusion therefrom. The test would always be that whatinferential process that a reasonable/prudent man would adoptto arrive at a conclusion. There was no possibility of such perfectmatching of quantity, timing, prices etc. between the same partiesunless there was prior meeting of minds or a specificunderstanding/arrangement between the parties. Applying thetest laid down in Kishore R. Ajmera case to the present case, bycumulative analysis of the reversal transactions betweenrespondent and Kasam Holding, quantity, time and significantvariation of prices, without major variation in the underlying priceof the securities clearly indicate that the respondent’s trades arenot genuine and had only misleading appearance of trading in thesecurities market, without intending to transfer beneficialownership. [Paras 25, 26, 27] [996-D-H; 996-H; 998-F]

5. Contention of the appellant is that if the market startsmoving or there is a change in the perception of the market andthe anticipated future performance thereof, then the seller oftengets very apprehensive and may even panic, anticipating asubstantial loss and would want to square off his position to restricta loss. There is no merit in this contention. Insofar as the AB

C

D

E

F

G

H

Aimpugned transactions are concerned, it is seen that the marketof underlying shares had remained unmoved altogether, then therewas no question of getting panic. When there were no othertransactions in the market affecting the price of the underlyingshares or F & O Segment and the price in both the segments hadremained static, then there was no reasonable ground to getBapprehensive and panic. Therefore, squaring off the positionappears to adjust the financial results with a view to avoid the taxincidence through an unfair trade practice or for some ulteriorpurpose. [Para 28] [998-F-H]

6. The respondent has made the transactions repeatedlyCby incurring losses, particularly when there were no transactionsmade by any third party in the market. Abnormal differencebetween the prices at which the trades were executed withoutcorresponding effect on the price of the underlying security, showsthat the option in which the party traded was not in demand in theDmarket. It is unusual that the trades were transacted with suchhuge profits when there was no change in the underlying prices.These trade transactions obviously only aimed at carrying outmanipulative objective. Once the reversal transactions are shownto be non-genuine or shown to be fictitious creating a false ormisleading appearance in the market for ulterior purpose andEthat 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 Regulationsprohibit such manipulative trades, unfair trade practices. [Paras32, 33] [999-F-H; 1000-A]F

7. Regulation 3 deals with “Prohibition of certain dealingsin 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....”. Regulation4(2) is an inclusive provision. Regulation 4(2) stipulates thatG“Dealing in securities shall be deemed to be a fraudulent or anunfair trade practice if it involves fraud and may include all or anyof the....”, instances pointed out thereon. Regulation 4(2)(a) dealswith “...an act which creates false or misleading appearance oftrading in the securities market”. An act to fall within Regulation4(2)(a), it is not necessary that the transactions entered into byH

the party was with intention to manipulate the market and thatthe market was in fact manipulated. Market manipulation is adeliberate attempt to interfere with the free and fair operation ofthe market and create artificial, false or misleading appearanceswith respect to the price, market, product, security and currency.[Para 35] [1000-E-G]

8. Respondent-Rakhi Trading and Kasam Holding on factsare found to have been engaged in non-genuine transactionscreating appearance of trading. If the factum of manipulation isestablished, it will necessarily follow that the investors in themarket have been induced to buy or sell and that no further proofin this regard is required. The market is so widespread that itmay not be humanly possible for the Board to track the personswho were actually induced to buy or sell securities as a result ofmanipulation and the Board cannot be imposed with a burdenwhich is impossible to be discharged. [Para 36] [1000-H; 1001-A]

9. Stock market is regulated mainly by SEBI and to someextent by the Departments of Economic Affairs and CompanyAffairs of Government of India. Market manipulation can occurin a variety of ways. Manipulations/unfair trade practices reducethe market efficacy. Section 11 of the SEBI Act, 1992 providesfor the functions of the Board, as per which it shall be the duty ofthe Board to protect the interests of the investors in securitiesand to promote the development and to regulate the securitiesmarket by such measures as it thinks fit. Main function of SEBIin this regard is to make inquiry, investigation and to givedirections, to promote the orderly and healthy growth of thesecurities market. With a view to curb unfair trade practices,market manipulation, price rigging and other frauds in securitiesmarket, SEBI is empowered to make inquiries and inspection.[Para 40] [1003-B-D]

10. Section 12A of the SEBI Act, 1992 read withRegulations 3 and 4 of the PFUTP Regulations, 2003 areessentially intended to preserve ‘market integrity’ and toprevent ‘market abuse’. The object of the SEBI Act is to protectthe interest of the investors in securities and to promote thedevelopment and to regulate the securities market so as to A

B

C

D

EF

G

H

Apromote orderly, healthy growth of securities market and topromote investor’s protection. The capital market regulator, SEBIhas a significant role to play in safeguarding the interest ofinvestors and to ensure strict compliance of all the relevant SEBIrules and regulations targeting at safeguarding the interest ofsmall investors. As supervisory functionary/ regulating body,BSEBI has the duty and obligation to protect ordinary genuineinvestors and SEBI is empowered to do so under the SEBI Act,1992 so as to make security market a secure and safe place tocarry on the business in securities. At the same time, under theguise of supervisory intervention, SEBI cannot affect theCdevelopment of the market or market oriented creativity. Intensesupervision might distort the path of securities marketdevelopment; but SEBI cannot be a silent spectator to unfairtrade practices/manipulative market for some ulterior purposelike tax evasion etc. To find the right balance between marketforces and Regulatory body’s intervention, SEBI has to dealDsternly with those who indulge in manipulative trading anddeceptive devices to misuse the market and at the same timeensuring the development of the market. Considering thereversal transactions, quantity, price and time and sale, partiesbeing persistent in number of such trade transactions with hugeEprice variations, it will be too naïve to hold that the transactionsare through screen-based trading and hence anonymous. Suchconclusion would be over-looking the prior meeting of mindsinvolving synchronization of buy and sell order and notnegotiated deals as per the board’s circular. The impugnedtransactions are manipulative/deceptive device to create aFdesired loss and/or profit. Such synchronized trading is violativeof transparent norms of trading in securities. If the findings ofSAT are to be sustained, it would have serious repercussionsundermining the integrity of the market and the impugned orderof SAT is liable to be set aside. [Paras 41, 42, 43, 46] [1003-D-E;G1005-B-C, E-G; 1006-E-G]

Ketan Parekh v. SEBI (Appeal No. 2 of 2004) ; KetanParekh v. SEBI, Manu/SB/0229/2006 ; Securities andExchange Board of India v. Kishore R. Ajmera (2016)6 SCC 368 : [2016] 1 SCR 1118 ; Nirmal BangH

Securities Private Ltd. v. The Chairman, Securities andExchange Board of India MANU/SB/0206/2003 ; SEBIv. Accord Capital Markets Ltd. MANU/SB/0136/2007 ;Narayanan v. Adjudicating Officer, Securities andExchange Board of India (2013) 12 SCC 152 ; ViramInvestment Pvt. Ltd. and Ors. v. Securities and ExchangeBoard of India MANU/SB/0046/2005 – referred to.

A

B

Case Law Reference

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1969of 2011.

From the Judgment and Order dated 11.10.2010 of the SecuritiesAppellate Tribunal, Mumbai in Appeal No. 70 of 2009

E

WITH

Civil Appeal Nos. 3174-3177 and 3180 of 2011.

Gourab Banerji, Sr. Advs, Bhargava V. Desai, Sahil Tagotra, S. P.Mukherjee, Akshat Malpani, Advs for the Appellant.

F

Shyam Divan, P. Chidambaram, Sr. Advs, Ms. Mumtaz Bhalla,Ms. Abhilasha Vij, Ms. Samiksha Godiyal, Ms. Anisha Upadhyay, NishantKumar, Aniket Gautam, Neerav Merchant, Somasekhar Sundaresan,Mayank Mishra, Divyam Agarwal, Ritunjay Gupta, Dheeraj Nair,Preteesh Kapur, Ranjit B. Raut, Ms. Surbhi Kapoor, Ms. Bina Gupta,Vikram Mehta, Ms. Raka Chatterjee, Vikas Mehta, Abhay Kumar, Ms.Mridula Ray Bharadwaj, Advs for the Respondents.

G

H

AThe Judgment of the Court was delivered by

KURIAN, J. 1. Fairness, integrity and transparency are thehallmarks of the stock market in India. The Securities and ExchangeBoard of India (hereinafter referred to as “SEBI”) is the vigilantwatchdog. Whether the factual matrix justified the watchdog’s bite isBthe issue arising for consideration in this case.

2. There are two sets of party respondents – the traders and thebrokers. SEBI proceeded against the traders for violation of Regulations3(a), (b) and (c) and 4 (1), (2)(a) and (b) of the Securities and ExchangeBoard of India (Prohibition of Fraudulent and Unfair Trade PracticesCRelating to Securities Market) Regulations, 2003 (hereinafter referredto as “the PFUTP Regulations”). In the case of brokers, the charge isthat they also violated Regulations 7A (1), (2), (3) and (4) of theSecurities and Exchange Board of India (Stock Brokers and Sub-brokers)Regulations, 1992.

3. As the matter before us involves three traders and threebrokers, for convenience, we have extracted the dates of the decision ofthe Adjudicating Officer (hereinafter referred to as “A.O.”) and theSecurities Appellate Tribunal (hereinafter referred to as “the SAT”) inthe table below:

D

SAT set aside the decisions of the A.O. in all the aforementionedcases. Aggrieved, SEBI is before this Court under Section 15Z of theSecurities and Exchange Board of India Act, 1992 (hereinafter referredto as the “SEBI Act”).

4. Both the facts and the law are complex, and hence, we shallfirst analyse the legal framework.

5. The Securities Contracts (Regulation) Act, 1956 wasintroduced “… to prevent undesirable transactions in securities byregulating the business of dealing therein, by providing for certainother matters connected therewith”. Section 18A dealing withcontracts in derivatives was introduced with effect from 22.02.2000.The provision reads as follows:

“18A. Contracts in derivative.—Notwithstanding anythingcontained in any other law for the time being in force, contracts inderivative shall be legal and valid if such contracts are —

(a) traded on a recognised stock exchange; (b) settled on the clearing house of the recognised stockexchange; or in accordance with the rules and bye-laws of suchstock exchange;

(c) between such parties and on such terms as the CentralGovernment may, by notification in the official Gazette, specify.”

“Derivative” is defined under Section 2(ac) of the 1956 Act, whichread as under:

“2(ac)] “derivative” includes—

(A) a security derived from a debt instrument, share, loan, whethersecured or unsecured, risk instrument or contract for differencesor any other form of security; (B) a contract which derives its value from the prices, or index ofprices, of underlying securities.

(C) commodity derivatives; and

(D) such other instruments as may be declared by the CentralGovernment to be derivatives;”

A

B

C

D

E

F

G

H

A6. “Option in securities” is defined under Section 2 (d) of the1956 Act, which reads as under:

“2(d) “option in securities” means a contract for the purchase orsale of a right to buy or sell, or a right to buy and sell, securities infuture, and includes a teji, a mandi, a teji mandi, a galli, a put,Ba call or a put and call in securities.”

7. The term “securities” is defined under Section 2(h) of the 1956Act, which reads as under:

“2(h) “securities” include—

C(i) shares, scrips, stocks, bonds, debentures, debenture stock orother marketable securities of a like nature in or of anyincorporated company or other body corporate.

xxx xxx xxx

(ia) derivative;”D

8. In 1992, the SEBI Act was introduced “…to provide for theestablishment of a Board, to protect the interest of investors insecurities and to promote the development of and to regulate, thesecurities market and for matters connected therewith or incidentalthereto”.E9. Section 15HA of the SEBI Act provides for penalty forfraudulent 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 practicesrelating to securities, he shall be liable to a penalty which shall notFbe less than five lakh rupees but which may extend to twenty-fivecrore rupees or three times the amount of profits made out ofsuch practices, whichever is higher.”

10. Adjudication is provided under Section 15I. Section 15Tprovides for appeal to SAT against any order made by an AdjudicatingGOfficer and Section 15Z provides for an appeal to Supreme Court againstan order passed by the SAT “...on any question of law arising out ofsuch order..”

11. Under Section 30 of the SEBI Act “….the Board may, bynotification, make regulations consistent with this Act and the RulesH

made thereunder to carry out the purposes of this Act.” The PFUTPRegulations were notified on 17.07.2003.

12. Regulation 2(1)(b) of the PFUTP Regulations provides thedefinition of “dealing in securities”, which reads as under:

“2(1)(b) “dealing in securities” includes an act of buying, sellingor subscribing pursuant to any issue of any security or agreeing tobuy, sell or subscribe to any issue of any security or otherwisetransacting 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 Regulations3 and 4 deals with the prohibition of fraudulent and unfair tradepractices relating to securities in the market. Regulation 3 speaks ofprohibition about certain dealings in securities and Regulation 4 providesfor prohibition of manipulative, fraudulent and unfair trade practices.The regulations relevant for the purpose of the present case read asunder:

“3. Prohibition of certain dealings in securities No person shall directly or indirectly—

(a) buy, sell or otherwise deal in securities in a fraudulentmanner; (b) use or employ, in connection with issue, purchase or sale ofany security listed or proposed to be listed in a recognizedstock exchange, any manipulative or deceptive device orcontrivance in contravention of the provisions of the Act orthe rules or the regulations made there under;

(c) employ any device, scheme or artifice to defraud inconnection with dealing in or issue of securities which arelisted or proposed to be listed on a recognized stock exchange; (d) engage in any act, practice, course of business whichoperates or would operate as fraud or deceit upon anyperson in connection with any dealing in or issue ofsecurities which are listed or proposed to be listed on arecognized stock exchange in contravention of the provisionsof the Act or the rules and the regulations made there under.

A

B

C

D

E

F

G

H

A

“4. Prohibition of manipulative, fraudulent and unfair trade practices

(1) Without prejudice to the provisions of regulation 3, no personshall indulge in a fraudulent or an unfair trade practice insecurities.

(2) Dealing in securities shall be deemed to be a fraudulent or anBunfair trade practice if it involves fraud and may include all or anyof the following, namely:—

(a) indulging in an act which creates false or misleadingappearance of trading in the securities market; C

(b) dealing in a security not intended to effect transfer ofbeneficial ownership but intended to operate only as a device toinflate, depress or cause fluctuations in the price of such securityfor wrongful gain or avoidance of loss; D

xxxxxxxxx

(e) any act or omission amounting to manipulation of the price ofa security; xxxxxxxxx E(g) entering into a transaction in securities without intention ofperforming it or without intention of change of ownership of suchsecurity;

14. The Regulations do not provide a definition for unfair tradepractices but “fraud” and “fraudulent” have been defined underFRegulation 2(1)(c), which reads as under :

“2(1)(c) “fraud” includes any act, expression, omission orconcealment committed whether in a deceitful manner or not by aperson or by any other person with his connivance or by his agentwhile dealing in securities in order to induce another person or hisGagent to deal in securities, whether or not there is any wrongfulgain or avoidance of any loss, and shall also include:

H

(1) a knowing misrepresentation of the truth or concealment ofmaterial 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 notbelieve it to be true;

(3) an active concealment of a fact by a person having knowledgeor belief of the fact;

(4) a promise made without any intention of performing it;

(5) a representation made in a reckless and careless mannerwhether it be true or false;

(6) any such act or omission as any other law specifically declaresto be fraudulent,

(7) deceptive behavior by a person depriving another of informedconsent or full participation,

(8) a false statement made without reasonable ground for believingit to be true.

(9) the act of an issuer of securities giving out misinformation thataffects the market price of the security, resulting in investors beingeffectively misled even though they did not rely on the statementitself 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 generalcomments made in good faith in regard to—

(a) the economic policy of the government (b) the economic situation of the country

(c) trends in the securities market;

(d) any other matter of a like nature

whether such comments are made in public or in private; xxxxxxxxx (e) “securities” means securities as defined in section 2 of theSecurities Contracts (Regulation) Act, 1956 (42 of 1956).”

15. The Securities and Exchange Board of India (Stock brokersand Sub-brokers) Regulations, 1992 in Schedule II deals with the codeof conduct for stockbrokers which reads as follows:

A

B

C

D

E

F

G

H

SUPREME COURT REPORTS

A

“SCHEDULE IISecurities and Exchange Board of India(Stock Brokers and Sub-brokers)Regulations, 1992

CODE OF CONDUCT FOR STOCK BROKERS[Regulation 7]

B

A. General.

(1) Integrity: A stock-broker, shall maintain high standards ofintegrity, promptitude and fairness in the conduct of all hisbusiness.

C

(2) Exercise of due skill and care : A stock-broker shall act withdue skill, care and diligence in the conduct of all his business.

(3) Manipulation : A stock-broker shall not indulge inmanipulative, fraudulent or deceptive transactions or schemes orspread rumours with a view to distorting market equilibrium ormaking personal gains.

D

(4) Malpractices: A stock-broker shall not create false marketeither singly or in concert with others or indulge in any actdetrimental to the investors interest or which leads tointerference with the fair and smooth functioning of the market.A stockbroker shall not involve himself in excessive speculativebusiness in the market beyond reasonable levels notcommensurate with his financial soundness.

E

(5) Compliance with statutory requirements: A stock-broker shallabide by all the provisions of the Act and the rules, regulationsFissued by the Government, the Board and the Stock Exchangefrom time to time as may be applicable to him.”

16. As the facts pertain to transactions involving certain technicalterms, we will have to necessarily deal with their meaning and content.

17. Derivatives – Derivatives are a form of financial instrumentsGwhich are traded in the securities market and whose values are derivedfrom the value of the underlying variables like the share price of aparticular scrip in the cash segment of the market or the stock index ofa portfolio of stocks. Derivative trading is governed by Section 18A ofthe 1956 Act. There are two types of derivative instruments - ‘futures’

H

and ‘options’. In futures and options, the trading can either be ofindividual stocks or of indices like NIFTY, Bank NIFTY etc.

18. Futures - a future contract is an agreement between twoparties to buy or sell an asset at a certain time in the future at a certainprice agreed upon on the date of the contract. All the futures contractsare settled in cash.

19. Options – options are contracts between a buyer and the sellerwhich gives a right, but not an obligation, to buy or sell the underlyingasset at a stated price on or before a specified date. While a buyer of anoption pays the premium and buys his right to exercise his option, thewriter of an option is the one who receives the option premium and istherefore obliged to sell or buy the asset as per the option exercised bythe buyer.

Options are of two types, ‘Call’ and ‘Put’. Call Option gives thebuyer the right but not the obligation to buy a given quantity of theunderlying asset at a given price on or before a given future date. PutOption gives the buyer the right, but not obligation to sell a given quantityof underlying asset at a given price on or before a given future date.

20. The impugned SAT order in the case of Rakhi Trading hassuccinctly dealt with the working of options:

“2. …The seller in an options contract sells a right to the buyerand since nothing can be sold without a cost, the former chargesan amount from the latter which is called the premium. It is thispremium which is the only negotiable element in an options contractthat is negotiated on the trading screen of the stock exchange. Atthe beginning of every trading cycle which is fixed by the concernedstock exchange, it (stock exchange) prescribes in the case ofstock options a series of strike rates based upon the prevailingmarket price of particular shares that are allowed to be traded inthe F & O segment. In the case of index options, the strike ratesare determined with reference to the index value in the cashsegment. These strike rates are based on the general marketperception both bullish and bearish. Equal number of strike ratesboth upwards and downwards of the prevailing market price/indexvalue are fixed by the stock exchange. The stock exchange alsofixes the size of the contracts that are traded in lots. When an AB

C

D

E

F

G

H

A

Ainvestor chooses to trade in the options contracts, he has to choosea scrip or the Nifty, then assess whether the same will go up ordown on the next settlement date and by how much. That is hisgamble. Accordingly, he will select a strike rate which is theexercise price. He can then buy or sell a “call Option” or a “PutOption”. A Call Option is an option to “buy”, that is, the contractBis to buy the shares on a settlement date at the selected strikerate. A Put Option is an option to sell, that is, the contract is to sellthe shares on the settlement date at the selected strike rate. Incase the price of the underlying or the value of the index in thecash segment goes below the selected strike rate/exercise price,Cthe buyer will have no attraction to exercise his option under thecontract and will allow the contract to lapse and thereby losewhatever premium was paid by him. Premium amount is themaximum that the buyer can lose in case the market movescontrary to his perception. In case the price of the underlying orthe index value in the cash segment were to go beyond theDselected strike rate/exercise price, the buyer would certainlyexercise his option under the contract depending upon how highthe price or the stock index has gone after adjusting the premiumamount.These are some of the motivating factors which weighwith the investors in the options contracts. It is a one sided contractEwhere the loss suffered, if any, by the buyer is limited only to thepremium amount whereas the loss which could be suffered, ifany, by the buyer is limited only to the premium amount whereasthe loss which could be suffered by the writer of the contract(seller) is limitless. If during the period of the contract the marketperception of the seller (writer) changes or the market startsFmoving contrary to his expectations, he may, in his anxiety to caphis losses, take a reverse position. He would then put in an offeror accept an offer of a higher premium for the same option andthis in effect would result in his repurchasing the contract at a”higher rate/premium to avoid greater losses.

G

(Emphasis supplied)

21. Index - a stock market index is a measure of the relativevalue of a group of stocks in numerical terms. As the stocks within anindex change value, the index value changes. NIFTY 50 is an index onNational Stock Exchange which tracks the behaviour of 50 companiesHcovering different sectors of the Indian economy.

22. Trading in Index – an investor can trade even the entire stockmarket by buying index futures instead of buying individual securities.The advantages of trading in index futures are- the contracts are highlyliquid, the index futures provide higher leverage than any other stocks, itrequires comparatively low initial capital investment (only the premium),it has lower risk than buying and holding stocks, it is just as easy to tradethe short side as the long side, the trader needs to study only one indexinstead of several stocks and finally, the contracts are settled in cash inthe 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 tosynchronised trading. The concept of synchronised trading has beenexplained by SAT inKetan Parekhv. Securities and Exchange Boardof India2. To quote:

“20. …. “A synchronised trade is one where the buyer and sellerenter the quantity and price of the shares they wish to transact atsubstantially the same time. This could be done through the samebroker (termed a cross deal) or through two different brokers.Every buy and sell order has to match before the deal can gothrough. This matching may take place through the stock exchangemechanism or off market. When it matches through the stockexchange, it may or may not be a synchronised deal depending onthe time when the buy and sell orders are placed. …”

Facts:

24. As mentioned before, this case involves three traders andthree brokers.

Traders:

Rakhi Trading: Rakhi Trading was issued a show cause notice(hereinafter referred to as “SCN”) on 05.10.2007 alleging execution ofnon genuine transactions in the Futures and Options segment (hereinafterreferred to as the “F&O segment”). The trades in question pertain toNIFTY options. In his decision, the A.O. analysed the trade logs andobserved that the trades executed by Rakhi Trading matched with thecounter-party Kasam Holding Private Limited in a few seconds. The 1This information has been extracted from the NSE Handbook on Derivatives Trading.

2Appeal No. 2 of 2004 before SAT.

AB

C

D

E

F

G

H

Acounter-party to all the trades in the NIFTY contract was Kasam HoldingPvt. Ltd. and the reversals took place in a matter of minutes/hours. TheA.O. also noted that on various occasions, when the time was notmatched by the respective parties, the first order was placed at anunattractive price relative to market price. These transactions took placeon 21.03.2007, 22.03.2007. 23.03.2007 and 30.03.2007 and resulted in aBclose out difference of Rs 115.79 lakhs without any significant change inthe value of the underlying.

Tungarli: The SCN was issued to Tungarli on 05.10.2007. Theallegation in the SCN was that through these synchronized transactions,one party booked profits and the other party booked losses. The tradesCpertained to future scrips. The A.O.’s order notes that the trades werereversed in all the cases in a matter of few seconds showing significantdifference between the buy and sell trade prices. The change in positionstook place without any significant change/negligible change in the priceof the underlying security. The trades took place on 12.03.2007,D15.03.2007, 23.03.2007, 26.03.2007 and 28.03.2007 and the total profitmade by Tungarli was Rs 64.52 lakhs.

TLB: The SCN was issued to TLB on 05.10.2007. The tradespertained to future scrips. As per the A.O.’s order, TLB traded throughstock broker SMC Global Securities Ltd and the same broker is theEcounter party broker as well, trading on behalf of different clients. Allthe transactions undertaken by TLB resulted in loss to TLB and the totalloss 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. TheA.O.’s order notes that in many cases, the trades were reversed in amatter of minutes showing significant difference in prices without anyFsignificant change in value of the underlying. The A.O.’s order notesthat during investigation, it was also seen that when the time was notmatched by the respective parties, the first order that was placed was atan unattractive price relative to the market price.

Brokers:

G

Indiabulls: The case pertains to 23 reverse trades in 21 futuresand 2 options on 22 different scrips and one Bank Nifty futures. TheA.O. takes into account the fact, that in many cases, the reversals tookplace in a matter of seconds/minutes without change in the value of theunderlying. The A.O. records that the Indiabulls representative statedH

that they could not have known about the intention of the clients, however,the representative admitted that the trades were non-genuine and shouldnot have taken place.

Angel: In the SCN dated 05.10.2007, the charge is that as astock-broker, it executed 56 reversal trades. As per the A.O., thesetrades were reversed in a matter of a few minutes/ hours. However, theA.O. noted the positive steps taken by Angel in curbing such trades(post reversal trades) and submitted proof of its actions in this regardand therefore, a lesser penalty was imposed on Angel.

Prashant Jayantilal:The SCN was dated 05.10.2007. The casepertains to 19 reversal trades wherein the original trades were closedout during the day at a price which was significantly above or below theprice at which the first/original transaction was executed.

25. The crux of the allegations in the show cause notices is thatthe parties were buying and selling securities in the derivatives segmentat a price which did not reflect the value of the underlying in synchronisedand reverse transactions.

26. After affording an opportunity for filing reply to the SCNs anda personal hearing, the A.O. passed a detailed order dated 26.03.2009 inthe case of Rakhi Trading. Paragraphs 22 to 24 read as follows:

“22. If the individual trades are seen from the order log providedto the noticee, it is seen that the time difference between the buyand sell order is only in seconds. Most of the orders were matchedin a time gap of 1, 2 or 3 seconds and many orders have matchedto the exact second, i.e. time difference is 0 (zero). This is proofenough to establish the existence of synchronization of trades;otherwise the trades would not have matched repeatedly to theexact second in the NIFTY Contracts which is the most activecontract in the options segment. Hence it overrides the noticee’ssubmission that no material or data has been disclosed tosubstantiate the said allegation of “synchronization” of any trades.

23. On analysis of the reversal transactions undertaken by thenoticee, it is seen that the percentage to market gross is in therange of 30 percent to 50 percent in the 14 contracts executed bythe noticee. In two contracts of NIFTY, the percentage to marketgross reached 50 percent. This accounts for a significant A

B

C

D

E

F

G

H

A

Apercentage of trades on the concerned days and the traded valuewas Rs.95.75 lakhs for those two reversal trades. The tradequantities are also high. The total traded value is Rs.503.00 lakhin a matter of just 4 (four) trading days. As submitted by thenoticee, NIFTY moves constantly. Also, NIFTY is the mostactive of the options contracts traded on the exchange and it hasBcontributed to 92.21 percent of the contracts traded in theOptions segment during March 2007. Further, the NIFTY optionscontracts contributed to 99.97 percent of the total Index Optionscontracts traded in March 2007 (source: NSE website). In such ascenario it is seen that the noticee’s counter party to all the tradesCin NIFTY contracts is Kasam Holding Pvt. Ltd. (trading throughthe broker Vibrant Securities Private Limited), this clearly givesan indication to the existence of a pre-arrangement/synchronization / matched trades between the clients. Otherwiseit does seem unrealistic that the orders should match exactly bothquantity and price wise, just as a matter of coincidence, with theDsame party again and again. It is clear that there was an intentionof creating a false or misleading appearance in the market andalso that a manipulative /deceptive device was used forsynchronization of trades.

24. The trades executed by the noticee in all NIFTY contracts,Ematched with the counter party client, Kasam Holding Pvt. Ltd.in less than a few seconds. It is pertinent to note here that thenoticee executed all the reversal trades in a matter of minutes/hours, at a profit of Rs.107.79 lakh without any significant changein the value of the underlying security. This raises doubts aboutthe genuineness of the transactions. The fact that such transac-Ftions took place repeatedly over a period of time reinstates thefraudulent nature of such trades.”

Thus, according to the A.O. a manipulative/deceptive devise wasused for synchronization of trades and the trades werefraudulent/fictitious in nature. It was found that there is violation ofGRegulations 3(a), (b) and (c) and 4(1), (2)(a) and (b) of the PFUTPRegulations, 2003. Consequently, a penalty of Rs.1,08,00,000/- wasimposed under Section 15HA of the SEBI Act, 1992. Appeal was filedunder Section 15T before the SAT. An appeal was disposed of by orderdated 11.10.2010 whereby SAT set aside the order of SEBI. Thedetailed consideration is available at paragraphs 5 to 8 of the SAT orderHin Rakhi Trading, which read as follows:

“5. Index in a capital market is a statistical indicator of how themarket is functioning and acts as a barometer for market behaviour.It is not a product but a measure expressed in numbers and abenchmark against which financial or economic performance isevaluated. Unlike stocks in the cash segment, it is not traded assuch though investors speculate on market behaviour using indexas the underlying in the F & O segment. Nifty, the stock index ofNSE, is computed using market capitalization weighted method(share price x number of outstanding shares) of fifty stocks beingtraded in the cash segment of NSE. It is a well diversified stockindex covering 22 different sectors of the Indian economy. Theeligibility of a particular stock for being selected for Nifty indexdepends on the liquidity of the stock as well as the floating stockof the company. Nifty, therefore, is a very dynamic index which isnot constant but evolves continuously. Obviously, to manipulatesuch a diverse and changing portfolio of stocks in the cashsegment is extremely difficult, if not impossible by trading in theF & O segment. It is also NSE’s stated position on its websitethat “stock index is difficult to manipulate as compared to stockprices, more so in India and the possibility of cornering is reduced.This is partly because an individual stock has a limited supplywhich can be cornered”. It is obvious that when Nifty is traded inoptions contracts, the movement of prices in that segment cannothave any impact on the price discovery system in the cashsegment which is one of the allegations brought out in thead-interim ex-parte order and the show cause notice. The chargeagainst the appellant in the show cause notice is that by executingtrades in Nifty options in the F & O segment “the original tradeswere closed out during the day at a price which was significantlyabove or below the price at which the first/original transactionwas executed without significant variations in the traded price ofthe underlying security”. The insinuation is that by executingmanipulative trades in the F & O segment, Nifty index was soughtto be tampered with. This charge proceeds on the assumptionthat the movement of Nifty options in the F & O segment shouldbe in harmony with the movement of Nifty index in the cashsegment. This assumption is fallacious and we cannot agree.Movement of index in the cash segment does influence the index ABC

D

EF

G

H

A

B

C

D

E

F

G

H

ABC

D

EF

G

H

A

B

C

D

E

F

G

H

options in the F & O segment because the strike rate is directlylinked with the index value in the cash segment. However, theconverse is not always true. While transactions in the cashmarket are based on the current market price of the underlyingderived by the principle of demand and supply and in the case ofan index, the value depends on the performance of the stocks thatconstitute it, the pricing in the F & O segment is based on futureexpected events which may or may not happen. Anticipatedfuture events may not have a discernible effect on the cashsegment today where delivery of shares is given/taken i mmediately.Such events may have a great impact on perceptions in the F &O market where the investor holds an open position and acontinuous liability during the currency of the contract which isgenerally for one to three months with anticipation of future eventswhich are always pregnant with all sorts of possibilities. Again,volatility and potential for greater losses may trigger movementsin the F & O market without any equivalent cash marketmovements. Further, the cash market may move up today but theprediction for the F & O market could be that at the end of amonth, two months or three months the market may move down.Only short term investors like speculators trade in the F & Omarket whereas in the cash market long terms investors also trade.We are, therefore, satisfied that the movement in the twosegments need not be in tandem. In the instant case the appellantexecuted Nifty option contracts and it must be remembered thatNifty index is determined by fifty highly liquid scrips which alsovary from time to time and the index moves on the basis of theirperformance in the cash segment. These movements cannot bein tandem with the movement of the price of Nifty options in theF & O segment because Nifty as an index is not capable of beingtraded in the cash segment. What is traded in the cash segmentare the fifty stocks which constitute Nifty. To say that somemanipulative trades in Nifty options in the F & O segment couldinfluence the Nifty index is too farfetched to be accepted. Theonly way Nifty index could be influenced is through manipulationof the prices of all or majority of the scrips in the cash segmentthat 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 thesetrades were manipulative, could these ever influence the Niftyindex. As already observed, Nifty index is a very large welldiversified portfolio of stocks which is not capable of beinginfluenced much less manipulated by the movement of prices inthe F & O segment particularly by the handful of trades executedby the appellant. In this view of the matter, we have no hesitationto hold that the 13 trades in Nifty options executed by theappellant had no impact on the market or affected the investors inany 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 Niftyoptions were fictitious transactions which were synchronized andreversed resulting in the creation of misleading appearance oftrading in those options. Derivative segment is highly volatile andinvolves a complexed form of trading with high risks and theplayers in this segment do not follow the herd mentality as isoften noticed in the cash segment but take decisions based ontheir own perception of the market. The number of persons tradingin this segment is comparatively much less than those in the cashsegment. The Board has found that only 14 contracts executedby the appellant in the options segment constituted 30 to 50 percent of the market gross in that segment though nifty is the mostactive of the options contracts traded on the exchange andcontributed 92.21 per cent of the trades during March, 2007. Thisis indicative of the fact that the number of players in the optionssegment is very less. Artificial/fictitious trades in the cash segmentdo give a false appearance of active trading in a particular scrip byincreasing volumes which tend tolurethelayinvestorstoinvestinthatscrip.Theimpressiongiventotheinvestorsis that the scrip ishighly liquid and much in demand and this interferes with the pricediscovery mechanism of the exchange and it is for this reasonthat such trades are held illegal in the cash segment. This, however,cannot be the case in the F & O segment. Since all the trades areexecuted through the stock exchange and settled in cash throughits mechanism they cannot be said to be artificial trades creatinga misleading appearance of trading in the options. The charge ismisconceived.

AB

C

D

E

F

G

H

A

A7. This brings us to the issue of synchronization of the buy andsell orders in the Nifty option contracts executed by the appellantwhere the counter party in the 13 impugned transactions was thesame entity. Impugned order records that Nifty contracts whichare the most active contracts in the options segment cannot betraded in the way the appellant has traded matching its orders toBseconds with the counter party client. This, according to theadjudicating officer, was a pre-planned arrangement between theappellant and its counter party and their intention was to create afalse and misleading appearance in the market and a manipula-tive device was used for synchronizing the trades. The learnedCsenior 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 thesynchronized trades which manipulate the market are prohibited.He placed reliance on a judgment of this Tribunal in Ketan Parekhvs. Securities and Exchange Board of India, Appeal No.2 of 2004Ddecided on 14.7.2006.He also referred to the order passed by theBoard in the case of ICICI Brokerage Services Ltd. wherein asimilar view had been taken and strenuously argued that since thesynchronized trades of the appellant did not manipulate themarket, the impugned order deserves to be set aside. We findEmerit in this contention. The fact that the trades executed by theappellant had been synchronized with the counter party is notreally in dispute before us. We have already held that the 13 tradesin Nifty options executed by the appellant had no impact on themarket or affected the investors or the Nifty index in any manner.In Ketan Parekh’s case (supra) this Tribunal had observed thatFsynchronized trades per se are not illegal but only those whichmanipulate the market in any manner are the ones that areprohibited and violate the Regulations. Relying upon theobservations made by this Tribunal in Nirmal Bang SecuritiesPvt. Ltd. vs. Securities and Exchange Board of India [2004] 49GSCL 421, the then chairman of the Board while dealing with thesynchronized trades executed by the appellant therein observedas under:- “For the above reason, although it cannot be said thatsynchronized deals are pre se illegal, for the same reason, it H

cannot be said that all synchronized transactions are legal andpermitted. All synchronized transactions which have the ef-fect of manipulating the market are against fair market prac-tices and hence undesirable and prohibited.”

We have reproduced the observations from the order of the Boardonly to highlight that the Board also understands that the law isthat only such synchronized trades violate the Regulations whichmanipulate the market. Since the impugned trades of the appellantin the F & O segment had no impact on the market, we hold thatthey did not violate the Regulations. Shri Kumar Desai learnedcounsel for the respondent was equally emphatic in arguing thatthe appellant had not only executed synchronized trades but hadalso reversed them during the course of the trading with the same-counter party and, therefore, the trades were fictitious and nongenuine and that the adjudicating officer was justified in holdingso and imposing the monetary penalty for violating theRegulations. He placed strong reliance on the observations of theTribunal in Ketan Parekh’s case (supra) wherein it has been heldthat reversal of trades between the same parties results in fictitioustrades and they are illegal.We are unable to agree with him. Theobservations in Ketan Parekh’s case were made with referenceto the trades that were executed in the cash segment and we areclearly of the view that all those observations cannot apply to thetrades executed in the F & O segment. Reverse trades in thecash segment have been held to be illegal and violate theRegulations because there is no “change of beneficial owner-”ship in the traded scrip. Moreover, in the cash segment the scripis actually traded entailing not only “change of beneficialownership” but also physical delivery/movement of the traded scrip.When this does not happen in the cash segment, the trade isdescribed as a fictitious trade creating false volumeswhich manipulates the market. The scenario in the F & O segment,particularly in the options contracts with which we are concernedin the present case, is altogether different from that of the cashsegment. In the F & O segment there is no concept of “change ofbeneficial ownership” since what is traded in this segment arecontracts and not the underlying stock or index and it is onlythrough cash settlement that the trade is concluded and no A

B

C

D

E

F

G

H

Aphysical delivery of any asset is involved. In this view of the matter,synchronized and reversed trades in Nifty optionsin the F & Osegment can never manipulate the market which, in the presentcontext, means the value of the Nifty index in the cash segment.To repeat, we may again observe that it is almost impossible tomanipulate the Nifty index which consists of fifty well diversifiedBhighly liquid stocks in the cash segment.Since the trades of theappellant were settled in cash through the stock exchangemechanism, they were genuine and these could not create a falseor misleading appearance of trading in the F & O segment. It isthe Board’s own case that the appellant made profits in all theseCtransactions and the counter party suffered losses.

8. When we analyse the nature of the trades executed by theappellant, we find that it played in the derivative market neither as ahedger nor as a speculator and not even as an arbitrageur. The questionthat now arises is why did the appellant execute such trades with theDcounter party in which it continuously made profits and the other partybooked continuous losses. All these trades were transacted in March2007 at the end of the financial year 2006-07. It is obvious and, this factwas not seriously disputed by the learned senior counsel appearing forthe appellant, that the impugned trades were executed for the purposeof tax planning. The arrangement between the parties was that profitsEand losses would be booked by each of them for effective tax planningto ease the burden of tax liability and it is for this reason that theysynchronized the trades and reversed them. They have played in themarket without violating any rule of the game. This Tribunal in ViramInvestment Pvt. Ltd. vs. Securities and Exchange Board of India,FAppeal no.160 of 2004 decided on February 11, 2005 while dealing witha contention as to whether trades could be executed through the stockexchange for tax planning, made the following observations which arerelevant for our purpose:- “Even if we consider transactions undertaken for tax planningGas being non genuine trades, such trades in order to be heldobjectionable, must result in influencing the market one way orthe other. We do not find any evidence of that either in theinvestigation conducted by the Bombay Stock Exchange, copyof which has been annexed to the memorandum of appeal orin the impugned order that there was any manipulation. ………H

Trading in securities can take place for any number of reasonsand the authorities enquire into such transactions whichartificially influence the market and induce the investors tobuy or sell on the basis of such artificial transactions.”

The observations even though made in the context of the cashsegment are equally applicable to the F & O segment. We are inagreement with the aforesaid observations and relying thereonwe hold that the impugned transactions in the case before us donot become illegal merely because they were executed for taxplanning as they did not influence the market. The learnedcounsel for the respondent Board drew our attention toRegulation 3(a), (b) & (c) and Regulation 4(1) and 4(2)(a) & (b)of the Regulations to contend that the trades of the appellant werein violation of these provisions. We cannot agree with him.Regulation 3 of the Regulations prohibits a person from buying,selling or otherwise dealing in securities in a fraudulent manner orusing or employing in connection with purchase or sale of anysecurity any manipulative or deceptive device in contravention ofthe Act, Rules or Regulations. Similarly, Regulation 4 prohibitspersons from indulging in fraudulent or any unfair trade practicesin securities which include creation of false or misleadingappearance of trading in the securities market or dealing in asecurity not intended to effect transfer of beneficial ownership.Having carefully considered these provisions, we are of the viewthat market manipulation of whatever kind, must be in evidencebefore any charge of violating these Regulations could be upheld.We see no trace of any such evidence in the instant case. Wehave, therefore, no hesitation in holding that the charge againstthe appellant for violating Regulations 3 and 4 must also fail.”

(Emphasis Supplied)

27. The SAT has also taken a view that the circular dated10.03.2005 issued by the NSE was not legally binding. The memberswere 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 differencesin premiums that had no relevance to the movement in prices of theunderlying. In the said circular, members were also advised to desistfrom entering such orders which prima facie appeared to be A

B

C

D

E

F

G

H

A

B

C

D

E

F

G

H

Anon-genuine and further advised to put in appropriate internal systemsfor checking such orders. SAT held that only SEBI-the Regulator canissue and should issue such directions.

28. SAT, in the case of Tungarli, squarely followed its decision inRakhi Trading. In TLB Securities also, after briefly discussing the facts,BSAT relied on Rakhi Trading to set aside the SEBI order.

29. As far as the brokers are concerned, in addition to relying onits decision in Rakhi Trading, SAT held in Indiabulls Securities that thebrokers must succeed for two additional reasons. To quote:

“7. The appellant before us which is a stock broker must alsoCsucceed for two additional reasons as well. The appellant is saidto have executed 23 trades on behalf of its clients which werereversed between the same parties. Assuming that these tradeswere manipulative and had been executed by the clients with apremeditated plan, the fact still remains that the appellant onlyacted as a broker and carried out the directions of its clients whichDit ought to. Could the appellant be held liable merely because itacted as a broker? This question has come up for the considerationof this Tribunal time and again and this is what was held in KasatSecurities Pvt. Ltd. vs. Securities and Exchange Board of India,Appeal No. 27 of 2006 decided on June 20, 2006 wherein thisETribunal observed as under:- C

D

“The trades, on the face of it, appear to be fictitious and weshall proceed on that assumption. It is obvious that these tradeswere executed by the clients and the appellant acted only as abroker. If the appellant knew that the trades were fictitiousthen there would be no hesitation in upholding the finding ofthe Board that it aided and abetted the parties to executefraudulent transactions. Having heard the learned counsel forthe parties and after going through the record we are satisfiedthat this link is missing. There is no material on record to showthat the appellant as a broker knew that the trades were fictitiousor that the buyer and the seller were the same persons. Tradingwas through the exchange mechanism and was online wherethe code number of the broker alone is known and the learnedcounsel for the parties are agreed that it is not possible foranyone to ascertain from the screen as to who the clients were.

F

G

H

This is really a unique feature of the stock exchange where,unlike other moveable properties, securities are bought andsold between the unknowns through the exchange mechanismwithout the buyer or the seller ever getting to meet. Thereforeit was not possible for the broker to know who the partieswere. Merely because the appellant acted as a broker cannotlead us to the conclusion that it must have known about thenature of the transaction. There has to be some other materialon the record to prove this fact. The Board could have examinedsomeone from KIL to find out whether the appellant knewabout the nature of the transactions but it did not do so. As abroker, the appellant would welcome any person who comesto buy or sell shares. The Board in the impugned order whiledrawing an inference that the appellant must have known aboutthe nature of the transactions has observed that the appellantfailed to enquire from its clients as to why they were wantingto sell the securities. We do not think that any broker wouldask such a question from its clients when he is getting businessnor is such a question relevant unless, of course, he suspectssome wrong doing for which there has to be some material onthe record.”

In Kishor R. Ajmera vs. Securities and Exchange Board of India,Appeal No. 13 of 2007 decided on February 5, 2008 this Tribunalagain observed as under:-

“Merely because two clients have executed matched trades, itdoes not follow that their brokers were necessarily a party tothe game plan. On a screen based trading through the priceorder matching mechanism of the exchange, it is not possiblefor either of the brokers (or sub-brokers) to know who thecounter party or his broker (or sub broker) is and when thetrade is executed, their names or codes do not appear on thescreen. A unique feature of the stock exchange is that, unlikeother moveable properties, securities are bought and sold amongthe unknowns who never get to meet and they are traded atprices determined by the forces of demand and supply. If theBoard is to hold the broker (or the sub-broker) responsible fora matching trade, it has to allege and establish that the broker(or the sub-broker) was aware of the counter party or his broker A

B

C

D

E

F

G

H

A

B

C

D

E

F

G

H

at the time when the trade was executed. There is no suchallegation in this case.”

The aforesaid observations apply with full force to the facts ofthe present case because the trading system is the same, both inthe cash segment as well as in the F&O segment. As alreadyobserved, even if we assume that the appellant’s clients hadexecuted reverse trades with the same counter party for somemischief, we cannot impute knowledge of the same to the appellantwhen the anonymity of the trading system does not allow a brokerto know who the counter party or counter party broker is. Thescreen based trading system provides complete anonymity andthe trades are executed through the price order matchingmechanism. In the instant case, no link other than broker clientrelationship between the appellant and its clients has beenestablished, let alone any relation with the counter parties or thecounter party brokers. Moreover, the appellant executed only 23trades on behalf of 15 clients with a total close out difference ofRs. 35.44 lacs (positive) which have been called in question. Havingregard to the fact that the appellant had executed 1,69,71,078trades for 1,21,306 clients with a turnover of Rs. 1,11,659 croresduring the investigation period we are of the view that in terms ofmateriality and substance this miniscule number of trades doneon behalf of 15 clients were not likely to raise any alarm for theappellant with a client base of over 4,70,000 clients. In thesecircumstances, we cannot hold the appellant liable for the impugnedtrades.

8. The other additional reason for which we cannot hold theappellant liable is that out of the 23 impugned trades that it executedon behalf of its clients, 17 were executed directly by the clientsthrough the Internet. NSE by its circular of August 24, 2000 hasset detailed guidelines on Internet based trading through orderrouting system which route client orders to the exchange tradingsystem and the software for this service has to be in compliancewith the parameters set by the Board. The appellant as a brokerhas very little direct control over such trades though it is recordedas a broker in those trades. Having regard to the total volume oftrades executed by the appellant and the wide client base that ithas, the learned counsel for the appellant was right in contending

that the appellant could not be expected to put every single tradeunder its scanner on a continuous basis particularly those executedby the clients through the Internet and that the impugned tradesbeing so miniscule, there was no occasion for the appellant to geta red alert. It is a fact that the clients had sufficient margins withthe appellant with no credit defaults at any stage and that all thetrades were settled in cash through the clearing system of theexchange. In this background, we find no evidence of lack of duediligence on the part of the appellant while executing the impugnedtransactions which could make him guilty of violating the code ofconduct prescribed for the stock brokers. The charge must,therefore, fail.”

30. Aggrieved by the SAT orders, SEBI is before us under Section15Z of the SEBI Act.

31. We have extensively heard learned senior counsel and othercounsel appearing on both sides. SEBI has assailed the SAT order onthe ground that SAT has misunderstood SEBI’s case. It is thesubmission of Mr. Gourab Banerji, learned Senior Counsel appearing forSEBI, that the stock exchange is a platform created to facilitate efficientand fair trading. However, the transactions between the parties werenon-genuine and orchestrated which is prohibited under the PFUTPRegulations. The Show Cause Notice makes it clear that the transactionswere a misuse of market mechanism as they were not genuine trades.The non-genuineness of these transactions is evident from the fact thatthere was no commercial basis to suddenly, within a matter of minutes,reverse a transaction when the value of the underlying had not undergoneany significant change.

32. According to SAT, the synchronization and reversal of tradeseffected by the parties with a significant price difference, some in a fewseconds and majority, in any case, on the same day had no impact on themarket and it has not affected the NIFTY index in any manner orinduced investors. SAT has held that such trades are illegal only whenthey manipulate the market in any manner and induce investors. It hasalso taken a view that there being no physical delivery of any asset,there is no change of beneficial ownership and what is traded in theF&O segment are only contracts and hence, such synchronised andreverse trades in NIFTY options in the F&O segment “can nevermanipulate the market”. It has also held that the trades being settled in A

B

C

D

E

F

G

H

Acash through a stock exchange mechanism, are genuine and thereforecannot create a false or misleading appearance of trading in the F&Osegment. Further, any trade to be objectionable must result ininfluencing the market one way or the other. SAT held that these tradeswere for the purpose of tax planning which is not violative of anyregulation. We are not inclined to get in to the issue of tax planning as itBwas not mentioned in the show cause notices.

33. We find it difficult to appreciate the stand taken by the SATwhich is endorsed by the learned senior counsel appearing for therespondents. Mr. Chidambaram, learned senior counsel appearing forRakhi Trading argues that the SAT decision is valid and proper. RelianceCis also placed on the case of Ketan Parekh(supra) in which SAT heldthat synchronised trades are not per se illegal. As far as reversal oftrades is concerned, the senior counsel has sought to distinguishKetanParekh(supra) as it pertained to dealings in the cash segment whereasthe present case deals with the F&O segment. The learned senior counselDhas strenuously argued that no rules of the game have been violated.

34. We are unable to agree with the arguments of the learnedsenior counsel appearing for Rakhi Trading. Regulation 4(1) in clear andunmistakable terms has provided that “no person shall indulge in afraudulent or an unfair trade practice in securities”. In Securities andEExchange Board of India and Ors.v. Shri Kanaiyalal BaldevbhaiPatel and Ors.3, it has been held by this Court that a trade practice isunfair if the conduct undermines the ethical standards and good faithdealings between the parties engaged in business transactions. To quote:

“31. Although unfair trade practice has not been defined underFthe regulation, various other legislations in India have defined theconcept of unfair trade practice in different contexts. A clear cutgeneralized definition of the ‘unfair trade practice’ may not bepossible to be culled out from the aforesaid definitions. Broadlytrade practice is unfair if the conduct undermines the ethicalstandards and good faith dealings between parties engaged inGbusiness transactions. It is to be noted that unfair trade practicesare not subject to a single definition; rather it requires adjudicationon case to case basis. Whether an act or practice is unfair is to bedetermined by all the facts and circumstances surrounding thetransaction. In the context of this regulation a trade practice may H32017 SCC Online SC 1148

be unfair, if the conduct undermines the good faith dealings involvedin the transaction. Moreover the concept of ‘unfairness’ appearsto be broader than and includes the concept of ‘deception’ or‘fraud’.

xxx xxxxxx

60. Coupled with the above, is the fact, the said conductcan also be construed to be an act of unfair tradepractice, which though not a defined expression, has to beunderstood comprehensively to include any act beyond a fairconduct of business including the business in sale and purchase ofsecurities.However the said question, as suggested by my learnedBrother, Ramana, J. is being kept open for a decision in a moreappropriate occasion as the resolution required presently can bemade irrespective of a decision on the said question.”

35. Having regard to the fact that the dealings in the stock exchangeare governed by the principles of fair play and transparency, one doesnot have to labour much on the meaning of unfair trade practices insecurities. Contextually and in simple words, it means a practice whichdoes not conform to the fair and transparent principles of trades in thestock market. In the instant case, one party booked gains and the otherparty booked a loss. Nobody intentionally trades for loss. An intentionaltrading for loss per se, is not a genuine dealing in securities. The platformof the stock exchange has been used for a non-genuine trade. Trading isalways with the aim to make profits. But if one party consistently makesloss and that too in preplanned and rapid reverse trades, it is not genuine;it is an unfair trade practice. Securities market, as the 1956 Act providesin the preamble, does not permit “undesirable transactions in securities”.The Act intends to prevent undesirable transactions in securities byregulating the business of dealing therein. Undesirable transactions wouldcertainly include unfair practices in trade. The SEBI Act, 1992 wasenacted to protect the interest of the investors in securities. Protectionof interest of investors should necessarily include prevention of misuseof the market. Orchestrated trades are a misuse of the marketmechanism. It is playing the market and it affects the market integrity.

36. Ordinarily, the trading would have taken place betweenanonymous parties and the price would have been determined by themarket forces of demand and supply. In the instant case, the parties didnot stop at synchronised trading. The facts go beyond that. The tradereversals in this case indicate that the parties did not intend to transfer A

BC

D

E

F

G

H

Abeneficial ownership and through these orchestrated transactions, theintention of which was not regular trading, other investors have beenexcluded from participating in these trades. The fact that when the tradewas not synchronizing, the traders placed it at unattractive prices is alsoa strong indication that the traders intended to play with the market.

B37. We also find it difficult to appreciate the stand of SAT that therationale of change of beneficial ownership does not arise in thederivatives segment. No doubt, as in the case of trade in a scrip in thecash segment, there is no physical delivery of the asset. However, evenin the derivative segment there is a change of rights in a contract. In theinstant case, through reverse trades, there was no genuine change ofCrights in the contract. SAT has erred in its understanding of change inbeneficial ownership in reverse trades. Even in derivatives, the ownershipof the right is restored to the first party when the reverse trade occurs.In this context, the discussion in Ketan Parekh(supra) assumessignificance:

D“20. …As already observed ‘synchronisation’ or a negotiated dealipso facto is not illegal. A synchronised transaction will, however,be illegal or violative of the Regulations if it is executed with aview to manipulate the market or if it results in circular trading oris dubious in nature and is executed with a view to avoid regulatorydetection or does not involve change of beneficial ownership or isEexecuted to create false volumes resulting in upsetting the marketequilibrium. Any transaction executed with the intention to defeatthe market mechanism whether negotiated or not would be illegal.Whether a transaction has been executed with the intention tomanipulate the market or defeat its mechanism will depend uponFthe intention of the parties which could be inferred from theattending circumstances because direct evidence in such casesmay not be available. The nature of the transaction executed, thefrequency with which such transactions are undertaken, the valueof the transactions, whether they involve circular trading andwhether there is real change of beneficial ownership, theGconditions then prevailing in the market are some of the factorswhich go to show the intention of the parties. This list of factors,in the very nature of things, cannot be exhaustive. Any one factormay or may not be decisive and it is from the cumulative effect ofthese that an inference will have to be drawn.”

(Emphasis Supplied)

H

From the facts before us, it is clear that the traders in question didnot intend to transfer beneficial ownership and therefore these tradesare non genuine.

38. Rather than allowing the market forces to operate in theirnatural course, the traders repeatedly carried out the impugnedtransactions which deprived other market players from full participation.The repeated reversals and predetermined arrangement to book profitsand losses respectively, made it clear that the parties were not trading inthe normal sense and ordinary course. Resultantly, there has clearlybeen a restriction on the free and fair operation of market forces in theinstant 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 tobe true is fraud. Under Regulation 2(1)(c)(7), a deceptive behaviour ofone depriving another of informed consent or full participation is fraud.And under Regulation 2(1)(c)(8), a false statement without anyreasonable ground for believing it to be true is also fraud. In asynchronised and reverse dealing in securities, with predeterminedarrangement to book loss or gain between pre-arranged parties, all thesevices are attracted.

40. Regulation 3(a) expressly prohibits buying, selling or otherwisedealing in securities in a fraudulent manner. Under Regulation 4(2) dealingin securities shall be deemed to be fraudulent if the trader indulges in anact which creates a false or misleading appearance of trading in thesecurities market. It is a deeming provision. Such trading also involvesan act amounting to manipulation of the price of the security in the sensethat the price has been artificially and apparently prefixed. The pricedoes not at all reflect the value of the underlying asset. It is also atransaction in securities entered into without any intention of performingit and without any intention of effecting a change of ownership of suchsecurities, ownership being understood in the limited sense of the rightsin the contract.

41. According to SAT, only if there is market impact on accountof sham transactions, could there be violation of the PFUTP Regulations.We find it extremely difficult to agree with the proposition. As alreadynoted above, SAT has missed the crucial factors affecting the marketintegrity, which may be direct or indirect. The stock market is not a AB

C

D

E

F

G

H

Aplatform for any fraudulent or unfair trade practice. The field is open toall the investors. By synchronization and rapid reverse trade, as hasbeen carried out by the traders in the instant case, the price discoverysystem itself is affected. Except the parties who have pre-fixed theprice nobody is in the position to participate in the trade. It also has anadverse impact on the fairness, integrity and transparency of the stockBmarket.

42. We are fortified in our conclusion by the judgment of thisCourt in Securities And Exchange Board of Indiav. Kishore R.Ajmera4, though it is a case pertaining to brokers, wherein it has beenheld at paragraph 25:C

“25. The SEBI Act and the Regulations framed thereunder areintended to protect the interests of investors in the Securities Marketwhich has seen substantial growth in tune with the paralleldevelopments in the economy. Investors’ confidence in thecapital/securities market is a reflection of the effectiveness of theDregulatory mechanism in force. All such measures are intendedto pre-empt manipulative trading and check all kinds ofimpermissible conduct in order to boost the investors’ confidencein the capital market. The primary purpose of the statutoryenactments is to provide an environment conducive to increasedEparticipation and investment in the securities market which is vitalto the growth and development of the economy. The provisions ofthe SEBI Act and the Regulations will, therefore, have to beunderstood and interpreted in the above light.”

In this case it was also held that in the absence of direct proof ofFmeeting of minds elsewhere in synchronised transactions, the test shouldbe one of preponderance of probabilities as far as adjudication of civilliability arising out of the violation of the Act or the provision of theRegulations is concerned. To quote:

“31. The conclusion has to be gathered from various circumstancesGlike that volume of the trade effected; the period of persistence intrading in the particular scrip; the particulars of the buy and sellorders, namely, the volume thereof; the proximity of time betweenthe two and such other relevant factors…”

We do not think that those illustrations are exhaustive. There canbe several such situations, some of which we have discussedhereinabove.

43. The traders thus having engaged in a fraudulent and unfairtrade practice while dealing in securities, are hence liable to beproceeded against for violation of Regulations 3(a), 4(1) and 4(2)(a) ofPFUTP Regulations. Appeal Nos.1969/2011, 3175/2011 and 3180/2011are hence allowed. The orders of the Securities Appellate Tribunal areset 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 thatthere is hardly any evidence on their involvement so as to proceed againstthem for violation of Regulation 7A of the Brokers Regulations andPFUTP Regulations. Merely because a broker facilitated a transaction,it cannot be said that there is violation of the Regulation. SEBI has notprovided any material to suggest negligence or connivance on the partof the brokers. As held by this Court in Kishore R. Ajmera (supra),there are several factors to be considered. We would especially like torefer to the case of Angel Trading wherein the broker repeatedly wroteto the National Stock Exchange informing them about trades in theoptions segment that were executed at unrealistic prices and requestingthem to put in mechanisms in the Options segment so that these tradesare not allowed to enter the system. In the absence of any materialprovided by SEBI to prove the charges against the brokers, particularlyregarding aiding and abetting fraudulent or unfair trade practices, weare of the opinion that the orders of SEBI against the brokers should beinterfered with. Accordingly, the appeals filed against the brokers aredismissed.

45. Before concluding, we would like to reiterate theobservations made by this Court in Kishore R. Ajmera(supra) andKanaiyalal Patel(supra) regarding the need for a more comprehensivelegal 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 developsprinciples for good governance in the stock market which ensure freeand fair trading.

46. There shall be no order as to costs.

AB

C

D

E

F

G

H

AR. BANUMATHI, J. 1. I have gone through the judgmentproposed by His Lordship Justice Kurian Joseph. I am in agreementwith the conclusion arrived at by His Lordship. However, in view of theimportance of the issues involved, I prefer to give my own additionalreasonings also for my concurrence.

B

2. Since the issues involved in all the appeals are one and thesame, appeals filed by SEBI pertaining to the traders and the brokerswere heard together. For convenience and reference on facts, I havetaken up the appeal arising out of Rakhi Trading Pvt. Ltd. as the leadcase.

C

3. Brief facts of the case are that in 2007, SEBI had examinedthe nature of transactions occurring in the derivative segment of thecapital market. Upon examination of the trading data of the Future andOption Segment (herein after referred as “F & O Segment”) on theNSE for the period January to March, 2007, it was observed that theDbrokers at NSE were buying and selling almost equal quantities ofcontracts within the day. Moreover, it was noticed that such buy/sellorders were synchronized [Synchronized trade is one where buy andsell orders are placed simultaneously for the same volume]. In mostof the cases, the same quantity and in few cases, substantially the samequantity of the original trade was closed out during the day at a priceEwhich was significantly above or below the price at which the first/original transaction was executed without significant variations in thetraded price of the underlying security. After preliminary examinationinto the trading of F&O contracts, SEBI identified that certain entitiesincluding the respondent-Rakhi Trading operating in the derivative segmentFhad executed fictitious and non-genuine trades. Exercising its powersunder Section 19 read with Section 11B and 11D of the Securities andExchange Board of India Act, 1992, (for short ‘SEBI Act, 1992’) theWhole Time Member of the Board had passed an ex parte order directingthe respondent and other entities to cease and desist from indulging inthe violations till further orders as they were found indulging in non-Ggenuine transactions.

H

4. Meanwhile, in terms of provisions of Rule 4(1) of the Securitiesand Exchange Board of India Rules, 1995, the Board issued a showcause 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 periodof examination in the F & O Segment by enclosing a report showingfourteen Options Contracts executed by it in F & O Segment between21[st] March to 30[th] March, 2007 with a total close out difference (COD)of Rs. 1,15,79,312.15/- i.e. net profit of Rs. 115.79 lakhs, thereby violatingRegulations 3(a), 4(1) and 4(2)(a) of SEBI (Prohibition of Fraudulentand Unfair Trade Practices relating to Securities Market) Regulations,2003 (for short “PFUTP Regulations”). On the show cause notice, therespondent, inter alia, contended that the impugned transactions weregenuine trades, traded on the screen in anonymity in compliance withthe rules and regulations of the exchange for trading in Options Segmentand the said transactions in no manner undermined price discovery orinfluenced the market.

5. Upon consideration of the findings in the preliminary enquiryand submissions of the respondent, the Adjudicating Officer found thatmost of the trades i.e. buying and selling of contracts within a gap offew seconds between the same parties through same set of brokersmatched and found that it is unrealistic that the orders would matchexactly both the quantity and price and with the same party again andagain. The Adjudicating Officer further held that manipulative devicewas used for synchronization of trades and the trades were fraudulent/fictitious in nature. After referring to SAT’s judgment in Ketan Parekhv. SEBI (Appeal No. 2 of 2004) and other judgments, the AdjudicatingOfficer found that the respondent has executed synchronized/reversaltrades, in violation of PFUTP Regulations, 2003 and imposed a penaltyof Rs.1,08,00,000/- on the respondent in terms of the provisions of Section15HA 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 NIFTYis a large well diversified index of stocks which is not capable of beinginfluenced. SAT further held that the thirteen trades in the NIFTY optionsexecuted by the respondent had no impact on the market and thosetransactions did not influence the NIFTY index in any manner. SATheld that the impugned transactions do not become illegal merely becausethey 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

A

B

C

D

E

F

G

H

Aset aside the order of the Adjudicating Officer. Being aggrieved, SEBIhas preferred this statutory appeal under Section 15Z of SEBI Act, 1992.

B

RELEVANT PROVISIONS OF THE SEBI ACT AND THEREGULATIONS

7. Section 12-A contained in Chapter V-A of the SEBI Act, 1992deals with “Prohibition of manipulative and deceptive devices, insidertrading and substantial acquisition of securities or control” andreads as follows:

12A. Prohibition of manipulative and deceptive devices,Cinsider trading and substantial acquisition of securities orcontrol.—No person shall directly or indirectly—

(a) use or employ, in connection with the issue, purchase orsale of any securities listed or proposed to be listed on aDrecognised stock exchange, any manipulative or deceptivedevice or contrivance in contravention of the provisionsof this Act or the rules or the regulations made thereunder; (b) employ any device, scheme or artifice to defraud inconnection with issue or dealing in securities which areElisted or proposed to be listed on a recognised stockexchange;

(c) engage in any act, practice, course of business whichoperates or would operate as fraud or deceit upon anyperson, in connection with the issue, dealing in securitiesFwhich are listed or proposed to be listed on a recognisedstock exchange, in contravention of the provisions of thisAct or the rules or the regulations made thereunder; G

H

(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 whichis in contravention of the provisions of this Act or therules or the regulations made thereunder; (f) acquire control of any company or securities more thanthe percentage of equity share capital of a company whosesecurities are listed or proposed to be listed on a recognisedstock exchange in contravention of the regulations madeunder this Act.

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

30. Power to make regulations.- (1) The Board may, with theprevious approval of the Central Government by notification, makeregulations consistent with this Act and the rules made thereunderto carry out the purposes of this Act.

9. Section 15HA of the Act which deals with penalty for fraudulentand unfair trade practices, Section 15HB which deals with penalty forcontravention where no separate penalty has been provided and Section15J which lays down the factors to be taken into account while adjudgingthe quantum of penalty read as follows:

15HA. Penalty for fraudulent and unfair trade practices.—If any person indulges in fraudulent and unfair trade practicesrelating to securities he shall be liable to a penalty of twenty-fivecrore rupees or three times the amount of profits made out ofsuch practices, whichever is higher.

15HB. Penalty for contravention where no separate penaltyhas been provided.- Whoever fails to comply with any provisionof this Act, the rules or the regulations made or directions issuedby the Board thereunder for which no separate penalty has beenprovided, shall be liable to a penalty which may extend to onecrore rupees.

15J. Factors to be taken into account by the adjudicatingofficer.—While adjudging the quantum of penalty under Section15-I, the adjudicating officer shall have due regard to the followingfactors, namely—

(a) the amount of disproportionate gain or unfair advantage,wherever quantifiable, made as a result of the default; A

B

C

D

E

F

G

H

A(b) the amount of loss caused to an investor or group ofinvestors 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 theBPFUTP Regulations, 2003, SEBI (Stockbrokers and Sub-Brokers)Regulations, 1992 and the SEBI (Procedure for Holding Enquiry byEnquiry Officer and Imposing Penalty) Regulations, 2002. Regulation 3of the PFUTP Regulations, 2003 deals with “Prohibition of certaindealings in securities”. Regulation 4 deals with “Prohibition of”Cmanipulative, fraudulent and unfair trade practices. Regulation 2(1)(c) defines “fraud”. For relevant Capital Market Terms, I havemade reference to SEBI Act and K. Sekar’s Guide to SEBI, CapitalIssues, Debentures & Listing, Lexis Nexis fourth Edition 2017 andEconomics of Derivatives by Cambridge University Press by T.V.Somanathan and V. Anantha Nageswaran. To avoid repetition, I refrainDfrom referring to the explanation of the relevant Capital Market Terms.

11. Re-Contention: The impugned trades were normaltransactions traded on the system and not fictitious transactions:-Contention of the respondent is that the impugned trades were normaltransactions traded on the system maintaining complete anonymity andEthe trades were not illegal and the respondent has not violated theprovisions of SEBI Regulations. Respondent-Rakhi Trading Pvt. Ltd.contended that the trading was done on automated screen based tradingand it was not possible for them to know who the counter party was andtherefore, the synchronization of trade was a mere coincidence. PerFcontra, SEBI maintained that the respondent-Rakhi Trading and thecounter party-Kasam Holding Pvt. Ltd. had prior understanding and havethwarted the checks and balances of the trading system by executingnon-genuine transactions with ulterior purpose.

12. To appreciate the contentious issues raised by the parties, IGrefer to the impugned reversal trade transactions:

A

B

C

D

E

F

G

H

13. Synchronized Trading: As per the Oxford dictionary the word‘synchronize’ means “cause to occur at the same time; besimultaneous”. A synchronized trade is one where the buyer and sellerenter the quantity and price of the shares they wish to transact atsubstantially the same time. This could be done through the same broker(termed a cross deal) or through two different brokers. [Ketan Parekhv. SEBI, Manu/SB/0229/2006]

14. Synchronized trade is one wherein ‘buy and sell’ orders areplaced simultaneously for the same quantity and price they wish to transactat substantially the same time. Synchronized trades are not illegalprovided that they are executed on the screens of the exchange in theprice and order matching mechanism of the exchanges just like anyother normal trade. As per SEBI’s circular No.SMDRP/ POLICY/CIR-32/99 dated 14.09.1999, “All negotiated deals...... shall be executedonly on the screens of the exchanges in the price and order matchingmechanism of the exchanges just like any other normal trade.”. Inthe said circular, it was stated that “The above decision was taken asnegotiated deals avoid transparency requirements, do not contributeto price discovery and some investors do not have benefit of thebest possible price and militate against the basic concept of stockexchanges, which are meant to bring together a large number ofbuyers and sellers in an open manner.”. (Reference: https://www.sebi.gov.in/legal/circulars/sep-1999/negotiated-deals_18629. html)

15. In Ketan Parekh v. SEBI Manu/SB/0229/2006, the SecuritiesAppellate 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 commonlycalled synchronized deals. The word ‘synchronise’ according tothe Oxford dictionary means “cause to occur at the same time;be simultaneous”. A synchronized trade is one where the buyerand seller enter the quantity and price of the shares they wish totransact at substantially the same time. This could be done throughthe same broker (termed a cross deal) or through two differentbrokers. Every buy and sell order has to match before the dealcan go through. This matching may take place through the stockexchange mechanism or off market. When it matches throughthe stock exchange, it may or may not be a synchronized deal AB

C

D

E

F

G

H

A

Adepending on the time when the buy and sell orders are placed.There are deals which match off market i.e., the buyer and theseller agree on the price and quantity and execute the transactionoutside the market and then report the same to the exchange.These are also called negotiated transactions...... It has recentlyissued a circular requiring all bulk deals to be transacted throughBthe exchange even if the price and quantity are settled outside themarket. When such deals go through the exchange, they are boundto synchronise. It would, therefore, follow that a synchronizedtrade or a trade that matches off market is per se not illegal.Merely because a trade was crossed on the floor of the stockCexchange with the buyer and seller entering the price at whichthey intended to buy and sell respectively, the transaction doesnot become illegal. A synchronized transaction even on the tradingscreen between genuine parties who intend to transfer beneficialinterest in the trading stock and who undertake the transactiononly for that purpose and not for rigging the market is not illegalDand cannot violate the regulations....” [underlining added]

16. A synchronized transaction will become illegal or violative ofthe Regulations if it is executed with a view to manipulate the market orif it results in circular trading or is dubious in nature and with a view tomanipulate the price or volume of the scrip or with some ulterior purpose.EIn Ketan Parekh case, SAT held as under:

“..... A synchronized transaction will, however, be illegal or violativeof the Regulations if it is executed with a view to manipulate themarket or if it results in circular trading or is dubious in natureandis executed with a view to avoid regulatory detection or does notFinvolve change of beneficial ownership or is executed to createfalse volumes resulting in upsetting the market equilibrium. Anytransaction executed with the intention to defeat the marketmechanism whether negotiated or not would be illegal. Whethera transaction has been executed with the intention to manipulateGthe market or defeat its mechanism will depend upon the intentionof the parties which could be inferred from the attendingcircumstances because direct evidence in such cases may not beavailable. The nature of the transaction executed, the frequencywith which such transactions are undertaken, the value of thetransactions, whether they involve circular trading and whether H

there is real change of beneficial ownership, the conditions thenprevailing in the market are some of the factors which go to showthe intention of the parties. This list of factors, in the very natureof things, cannot be exhaustive. Any one factor may or may notbe decisive and it is from the cumulative effect of these that aninference 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 outby SAT in para (7) of its order, the respondent did not dispute the factthat “....trades had been synchronized and reversed....”. Therespondent only contended that the impugned “synchronized trade’ didnot manipulate the market and that what is prohibited are only thesynchronized trades and that the impugned trades were normaltransactions and the respondent had not violated the provisions of PFUTPRegulations. In the context of the stand taken by Rakhi Trading beforeSAT, it is now not open to respondent Rakhi Trading to contend that thetransactions 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 thatthe reversal trades were executed almost of the same quantity and thetrade was also within a short gap of few seconds with significant variationof the price, though, there was no major variation in the underlying priceduring that period. Upon examination of the trade transactions, it wasfurther observed that the respondent in the impugned transactions hadoperated through Prashant Jayantilal Patel as its broker and the counterparty Kasam Holding Pvt. Ltd., which executed those transactionsthrough Vibrant Securities Pvt. Ltd. as its broker. As pointed out in thetabular column, all reversed/closed out transactions were executed atprices with significant variation within a short period though there wasno major variation in the underlying price during that period.

19. For instance, let us refer to one of the impugned reversaltrades. 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 atTrade Price of Rs.270/-. Within a short gap of time, at 15:06:42, thesame NIFTY 50 (Trade Volume 10,000) (Strike Price 3930) was boughtby the respondent within three seconds at Trade Price of Rs.110/- andthe price difference of two legs of the trade being Rs.160/- with CODRs.16,00,000/-. The percentage of the gross of the trade on that day A

B

C

D

E

F

G

H

A

B

C

D

E

F

G

H

Awas 40.82%. As seen from the chart, the other reversal trade transactionswere also almost similar within a gap of few seconds, between ‘buy’and ‘sell’ order, with significant price variation, though no major pricevariation in the underlying price. During examination of thosetransactions, the Whole Time Member observed that the synchronizedtransactions had a definite objective of enabling one party (Rakhi TradingBPvt. Ltd.) to book profits and the other party (Kasam Holding Pvt. Ltd.)to book losses in the close out difference. Thirteen Options Contractsexecuted by respondent-Rakhi Trading in the F & O Segment betweenMarch 21 and March 30, 2007 with a total Close Out Difference (COD)of Rs.1,15,79,312.15 (Positive) showing a net profit of Rs.115.79 lakhsCto Rakhi Trading Pvt. Ltd. and loss to the counter party i.e. KasamHolding Pvt. Ltd.

20. The question whether there was fictitious transactions creatingillegal synchronization has to be gathered from the facts andcircumstances and intention of the parties. Acting in concert is somethingDabout which it is difficult to obtain direct evidence. Proof of manipulationmight depend upon inferences drawn from factual details. Suchinferences could be gathered from pattern of trading data and the natureof the transactions etc.

21. ‘By manipulation and synchronization’, it is meant that twoEparties have pre-meditated; as such a drastic movement in price withinfew seconds could have been only through prior understanding betweenthe parties concerned only to fulfill an unlawful objective through misuseof the stock exchange. That is, prior arrangement/prior understandingwith each other wherein one will make profit and other will lose andthereby as soon as one party opens up its trade in the market, the otherFparty will buy it. Though the trading is shown on the screen, but priorarrangement is very well possible behind the screen. This is what hasbeen done in the case in hand. Buy and sell orders were placed at adifference of few seconds/minutes, while ‘sell’ by respondent to KasamHolding at a high price and “buy” by the respondent from Kasam HoldingGPvt. Ltd. at a low price. The transactions wherein the ‘buy and sell’orders entered almost simultaneously and the transactions matched intime and quantity with significant price variation and respondentconsistently making profit but Kasam Holding Pvt. Ltd. consistentlymaking loss. Number of reversal trades between the respondent andKasam Holding Pvt. Ltd. and such reversal trade taking place repeatedlyHover a period of time only indicates that there was pre-arrangement between the parties before the trade was executed. The transactionsinvolving only the same two parties within few seconds with hugedifference in ‘buy and sell’ value, though there is no difference in theunderlying security, can take place only with prior understanding betweenthe two parties. The Board who is the regulator of the market, canalways lift the veil of such transactions to show the non-genuineness ofsuch transactions.

22. Buying and selling of equal quantities within the day may notbe wrong but the trades with ulterior purpose are not genuine for sure.In the present case, every time one party is making profit and otherparty is facing loss. Further, there was proximity in the time of sellorders at a high price to the party-Kasam Holding Pvt. Ltd. and thesame quantity being reversed by Kasam Holding Pvt. Ltd. to the sameparty-Rakhi Trading Pvt. Ltd. at a low price through the same set ofbrokers. As discussed earlier, during March, 2007 thirteen Nifty OptionContracts got matched between the same parties through the samebrokers. I fail to understand as to why Kasam Holding has made thetransactions repeatedly by incurring losses. It seems improbable thatKasam Holding which was facing loss in each transaction by tradingwith the respondent, was still eager to trade with the same repeatedlyfor about four days which is not in consonance with the market trendand human conduct; more so, when there has not been any majordifference in the underlying price. It is thus difficult to accept that severalsuch sell and buy orders between the respondent and Kasam Holdingbeing within a gap of “1”, “2” or “3” or few seconds were by merecoincidence. As contended by the appellant-SEBI, it was too much ofcoincidence that there were number of transactions of ‘buy and sellorders’ between the same parties with same quantity of stock withsignificant variation in price.

23. Insofar as synchronized trade involving same set of brokersand 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 casesi.e. Ess Ess Intermediaries (P) Ltd., Rajesh N. Jhaveri andRajendra Jayantilal Shah (second category) and MonarchNetworth Capital Ltd. (earlier known as Networth Stock BrokingLtd.) (third category). In these cases the volume of trading in theilliquid scrips in question was huge, the extent being set out AB

C

DEF

GH

A

hereinabove. Coupled with the aforesaid fact, what has beenalleged and reasonably established, is that buy and sell orders inrespect of the transactions were made within a span of 0 to 60seconds. While the said fact by itself i.e. proximity of time betweenthe buy and sell orders may not be conclusive in an isolated casesuch an event in a situation where there is a huge volume oftrading can reasonably point to some kind of a fraudulent/manipulative exercise with prior meeting of minds. Such meetingof minds so as to attract the liability of the broker/sub-broker maybe between the broker/sub-broker and the client or it could bebetween the two brokers/sub-brokers engaged in the buy and selltransactions. When over a period of time such transactions hadbeen made between the same set of brokers or a group of brokersa conclusion can be reasonably reached that there is a concertedeffort on the part of the brokers concerned to indulge insynchronized trades the consequence of which is large volumesof fictitious trading resulting in the unnatural rise in hiking theprice/value of the scrip(s). It must be specifically taken note ofherein that the trades in question were not “negotiated trades”executed in accordance with the terms of the Board’s circularsissued from time to time. A negotiated trade, it is clarified, invokesconsensual bargaining involving synchronising of buy and sell orderswhich will result in matching thereof but only as per permissibleparameters which are programmed accordingly.

B

C

D

E

B

C

D

E

30. It has been vehemently argued before us that on a screen-based trading the identity of the 2[nd] party be it the client or thebroker is not known to the first party/client or broker. AccordingFto us, knowledge of who the 2[nd ]party/client or the broker is, is notrelevant at all. While the screen-based trading system keeps theidentity of the parties anonymous it will be too naive to rest thefinal conclusions on said basis which overlooks a meeting of mindselsewhere. Direct proof of such meeting of minds elsewhere wouldrarely be forthcoming.The test, in our considered view, is one ofGpreponderance of probabilities so far as adjudication of civil liabilityarising out of violation of the Act or the provisions of theRegulations framed thereunder is concerned. Prosecution underSection 24 of the Act for violation of the provisions of any of theRegulations, of course, has to be on the basis of proof beyondreasonable doubt.

H

31. The conclusion has to be gathered from various circumstanceslike that volume of the trade effected; the period of persistence intrading in the particular scrip; the particulars of the buy and sellorders, namely, the volume thereof; the proximity of time betweenthe two and such other relevant factors. The fact that the brokerhimself has initiated the sale of a particular quantity of the scripon any particular day and at the end of the day approximatelyequal number of the same scrip has come back to him; that tradinghas gone on without settlement of accountsi.e. without anypayment and the volume of trading in the illiquid scrips, all, shouldraise a serious doubt in a reasonable man as to whether the tradesare genuine. The failure of the brokers/sub-brokers to alertthemselves to this minimum requirement and their persistence intrading in the particular scrip either over a long period of time orin respect of huge volumes thereof, in our considered view, wouldnot only disclose negligence and lack of due care and caution butwould also demonstrate a deliberate intention to indulge in tradingbeyond the forbidden limits thereby attracting the provisions ofthe 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 synchronizedtrading in that case was violative of norms of trading in securities andheld as under:- “249. BEB has been charged for synchronized deals with FirstGlobal. I have examined the data provided by the parties on thisissue. I find many transactions between BEB and FGSB. Thereare many instances of such transactions. I find the scrip, quantityand price for these orders had been synchronized by the counterparty brokers. Such transactions undoubtedly create an artificialmarket to mislead the genuine investors. Synchronized trading isviolative of all prudential and transparent norms of trading insecurities. Synchronized trading on a large scale, can create falsevolumes. The argument that the parties had no means of knowingwhether any entity controlled by the client is simultaneouslyentering any contra order elsewhere for the reason that in theonline trading system, confidentiality of counter parties is ensured,is untenable. It was submitted by the Appellants that it was not A

B

C

D

E

F

G

H

A

B

C

D

E

F

G

H

Apossible for the broker to know who the counter party broker isand that trades were not synchronized but it was only a coincidencein some cases. Theoretically this is OK. But when parties decideto synchronize the transaction the story is different. There aremany transactions giving an impression that these were allsynchronized, otherwise there was no possibility of such perfectBmatching of quantity price etc. As the Respondent rightly stated itis too much of a coincidence over too long a period in too manytransactions when both parties to the transaction had entered buyand sell orders for the same quantity of shares almostsimultaneously. The data furnished in the show cause noticeCcertainly goes to prove the synchronized nature of the transactionwhich is in violation of regulation 4 of the FUTP Regulations. Thefacts on record categorically establishes that BEB had indulgedin synchronized trading in violation of regulation 47 of the FUTPRegulations. In a synchronized trading intention is implicit.”

D25. In the quasi-judicial proceeding before SEBI, the standard ofproof is preponderance of probability. In a case of similar synchronizedtrading involving same set of brokers emphasizing that the standard ofproof is “preponderance of probability” in paras (26) and (27), in KishoreR. Ajmera case, this Court held as under:- E“26. It is a fundamental principle of law that proof of an allegationlevelled against a person may be in the form of direct substantiveevidence or, as in many cases, such proof may have to be inferredby a logical process of reasoning from the totality of the attendingfacts and circumstances surrounding the allegations/charges madeand levelled. While direct evidence is a more certain basis to comeFto a conclusion, yet, in the absence thereof the Courts cannot behelpless. It is the judicial duty to take note of the immediate andproximate facts and circumstances surrounding the events onwhich the charges/allegations are founded and to reach what wouldappear to the Court to be a reasonable conclusion therefrom. TheGtest would always be that what inferential process that areasonable/prudent man would adopt to arrive at a conclusion.”[underlining added]

26. There was no possibility of such perfect matching of quantity,timing, prices etc. between the same parties unless there was priorHmeeting of minds or a specific understanding/arrangement between the parties. After referring to Ketan Parekh and Nirmal Bang cases, inSEBI v. Accord Capital Markets Ltd. (MANU/SB/0136/2007), SEBIheld as under:- “4.12 I note that most of the synchronized trades executed by theBroker were perfectly matched with the counter party orderseven with respect of the price to the extent of two decimal points.The proximity in placing the orders at the same price and for thesame quantity almost at the same time (in majority of the cases)resulted in the matching of the aforesaid transactions, with all theingredients i.e. quantity, price and the time, required to concludethe trades. The time difference (between the buy and sell orders)of majority of the synchronized trades was very less with theprice and quantity matching. The said synchronization cannot takeplace in the absence of any specific understanding/arrangementbetween the clients at the first instance, especially when the sharesof the company were highly liquid at the time of the trades.

4.24 The proof of manipulation in the circumstances alwaysdepends on inferences drawn from a mass of factual details.Findings must be gathered from patterns of trading data and thenature of the transactions etc. Several circumstances of adeterminative character coupled with the inference arising fromthe conduct of the parties in a major market manipulation couldreasonably lead to conclusion that the Broker was responsible inthe manipulation. The evidence, direct or circumstantial, shouldbe sufficient to raise a presumption in its favour with regard to theexistence of a fact sought to be proved. As pointed out by Best in“Law of Evidence”, the presumption of innocence is no doubtpresumption juris; but everyday practice shows that it may besuccessfully encountered by the presumption of guilt arising fromcircumstances, though it may be a presumption of fact. Since it isexceedingly difficult to prove facts which are especially withinthe knowledge of parties concerned, the legal proof in suchcircumstances partakes the character of a prudent man’s estimateas to the probabilities of the case. Hon’ble Securities AppellateTribunal (SAT) has observed in the matter of Ketan Parekh v.SEBI:

A

BC

D

E

FG

H

998SUPREME COURT REPORTS

A

“...Whether a transaction has been executed with the intentionto manipulate the market or defeat its mechanism will dependupon the intention of the parties which could be inferred fromthe attending circumstances because direct evidence in suchcases may not be available....”

B4.25 Presumption plays a critical role in coming to a finding as tothe involvement or otherwise of a market participant in anymanipulation. For instance, while trading, a lip service can be paidto a screen based trading system while agreement is reachedbeforehand between brokers to effect the transaction. Anonymitycan be a cloak to cover anastomosis of interest. Therefore, theChackneyed plea based on intentions in the market place cannotpass muster in all circumstances, more so when such intentionsare in the special/peculiar knowledge of the parties to thetransactions. Also any suggestion attributing innocence to theparties involved in such transactions would give rise to an untenableDsituation where certain other third persons/entities alone wouldbe responsible for the manipulation and none else.”

27. Applying the test laid down in Kishore R. Ajmera case to thepresent case, I find that by cumulative analysis of the reversal transactionsbetween respondent and Kasam Holding, quantity, time and significantvariation of prices, without major variation in the underlying price of theEsecurities clearly indicate that the respondent’s trades are not genuineand had only misleading appearance of trading in the securities market,without intending to transfer beneficial ownership.

28. Contention of the appellant is that if the market starts movingor there is a change in the perception of the market and the anticipatedFfuture performance thereof, then the seller often gets very apprehensiveand may even panic, anticipating a substantial loss and would want tosquare 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 themarket of underlying shares had remained unmoved altogether, then thereGwas no question of getting panic. When there were no other transactionsin the market affecting the price of the underlying shares or F & OSegment and the price in both the segments had remained static, thenthere was no reasonable ground to get apprehensive and panic. Therefore,squaring off the position appears to adjust the financial results with aview to avoid the tax incidence through an unfair trade practice or forHsome ulterior purpose.

29. On behalf of respondent, learned senior counsel Mr. P.Chidambaram contended that securities like Nifty are vast pools andNifty has a dynamic index which evolves continuously and it is too difficultfor a manipulator to affect such prices. Further contention of therespondent is that whether the impugned trades are synchronized or nothad no impact on the market and the respondent cannot be held to haveviolated regulations.

30. On behalf of the respondent-Tungarli Tradeplace Pvt. Ltd.,Mr. Mehta learned counsel submitted that a person can be found tohave violated Regulations 3 and 4, he should have indulged in somefraudulent practice with an intention to manipulate the securities marketand has drawn our attention to Regulation 2(c) of the SEBI Regulations,2003 in which ‘fraud’ has been defined. Learned counsel submitted thatfor a person to be held liable for breach of the above mentionedRegulations, SEBI has to establish the following:- (i) that the party enteredinto 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 thatSAT had misconstrued the charge that the impugned synchronized tradeshad no effect of manipulating the Nifty index and SAT was not right inholding that only those synchronized transactions which have the effectof manipulating the market are undesirable and prohibited. It wascontended that it was never the case of SEBI that Nifty was beingmanipulated by the impugned trade executed by the respondent andfindings of SAT are not sustainable in law and would have seriousrepercussion on the market integrity.

32. The respondent has made the transactions repeatedly byincurring losses, particularly when there were no transactions made byany third party in the market. Abnormal difference between the pricesat which the trades were executed without corresponding effect on theprice of the underlying security, shows that the option in which the partytraded was not in demand in the market. It is unusual that the tradeswere transacted with such huge profits when there was no change inthe underlying prices. These trade transactions obviously only aimed atcarrying out manipulative objective.

33. Once the reversal transactions are shown to be non-genuineor shown to be fictitious creating a false or misleading appearance in themarket for ulterior purpose and that the stock market was misused by A

B

C

D

E

FG

H

Asuch manipulative device, this is in clear violation of the provisions ofPFUTP Regulations, 2003. Regulations 3(a), 4(1) and 4(2)(a) of PFUTPRegulations prohibit such manipulative trades, unfair trade practices.

34. SAT mainly proceeded that the impugned reversal tradetransactions had no impact on the market and it could have neverBinfluenced the Nifty. After extracting the show cause notice, SAT, interalia, recorded the findings:- (i) The insinuation is that by executingmanipulative trades in the F & O segment, Nifty was sought to betampered with; (ii) It is a common case of the parties that the appellant-Rakhi Trading traded only thirteen Nifty option contracts in the F & OSegment; assuming these trades were manipulative, they could haveCnever influenced the Nifty; Nifty which consists of fifty well diversifiedhighly liquid stocks in the cash segment is a very large well diversifiedindex of stocks which is not capable of being influenced much lessmanipulated by the movement of prices; and (iii) thirteen impugned tradesin Nifty options executed by the appellant had no impact on the marketDor affected the investors in any way nor did they influence the Nifty inany manner.

35. Regulation 3 deals with “Prohibition of certain dealings insecurities”. Regulation 4 deals with “Prohibition of manipulative,fraudulent and unfair trade practices”. Regulation 4 starts asE“Without prejudice to the provisions of Regulation 3.....”. Regulation4(2) is an inclusive provision. Regulation 4(2) stipulates that “Dealingin securities shall be deemed to be a fraudulent or an unfair tradepractice if it involves fraud and may include all or any of the.....”,instances pointed out thereon. Regulation 4(2)(a) deals with “.....an actwhich creates false or misleading appearance of trading in theFsecurities market”. An act to fall within Regulation 4(2)(a), it is notnecessary that the transactions entered into by the party was withintention to manipulate the market and that the market was in factmanipulated. Market manipulation is a deliberate attempt to interferewith the free and fair operation of the market and create artificial, falseGor misleading appearances with respect to the price, market, product,security and currency.

36. Respondent-Rakhi Trading and Kasam Holding on facts arefound to have been engaged in non-genuine transactions creatingappearance of trading. If the factum of manipulation is established, itHwill 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. Themarket, as already observed, is so widespread that it may not be humanlypossible for the Board to track the persons who were actually inducedto buy or sell securities as a result of manipulation and the Board cannotbe imposed with a burden which is impossible to be discharged.

37. In the context of 1995 Regulations, old Regulation 4(2)(a),SAT, observing that if the factum of manipulation is established, it willnecessarily follow that the investors in the market had been induced tobuy and sell and no further proof is required in this regard, in KetanParekh’s case (supra), held as under:- “12. ....The stock exchange is also a platform for the fair pricediscovery of a scrip based on the market forces of demand andsupply. Securities market is so wide spread and in a system ofscreen based trading various potential investors who track thescrips through the screens of the exchanges only see whether aparticular scrip is active or not, whether it is trading in large volumesand whether the price is going up or down. Having regard tothese factors he makes up his mind to invest or disinvest in thesecurities. When a person takes part in or enters into transactionsin securities with the intention to artificially raise or depress theprice he thereby automatically induces the innocent investors inthe market to buy/sell their stocks. The buyer or the seller isinvariably influenced by the price of the stocks and if that is beingmanipulated the person doing so is necessarily influencing thedecision of the buyer/seller thereby inducing him to buy or selldepending upon how the market has been manipulated....In otherwords, if the factum of manipulation is established it will necessarilyfollow that the investors in the market had been induced to buy orsell and that no further proof in this regard is required. The market,as already observed, is so wide spread that it may not be humanlypossible for the Board to track the persons who were actuallyinduced to buy or sell securities as a result of manipulation andlaw can never impose on the Board a burden which is impossibleto be discharged. This, in our view, clearly flows from the plainlanguage of Regulation 4 (a) of the Regulations.”

38. The smooth operation of the securities market and its healthygrowth and development depends upon large extent on the quality andintegrity of the market. Unfair trade practices affect the integrity and A

B

CDEF

G

H

Aefficiency of the securities market and the confidence of the investors.Prevention of market abuse and preservation of market integrity are thehallmark of securities law. In N. Narayanan v. Adjudicating Officer,Securities and Exchange Board of India (2013) 12 SCC 152, it washeld as under:- B“33. Prevention of market abuse and preservation of marketintegrity is the hallmark of securities law. Section 12-A read withRegulations 3 and 4 of the 2003 Regulations essentially intendedto preserve “market integrity” and to prevent “market abuse”.The object of the SEBI Act is to protect the interest of investorsin securities and to promote the development and to regulate theCsecurities market, so as to promote orderly, healthy growth ofsecurities market and to promote investors’ protection. Securitiesmarket is based on free and open access to information, theintegrity of the market is predicated on the quality and the manneron which it is made available to market. “Market abuse” impairsDeconomic growth and erodes investor’s confidence. Market abuserefers to the use of manipulative and deceptive devices, givingout incorrect or misleading information, so as to encourage investorsto jump into conclusions, on wrong premises, which is known tobe wrong to the abusers. The statutory provisions mentioned earlierdeal with the situations where a person, who deals in securities,Etakes advantage of the impact of an action, may be manipulative,on the anticipated impact on the market resulting in the “creationof artificiality”. The same can be achieved by inflating thecompany’s revenue, profits, security deposits and receivables,resulting in price rise of the scrip of the company. Investors arethen lured to make their “investment decisions” on thoseFmanipulated inflated results, using the above devices which willamount to market abuse.”

39. In an interview, Lawrence E. Harris, a former chief economistat the Securities and Exchange Commission and now a Finance Professorat the University of Southern California, has stated that the difficulty inGproving manipulation is probably an inherent feature of modern markets.“Because the markets are so complex”, he said, “.....It is relativelyeasy for traders engaged in manipulation to offer alternativeexplanations for their behaviour that would make it difficult tosuccessfully prosecute them”. Professor Harris nonetheless saidH“when presented with the data suggesting manipulation by firm proprietary traders, it is reasonable to expect that the S.E.C. wouldconsider investigation of the matter further”. The S.E.C. had nocomment 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 extentby the Departments of Economic Affairs and Company Affairs ofGovernment of India. Market manipulation can occur in a variety ofways. 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 ofthe investors in securities and to promote the development and to regulatethe securities market by such measures as it thinks fit. Main function ofSEBI in this regard is to make inquiry, investigation and to give directions,to promote the orderly and healthy growth of the securities market. Witha view to curb unfair trade practices, market manipulation, price riggingand other frauds in securities market, SEBI is empowered to makeinquiries and inspection.

41. Section 12A of the SEBI Act, 1992 read with Regulations 3and 4 of the PFUTP Regulations, 2003 are essentially intended to preserve‘market integrity’ and to prevent ‘market abuse’. The object of theSEBI Act is to protect the interest of the investors in securities and topromote the development and to regulate the securities market so as topromote orderly, healthy growth of securities market and to promoteinvestor’s protection. N. Narayanan case arose in connection withviolation of Section 12A of the SEBI Act as well as the relevant provisionsof PFUTP Regulations, 2003. In N. Narayanan’s case, it was foundthat the financial results of the company as disclosed to the stockexchanges were inflated and the manipulation in financial results of thecompany resulted in price rise of the scrip of the company and that theydid not represent the true state of affairs of the company and which hasenabled certain shareholders to raise financing of pledging of shares.The director of the company was restrained in dealing with the securitiesfor a period of two years and also monetary penalty was imposed on theappellant thereon which was affirmed by this Court. The Supreme Courtobserved that message should go that our country will not tolerate ‘marketabuse’ and that the securities market abuse and that fraud, deceitartificiality, have no place in the securities market of the country andheld as under:

A

B

C

D

E

F

G

H

A

“1. India’s capital market in the recent times has witnessedtremendous growth, characterised particularly by increasingparticipation of public. Investors’ confidence in the capital marketcan be sustained largely by ensuring investors’ protection.Disclosure and transparency are the two pillars on which marketintegrity rests. Facts of the case disclose how the investors’confidence has been eroded and how the market has been abusedfor personal gains and attainments.

B

.....

11. We would like to demonstrate on the facts of this case as wellas law on the point that “market abuse” has now become acommon practice in the Indian security market and, if not properlycurbed, the same would result in defeating the very object andpurpose of the SEBI Act which is intended to protect the interestsof investors in securities and to promote the development ofsecurities market. Capital market, as already stated, has witnessedtremendous growth in recent times, characterised particularly bythe increasing participation of the public. Investor’s confidence incapital market can be sustained largely by ensuring investors’protection.

C

D

.......

E

42. SEBI, the market regulator, has to deal sternly with companiesand their Directors indulging in manipulative and deceptive devices,insider trading, etc. or else they will be failing in their duty topromote orderly and healthy growth of the securities market.Economic offence, people of this country should know, is a seriousFcrime which, if not properly dealt with, as it should be, will affectnot only the country’s economic growth, but also slow the inflowof foreign investment by genuine investors and also cast a slur onIndia’s securities market. Message should go that our countrywill not tolerate “market abuse” and that we are governed by theG“rule of law”. Fraud, deceit, artificiality, SEBI should ensure, haveno place in the securities market of this country and “marketsecurity” is our motto. People with power and money and inmanagement of the companies, unfortunately often command morerespect in our society than the subscribers and investors in theircompanies. Companies are thriving with investors’ contributionsHbut they are a divided lot. SEBI has, therefore, a duty to protect H

investors, individual and collective, against opportunistic behaviourof Directors and insiders of the listed companies so as to safeguardmarket’s integrity.” [underlining added]

The Supreme Court has also emphasized the duties of print andelectronic media, that they should not mislead the public who are presentand prospective investors, in their forecast on the securities market.

42. The capital market regulator, SEBI has a significant role toplay in safeguarding the interest of investors and to ensure strictcompliance of all the relevant SEBI rules and regulations targeting atsafeguarding the interest of small investors. In order to protect theinterests of the investors and the integrity of the markets, as a regulator,SEBI has to make the market place efficient and clean, wherein all theparticipants play their role diligently and professionally within the fourcorners of the system, without there being any scope for market abuse.Where certain unscrupulous elements are trying to manipulate the marketto serve their own interest, it becomes imperative on the part of SEBI tointervene and to curb further mischief and to take necessary action tomaintain public confidence in the integrity of the securities market.

43. In N. Narayanan’s case, Supreme Court expressed a ‘wordof caution’ that SEBI-the regulator is to ensure stringent enforcement,and efficacy of cleanliness of the market place; otherwise SEBI will befailing in their duty to promote orderly and healthy growth of the securitiesmarket. I am conscious as supervisory functionary/ regulating body, SEBIhas the duty and obligation to protect ordinary genuine investors andSEBI is empowered to do so under the SEBI Act, 1992 so as to makesecurity market a secure and safe place to carry on the business insecurities. At the same time, under the guise of supervisory intervention,SEBI cannot affect the development of the market or market orientedcreativity. Intense supervision might distort the path of securities marketdevelopment; but SEBI cannot be a silent spectator to unfair tradepractices/manipulative market for some ulterior purpose like tax evasionetc. To find the right balance between market forces and Regulatorybody’s intervention, SEBI has to deal sternly with those who indulge inmanipulative trading and deceptive devices to misuse the market and atthe same time ensuring the development of the market.

44. Before I conclude, it is necessary to refer to the findings ofSAT on ‘tax planning’. SAT held that even assuming that non-genuinesynchronized trades have been entered into for the purposes of tax A

B

C

D

E

F

G

H

Aplanning, such trade could be held objectionable only if they have resultedin influencing the market in one way or other. For its finding that everyperson is entitled to arrange his affairs as to avoid taxation, SAT reliedupon Viram Investment Pvt. Ltd. and Ors. v. Securities and ExchangeBoard of India (MANU/SB/0046/2005) decided on 11.02.2005.Contention of the respondents is that transactions which have beenBentered into with a view to achieve tax planning are not illegal andrespondents placed reliance upon Viram Investment Pvt. Ltd. case.The learned counsel for SEBI contended that the market cannot bemanipulated by fictitious transactions either for tax planning or for some ulterior purposes like money laundering etc.C45. No grounds have been raised in the show cause notice allegingthat the impugned fictitious transactions have been entered into with aview to avoid payment of tax and was an act of tax planning. Adjudicatingofficer also has not gone into this aspect. Hence, I am not inclined to gointo this aspect, whether the impugned transactions were intended toDreduce the brunt of taxation and an act of tax planning. The correctnessof findings of SAT in the case of Viram Investment Pvt. Ltd. is leftopen.

Conclusion:-

Conclusion:-

46. Considering the reversal transactions, quantity, price and timeand sale, parties being persistent in number of such trade transactionsEwith huge price variations, it will be too naïve to hold that the transactionsare through screen-based trading and hence anonymous. Such conclusionwould be over-looking the prior meeting of minds involving synchronizationof buy and sell order and not negotiated deals as per the board’s circular.The impugned transactions are manipulative/deceptive device to createFa desired loss and/or profit. Such synchronized trading is violative oftransparent norms of trading in securities. If the findings of SAT are tobe sustained, it would have serious repercussions undermining the integrityof the market and the impugned order of SAT is liable to be set aside.On the above additional reasonings also, I agree with the conclusionallowing the appeal preferred by SEBI against the traders. I also agreeGwith the conclusion dismissing the appeal preferred by the SEBI againstthe brokers.

H

Devika Gujral