whether ‘front running by non-intermediary’ is a prohibited practice under regulations 3 (a), (b), (c) and (d) and 4(1) of FUTP 2003?

1
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 2595 OF 2013
SECURITIES AND EXCHANGE BOARD OF INDIA … Appellant(s)
Versus
SHRI KANAIYALAL BALDEVBHAI PATEL … Respondent (s)
With
CIVIL APPEAL NO. 2596 OF 2013
[SECURITIES AND EXCHANGE BOARD OF INDIA V. SHRI DIPAK PATEL]
CIVIL APPEAL NO. 2666 OF 2013
[SECURITIES AND EXCHANGE BOARD OF INDIA V. SUJIT KARKERA AND ORS.]
CIVIL APPEAL NO. 5829 OF 2014
[Pooja Menghani v. SECURITIES AND EXCHANGE BOARD OF INDIA]
CIVIL APPEAL NO. 11195-11196 OF 2014
[Vibha Sharma and Anr. V. SECURITIES AND EXCHANGE BOARD OF INDIA]
2
J U D G M E N T
N. V. RAMANA J.
1. The important question of law, arising in these batch of cases, being
similar and the facts involved being largely comparable, all the
appeals were heard together and are being decided by this common
judgment.
2. This case revolves round the legality of ‘non-intermediary frontrunning’
in security market under the SECURITIES AND EXCHANGE
BOARD OF INDIA (PROHIBITION OF FRAUDULENT AND UNFAIR TRADE
PRACTICES RELATING TO SECURITIES MARKET) REGULATIONS, 2003
[hereinafter ‘FUTP 2003’ for brevity]. As SEBI Appellate Tribunal
[hereinafter ‘SAT’ for brevity] has taken two different views in
different cases appealed herein, Securities and Exchange Board of
India [herein after ‘SEBI’ for brevity] as well as private individuals,
who are alleged to have been involved in front running, are in appeal
before us.
3
3. A brief factual background would be necessary before we deal with
the question of law that has arisen in this case instant. Broadly to
understand the issue at hand, the facts in CIVIL APPEAL NO. 2595 OF
2013 AND 2596 OF 2013 (related cases) may be stated in brief. SEBI
investigated into the activities of Shri Kanaiyalal Baldevbhai Patel
[herein after ‘KB’ for brevity] an individual trader. During the
investigation, it was found that KB was putting orders ahead of
orders placed by Passport India Investment (Mauritius) Ltd. [herein
after ‘PII’ for brevity]. One Dipak Patel, was the portfolio manager of
PII, who also happens to be a cousin of KB and one Shri
Anandkumar Baldevbhai Patel [herein after ‘AB’ for brevity]. It was
alleged that Dipak Patel provided information to KB and AB
regarding forthcoming trading activity of the PII. It is to be noted that
trades were executed using the telephone number registered in the
name of AB at the common residential address of KB and AB. Taking
advantage of the information received from Dipak Patel, KB had
indulged in trading before the PII and consequently squared off the
position when the order of PII were placed in the market. It was
estimated that the KB earned a total profit of Rs. 1,56,32,364.01/-
4
from the alleged trades. This Court in CIVIL APPEAL NO. 2594 OF
2013, by order dated 05.04.2017, while remanding the matter back
to the Appellate Tribunal with respect to AB, held that there is no
finding or conclusion recorded with respect to AB in the following
mannerLearned
counsel for the appellant (SEBI) has
vehemently urged that such findings are
recorded in the Adjudication Order and the
said order has merged with the order of the
learned Appellate Tribunal. We disagree with
the aforesaid contention urged by the learned
counsel for the appellant. In the appeal(s) filed
by the aggrieved person(s) against the order(s)
of the Adjudicating Officer, the learned
Appellate Tribunal was expected to record its
own independent findings and arrive at its own
conclusions for holding the respondent liable
for the penalty imposed. It seems that the
learned Appellate Tribunal has proceeded on
the basis that the case of the respondent is
same and similar to the case of Kanaiyalal
Baldev Patel and Dipak Patel which, evidently,
is not.
5
4. In CIVIL APPEAL NO.2666 OF 2013, Sujit Karkera and Group were
trading through B.P. Equity Pvt. Ltd. SEBI alleges that they were
trading ahead of the trades of CITIGROUP Global Markets Mauritius
Pvt. Ltd.(CGMMPL) on the basis of information provided by Suresh
Menon (trader of CGMMPL) who was in possession of the orders of
CGMMPL for 6 scrip days. SEBI in its investigation had found that
there were several calls made between Suresh Menon and his family
friend Sujit Karkera during this time period of 6 days. In these
telephonic conversations, it was alleged that there was exchange of
information related to scrip name, order quantity, order timing, and
order price of the orders placed by Suresh Menon for CGMMPL. Sujit
Karkera utilized the information provided by Suresh Menon to trade
thereby making huge profits.
5. In CIVIL APPEAL NO.11195-96 OF 2014, Jitendra Kumar Sharma was
an equity dealer employed by the Central Bank of India. His
responsibilities entailed preparation of charts for the chief equity
dealer and placing of orders based on instructions of the chief equity
dealer. Vibha Sharma, who is the wife of Jitendra Kumar Sharma,
6
was a regular trader in the stock market and this fact was disclosed
to Central Bank of India as a good practice of making disclosure to
the employer. It is the allegation of SEBI that Vibha Sharma engaged
herself in front running Central Bank of India’s large scale orders
allegedly with the knowledge obtained from her husband. Further the
SEBI had alleged that Vibha Sharma’s trades substantially matched
with the trades of the bank during the relevant period thereby
violating regulations 3(a), (b), (c), (d) and 4(1) of FUTP 2003.
6. In CIVIL APPEAL NO. 5829 OF 2014, facts of the case are that
appellant used to trade in scrips of four companies namely Amtek
Auto Ltd., Amtek India Ltd., Monnet Ispat Ltd. and Ahmednagar
Forgings Ltd. through Religare Securities Ltd., ISF Securities Ltd.,
India Infoline Securities Ltd. and Narayan Securities Private Ltd. It is
alleged against the appellant that, she had bought and sold equal
quantities of shares in large volume in these four scrips by utilizing
the information provided by Deepak Khurana who was privy to
certain confidential information of Religare. SEBI conducted an
investigation in the trading of appellant from June 1, 2008 to
7
January 12, 2009. During the investigation, SEBI noticed
irregularities in her dealings in the scrips of above mentioned four
companies. A general trend of trading was noticed which further
revealed that the appellant was indulged in Front Running. It was
found that the appellant’s sell orders (quantity and price)
substantially matched with the buy orders (quantity and price) of
other traders and that her sell order limit price was always above the
sell LTP but was same or very close to the buy limit price of other
traders. Moreover the selling price, quoted by her, was close to the
highest price reached on market on those days.
7. With this factual background, a reference needs to be made to the
scheme of FUTP 2003. SEBI, by a notification under Section 30 of
the SEBI Act, 1992, dated 17.07.2003, formulated FUTP 2003.
8. Indisputably, the object and purpose of this regulation (FUTP 2003)
is to safeguard the investing public and honest businessmen. The
aim is to prevent exploitation of the public by fraudulent schemes
and worthless securities through misrepresentation, to place
adequate and true information before the investor, to protect honest
8
enterprises seeking capital by accurate disclosure, to prevent
exploitation against the competition afforded by dishonest securities
offered to the public and to restore the confidence of the prospective
investor in his ability to select sound securities.
9. FUTP 2003 has three chapters, namely ‘preliminary’, ‘prohibition of
fraudulent and unfair trade practices relating to securities market’
and ‘investigation’. Regulation 1 contains the short title and
commencement. Regulation 2 consists of certain definitions. Clause
(b) of regulation 2 defines ‘dealing in securities’ which includes an act
of buying, selling or subscribing pursuant to any issue of any
security or agreeing to buy, sell or subscribe to any issue of any
security or otherwise transacting in any way in any security by any
person as principal, agent or intermediary referred to in Section 12 of
the SEBI Act. Clause (c) of regulation 2 defines fraud in the following
mannerc)
"fraud" includes any act,
expression, omission or
concealment committed whether in
a deceitful manner or not by a
9
person or by any other person with
his connivance or by his agent while
dealing in securities in order to
induce another person or his agent
to deal in securities, whether or not
there is any wrongful gain or
avoidance of any loss, and shall also
include-
(1) a knowing misrepresentation of
the truth or concealment of material
fact in order that another person
may act to his detriment;
(2) a suggestion as to a fact which is
not true by one who does not believe
it to be true;
(3) an active concealment of a fact
by a person having knowledge or
belief of the fact;
(4) a promise made without any
intention of performing it;
(5) a representation made in a
reckless and careless manner
whether it be true or false;
10
(6) any such act or omission as any
other law specifically declares to be
fraudulent,
(7) deceptive behaviour by a person
depriving another of informed
consent or full participation.
(8) a false statement made without
reasonable ground for believing it to
be true.
(9) The act of an issuer of securities
giving out misinformation that
affects the market price of the
security, resulting in investors
being effectively misled even though
they did not rely on the statement
itself or anything derived from it
other than the market price.
And "fraudulent" shall be construed
accordingly;
Nothing contained in this clause
shall apply to any general comments
made in good faith in regard to
(a) the economic policy of the
government
11
(b) the economic situation of the
country
(c) trends in the securities market
or
(d) any other matter of a like nature
whether such comments are made
in public or in private
10. Regulation 3 prohibits certain dealings in securities, whereas
regulation 4 prohibits manipulative, fraudulent and unfair practices.
Regulation 5 deals with the power of the board to order investigation.
Regulation 6 elaborates on the power of the investigating authority.
11. It is important to note that SEBI has amended the regulation, a
number of times, to keep up with the technology and times. A
reference may be made to the amendments carried out to the
regulation -
Table No.1- comparison of relevant provisions
FUTP 1995 FUTP 2003 (APPLICABLE REGULATION) AMENDMENT OF
2013
12
REGULATION
2 (C) (DEFINITIONS)
“Fraud” includes any of the
following acts committed by a
party to ac contract, or with his
connivance, or by his agent, with
intent to decive another party
thereto or his agent, or to induce
him to enter into the contract:-
(1.) The suggestion, as to a fact,
of that which is not true, by
one who does not believe it to
be true;
(2.) The active concealment of a
fact by one having knowledge
or belief of the fact;
(3.) A promise made without
any intention of performing it;
(4.) Any other act fitted to
deceive;
(5.) Any such act or omission
as the law secially declares to
be fraudulent;
(6.) And “fraudulent” shall be
construed accordingly
REGULATION
2 (C) (DEFINITIONS)
“fraud” includes any act, expression,
omission or concealment committed
whether in a deceitful manner or
not by a person or by any other
person with his connivance or by
his agent while dealing in securities
in order to induce another person or
his agent to deal in securities,
whether or not there is any wrongful
gain or avoidance of any loss, and
shall also include-
(1) A knowing misrepresentation of
the truth or concealment of
material fact in order that
another person may act to his
detriment;
(2) A suggestion as to a fact which is
not true by one who does not
believe it to be true;
(3) An active concealment of a fact
by a person having knowledge or
belief of the fact;
(4) A promise made without any
intention of performing it;
(5) A representation made in a
reckless and careless manner
whether it be true or false;
(6) Any such act or omission as any
other law specifically declares to
be fraudulent,
(7) Deceptive behavior by a person
depriving another or informed
consent or full participation,
(8) A false statement made without
reasonable ground for believing it
to be true.
(9) The act of an issuer of securities
giving out misinformation that
affects the market price of the
security, resulting in investors
being effectively misled even
though they did not rely on the
statement itself or anything
derived from it other then the
market price.
No
amendments to
Section 2(c)
13
REGULATION
3 (Prohibition of certain dealings in securities)
No person shall buy, sell or
otherwise deal in securities in a
fraudulent manner.
REGULATION
3 (Prohibition of certain dealings in securities)
Prohibition of certain dealings in
securities
No person shall directly or indirectly-
(a)buy, sell or otherwise deal in
securities in a fraudulent manner;
(b)use or employ, in connection with
issue, purchase or sale of any
security listed or proposed to be
listed in a recognized stock
exchange, any manipulative or
deceptive device or contrivance in
contravention of the provisions of
the Act or the rules or the regulations
made there under;
(c) employ any device, scheme or
artifice to defraud in connection with
dealing in or issue of securities which
are listed or proposed to be listed on a
recognized stock exchange;
(d)engage in any act, practice, course
of business which operates or would
operate as fraud or deceit upon any
person in connection with any
dealing in or issue of securities which
are listed or proposed to be listed on a
recognized stock exchange in
contravention of the provisions of the
Act or the rules and the regulations
made there under.
No
amendments to
Section 3(c)
14
REGULATION
4 (PROHIBITION AGAINST MARKET MANIPULATIONS)
No person shall-
(a) Effect, take part in, or enter
into, either directly or indirectly,
transactions in securities, with the
intention of artificially raising or
depressing the prices of securities,
with the intention of artificially
raising or depressing the prices of
securities and thereby inducing the
sale or purchase of securities by
any person;
(b) Indulge in any act, which is
calculated to create a false or
misleading appearance of trading
on securities market;
(c) Indulge in any act which in
reflection of prices of securities
based on transactions that are not
genuine trade transactions;
(d) Enter into a purchase or
sale of any securities, not intended
to effect transfer of beneficial
ownership but intended to operate
only as a device to inflate, depress,
or cause fluctuations in the market
price of securities;
(e) Pay, offer or agree to pay or
offer, directly or indirectly, to any
person any money or money’s
worth for inducing another person
to purchase or sell any security
with the sole objection of inflating,
depressing, or causing fluctuations
in the market price of securities.
REGULATION
4 (PROHIBITION AGAINST MANIPULATIVE, FRAUDULENT AND UNFAIR TRADE PRACTICES)
(1) Without prejudice to the
provisions of regulation 3, no
person shall indulge in a fraudulent
or an unfair trade practice in
securities.
(2) Dealing in secuties shall be
deemed to be a fraudulent or an
unfair trade practice if it involves
fraud and may include all or any of
the following, namely:-
(a.) Indulging in a act which
creates false or misleading
appearance of trading in
the securities market;
(b.) Dealing in a security not
intended to effect transfer
of beneficial ownership but
intended to operate only as
a device to inflate, depress
or cause fluctuations in
the price of such security
for wrongful gain or
avoidance of loss;
…
(e.) Any act or omission
amounting to
manipulation of the price
of a security;
…
(q.) An intermediary buying or
selling securities in
advance of a substantial
client order or whereby a
futures or option position
is taken about an
impending transaction in
the same or related
futures or options
contract.
Explanation.-
For the
purposes of this
subregistration,
for
the removal of
doubt, it is
clarified that
the acts or
omissions listed
in this subregulation
are
not exhaustive
and that an act
or omission is
prohibited if it
falls within the
purview of
regulation 3
notwithstandin
g that it is not
included in this
sub-regulation
or is described
as being
committed only
by a certain
category or
persons in this
sub-regulation’
12. Although aforesaid amendments are made to the regulation, yet
such amendments sometimes fail to live up to human ingenuity and
growth of technology. Usurpation of reprehensible profits by
fraudsters, who are not entitled to them, must be made answerable
15
by this Court as per established tenants of rule of law without
leaving incentives for fraudulent practices, based on creativity of
disingenuous, to survive the legal gambits. Before embarking upon
the necessary discussions, I would like to record my views on a
somewhat unclear picture that emerge from undefined concepts
contained in the Act and the Regulations framed there under, a
comprehensive legislation can bring about more clarity and certainty
on these aspects.
13. Submissions of Mr. K. T. S. Tulsi, learned senior advocate,
appearing on behalf of the appellant in CIVIL APPEAL NO. 5829 OF
2014.
The finding with regard to the appellant being guilty of fraud
under regulations 3 and 4 of FUTP 2003 is contrary to the
definition of fraud as contained in Regulation 2(1)(c) of the said
Regulations.
Sub-clauses (i), (j), (l), (m), (p), (o) and (q) of clause (2) of
regulation 4 expressly make themselves applicable only to the
case of intermediaries and not to individual buyers or sellers.
16
The rest of the sub-clauses being part of the scheme which
seeks to regulate the conduct of intermediaries, will be deemed
on their face, to pertain to activities undertaken by
intermediaries. Thus, the whole of Regulation 4 seems to be
inapplicable to the case of the applicant.
Submissions of Mr. Arvind P. Datar, learned senior advocate,
appearing on behalf of SEBI-
That the ambit of FUTP regulations has been substantially
increased from 1995 to 2003.
That inclusion of specific prohibition of front-running with
respect to intermediaries under Regulation 4 (2)(q) should not
whittle the scope of regulation 4 of the FUTP 2003.
Moreover, ‘Expressio Unius Est Exclusio Alterius’ may not be a
safe principle to oust the liability for non-intermediary frontrunning.
14. Other learned counsels appearing for parties have either
adopted the submissions made by the above named advocates or
17
provided alternative reasons for the conclusions reached by the
abovementioned advocates.
15. The question which has arisen for our consideration is whether
‘front running by non-intermediary’ is a prohibited practice under
regulations 3 (a), (b), (c) and (d) and 4(1) of FUTP 2003?
16. As this case involves practice of ‘front-running’ in security
market, a reference may be made to various definitions and
meanings of front-runningMajor
Law
Lexicon by P.
Ramanatha
Aiyar (4th Ed.
(2010)
FRONT RUNNING.- Buying or selling
securities ahead of a large order so as
to benefit from the subsequent price
move.
This denotes persons dealing in the
market, knowing that a large
transaction will take place in the near
future and the parties are likely to
move in their favour.
The illegal private trading by a broker
or market maker who has prior
knowledge of a forthcoming large
18
movement in prices
The Black’s Law
dictionary (9th
Ed.)
Front running, n. Securities. A
broker’s or analyst’s use of non-public
information to acquire securities or
enter into options or futures contracts
for his or her own benefit, knowing
that when the information becomes
public, the price of the securities will
change in a predictable manner. This
practice is illegal. Front-running can
occur in many ways. For example, a
broker or analyst who works for a
brokerage firm may buy shares in a
company that the firm is about to
recommend as a strong buy or in
which the firm is planning to buy a
large block of shares.
Nancy Folbre1 In the world of financial trading, a frontrunner
is someone who gains an unfair
advantage with inside information
1
Nancy Folbre, The Front-Runners of Wall Street, 07.04.2014 (The New York Times).
19
17. SEBI has defined front-running in one of its circular2 in the
following mannerFront-running;
for the purpose of
this circular, front running means
usage of non public information to
directly or indirectly, buy or sell
securities or enter into options or
futures contracts, in advance of a
substantial order, on an impending
transaction, in the same or related
securities or futures or options
contracts, in anticipation that when
the information becomes public; the
price of such securities or contracts
may change.
18. Further a consultative paper3 issued by SEBI had grouped front
running to be an undesirable manipulative practice in the following
manner-
‘However, SEBI Act does not
prescribe or specify as to which
practice would be considered to be
2
Circular CIR/EFD/1/2012, dated 25.05.2012.
3
Consultative Paper issued by SEBI, pursuant to a Press release No. 34/95 dated March 16, 1995.
20
fraudulent and unfair trade
practices. While the fraudulent and
unfair trade practices are commonly
understood, it would be desirable if
these practices are defined
specifically.
..this will bring about clarity among
the intermediaries, issuers,
investors and other connected
persons in the securities markets
about the practices that are
prohibited, fraudulent and unfair.
…The draft defines fraudulent and
unfair trade practices. These
regulations seek to cover market
manipulation on the stock
exchanges also. Practices like
wash sales, front-running, price
rigging, artificial increasing or
decreasing the prices of the
securities are brought within the
ambit of the regulations’
(emphasis added)
21
19. In actuality, front-running is more complicated than these
definitions suggest. It comprises of at least three forms of conduct.
They are: (1) trading by third parties who are tipped on an impending
block trade ("tippee" trading); (2) transactions in which the owner or
purchaser of the block trade himself engages in the offsetting futures
or options transaction as a means of "hedging" against price
fluctuations caused by the block transaction ("self-front-running");
and (3) transactions where a intermediary with knowledge of an
impending customer block order trades ahead of that order for the
intermediary's own profit ("trading ahead"). In this batch of appeals
we are concerned with the first and the last types of trade i.e., tippee
trading and trading ahead. It is important to note that trading ahead
has been explicitly recognized under regulation 4(2)(q) of FUTP 2003.
20. A word on interpretation would be appropriate before I take up
legal aspects of this case. Mr. K.T.S. Tulsi, learned senior counsel,
states that penal laws have to be strictly construed. He places
reliance on Govind Impex Pvt. Ltd. v. Income Tax Department4,
4
(2011) 1 SCC 529.
22
Krishi Utpadan Mandi Samiti v. Pilibhit Pantnagar Beej Ltd.5
Although strict construction is well established principle when
interpreting a penal provision, but such interpretation should not
result in incongruence when compared with the purpose of the
regulation. In SEBI v. Kishore R. Ajmera, this Court observed thatthe
SEBI Act and the Regulations framed
there under are intended to protect the
interests of investors in
the Securities Market which has seen
substantial growth in tune with the
parallel developments in the economy.
Investors' confidence in the
Capital/Securities Market is a reflection of
the effectiveness of the regulatory
mechanism in force. All such measures are
intended to preempt manipulative trading
and check all kinds of impermissible
conduct in order to boost the investors'
confidence in the Capital market. The
primary purpose of the statutory
enactments is to provide an environment
conductive to increased participation and
investment in the securities market which
5
(2004) 1 SCC 391.
23
is vital to the growth and development of
the economy. The provisions of the SEBI
Act and the Regulations will, therefore,
have to be understood and interpreted in
the above light.6
21. The object and purpose of FUTP 2003 is to curb “market
manipulations”. Market manipulation is normally regarded as an
“unwarranted” interference in the operation of ordinary market forces
of supply and demand and thus undermines the “integrity” and
efficiency of the market.7 This Court in N. Narayanan v.
adjudicating Officer, SEBI8, has laid down thatPrevention
of market abuse and
preservation of market integrity is the
hallmark of Securities Law. Section
12A read with Regulations 3 and 4 of
the Regulations 2003 essentially
intended to preserve ‘market integrity’
and to prevent ‘Market abuse’. The
object of the SEBI Act is to protect
the interest of investors in securities
and to promote the development and
6 SEBI v. Kishore R. Ajmera, (2016) 6 SCC 368
7
Palmer’s Company Law, 25th Edition (2010), Volume 2 at page 11097; Gower & Davies – Principles of Modern
Company Law, 9th Edition (2012) at page 1160.
8 (2013) 12 SCC 152
24
to regulate the securities market, so
as to promote orderly, healthy growth
of securities market and to promote
investors protection. Securities
market is based on free and open
access to information, the integrity of
the market is predicated on the
quality and the manner on which it is
made available to market. ‘Market
abuse’ impairs economic growth and
erodes investor’s confidence. Market
abuse refers to the use of
manipulative and deceptive devices,
giving out incorrect or misleading
information, so as to encourage
investors to jump into conclusions,
on wrong premises, which is known
to be wrong to the abusers. The
statutory provisions mentioned
earlier deal with the situations where
a person, who deals in securities,
takes advantage of the impact of an
action, may be manipulative, on the
anticipated impact on the market
resulting in the “creation of
artificiality’.
25
22. From the line of decisions cited herein above, it can be inferred
that as a matter of principle, while interpreting this regulation, the
court must weigh against an interpretation which will protect unjust
claims over just, fraud over legality and expediency over principle.
Once this rule is clearly established, individual cases should not
pose any problem.
23. It is equally well settled that in interpreting a statute, effort
should be made to give effect to each and every word used by the
Legislature. The Courts should presume that the Legislature inserted
every part for a purpose and the legislative intention is that every
part of the statute should have effect. It must be kept in mind that
whenever this Court is seized with a matter which requires judicial
mind to be applied for interpreting a law, the effort must always be
made to realize the true intention behind the law.
24. Before dealing with the legal issue we are seized with, it would
be important to observe certain definition as occurring under the
regulations. The definition of ‘dealing in securities’ acquires some
26
importance as charge under regulation 3 completely depends on the
aspect whether the tippee was dealing in securities in the first
instant or not. For a transaction to be termed as dealing in
securities, following ingredients need to be satisfied-
1. includes an act of buying, selling or subscribing
pursuant to any issue of any security, or
2. Agreeing to buy, sell or subscribe to any issue of
any security, or;
3. Otherwise transacting in any way in any security
by any person as principal, agent or intermediary
referred to in Section 12 of the Act.
25. The definition of ‘dealing in securities’ is broad and inclusive in
nature. Under the old regime the usage of term ‘ to mean’ has been
changed to ‘includes’, which prima facie indicates that the definition
is broad. Moreover, the inclusion of term ‘otherwise transacting’ itself
provides an internal evidence for being broadly worded so as to
include situations such as the present one.
26. There is no dispute as to the fact that fraud is jurisprudentially
very difficult to define or cloth it with particular ingredients. A
generalized meaning may be difficult to be attributed, as human
27
ingenuity would invent ways to bypass such behaviour. It is to be
noted that fraud is extensively used in various regulatory framework
which mandates me to take notice of the conceptual and definitional
problem it brings along. Fraud is among the most serious, costly,
stigmatizing, and punitive forms of liability imposed in modern
corporations and financial markets. Usually, the antifraud provisions
of the security laws are not coextensive with common-law doctrines
of fraud as common-law fraud doctrines are too restrictive to deal
with the complexities involved in the security market, which is also
portrayed by the changes brought in through the 2003 regulation to
the 1995 regulation.
27. On a comparative analysis of the definition of "fraud" as existing
in the 1995 regulation and the subsequent amendments in the 2003
regulations, it can be seen that the original definition of "fraud"
under the FUTP regulation, 1995 adopts the definition of "fraud"
from the Indian Contract Act, 1872 whereas the subsequent
definition in the 2003 regulation is a variation of the same and does
not adopt the strict definition of "fraud" as present under the Indian
28
Contract Act. It includes many situations which may not be a "fraud"
under the Contract Act or the 1995 regulation, but nevertheless
amounts to a "fraud" under the 2003 regulation.
28. The definition of ‘fraud’ under clause (c) of regulation 2 has two
parts; first part may be termed as catch all provision while the
second part includes specific instances which are also included as
part and parcel of term ‘fraud’. The ingredients of the first part of the
definition are-
1. includes an act, expression, omission or
concealment whether in a deceitful
manner or not;
2. By a person or by any other person with
his connivance or his agent while dealing
in securities;
3. So that the same induces another person
or his agent to deal in securities;
4. Whether or not there is any wrongful gain
or avoidance of any loss.
The second part of the definition includes specific instances-

29
(1) a knowing misrepresentation of the
truth or concealment of material fact in
order that another person may act to
his detriment;
(2) a suggestion as to a fact which is not
true by one who does not believe it to be
true;
(3) an active concealment of a fact by a
person having knowledge or belief of the
fact;
(4) a promise made without any intention
of performing it;
(5) a representation made in a reckless
and careless manner whether it be true
or false;
(6) any such act or omission as any other
law specifically declares to be fraudulent,
(7) deceptive behavior by a person
depriving another of informed consent or
full participation.
(8) a false statement made without
reasonable ground for believing it to be
true.
(9) The act of an issuer of securities
giving out misinformation that affects
the market price of the security, resulting
30
in investors being effectively misled even
though they did not rely on the statement
itself or anything derived from it other
than the market price.
29. Although unfair trade practice has not been defined under the
regulation, various other legislations9 in India have defined the
concept of unfair trade practice in different contexts. A clear cut
generalized definition of the ‘unfair trade practice’ may not be
possible to be culled out from the aforesaid definitions. Broadly trade
practice is unfair if the conduct undermines the ethical standards
and good faith dealings between parties engaged in business
transactions. It is to be noted that unfair trade practices are not
subject to a single definition; rather it requires adjudication on case
to case basis. Whether an act or practice is unfair is to be determined
by all the facts and circumstances surrounding the transaction. In
the context of this regulation a trade practice may be unfair, if the
conduct undermines the good faith dealings involved in the
9
Monopolies and Restrictive Trade Practices Act, 1969, Section 36A; The Consumer Protection Act, 1986, Section
2(1)(r); The Competition Act, 2002, Section 3; The Food Security and Standards Act, 2006, Section 24(2); Specific
Relief Act, 1963, Section 20; Usurious Loans Act, 1918, Section 3.
31
transaction. Moreover the concept of ‘unfairness’ appears to be
broader than and includes the concept of ‘deception’ or ‘fraud’.
30. Although learned counsel for SEBI has admitted that there is no
difference between fraud and unfair trade practice under regulation 4
(1), but we are of the opinion that such submission may not be
conclusive. As these cases do not require further investigation, the
question regarding the scope of prosecution for unfair trade practice
is kept open.
31. Regulation 3 prohibits a person from committing fraud while
dealing in securities. A reading of the aforesaid provision describes
the width of the power vested with the SEBI to regulate the security
market. In our view, the words employed in the aforesaid provisions
are of wide amplitude and would therefore take within its sweep the
inducement to bring about inequitable result which has happened in
this case instant.
32. Regulation 4 prohibits manipulative, fraudulent and unfair
trade practices. It is to be noted that the regulation 4 (1) starts with
32
the phrase ‘without prejudice to the provisions of regulation 3’. This
phrase acquires significance as it portrays that the prohibitions
covered under the regulation 3 do not bar the prosecution under
regulation 4 (1). Therefore regulation 4 (1) has to be read to have its
own ambit which adds to what is contained under regulation 3.
33. Regulation 4 (2)(q) of FUTP 2003 states that-
(2) Dealing in securities shall be deemed
to be a fraudulent or an unfair trade
practice if it involves fraud and may
include all or any of the following,
namely:-
…
q) an intermediary buying or selling
securities in advance of a substantial
client order or whereby a futures or
option position is taken about an
impending transaction in the same or
related futures or options contract.
Under the provisions of regulation 4(2)(q), only intermediary trading
on the information of substantial client order, if it involves fraud then
the dealing in securities will be deemed to be fraudulent.
33
34. An argument has been introduced by the Mr. K.T.S. Tulsi,
learned senior counsel, that sub-clause (q) of regulation 4(2) includes
only front-running by the intermediaries, by implication it means
that any persons other than intermediaries are excluded from the
rigors of law. In our opinion such submission cannot be sustained in
the eyes of law as the intention of the legislation was to provide for a
catchall provision and the deeming provision under sub-clause (q) of
regulation 4(2) was specifically provided as the intermediary are in
fiduciary relationship with the clients. There is no dispute as to the
fact that a fiduciary must act in utmost good faith; he should not act
for his own benefit or benefit of any third party without the informed
consent of his client. The essential irreducible core of fiduciary duty
is the duty of loyalty10. Such heightened standard demanded a
deeming provision under the FUTP 2003.
35. The reliance on ‘expressio unius est exclusio alterius’ may not be
appropriate in this case instant as the intention of the regulation is
apparent in this case. Moreover, it has been well established that
10 SEBI (Stock Brokers and Sub-brokers) Regulations, 1992, Schedule II.
34
‘expressio unius est exclusio alterius’ is not a rule of law but a tool of
interpretation which must be cautiously applied.11 In light of the
above discussion, this rule of interpretation does not help the case of
the violators.
36. A crucial aspect which needs to be observed at this point is the
element of causation which is embedded under regulation 2(1)(c)
read with regulations 3 and 4. In order to establish the aforesaid
charges in this case, it is required by the SEBI to establish that the
harm was induced by the materialization of a risk that was not
disclosed because of the tippee’s fraudulent practice. Further the
charges under the FUTP 2003 needs to be established as per the
applicable standards rather than on mere conjectures and surmises.
37. It should be noted that the provisions of regulations 3 (a), (b),
(c), (d) and 4(1) are couched in general terms to cover diverse
situations and possibilities. Once a conclusion, that fraud has been
committed while dealing in securities, is arrived at, all these
provisions get attracted in a situation like the one under
11 Colquhoun v. Brooks, (1887) 19 Q.B.D. 400; Lowe v. Darling & Sons, (1906) 2 K. B. 772
35
consideration. We are not inclined to agree with the submission that
SEBI should have identified as to which particular provision of FUTP
2003 regulations has been violated. A pigeon-hole approach may not
be applicable in this case instant.
38. Before we conclude, it would be useful to have a look at
American jurisprudence which has developed around Title 17, Code
of Federal Regulations, Part 240, Rule 10b-5 (Prohibition of use of
manipulative or deceptive devices or contrivances with respect
to certain securities exempted from registration). It is to be noted
that much of Indian securities laws have similar provisions and a
brief survey of jurisprudence might be useful for the discussion
herein. The complexity of the subject we are dealing is reflected even
in the American jurisprudence as the U.S Supreme Court seems to
have accepted the aforesaid provision to be the most litigated ones.12
In David Carpenter, Kenneth P. Felis and R. Foster Winans, v.
United States13
, the United States Supreme Court dealt with the
12 Securities and Exchange Commission vs. National Securities, Inc., et al., 393 U.S. 453 (1969)
‘Although section 10(b) and 10 b-5 may well be the most litigated provisions in the federal securities
laws, this is the first time this Court has found it necessary to interpret them. We eneter the virgin
territory cautiously…’
13 484 U.S. 19.
36
matter of fraud under section 10(b). In this case, the Petitioner, who
was a co-author in a Journal’s investment advice column, entered
into a deal with a stock broker wherein he provided pre-publication
information on the content of the column. Further the stockbroker
bought and sold shares based on such information and shared the
profits made therein with the Petitioner. The Court, while convicting
the Petitioner, elaborated the meaning of fraud in following manner –
We cannot accept petitioners' further
argument that Winans' conduct in
revealing prepublication information was
no more than a violation of workplace
rules and did not amount to fraudulent
activity that is proscribed by the mail
fraud statute. Sections 1341 and 1343
reach any scheme to deprive another of
money or property by means of false or
fraudulent pretenses, representations, or
promises. As we observed last Term in
McNally, the words “to defraud” in the
mail fraud statute have the “common
understanding” of “ ‘wronging one in his
property rights by dishonest methods or
schemes,’ and ‘usually signify the
37
deprivation of something of value by
trick, deceit, chicane or overreaching.’ ”
483 U.S., at 358, 107 S.Ct., at 2881
(quoting Hammerschmidt v. United States,
265 U.S. 182, 188, 44 S.Ct. 511, 512, 68
L.Ed. 968 (1924)). The concept of “fraud”
includes the act of embezzlement, which
is “ ‘the fraudulent appropriation to one's
own use of the money or goods entrusted
to one's care by another.’ ” Grin v. Shine,
187 U.S. 181, 189, 23 S.Ct. 98, 102, 47
L.Ed. 130 (1902).
Elaborating on the fiduciary relationship between the employee of a
firm to safeguard the confidential information owned by the firm, the
court observed as underThe
District Court found that Winans'
undertaking at the Journal was not to
reveal prepublication information about
his column, a promise that became a
sham when in violation of his duty he
passed along to his coconspirators
confidential information belonging to the
Journal, pursuant to an ongoing scheme
to share profits from trading in
38
anticipation of the “Heard” column's
impact on the stock market. In Snepp v.
United States, 444 U.S. 507, 515, n. 11,
100 S.Ct. 763, 768, n. 11, 62 L.Ed.2d
704 (1980) (per curiam), although a
decision grounded in the provisions of a
written trust agreement prohibiting the
unapproved use of confidential
Government information, we noted the
similar prohibitions of the common law,
that “even in the absence of a written
contract, an employee has a fiduciary
obligation to protect confidential
information obtained during the course of
his employment.” As the New York courts
have recognized: “It is well established, as
a general proposition, that a person who
acquires special knowledge or
information by virtue of a confidential or
fiduciary relationship with another is not
free to exploit that knowledge or
information for his own personal benefit
but must account to his principal for any
profits derived therefrom.” Diamond v.
Oreamuno, 24 N.Y.2d 494, 497, 301
N.Y.S.2d 78, 80, 248 N.E.2d 910, 912
39
(1969); see also Restatement (Second) of
Agency §§ 388, Comment c, 396(c) (1958).
We have little trouble in holding that the
conspiracy here to trade on the Journal's
confidential information is not outside
the reach of the mail and wire fraud
statutes, provided the other elements of
the offenses are satisfied. The Journal's
business information that it intended to
be kept confidential was its property; the
declaration to that effect in the employee
manual merely removed any doubts on
that score and made the finding of
specific intent to defraud that much
easier. Winans continued in the employ
of the Journal, appropriating its
confidential business information for his
own use, all the while pretending to
perform his duty of safeguarding it. In
fact, he told his editors twice about leaks
of confidential information not related to
the stock-trading scheme, 612 F.Supp.,
at 831, demonstrating both his
knowledge that the Journal viewed
40
information concerning the “Heard”
column as confidential and his deceit as
he played the role of a loyal employee.
39. In Vincent F. Chiarella v. United States14, the United States
Supreme Court was seized of the matter relating to securities fraud
under section 10b of the Securities Exchange Act, 1934. The
Petitioner therein was a printer of some corporate takeover bids.
Despite attempts by the companies to conceal the names of the
takeover targets, Chiarella was able to deduce, and he traded shares
of the companies he knew were involved. Consequently he was
convicted by the lower forum as he traded in target companies
without informing its shareholders of his knowledge of proposed
takeover. The Supreme Court while reversing his conviction,
observed as under-
“the Petitioner employee could not be
convicted on theory of failure to disclose
his knowledge to stockholders or target
companies as he was under no duty to
14 445 U.S. 222 (1980).
41
speak, in that he had no prior dealings
with the stockholders and was not their
agent or fiduciary and was not a person
in whom sellers had placed their trust
and confidence, but dealt with them only
through impersonal market
transactions.”
On the issue of “General Duty between all participants (Tippee’s), the
Court stated that:
“Formulation of a general duty between
all participants in market transactions for
forego actions based on material,
nonpublic information, so as to give rise
to liability under section 10(b) of
Securities Exchange Act for failure to
disclose, would depart radically from
established doctrine that a duty arises
from a specific relationship between two
parties and should not be undertaken
absent some explicit evidence of
congressional intent. Securities Exchange
Act of 1934, § 10(b) as amended 15
U.S.C.A. § 78j(b).”
42
40. Although excessive reliance on foreign jurisprudence may not
be necessary as we have starkly deviated in many aspects from
American jurisprudence, but we need to keep in mind the
developments which other countries have undertaken regarding this
issue.
41. Now we come back to the regulations 3 and 4 (1) which bars
persons from dealing in securities in a fraudulent manner or
indulging in unfair trade practice. Fairness in financial markets is
often expressed in terms of level playing field. A playing field may be
uneven because of varied reasons such as inequalities in information
etc. Possession of different information, which is a pervasive feature
of markets, may not always be objectionable. Indeed, investors who
invest resources in acquiring superior information are entitled to
exploit this advantage, thereby making markets more efficient. The
unequal possession of information is fraudulent only when the
information has been acquired in bad faith and thereby inducing an
inequitable result for others.
43
42. The law of confidentiality has a bearing on this case instant.
“Confidential information acquired or compiled by a corporation in
the course and conduct of its business is a species of property to
which the corporation has the exclusive right and benefit, and which
a court of equity will protect through the injunctive process or other
appropriate remedy.”15 The information of possible trades that the
company is going to undertake is the confidential information of the
company concerned, which it has absolute liberty to deal with.
Therefore, a person conveying confidential information to another
person (tippee) breaches his duty prescribed by law and if the
recipient of such information knows of the breach and trades, and
there is an inducement to bring about an inequitable result, then the
recipient tippee may be said to have committed the fraud.
43. Accordingly, non-intermediary front running may be brought
under the prohibition prescribed under regulations 3 and 4 (1), for
being fraudulent or unfair trade practice, provided that the
ingredients under those heads are satisfied as discussed above. From
15 3 W. Fletcher, Cyclopedia of Law of Private Corporations § 857.1, p. 260 (rev. ed. 1986)
44
the above analysis, it is clear that in order to establish charges
against tippee, under regulations 3 (a), (b), (c) and (d) and 4 (1) of
FUTP 2003, one needs to prove that a person who had provided the
tip was under a duty to keep the non-public information under
confidence, further such breach of duty was known to the tippee and
he still trades thereby defrauding the person, whose orders were
front-runned, by inducing him to deal at the price he did.
44. Taking into consideration the facts and circumstances of the
case before us and the law laid down herein above and SEBI v.
Kishore R. Ajmera (Supra) can only lead to one conclusion that
concerned parties to the transaction were involved in an apparent
fraudulent practice violating market integrity. The parting of
information with regard to an imminent bulk purchase and the
subsequent transaction thereto are so intrinsically connected that no
other conclusion but one of joint liability of both the initiator of the
fraudulent practice and the other party who had knowingly aided in
the same is possible. Consequently, Civil Appeal Nos. 2595, 2596
and 2666 of 2013 are allowed. At the same time, for the same reason,
45
Civil Appeal Nos. 5829 of 2014 and 11195-11196 of 2014 are
dismissed.
............................J.
(N. V. RAMANA)
NEW DELHI
SEPTEMBER 20, 2017
1
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 2595 OF 2013
SECURITIES AND EXCHANGE BOARD
OF INDIA ...APPELLANT(S)
VERSUS
KANAIYALAL BALDEVBHAI
PATEL ...RESPONDENT(S)
WITH
CIVIL APPEAL NO.2596 OF 2013
[S.E.B.I. VS. DIPAK PATEL]
CIVIL APPEAL NO.2666 OF 2013
[S.E.B.I. VS. SUJIT KARKERA & ORS.]
CIVIL APPEAL NO.5829 OF 2014
[POOJA MENGHANI VS. S.E.B.I.]
CIVIL APPEAL NOS. 11195-11196 OF 2014
[VIBHA SHARMA AND ANR. VS. S.E.B.I.]
J U D G M E N T
RANJAN GOGOI,J.
1. I have had the privilege of going
through the very erudite judgment of my
learned brother Ramana, J. I can only
2
agree with the trend of reasoning that my
learned brother has chosen to adopt to
arrive at his ultimate conclusions.
However, I am of the view that the present
case is capable of resolution within a
very narrow spectrum of law and on an
interpretation of the relevant provisions
of the Securities and Exchange Board of
India (Prohibition of Fraudulent and
Unfair Trade Practices Relating to
Securities Market) Regulations 2003
(hereinafter referred to as “2003
Regulations”). I, therefore, propose to
record my own views in the matter.
2. The relevant provisions of the
2003 Regulations which would require
consideration of this Court has been set
out in extenso by my learned brother and,
therefore, I need not burden this order
with a repetition of the same. All that I
3
consider necessary to point out is that it
is the provisions of Regulation 2(c),(3)
and (4) of the 2003 Regulations which
would require a consideration from the
limited stand point of whether the actions
attributable to the respondents in Appeal
Nos.2595 of 2013, 2596 of 2013 and 2666 of
2013 and appellants in Appeal Nos.5829 of
2014 and 11195-11196 of 2014 come within
the four corners of fraudulent or unfair
trade practice as contemplated by the
aforesaid provisions of the 2003
Regulations.
3. The gravamen of the allegations
which can be culled out from the facts in
Civil Appeal No.2595 of 2013 is that one
Dipak Patel (respondent in Civil Appeal
No.2596 of 2013), who was holding a
position of trust and confidence in one
M/s Passport India Investment (Mauritius)
4
Limited (hereinafter referred to as “M/s
Passport India”), was privy to
privileged/confidential information that
M/s Passport India would be making
substantial investments in particular
scrips through the stock exchanges.
Dipak Patel is alleged to have parted the
said information to his cousins Kanaiyalal
Baldevbhai Patel [respondent in Civil
Appeal No.2595 of 2013] and Anandkumar
Baldevbhai Patel [respondent in Civil
Appeal No.2594 of 2013 (disposed of on 5th
April, 2017)] who on various dates placed
orders for purchase of scrips a few
minutes before the bulk orders in respect
of the same scrips were placed on behalf
of M/s Passport India by Dipak Patel. The
bulk order/orders, because of the sheer
volume, naturally had the effect of
pushing up the prices of the particular
scrips and no sooner the prices had
5
increased, Kanaiyalal Baldevhai Patel and
Anandkumar Baldevbhai Patel had traded the
said scrips thereby earning substantial
profits. The large volume of the shares
traded in the above manner; the several
number of days on which such trading took
place; and the close proximity of time
between the sale and purchase of the
shares i.e. before and after the bulk
purchases, were alleged by the appellant -
Securities and Exchange Board of India
(“SEBI” for short) to be amounting to
fraudulent or unfair trade practice
warranting imposition of penalty and
visiting the offending individuals with
other penal consequences.
4. The adjudicating authority held the
respondents liable. The Securities
Appellate Tribunal (“Appellate Tribunal”
for short) before whom appeals were filed
6
by the aggrieved persons (respondents
herein) interfered with the orders passed
by the adjudicating authority primarily on
the ground that on a reading of Regulation
2(c),(3) and Regulation(4) of the 2003
Regulations it does not transpire that the
acts attributable amount to fraudulent or
unfair trade practice warranting the
findings recorded by the Adjudicating
authority and the imposition of penalty in
question on that basis.
5. If Regulation 2(c) of the 2003 was
to be dissected and analyzed it is clear
that any act, expression, omission or
concealment committed, whether in a
deceitful manner or not, by any person
while dealing in securities to induce
another person to deal in securities would
amount to a fraudulent act. The emphasis
in the definition in Regulation 2(c) of
7
the 2003 Regulations is not, therefore, of
whether the act, expression, omission or
concealment has been committed in a
deceitful manner but whether such act,
expression, omission or concealment
has/had the effect of inducing another
person to deal in securities.
6. The definition of 'fraud', which
is an inclusive definition and, therefore,
has to be understood to be broad and
expansive, contemplates even an action or
omission, as may be committed, even
without any deceit if such act or omission
has the effect of inducing another person
to deal in securities. Certainly, the
definition expands beyond what can be
normally understood to be a 'fraudulent
act' or a conduct amounting to 'fraud'.
The emphasis is on the act of inducement
and the scrutiny must, therefore, be on
8
the meaning that must be attributed to the
word “induce”.
7. The dictionary meaning of the word
“induced” may now be taken note of.
BLACK’S LAW DICTIONARY, EIGHTH
EDITION, defines ‘inducement’ as “the
act or process of enticing or
persuading another person to take a
certain course of action.”
Merriam-Webster Dictionary
defines ‘inducement’ as “a motive or
consideration that leads one to action
or to additional or more effective
actions.”
8. A person can be said to have induced
another person to act in a particular way or
not to act in a particular way if on the basis
of facts and statements made by the first
person the second person commits an act or
omits to perform any particular act. The test
to determine whether the second person had
been induced to act in the manner he did or
not to act in the manner that he proposed, is
9
whether but for the representation of the
facts made by the first person, the latter
would not have acted in the manner he did.
This is also how the word inducement is
understood in criminal law. The difference
between inducement in criminal law and the
wider meaning thereof as in the present case,
is that to make inducement an offence the
intention behind the representation or
misrepresentation of facts must be dishonest
whereas in the latter category of cases like
the present the element of dishonesty need not
be present or proved and established to be
present. In the latter category of cases, a
mere inference, rather than proof, that the
person induced would not have acted in the
manner that he did but for the inducement is
sufficient. No element of dishonesty or bad
faith in the making of the inducement would be
required.
9. While Regulation 3(a) of the 2003
Regulations prohibits a person to buy,
10
sell or otherwise deal in securities in a
fraudulent manner, Regulation 4 declares
that no person shall indulge in a
fraudulent or an unfair trade practice in
securities. Sub-regulation (2) of
Regulation 4 enumerates different
situations in which dealing in securities
can be deemed to be a fraudulent or an
unfair trade practice. Regulation 4 being
without prejudice to the provisions of
Regulation 3 of the 2003 Regulations would
operate on its own without being
circumscribed in any manner by what is
contained in Regulation 3.
10. Adverting to the facts of the
present case, if the information with
regard to acquisition of shares by M/s
Passport India was parted with by Dipak
Patel to Kanaiyalal Baldevbhai Patel and
Anandkumar Baldevbhai Patel and the latter
11
had transacted in huge volume of shares of
the particular company/scrip mentioned by
Dipak Patel a little while before the bulk
order was placed by M/s. Passport India
and the said persons had sold the same a
short-while later at an increased price,
such increase being a natural consequence
of a huge investment made in the
particular scrip by M/s Passport India,
surely, it can be held that by the conduct
of Dipak Patel, Kanaiyalal Baldevbhai
Patel and Anandkumar Baldevbhai Patel were
induced to deal in securities. A natural
and logical inference that would follow is
that the aforesaid two latter persons
would not have entered into the
transactions in question, had it not been
for the information parted with by Dipak
Patel. The track record of earlier
trading of the concerned two persons does
not indicate trading in such huge volumes
12
in their normal course of business. Such
an inference would be a permissible mode
of arriving at a conclusion with regard to
the liability, as held by this Court in
Securities and Exchange Board of India
Vs. Kishore R. Ajmera1 referred to by my
learned brother Ramana, J. The volume;
the nature of the trading and the timing
of the transactions in question can leave
no manner of doubt that Kanaiyalal
Baldevbhai Patel and Anandkumar Baldevbhai
Patel had acted in connivance with Dipak
Patel to encash the benefit of the
information parted with by Dipak Patel to
them and, therefore, they are parties to
the 'fraud' committed by Dipak Patel
having aided and abetted the same.
11. If the parting of information by
Dipak Patel to Kanaiyalal Baldevbhai Patel
1
(2016) 6 SCC 368
13
and Anandkumar Baldevbhai Patel amounts to
'fraud' within the meaning of Regulation
2(c) of the 2003 Regulations, we do not
see as to how the transactions entered
into by Kanaiyalal Baldevbhai Patel and
M/s Passport India through Dipak Patel
both in regard to purchase and sale of the
shares would not be hit by the provisions
of Regulation 3(a) and Regulation 4(1) of
the 2003 Regulations in question.
12. Coupled with the above, is the
fact, the said conduct can also be
construed to be an act of unfair trade
practice, which though not a defined
expression, has to be understood
comprehensively to include any act beyond
a fair conduct of business including the
business in sale and purchase of
securities. However the said question, as
suggested by my learned Brother, Ramana,
14
J. is being kept open for a decision in a
more appropriate occasion as the
resolution required presently can be made
irrespective of a decision on the said
question.
13. On the conclusions that has been
reached, as indicated above, whether the
deemed provisions contained in Regulation
4(2)(q) of the 2003 Regulations would be
attracted to the facts of the present case
and the scope, effect and contours of the
explanation to Regulation 4 inserted by
Securities and Exchange Board of India
(Prohibition of Fraudulent and Unfair
Trade Practices relating to Securities
Market) (Amendment) Regulations, 2013
would hardly require any specific notice
of the Court.
14. To attract the rigor of
Regulations 3 and 4 of the 2003
15
Regulations, mens rea is not an
indispensable requirement and the correct
test is one of preponderance of
probabilities. Merely because the
operation of the aforesaid two provisions
of the 2003 Regulations invite penal
consequences on the defaulters, proof
beyond reasonable doubt as held by this
Court in Securities and Exchange Board of
India Vs. Kishore R. Ajmera(supra) is not
an indispensable requirement. The
inferential conclusion from the proved and
admitted facts, so long the same are
reasonable and can be legitimately arrived
at on a consideration of the totality of
the materials, would be permissible and
legally justified. Having regard to the
facts of the present cases i.e. the volume
of shares sold and purchased; the
proximity of time between the transactions
of sale and purchase and the repeated
16
nature of transactions on different dates,
in my considered view, would irresistibly
lead to an inference that the conduct of
the respondents in Appeal Nos.2595 of
2013, 2596 of 2013 and 2666 of 2013 and
appellants in Appeal Nos.5829 of 2014 and
11195-11196 of 2014 were in breach of the
code of business integrity in the
securities market. The consequences for
such breach including penal consequences
under the provisions of Section 15HA of
the SEBI Act must visit the concerned
defaulters for which reason the orders
passed by the Appellate Tribunal impugned
in Civil Appeal Nos.2595 of 2013, 2596 of
2013 and 2666 of 2013 are set aside and
the findings recorded and the penalty
imposed by the Adjudicating Officer are
restored.
15. Consequently and in view of the
17
above Civil Appeal Nos. 5829 of 2014 and
11195-11196 of 2014 are dismissed and
Civil Appeal Nos. 2595, 2596 and 2666 of
2013 are allowed.
..............,J.
(RANJAN GOGOI)
NEW DELHI
SEPTEMBER 20, 2017