corporate law -in the case of traders violation of Regulations 3(a), (b) and (c) and 4 (1), (2)(a) and (b) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereinafter referred to as “the PFUTP Regulations”). In the case of brokers, the charge is that they also violated Regulations 7A (1), (2), (3) and (4) of the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992. - whether the parties were buying and selling securities in the derivatives segment at a price which did not reflect the value of the underlying in synchronised and reverse transactions. = Considering the reversal transactions, quantity, price and time and sale, parties being persistent in number of such trade transactions with huge price variations, it will be too naïve to hold that the transactions are through screen-based trading and hence anonymous. Such conclusion would be over-looking the prior meeting of minds involving synchronization of buy and sell order and not negotiated deals as per the board's circular. The impugned transactions are manipulative/deceptive device to create a desired loss and/or profit. Such synchronized trading is violative of transparent norms of trading in securities. If the findings of SAT are to be sustained, it would have serious repercussions undermining the integrity of the market and the impugned order of SAT is liable to be set aside. On the above additional reasonings also, I agree with the conclusion allowing the appeal preferred by SEBI against the traders. I also agree with the conclusion dismissing the appeal preferred by the SEBI against the brokers.

 REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 1969 OF 2011
SECURITIES AND EXCHANGE BOARD OF INDIA ….APPELLANT(S)
VERSUS
RAKHI TRADING PRIVATE LTD. ....RESPONDENT(S)
WITH
CIVIL APPEAL NOS. 3174-3177 OF 2011
AND
CIVIL APPEAL NO. 3180 OF 2011
J U D G M E N T
KURIAN, J.
1. Fairness, integrity and transparency are the hallmarks of
the stock market in India. The Securities and Exchange Board
of India (hereinafter referred to as “SEBI”) is the vigilant
watchdog. Whether the factual matrix justified the
1
watchdog’s bite is the issue arising for consideration in this
case.
2. There are two sets of party respondents – the traders
and the brokers. SEBI proceeded against the traders for
violation of Regulations 3(a), (b) and (c) and 4 (1), (2)(a) and
(b) of the Securities and Exchange Board of India (Prohibition
of Fraudulent and Unfair Trade Practices Relating to Securities
Market) Regulations, 2003 (hereinafter referred to as “the
PFUTP Regulations”). In the case of brokers, the charge is that
they also violated Regulations 7A (1), (2), (3) and (4) of the
Securities and Exchange Board of India (Stock Brokers and
Sub-brokers) Regulations, 1992.
3. As the matter before us involves three traders and three
brokers, for convenience, we have extracted the dates of the
decision of the Adjudicating Officer (hereinafter referred to as
“A.O.”) and the Securities Appellate Tribunal (hereinafter
referred to as “the SAT”) in the table below:
S.No
.
Name of the Party Trader/
Broker
Date of
A.O’s
order
Date of
SAT’s
decision
1. Rakhi Trading
Private Limited
(“Rakhi Trading”)
Trader 26.03.20
09
11.10.201
0
2
2. Tungarli Tradeplace
Private Limited
(“Tungarli”)
Trader 30.04.20
10
16.11.201
0
3. TLB Securities
Limited
(“TLB”)
Trader 16.03.20
09
26.10.201
0
4. Indiabulls
Securities Limited
(“Indiabulls”)
Broker 25.02.20
09
26.10.201
0
5. Angel Capital and
Debt Market
Limited (“Angel”)
Broker 22.05.20
09
26.10.201
0
6. Prashant Jayantilal
Patel (“Prashant”)
Broker 31.08.20
09
26.10.201
0
SAT set aside the decisions of the A.O. in all the
aforementioned cases. Aggrieved, SEBI is before this Court
under Section 15Z of the Securities and Exchange Board of
India Act, 1992 (hereinafter referred to as the “SEBI Act”).
4. Both the facts and the law are complex, and hence, we
shall first analyse the legal framework.
5. The Securities Contracts (Regulation) Act, 1956 was
introduced “… to prevent undesirable transactions in
securities by regulating the business of dealing therein, by
providing for certain other matters connected therewith”.
Section 18A dealing with contracts in derivatives was
3
introduced with effect from 22.02.2000. The provision reads
as follows:
“18A. Contracts in derivative.—Notwithstanding
anything contained in any
other law for the time being in force,
contracts in derivative shall be legal and
valid if such contracts are —
(a) traded on a recognised stock exchange;
(b) settled on the clearing house of the
recognised stock exchange; or in
accordance with the rules and byelaws
of such stock exchange;
(c) between such parties and on such
terms as the Central Government
may, by notification in the official
Gazette, specify.”
“Derivative” is defined under Section 2(ac) of the 1956
Act, which read as under:
“2(ac)] “derivative” includes—
(A) a security derived from a debt instrument,
share, loan, whether secured or unsecured,
risk instrument or contract for differences or
any other form of security;
(B) a contract which derives its value from the
prices, or index of prices, of underlying securities.
4
(C) commodity derivatives; and
(D) such other instruments as may be declared
by the Central Government to be derivatives;”
6. “Option in securities” is defined under Section 2 (d) of
the 1956 Act, which reads as under:
“2(d) “option in securities” means a contract
for the purchase or sale of a right to buy or
sell, or a right to buy and sell, securities in future,
and includes a teji, a mandi, a teji mandi,
a galli, a put, a call or a put and call in securities.”
7. The term “securities” is defined under Section 2(h) of
the 1956 Act, which reads as under:
 “2(h) “securities” include—
(i) shares, scrips, stocks, bonds,
debentures, debenture stock or other
marketable securities of a like nature in
or of any incorporated company or other
body corporate.
xxx xxx
xxx
(ia) derivative;”
8. In 1992, the SEBI Act was introduced “…to provide for
the establishment of a Board, to protect the interest of
5
investors in securities and to promote the development of
and to regulate, the securities market and for matters
connected therewith or incidental thereto”.
9. Section 15HA of the SEBI Act provides for penalty for
fraudulent and unfair trade practices. The provision reads as
under:
“15HA. Penalty for fraudulent and unfair
trade practices.- If any person indulges in
fraudulent and unfair trade practices relating
to securities, he shall be liable to a penalty
which shall not be less than five lakh rupees
but which may extend to twenty-five crore rupees
or three times the amount of profits
made out of such practices, whichever is
higher.”
10. Adjudication is provided under Section 15I. Section 15T
provides for appeal to SAT against any order made by an
Adjudicating Officer and Section 15Z provides for an appeal to
Supreme Court against an order passed by the SAT “...on any
question of law arising out of such order..”
11. Under Section 30 of the SEBI Act “….the Board may, by
notification, make regulations consistent with this Act and the
Rules made thereunder to carry out the purposes of this Act.”
The PFUTP Regulations were notified on 17.07.2003.
6
12. Regulation 2(1)(b) of the PFUTP Regulations provides
the definition of “dealing in securities”, which reads as under:
“2(1)(b) “dealing in securities” includes an
act of buying, selling or subscribing pursuant
to any issue of any security or agreeing to
buy, sell or subscribe to any issue of any 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 Act.”
13. Chapter II of the PFUTP Regulations comprising
Regulations 3 and 4 deals with the prohibition of fraudulent
and unfair trade practices relating to securities in the market.
Regulation 3 speaks of prohibition about certain dealings in
securities and Regulation 4 provides for prohibition of
manipulative, fraudulent and unfair trade practices. The
regulations relevant for the purpose of the present case read
as under:
“3. Prohibition of certain dealings in securities
 No person shall directly or indirectly—
(a) buy, sell or otherwise deal in securities in
a fraudulent manner;
(b) use or employ, in connection with issue,
purchase or sale of any security listed or
7
proposed to be listed in a recognized
stock exchange, any manipulative or 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.
 “4. Prohibition of manipulative, fraudulent and
unfair trade practices
(1) Without prejudice to the provisions of
regulation 3, no person shall indulge in a
fraudulent or an unfair trade practice
insecurities.
(2) Dealing in securities shall be deemed to
be a fraudulent or an unfair trade practice if it
involves fraud and may include all or any of
the following, namely:—
(a) indulging in an act which creates false or
misleading appearance of trading in the securities
market;
8
(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;
xxx xxx
xxx
(e) any act or omission amounting to manipulation
of the price of a security;
xxx xxx
xxx
(g) entering into a transaction in securities
without intention of performing it or without
intention of change of ownership of such security;

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

“2(1)(c) "fraud" includes any act, expression,
omission or concealment committed whether
in a deceitful manner or not by a person or by
any other person with his connivance or by his
agent while dealing in securities in order to
induce another person or his agent to deal in
securities, whether or not there is any
wrongful gain or avoidance of any loss, and
shall also include:
9
(1) a knowing misrepresentation of the truth or
concealment of material fact in order that
another person may act to his detriment;
(2) a suggestion as to a fact which is not true
by one who does not believe it to be true;
(3) an active concealment of a fact by a
person having knowledge or belief of the fact;
(4) a promise made without any intention of
performing it;
(5) a representation made in a reckless and
careless manner whether it be true or false;
(6) any such act or omission as any other law
specifically declares to be fraudulent,
(7) deceptive behavior by a person depriving
another of informed consent or full
participation,
(8) a false statement made without reasonable
ground for believing it to be true.
(9) the act of an issuer of securities giving out
misinformation that affects the market price of
the security, resulting in investors being
effectively misled even though they did not
rely on the statement itself or anything
derived from it other than the market price.
And “fraudulent” shall be construed 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
10
(b) the economic situation of the country
(c) trends in the securities market;
(d) any other matter of a like nature
whether such comments are made in public
or in private;
xxx xxx
xxx
(e) “securities” means securities as defined
in section 2 of the Securities Contracts (Regulation)
Act, 1956 (42 of 1956).”
15. The Securities and Exchange Board of India (Stock
brokers and Sub-brokers) Regulations, 1992 in Schedule II
deals with the code of conduct for stockbrokers which reads
as follows:
“SCHEDULE II
Securities and Exchange Board of India
(Stock Brokers and Sub-brokers)
Regulations, 1992
CODE OF CONDUCT FOR STOCK BROKERS
[Regulation 7]
A. General.
11
(1) Integrity: A stock-broker, shall maintain
high standards of integrity, promptitude
and fairness in the conduct of all his
business.
(2) Exercise of due skill and care : A
stock-broker shall act with due skill, care
and diligence in the conduct of all his business.
(3) Manipulation : A stock-broker shall
not indulge in manipulative, fraudulent or
deceptive transactions or schemes or
spread rumours with a view to distorting
market equilibrium or making personal
gains.
(4) Malpractices: A stock-broker shall not
create false market either singly or in concert
with others or indulge in any act detrimental
to the investors interest or which
leads to interference with the fair and
smooth functioning of the market. A stockbroker
shall not involve himself in excessive
speculative business in the market beyond
reasonable levels not commensurate
with his financial soundness.
(5) Compliance with statutory requirements:
A stock-broker shall abide by all
the provisions of the Act and the rules,
regulations issued by the Government, the
Board and the Stock Exchange from time
to time as may be applicable to him.”
12
16. As the facts pertain to transactions involving certain
technical terms, we will have to necessarily deal with their
meaning and content.
17. Derivatives – Derivatives are a form of financial
instruments which are traded in the securities market and
whose values are derived from the value of the underlying
variables like the share price of a particular scrip in the cash
segment of the market or the stock index of a portfolio of
stocks. Derivative trading is governed by Section 18A of the
1956 Act. There are two types of derivative instruments -
‘futures’ and ‘options’. In futures and options, the trading can
either be of individual stocks or of indices like NIFTY, Bank
NIFTY etc.
18. Futures - a future contract is an agreement between two
parties to buy or sell an asset at a certain time in the future at
a certain price agreed upon on the date of the contract. All
the futures contracts are settled in cash.
19. Options – options are contracts between a buyer and the
seller which gives a right, but not an obligation, to buy or sell
the underlying asset at a stated price on or before a specified
date. While a buyer of an option pays the premium and buys
13
his right to exercise his option, the writer of an option is the
one who receives the option premium and is therefore obliged
to sell or buy the asset as per the option exercised by the
buyer.
Options are of two types, ‘Call’ and ‘Put’. Call Option gives the
buyer the right but not the obligation to buy a given quantity
of the underlying asset at a given price on or before a given
future date. Put Option gives the buyer the right, but not
obligation to sell a given quantity of underlying asset at a
given price on or before a given future date.
20. The impugned SAT order in the case of Rakhi Trading has
succinctly dealt with the working of options:
“2. …The seller in an options contract sells a
right to the buyer and since nothing can be
sold without a cost, the former charges an
amount from the latter which is called the
premium. It is this premium which is the only
negotiable element in an options contract that
is negotiated on the trading screen of the
stock exchange. At the beginning of every
trading cycle which is fixed by the concerned
stock exchange, it (stock exchange) prescribes
in the case of stock options a series of strike
rates based upon the prevailing market price
of particular shares that are allowed to be
traded in the F & O segment. In the case of
index options, the strike rates are determined
with reference to the index value in the cash
14
segment. These strike rates are based on the
general market perception both bullish and
bearish. Equal number of strike rates both
upwards and downwards of the prevailing
market price/index value are fixed by the stock
exchange. The stock exchange also fixes the
size of the contracts that are traded in lots.
When an investor chooses to trade in the
options contracts, he has to choose a scrip or
the Nifty, then assess whether the same will
go up or down on the next settlement date
and by how much. That is his gamble.
Accordingly, he will select a strike rate which is
the exercise price. He can then buy or sell a
“call Option” or a “Put Option”. A Call Option is
an option to “buy”, that is, the contract is to
buy the shares on a settlement date at the
selected strike rate. A Put Option is an option
to sell, that is, the contract is to sell the shares
on the settlement date at the selected strike
rate. In case the price of the underlying or the
value of the index in the cash segment goes
below the selected strike rate/exercise price,
the buyer will have no attraction to exercise
his option under the contract and will allow the
contract to lapse and thereby lose whatever
premium was paid by him. Premium amount is
the maximum that the buyer can lose in case
the market moves contrary to his perception.
In case the price of the underlying or the index
value in the cash segment were to go beyond
the selected strike rate/exercise price, the
buyer would certainly exercise his option
under the contract depending upon how high
the price or the stock index has gone after
adjusting the premium amount. These are
some of the motivating factors which weigh
with the investors in the options contracts. It is
a one sided contract where the loss suffered, if
15
any, by the buyer is limited only to the
premium amount whereas the loss which could
be suffered, if any, by the buyer is limited only
to the premium amount whereas the loss
which could be suffered by the writer of the
contract (seller) is limitless. If during the
period of the contract the market perception of
the seller (writer) changes or the market starts
moving contrary to his expectations, he may,
in his anxiety to cap his losses, take a reverse
position. He would then put in an offer or
accept an offer of a higher premium for the
same option and this in effect would result in
his repurchasing the contract at a higher
rate/premium to avoid greater losses.”
 (Emphasis
supplied)
21. Index - a stock market index is a measure of the relative
value of a group of stocks in numerical terms. As the stocks
within an index change value, the index value changes. NIFTY
50 is an index on National Stock Exchange which tracks the
behaviour of 50 companies covering different sectors of the
Indian economy.
22. Trading in Index – an investor can trade even the entire
stock market by buying index futures instead of buying
individual securities. The advantages of trading in index
futures are- the contracts are highly liquid, the index futures
provide higher leverage than any other stocks, it requires
16
comparatively low initial capital investment (only the
premium), it has lower risk than buying and holding stocks, it
is just as easy to trade the short side as the long side, the
trader needs to study only one index instead of several stocks
and finally, the contracts are settled in cash in the stock
exchange and therefore, all problems related to bad delivery,
fake or forged certificate etc. can be avoided.1
23. The case at hand deals, inter alia, with questions related
to synchronised trading. The concept of synchronised trading
has been explained by SAT in Ketan Parekh v. Securities
and Exchange Board of India2
. To quote:
“20. …. “A synchronised trade is one where
the buyer and seller enter the quantity and
price of the shares they wish to transact at
substantially the same time. This could be
done through the same broker (termed a cross
deal) or through two different brokers. Every
buy and sell order has to match before the
deal can go through. This matching may take
place through the stock exchange mechanism
or off market. When it matches through the
stock exchange, it may or may not be a
synchronised deal depending on the time
when the buy and sell orders are placed. …”
Facts:
1 This information has been extracted from the NSE Handbook on
Derivatives Trading.
2 Appeal No. 2 of 2004 before SAT.
17
24. As mentioned before, this case involves three traders
and three brokers.
Traders:
Rakhi Trading: Rakhi Trading was issued a show cause
notice (hereinafter referred to as “SCN”) on 05.10.2007
alleging execution of non genuine transactions in the Futures
and Options segment (hereinafter referred to as the “F&O
segment”). The trades in question pertain to NIFTY options.
In his decision, the A.O. analysed the trade logs and observed
that the trades executed by Rakhi Trading matched with the
counter-party Kasam Holding Private Limited in a few
seconds. The counter-party to all the trades in the NIFTY
contract was Kasam Holding Pvt. Ltd. and the reversals took
place in a matter of minutes/hours. The A.O. also noted that
on various occasions, when the time was not matched by the
respective parties, the first order was placed at an
unattractive price relative to market price. These transactions
took place on 21.03.2007, 22.03.2007. 23.03.2007 and
30.03.2007 and resulted in a close out difference of Rs 115.79
18
lakhs without any significant change in the value of the
underlying.
Tungarli: The SCN was issued to Tungarli on
05.10.2007. The allegation in the SCN was that through these
synchronized transactions, one party booked profits and the
other party booked losses. The trades pertained to future
scrips. The A.O.’s order notes that the trades were reversed in
all the cases in a matter of few seconds showing significant
difference between the buy and sell trade prices. The change
in positions took place without any significant
change/negligible change in the price of the underlying
security. The trades took place on 12.03.2007, 15.03.2007,
23.03.2007, 26.03.2007 and 28.03.2007 and the total profit
made by Tungarli was Rs 64.52 lakhs.
TLB: The SCN was issued to TLB on 05.10.2007. The
trades pertained to future scrips. As per the A.O.’s order, TLB
traded through stock broker SMC Global Securities Ltd and
the same broker is the counter party broker as well, trading
on behalf of different clients. All the transactions undertaken
19
by TLB resulted in loss to TLB and the total loss was Rs.38.69
lakhs. The trades in question took place on 22.01.2007,
23.01.2007, 31.01.2007, 01.02.2007, 05.02.2007 and
06.02.2007. The A.O.’s order notes that in many cases, the
trades were reversed in a matter of minutes showing
significant difference in prices without any significant change
in value of the underlying. The A.O.’s order notes that during
investigation, it was also seen that when the time was not
matched by the respective parties, the first order that was
placed was at an unattractive price relative to the market
price.
Brokers:
 Indiabulls: The case pertains to 23 reverse trades in 21
futures and 2 options on 22 different scrips and one Bank
Nifty futures. The A.O. takes into account the fact, that in
many cases, the reversals took place in a matter of
seconds/minutes without change in the value of the
underlying. The A.O. records that the Indiabulls representative
stated that they could not have known about the intention of
20
the clients, however, the representative admitted that the
trades were non-genuine and should not have taken place.
Angel: In the SCN dated 05.10.2007, the charge is that
as a stock-broker, it executed 56 reversal trades. As per the
A.O., these trades were reversed in a matter of a few minutes/
hours. However, the A.O. noted the positive steps taken by
Angel in curbing such trades (post reversal trades) and
submitted proof of its actions in this regard and therefore, a
lesser penalty was imposed on Angel.
 Prashant Jayantilal: The SCN was dated 05.10.2007.
The case pertains to 19 reversal trades wherein the original
trades were closed out during the day at a price which was
significantly above or below the price at which the
first/original transaction was executed.
25. The crux of the allegations in the show cause notices is
that the parties were buying and selling securities in the
derivatives segment at a price which did not reflect the value
of the underlying in synchronised and reverse transactions.
21
26. After affording an opportunity for filing reply to the SCNs
and a personal hearing, the A.O. passed a detailed order
dated 26.03.2009 in the case of Rakhi Trading. Paragraphs 22
to 24 read as follows:
“22. If the individual trades are seen from the
order log provided to the noticee, it is seen
that the time difference between the buy and
sell order is only in seconds. Most of the orders
were matched in a time gap of 1, 2 or 3
seconds and many orders have matched to
the exact second, i.e. time difference is 0
(zero). This is proof enough to establish the
existence of synchronization of trades;
otherwise the trades would not have matched
repeatedly to the exact second in the NIFTY
Contracts which is the most active contract in
the options segment. Hence it overrides the
noticee’s submission that no material or data
has been disclosed to substantiate the said
allegation of “synchronization” of any trades.
23. On analysis of the reversal transactions
undertaken by the noticee, it is seen that the
percentage to market gross is in the range of
30 percent to 50 percent in the 14 contracts
executed by the noticee. In two contracts of
NIFTY, the percentage to market gross
reached 50 percent. This accounts for a
significant percentage of trades on the
concerned days and the traded value was
Rs.95.75 lakhs for those two reversal trades.
The trade quantities are also high. The total
traded value is Rs.503.00 lakh in a matter of
just 4 (four) trading days. As submitted by the
noticee, NIFTY moves constantly. Also, NIFTY is
the most active of the options contracts
22
traded on the exchange and it has contributed
to 92.21 percent of the contracts traded in the
Options segment during March 2007. Further,
the NIFTY options contracts contributed to
99.97 percent of the total Index Options
contracts traded in March 2007 (source: NSE
website). In such a scenario it is seen that the
noticee’s counter party to all the trades in
NIFTY contracts is Kasam Holding Pvt. Ltd.
(trading through the broker Vibrant Securities
Private Limited), this clearly gives an
indication to the existence of a
pre-arrangement/synchronization / matched
trades between the clients. Otherwise it does
seem unrealistic that the orders should match
exactly both quantity and price wise, just as a
matter of coincidence, with the same party
again and again. It is clear that there was an
intention of creating a false or misleading
appearance in the market and also that a
manipulative /deceptive device was used for
synchronization of trades.
24. The trades executed by the noticee in all
NIFTY contracts, matched with the counter
party client, Kasam Holding Pvt. Ltd. in less
than a few seconds. It is pertinent to note here
that the noticee executed all the reversal
trades in a matter of minutes/hours, at a profit
of Rs.107.79 lakh without any significant
change in the value of the underlying security.
This raises doubts about the genuineness of
the transactions. The fact that such
transactions took place repeatedly over a
period of time reinstates the fraudulent nature
of such trades.”
23
Thus, according to the A.O. a manipulative/deceptive
devise was used for synchronization of trades and the trades
were fraudulent/fictitious in nature. It was found that there is
violation of Regulations 3(a), (b) and (c) and 4(1), (2)(a) and
(b) of the PFUTP Regulations, 2003. Consequently, a penalty
of Rs.1,08,00,000/- was imposed under Section 15HA of the
SEBI Act, 1992. Appeal was filed under Section 15T before the
SAT. An appeal was disposed of by order dated 11.10.2010
whereby SAT set aside the order of SEBI. The detailed
consideration is available at paragraphs 5 to 8 of the SAT
order in Rakhi Trading, which read as follows:
“5. Index in a capital market is a statistical
indicator of how the market is functioning and
acts as a barometer for market behaviour. It is
not a product but a measure expressed in
numbers and a benchmark against which
financial or economic performance is
evaluated. Unlike stocks in the cash segment,
it is not traded as such though investors
speculate on market behaviour using index as
the underlying in the F & O segment. Nifty, the
stock index of NSE, is computed using market
capitalization weighted method (share price x
number of outstanding shares) of fifty stocks
being traded in the cash segment of NSE. It is a
well diversified stock index covering 22
different sectors of the Indian economy. The
24
eligibility of a particular stock for being
selected for Nifty index depends on the
liquidity of the stock as well as the floating
stock of the company. Nifty, therefore, is a very
dynamic index which is not constant but
evolves continuously. Obviously, to manipulate
such a diverse and changing portfolio of stocks
in the cash segment is extremely difficult, if not
impossible by trading in the
F & O segment. It is also NSE’s stated position
on its website that “stock index is difficult to
manipulate as compared to stock prices, more
so in India and the possibility of cornering is
reduced. This is partly because an individual
stock has a limited supply which can be
cornered”. It is obvious that when Nifty is
traded in options contracts, the movement of
prices in that segment cannot have any impact
on the price discovery system in the cash
segment which is one of the allegations
brought out in the ad-interim ex-parte order
and the show cause notice. The charge against
the appellant in the show cause notice is that
by executing trades in Nifty options in the F &
O segment “the original trades were closed out
during the day at a price which was
significantly above or below the price at which
the first/original transaction was executed
without significant variations in the traded
price of the underlying security”. The
insinuation is that by executing manipulative
trades in the F & O segment, Nifty index was
sought to be tampered with. This charge
proceeds on the assumption that the
25
movement of Nifty options in the F & O
segment should be in harmony with the
movement of Nifty index in the cash segment.
This assumption is fallacious and we cannot
agree. Movement of index in the cash segment
does influence the index options in the F & O
segment because the strike rate is directly
linked with the index value in the cash
segment. However, the converse is not always
true. While transactions in the cash market are
based on the current market price of the
underlying derived by the principle of demand
and supply and in the case of an index, the
value depends on the performance of the
stocks that constitute it, the pricing in the F &
O segment is based on future expected events
which may or may not happen. Anticipated
future events may not have a discernible effect
on the cash segment today where delivery of
shares is given/taken immediately. Such events
may have a great impact on perceptions in the
F & O market where the investor holds an open
position and a continuous liability during the
currency of the contract which is generally for
one to three months with anticipation of future
events which are always pregnant with all sorts
of possibilities. Again, volatility and potential
for greater losses may trigger movements in
the F & O market without any equivalent cash
market movements. Further, the cash market
may move up today but the prediction for the F
& O market could be that at the end of a
month, two months or three months the
market may move down. Only short term
26
investors like speculators trade in the F & O
market whereas in the cash market long terms
investors also trade. We are, therefore,
satisfied that the movement in the two
segments need not be in tandem. In the instant
case the appellant executed Nifty option
contracts and it must be remembered that
Nifty index is determined by fifty highly liquid
scrips which also vary from time to time and
the index moves on the basis of their
performance in the cash segment. These
movements cannot be in tandem with the
movement of the price of Nifty options in the F
& O segment because Nifty as an index is not
capable of being traded in the cash segment.
What is traded in the cash segment are the
fifty stocks which constitute Nifty. To say that
some manipulative trades in Nifty options in
the F & O segment could influence the Nifty
index is too farfetched to be accepted. The
only way Nifty index could be influenced is
through manipulation of the prices of all or
majority of the scrips in the cash segment that
constitute Nifty. This is extremely difficult, if not
impossible. It is common case of the parties
that the appellant traded only 13 Nifty option
contracts in the F & O segment. Assuming
these trades were manipulative, could these
ever influence the Nifty index. As already
observed, Nifty index is a very large well
diversified portfolio of stocks which is not
capable of being influenced much less
manipulated by the movement of prices in the
F & O segment particularly by the handful of
27
trades executed by the appellant. In this view
of the matter, we have no hesitation to hold
that the 13 trades in Nifty options executed by
the appellant had no impact on the market or
affected the investors in any way nor did these
influence the Nifty index in any manner. The
charge in this regard must fail.
6. Another charge against the appellant is that
its trades in Nifty options were fictitious
transactions which were synchronized and
reversed resulting in the creation of misleading
appearance of trading in those options.
Derivative segment is highly volatile and
involves a complexed form of trading with high
risks and the players in this segment do not
follow the herd mentality as is often noticed in
the cash segment but take decisions based on
their own perception of the market. The
number of persons trading in this segment is
comparatively much less than those in the
cash segment. The Board has found that only
14 contracts executed by the appellant in the
options segment constituted 30 to 50 per cent
of the market gross in that segment though
nifty is the most active of the options contracts
traded on the exchange and contributed 92.21
per cent of the trades during March, 2007. This
is indicative of the fact that the number of
players in the options segment is very less.
Artificial/fictitious trades in the cash segment
do give a false appearance of active trading in
a particular scrip by increasing volumes which
 tend to lure the lay investors to invest in that
 scrip. The impression given to the investors is
28
that the scrip is highly liquid and much in
demand and this interferes with the price
discovery mechanism of the exchange and it is
for this reason that such trades are held illegal
in the cash segment. This, however, cannot be
the case in the F & O segment. Since all the
trades are executed through the stock
exchange and settled in cash through its
mechanism they cannot be said to be artificial
trades creating a misleading appearance of
trading in the options. The charge is
misconceived.
7. This brings us to the issue of
synchronization of the buy and sell orders in
the Nifty option contracts executed by the
appellant where the counter party in the 13
impugned transactions was the same entity.
Impugned order records that Nifty contracts
which are the most active contracts in the
options segment cannot be traded in the way
the appellant has traded matching its orders to
seconds with the counter party client. This,
according to the adjudicating officer, was a
pre-planned arrangement between the
appellant and its counter party and their
intention was to create a false and misleading
appearance in the market and a manipulative
device was used for synchronizing the trades.
The learned senior counsel appearing for the
appellant did not dispute the fact that the
trades had been synchronized and reversed
but he argued that these did not manipulate
the market and that only the synchronized
trades which manipulate the market are
29
prohibited. He placed reliance on a judgment of
this Tribunal in Ketan Parekh vs. Securities and
Exchange Board of India, Appeal No.2 of 2004
decided on 14.7.2006. He also referred to the
order passed by the Board in the case of ICICI
Brokerage Services Ltd. wherein a similar view
had been taken and strenuously argued that
since the synchronized trades of the appellant
did not manipulate the market, the impugned
order deserves to be set aside. We find merit in
this contention. The fact that the trades
executed by the appellant had been
synchronized with the counter party is not
really in dispute before us. We have already
held that the 13 trades in Nifty options
executed by the appellant had no impact on
the market or affected the investors or the
Nifty index in any manner. In Ketan Parekh’s
case (supra) this Tribunal had observed that
synchronized trades per se are not illegal but
only those which manipulate the market in any
manner are the ones that are prohibited and
violate the Regulations. Relying upon the
observations made by this Tribunal in Nirmal
Bang Securities Pvt. Ltd. vs. Securities and
Exchange Board of India [2004] 49 SCL 421,
the then chairman of the Board while dealing
with the synchronized trades executed by the
appellant therein observed as under:-
“For the above reason, although it
cannot be said that synchronized
deals are pre se illegal, for the
same reason, it cannot be said that
30
all synchronized transactions are legal
and permitted. All synchronized
transactions which have the effect
of manipulating the market are
against fair market practices and
hence undesirable and prohibited.”
We have reproduced the observations from the
order of the Board only to highlight that the
Board also understands that the law is that
only such synchronized trades violate the Regulations
which manipulate the market. Since
the impugned trades of the appellant in the F &
O segment had no impact on the market, we
hold that they did not violate the Regulations.
Shri Kumar Desai learned counsel for the respondent
was equally emphatic in arguing that
the appellant had not only executed synchronized
trades but had also reversed them during
the course of the trading with the same
counter party and, therefore, the trades were
fictitious and non-genuine and that the adjudicating
officer was justified in holding so and
imposing the monetary penalty for violating
the Regulations. He placed strong reliance on
the observations of the Tribunal in Ketan
Parekh’s case (supra) wherein it has been held
that reversal of trades between the same parties
results in fictitious trades and they are illegal.
We are unable to agree with him. The observations
in Ketan Parekh’s case were made
with reference to the trades that were executed
in the cash segment and we are clearly
of the view that all those observations cannot
apply to the trades executed in the F & O segment.
Reverse trades in the cash segment
have been held to be illegal and violate the
Regulations because there is no “change of
beneficial ownership” in the traded scrip. More31
over, in the cash segment the scrip is actually
traded entailing not only “change of beneficial
ownership” but also physical delivery/movement
of the traded scrip. When this does not
happen in the cash segment, the trade is described
as a fictitious trade creating false volumes
which manipulates the market. The scenario
in the F & O segment, particularly in the
options contracts with which we are concerned
in the present case, is altogether different from
that of the cash segment. In the F & O segment
there is no concept of “change of beneficial
ownership” since what is traded in this segment
are contracts and not the underlying
stock or index and it is only through cash settlement
that the trade is concluded and no
physical delivery of any asset is involved. In
this view of the matter, synchronized and re
versed trades in Nifty options in the F & O segment
can never manipulate the market which,
in the present context, means the value of the
Nifty index in the cash segment. To repeat, we
may again observe that it is almost impossible
to manipulate the Nifty index which consists of
fifty well diversified highly liquid stocks in the
cash segment. Since the trades of the appellant
were settled in cash through the stock exchange
mechanism, they were genuine and
these could not create a false or misleading appearance
of trading in the F & O segment. It is
the Board’s own case that the appellant made
profits in all these transactions and the counter
party suffered losses.
8. When we analyse the nature of the trades
executed by the appellant, we find that it
played in the derivative market neither as a
hedger nor as a speculator and not even as an
32
arbitrageur. The question that now arises is
why did the appellant execute such trades with
the counter party in which it continuously
made profits and the other party booked
continuous losses. All these trades were
transacted in March 2007 at the end of the
financial year 2006-07. It is obvious and, this
fact was not seriously disputed by the learned
senior counsel appearing for the appellant, that
the impugned trades were executed for the
purpose of tax planning. The arrangement
between the parties was that profits and losses
would be booked by each of them for effective
tax planning to ease the burden of tax liability
and it is for this reason that they synchronized
the trades and reversed them. They have
played in the market without violating any rule
of the game. This Tribunal in Viram Investment
Pvt. Ltd. vs. Securities and Exchange Board of
India, Appeal no.160 of 2004 decided on
February 11, 2005 while dealing with a
contention as to whether trades could be
executed through the stock exchange for tax
planning, made the following observations
which are relevant for our purpose:-
 “Even if we consider transactions undertaken
for tax planning as being
non genuine trades, such trades in order
to be held objectionable, must result
in influencing the market one way
or the other. We do not find any evidence
of that either in the investigation
conducted by the Bombay Stock
Exchange, copy of which has been an33
nexed to the memorandum of appeal
or in the impugned order that there
was any manipulation. ……… Trading
in securities can take place for any
number of reasons and the authorities
enquire into such transactions which
artificially influence the market and induce
the investors to buy or sell on
the basis of such artificial transactions.”
The observations even though made in the
context of the cash segment are equally applicable
to the F & O segment. We are in agreement
with the aforesaid observations and relying
thereon we hold that the impugned transactions
in the case before us do not become illegal
merely because they were executed for
tax planning as they did not influence the market.
The learned counsel for the respondent
Board drew our attention to Regulation 3(a), (b)
& (c) and Regulation 4(1) and 4(2)(a) & (b) of
the Regulations to contend that the trades of
the appellant were in violation of these 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 or using or employing in
connection with purchase or sale of any security
any manipulative or deceptive device in
contravention of the Act, Rules or Regulations.
Similarly, Regulation 4 prohibits persons from
indulging in fraudulent or any unfair trade
practices in securities which include creation of
false or misleading appearance of trading in
the securities market or dealing in a security
not intended to effect transfer of beneficial
ownership. Having carefully considered these
provisions, we are of the view that market ma34
nipulation of whatever kind, must be in evidence
before any charge of violating these
Regulations could be upheld. We see no trace
of any such evidence in the instant case. We
have, therefore, no hesitation in holding that
the charge against the appellant for violating
Regulations 3 and 4 must also fail.”
(Emphasis Supplied)
27. The SAT has also taken a view that the circular dated
10.03.2005 issued by the NSE was not legally binding. The
members were advised to desist from entering
orders/transactions on illiquid securities/contracts where
some set of members/clients executed reversing
transactions/both buy and sell at abnormal price differences
in premiums that had no relevance to the movement in prices
of the underlying. In the said circular, members were also
advised to desist from entering such orders which prima facie
appeared to be non-genuine and further advised to put in
appropriate internal systems for checking such orders. SAT
held that only SEBI-the Regulator can issue and should issue
such directions.
28. SAT, in the case of Tungarli, squarely followed its
decision in Rakhi Trading. In TLB Securities also, after briefly
35
discussing the facts, SAT relied on Rakhi Trading to set aside
the SEBI order.
29. As far as the brokers are concerned, in addition to
relying on its decision in Rakhi Trading, SAT held in Indiabulls
Securities that the brokers must succeed for two additional
reasons. To quote:
“7. The appellant before us which is a stock
broker must also succeed for two additional
reasons as well. The appellant is said to have
executed 23 trades on behalf of its clients
which were reversed between the same
parties. Assuming that these trades were
manipulative and had been executed by the
clients with a premeditated plan, the fact still
remains that the appellant only acted as a
broker and carried out the directions of its
clients which it ought to. Could the appellant
be held liable merely because it acted as a
broker? This question has come up for the
consideration of this Tribunal time and again
and this is what was held in Kasat Securities
Pvt. Ltd. vs. Securities and Exchange Board of
India, Appeal No. 27 of 2006 decided on June
20, 2006 wherein this Tribunal observed as
under:-
“The trades, on the face of it,
appear to be fictitious and we shall
proceed on that assumption. It is
obvious that these trades were
executed by the clients and the
appellant acted only as a broker. If
the appellant knew that the trades
were fictitious then there would be
no hesitation in upholding the
finding of the Board that it aided
36
and abetted the parties to execute
fraudulent transactions. Having
heard the learned counsel for the
parties and after going through the
record we are satisfied that this link
is missing. There is no material on
record to show that the appellant as
a broker knew that the trades were
fictitious or that the buyer and the
seller were the same persons.
Trading was through the exchange
mechanism and was online where
the code number of the broker
alone is known and the learned
counsel for the parties are agreed
that it is not possible for anyone to
ascertain from the screen as to who
the clients were. This is really a
unique feature of the stock
exchange where, unlike other
moveable properties, securities are
bought and sold between the
unknowns through the exchange
mechanism without the buyer or
the seller ever getting to meet.
Therefore it was not possible for the
broker to know who the parties
were. Merely because the appellant
acted as a broker cannot lead us to
the conclusion that it must have
known about the nature of the
transaction. There has to be some
other material on the record to
prove this fact. The Board could
have examined someone from KIL
to find out whether the appellant
knew about the nature of the
transactions but it did not do so. As
a broker, the appellant would
37
welcome any person who comes to
buy or sell shares. The Board in the
impugned order while drawing an
inference that the appellant must
have known about the nature of the
transactions has observed that the
appellant failed to enquire from its
clients as to why they were wanting
to sell the securities. We do not
think that any broker would ask
such a question from its clients
when he is getting business nor is
such a question relevant unless, of
course, he suspects some wrong
doing for which there has to be
some material on the record.”
In Kishor R. Ajmera vs. Securities and
Exchange Board of India, Appeal No. 13 of
2007 decided on February 5, 2008 this
Tribunal again observed as under:-
“Merely because two clients have
executed matched trades, it does
not follow that their brokers were
necessarily a party to the game
plan. On a screen based trading
through the price order matching
mechanism of the exchange, it is
not possible for either of the
brokers (or sub-brokers) to know
who the counter party or his broker
(or sub broker) is and when the
trade is executed, their names or
codes do not appear on the screen.
A unique feature of the stock
exchange is that, unlike other
moveable properties, securities are
bought and sold among the
38
unknowns who never get to meet
and they are traded at prices
determined by the forces of
demand and supply. If the Board is
to hold the broker (or the
sub-broker) responsible for a
matching trade, it has to allege and
establish that the broker (or the
sub-broker) was aware of the
counter party or his broker at the
time when the trade was executed.
There is no such allegation in this
case.”
The aforesaid observations apply with full
force to the facts of the present case because
the trading system is the same, both in the
cash segment as well as in the F&O segment.
As already observed, even if we assume that
the appellant’s clients had executed reverse
trades with the same counter party for some
mischief, we cannot impute knowledge of the
same to the appellant when the anonymity of
the trading system does not allow a broker to
know who the counter party or counter party
broker is. The screen based trading system
provides complete anonymity and the trades
are executed through the price order matching
mechanism. In the instant case, no link other
than broker client relationship between the
appellant and its clients has been established,
let alone any relation with the counter parties
or the counter party brokers. Moreover, the
appellant executed only 23 trades on behalf of
15 clients with a total close out difference of
Rs. 35.44 lacs (positive) which have been
called in question. Having regard to the fact
that the appellant had executed 1,69,71,078
trades for 1,21,306 clients with a turnover of
39
Rs. 1,11,659 crores during the investigation
period we are of the view that in terms of
materiality and substance this miniscule
number of trades done on behalf of 15 clients
were not likely to raise any alarm for the
appellant with a client base of over 4,70,000
clients. In these circumstances, we cannot
hold the appellant liable for the impugned
trades.
8. The other additional reason for which we
cannot hold the appellant liable is that out of
the 23 impugned trades that it executed on
behalf of its clients, 17 were executed directly
by the clients through the Internet. NSE by its
circular of August 24, 2000 has set detailed
guidelines on Internet based trading through
order routing system which route client orders
to the exchange trading system and the
software for this service has to be in
compliance with the parameters set by the
Board. The appellant as a broker has very little
direct control over such trades though it is
recorded as a broker in those trades. Having
regard to the total volume of trades executed
by the appellant and the wide client base that
it has, the learned counsel for the appellant
was right in contending that the appellant
could not be expected to put every single
trade under its scanner on a continuous basis
particularly those executed by the clients
through the Internet and that the impugned
trades being so miniscule, there was no
occasion for the appellant to get a red alert. It
is a fact that the clients had sufficient margins
with the appellant with no credit defaults at
any stage and that all the trades were settled
in cash through the clearing system of the
exchange. In this background, we find no
40
evidence of lack of due diligence on the part of
the appellant while executing the impugned
transactions which could make him guilty of
violating the code of conduct prescribed for
the stock brokers. The charge must, therefore,
fail.”
30. Aggrieved by the SAT orders, SEBI is before us under
Section 15Z of the SEBI Act.
31. We have extensively heard learned senior counsel and
other counsel appearing on both sides. SEBI has assailed the
SAT order on the ground that SAT has misunderstood SEBI’s
case. It is the submission of Mr. Gourab Banerji, learned
Senior Counsel appearing for SEBI, that the stock exchange is
a platform created to facilitate efficient and fair trading.
However, the transactions between the parties were
non-genuine and orchestrated which is prohibited under the
PFUTP Regulations. The Show Cause Notice makes it clear
that the transactions were a misuse of market mechanism as
they were not genuine trades. The non-genuineness of these
transactions is evident from the fact that there was no
commercial basis to suddenly, within a matter of minutes,
41
reverse a transaction when the value of the underlying had
not undergone any significant change.
32. According to SAT, the synchronization and reversal of
trades effected by the parties with a significant price
difference, some in a few seconds and majority, in any case,
on the same day had no impact on the market and it has not
affected the NIFTY index in any manner or induced investors.
SAT has held that such trades are illegal only when they
manipulate the market in any manner and induce investors. It
has also taken a view that there being no physical delivery of
any asset, there is no change of beneficial ownership and
what is traded in the F&O segment are only contracts and
hence, such synchronised and reverse trades in NIFTY
options in the F&O segment “can never manipulate the
market”. It has also held that the trades being settled in cash
through a stock exchange mechanism, are genuine and
therefore cannot create a false or misleading appearance of
trading in the F&O segment. Further, any trade to be
objectionable must result in influencing the market one way
or the other. SAT held that these trades were for the purpose
42
of tax planning which is not violative of any regulation. We are
not inclined to get in to the issue of tax planning as it was not
mentioned in the show cause notices.
33. We find it difficult to appreciate the stand taken by the
SAT which is endorsed by the learned senior counsel
appearing for the respondents. Mr. Chidambaram, learned
senior counsel appearing for Rakhi Trading argues that the
SAT decision is valid and proper. Reliance is also placed on the
case of Ketan Parekh (supra) in which SAT held that
synchronised trades are not per se illegal. As far as reversal of
trades is concerned, the senior counsel has sought to
distinguish Ketan Parekh (supra) as it pertained to dealings
in the cash segment whereas the present case deals with the
F&O segment. The learned senior counsel has strenuously
argued that no rules of the game have been violated.
34. We are unable to agree with the arguments of the
learned senior counsel appearing for Rakhi Trading.
Regulation 4(1) in clear and unmistakable terms has provided
that “no person shall indulge in a fraudulent or an unfair trade
practice in securities”. In Securities and Exchange Board
of India and Ors. v. Shri Kanaiyalal Baldevbhai Patel
43
and Ors.3
, it has been held by this Court that a trade practice
is unfair if the conduct undermines the ethical standards and
good faith dealings between the parties engaged in business
transactions. To quote:
“31. Although unfair trade practice has
not been defined under the regulation, various
other legislations in India have defined the
concept of unfair trade practice in different
contexts. A clear cut generalized definition of
the ‘unfair trade practice’ may not be possible
to be culled out from the aforesaid definitions.
Broadly trade practice is unfair if the conduct
undermines the ethical standards and good
faith dealings between parties engaged in
business transactions. It is to be noted that
unfair trade practices are not subject to a
single definition; rather it requires adjudication
on case to case basis. Whether an act or
practice is unfair is to be determined by all the
facts and circumstances surrounding the
transaction. In the context of this regulation a
trade practice may be unfair, if the conduct
undermines the good faith dealings involved in
the transaction. Moreover the concept of
‘unfairness’ appears to be broader than and
includes the concept of ‘deception’ or ‘fraud’.
xxx xxx
xxx
60. Coupled with the above, is the
fact, the said conduct can also be
3
 2017 SCC Online SC 1148.
44
construed to be an act of unfair
trade practice, which though not a defined
expression, has to be understood
comprehensively to include any act beyond a
fair conduct of business including the business
in sale and purchase of securities. However
the said question, as suggested by my learned
Brother, Ramana, J. is being kept open for a
decision in a more appropriate occasion as the
resolution required presently can be made
irrespective of a decision on the said
question.”
35. Having regard to the fact that the dealings in the stock
exchange are governed by the principles of fair play and
transparency, one does not have to labour much on the
meaning of unfair trade practices in securities. Contextually
and in simple words, it means a practice which does not
conform to the fair and transparent principles of trades in the
stock market. In the instant case, one party booked gains and
the other party booked a loss. Nobody intentionally trades for
loss. An intentional trading for loss per se, is not a genuine
dealing in securities. The platform of the stock exchange has
been used for a non-genuine trade. Trading is always with the
aim to make profits. But if one party consistently makes loss
and that too in preplanned and rapid reverse trades, it is not
45
genuine; it is an unfair trade practice. Securities market, as
the 1956 Act provides in the preamble, does not permit
“undesirable transactions in securities”. The Act intends to
prevent undesirable transactions in securities by regulating
the business of dealing therein. Undesirable transactions
would certainly include unfair practices in trade. The SEBI Act,
1992 was enacted to protect the interest of the investors in
securities. Protection of interest of investors should
necessarily include prevention of misuse of the market.
Orchestrated trades are a misuse of the market mechanism. It
is playing the market and it affects the market integrity.
36. Ordinarily, the trading would have taken place between
anonymous parties and the price would have been
determined by the market forces of demand and supply. In
the instant case, the parties did not stop at synchronised
trading. The facts go beyond that. The trade reversals in this
case indicate that the parties did not intend to transfer
beneficial ownership and through these orchestrated
transactions, the intention of which was not regular trading,
other investors have been excluded from participating in
46
these trades. The fact that when the trade was not
synchronizing, the traders placed it at unattractive prices is
also a strong indication that the traders intended to play with
the market.
37. We also find it difficult to appreciate the stand of SAT
that the rationale of change of beneficial ownership does not
arise in the derivatives segment. No doubt, as in the case of
trade in a scrip in the cash segment, there is no physical
delivery of the asset. However, even in the derivative
segment there is a change of rights in a contract. In the
instant case, through reverse trades, there was no genuine
change of rights in the contract. SAT has erred in its
understanding of change in beneficial ownership in reverse
trades. Even in derivatives, the ownership of the right is
restored to the first party when the reverse trade occurs. In
this context, the discussion in Ketan Parekh (supra)
assumes significance:
“20. …As already observed
‘synchronisation’ or a negotiated deal ipso
facto is not illegal. A synchronised transaction
will, however, be illegal or violative of the
Regulations if it is executed with a view to
manipulate the market or if it results in
circular trading or is dubious in nature and is
47
executed with a view to avoid regulatory
detection or does not involve change of
beneficial ownership or is executed to create
false volumes resulting in upsetting the
market equilibrium. Any transaction executed
with the intention to defeat the market
mechanism whether negotiated or not would
be illegal. Whether a transaction has been
executed with the intention to manipulate the
market or defeat its mechanism will depend
upon the intention of the parties which could
be inferred from the attending circumstances
because direct evidence in such cases may
not be available. The nature of the transaction
executed, the frequency with which such
transactions are undertaken, the value of the
transactions, whether they involve circular
trading and whether there is real change of
beneficial ownership, the conditions then
prevailing in the market are some of the
factors which go to show the intention of the
parties. This list of factors, in the very nature
of things, cannot be exhaustive. Any one
factor may or may not be decisive and it is
from the cumulative effect of these that an
inference will have to be drawn.”
(Emphasis Supplied)
From the facts before us, it is clear that the traders in
question did not intend to transfer beneficial ownership and
therefore these trades are non genuine.
38. Rather than allowing the market forces to operate in
their natural course, the traders repeatedly carried out the
48
impugned transactions which deprived other market players
from full participation. The repeated reversals and
predetermined arrangement to book profits and losses
respectively, made it clear that the parties were not trading in
the normal sense and ordinary course. Resultantly, there has
clearly been a restriction on the free and fair operation of
market forces in the instant case.
39. Regulation 2(1)(c) defines fraud. Under Regulation 2(1)
(c)(2) a suggestion as to a fact which is not true while he
does not believe it to be true is fraud. Under Regulation 2(1)
(c)(7), a deceptive behaviour of one depriving another of
informed consent or full participation is fraud. And under
Regulation 2(1)(c)(8), a false statement without any
reasonable ground for believing it to be true is also fraud. In a
synchronised and reverse dealing in securities, with
predetermined arrangement to book loss or gain between
pre-arranged parties, all these vices are attracted.
40. Regulation 3(a) expressly prohibits buying, selling or
otherwise dealing in securities in a fraudulent manner. Under
Regulation 4(2) dealing in securities shall be deemed to be
fraudulent if the trader indulges in an act which creates a
49
false or misleading appearance of trading in the securities
market. It is a deeming provision. Such trading also involves
an act amounting to manipulation of the price of the security
in the sense that the price has been artificially and apparently
prefixed. The price does not at all reflect the value of the
underlying asset. It is also a transaction in securities entered
into without any intention of performing it and without any
intention of effecting a change of ownership of such
securities, ownership being understood in the limited sense of
the rights in the contract.
41. According to SAT, only if there is market impact on
account of sham transactions, could there be violation of the
PFUTP Regulations. We find it extremely difficult to agree with
the proposition. As already noted above, SAT has missed the
crucial factors affecting the market integrity, which may be
direct or indirect. The stock market is not a platform for any
fraudulent or unfair trade practice. The field is open to all the
investors. By synchronization and rapid reverse trade, as has
been carried out by the traders in the instant case, the price
discovery system itself is affected. Except the parties who
50
have pre-fixed the price nobody is in the position to
participate in the trade. It also has an adverse impact on the
fairness, integrity and transparency of the stock market.
42. We are fortified in our conclusion by the judgment of this
Court in Securities And Exchange Board of India v.
Kishore R. Ajmera4
, though it is a case pertaining to
brokers, wherein it has been held at paragraph 25:
“25. The SEBI Act and the Regulations
framed thereunder are intended to protect the
interests of investors in the Securities Market
which has seen substantial growth in tune with
the parallel developments in the economy. 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 pre-empt 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 conducive to increased
participation and investment in the securities
market which 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.”
In this case it was also held that in the absence of direct
proof of meeting of minds elsewhere in synchronised
transactions, the test should be one of preponderance of
4
 (2016) 6 SCC 368
51
probabilities as far as adjudication of civil liability arising out
of the violation of the Act or the provision of the Regulations
is concerned. To quote:
“31. The conclusion has to be gathered
from various circumstances like that volume of
the trade effected; the period of persistence in
trading in the particular scrip; the particulars
of the buy and sell orders, namely, the volume
thereof; the proximity of time between the two
and such other relevant factors…”
We do not think that those illustrations are exhaustive.
There can be several such situations, some of which we have
discussed hereinabove.
43. The traders thus having engaged in a fraudulent and
unfair trade practice while dealing in securities, are hence
liable to be proceeded against for violation of Regulations
3(a), 4(1) and 4(2)(a) of PFUTP Regulations. Appeal
Nos.1969/2011, 3175/2011 and 3180/2011 are hence
allowed. The orders of the Securities Appellate Tribunal are
set aside and that of the SEBI are restored to the extent
indicated above.
44. As far as brokers are concerned, we are of the view that
there is hardly any evidence on their involvement so as to
52
proceed against them for violation of Regulation 7A of the
Brokers Regulations and PFUTP Regulations. Merely because a
broker facilitated a transaction, it cannot be said that there is
violation of the Regulation. SEBI has not provided any
material to suggest negligence or connivance on the part of
the brokers. As held by this Court in Kishore R. Ajmera
(supra), there are several factors to be considered. We would
especially like to refer to the case of Angel Trading wherein
the broker repeatedly wrote to the National Stock Exchange
informing them about trades in the options segment that
were executed at unrealistic prices and requesting them to
put in mechanisms in the Options segment so that these
trades are not allowed to enter the system. In the absence of
any material provided by SEBI to prove the charges against
the brokers, particularly regarding aiding and abetting
fraudulent or unfair trade practices, we are of the opinion that
the orders of SEBI against the brokers should be interfered
with. Accordingly, the appeals filed against the brokers are
dismissed.
53
45. Before concluding, we would like to reiterate the
observations made by this Court in Kishore R. Ajmera
(supra) and Kanaiyalal Patel (supra) regarding the need
for a more comprehensive legal framework governing the
securities market. As the market grows, ingenuous means of
manipulation are also employed. In such a scenario, it is
essential that SEBI keeps up with changing times and
develops principles for good governance in the stock market
which ensure free and fair trading.
46. There shall be no order as to costs.
.......................J.
 (KURIAN JOSEPH)
New Delhi;
February 8, 2018.
54
 REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 1969 OF 2011
SECURITIES AND EXCHANGE BOARD OF INDIA ….APPELLANT(S)
VERSUS
RAKHI TRADING PRIVATE LTD. ....RESPONDENT(S)
WITH
CIVIL APPEAL NOS. 3174-3177 OF 2011
AND
CIVIL APPEAL NO. 3180 OF 2011
J U D G M E N T
R. BANUMATHI, J.
I have gone through the judgment proposed by His Lordship
Justice Kurian Joseph. I am in agreement with the conclusion arrived
at by His Lordship. However, in view of the importance of the issues
involved, I prefer to give my own additional reasonings also for my
concurrence.
2. Since the issues involved in all the appeals are one and the
same, appeals filed by SEBI pertaining to the traders and the brokers
were heard together. For convenience and reference on facts, I have
55
taken up the appeal arising out of Rakhi Trading Pvt. Ltd. as the lead
case.
3. Brief facts of the case are that in 2007, SEBI had examined the
nature of transactions occurring in the derivative segment of the capital
market. Upon examination of the trading data of the Future and Option
Segment (herein after referred as "F & O Segment") on the NSE for
the period January to March, 2007, it was observed that the brokers at
NSE were buying and selling almost equal quantities of contracts
within the day. Moreover, it was noticed that such buy/sell orders were
synchronized [Synchronized trade is one where buy and sell orders
are placed simultaneously for the same volume]. In most of the cases,
the same quantity and in few cases, substantially the same quantity of
the original trade was closed out during the day at a price which was
significantly above or below the price at which the first/original
transaction was executed without significant variations in the traded
price of the underlying security. After preliminary examination into the
trading of F&O contracts, SEBI identified that certain entities including
the respondent-Rakhi Trading operating in the derivative segment had
executed fictitious and non-genuine trades. Exercising its powers
under Section 19 read with Section 11B and 11D of the Securities and
56
Exchange Board of India Act, 1992, (for short 'SEBI Act, 1992') the
Whole Time Member of the Board had passed an ex parte order
directing the respondent and other entities to cease and desist from
indulging in the violations till further orders as they were found
indulging in non-genuine transactions.
4. Meanwhile, in terms of provisions of Rule 4(1) of the Securities
and Exchange Board of India Rules, 1995, the Board issued a show
cause notice to the respondent on 05.10.2007 alleging that the
respondent executed synchronized/matched/reversal trades and
indulged in non-genuine transactions with certain clients/stock brokers
during the period of examination in the F & O Segment by enclosing a
report showing fourteen Options Contracts executed by it in F & O
Segment between 21st March to 30th March, 2007 with a total close out
difference (COD) of Rs. 1,15,79,312.15/- i.e. net profit of Rs. 115.79
lakhs, thereby violating Regulations 3(a), 4(1) and 4(2)(a) of SEBI
(Prohibition of Fraudulent and Unfair Trade Practices relating to
Securities Market) Regulations, 2003 (for short "PFUTP Regulations").
On the show cause notice, the respondent, inter alia, contended that
the impugned transactions were genuine trades, traded on the screen
in anonymity in compliance with the rules and regulations of the
57
exchange for trading in Options Segment and the said transactions in
no manner undermined price discovery or influenced the market.
5. Upon consideration of the findings in the preliminary enquiry and
submissions of the respondent, the Adjudicating Officer found that
most of the trades i.e. buying and selling of contracts within a gap of
few seconds between the same parties through same set of brokers
matched and found that it is unrealistic that the orders would match
exactly both the quantity and price and with the same party again and
again. The Adjudicating Officer further held that manipulative device
was used for synchronization of trades and the trades were
fraudulent/fictitious in nature. After referring to SAT's judgment in
Ketan Parekh v. SEBI (Appeal No. 2 of 2004) and other judgments, the
Adjudicating Officer found that the respondent has executed
synchronized/reversal trades, in violation of PFUTP Regulations, 2003
and imposed a penalty of Rs.1,08,00,000/- on the respondent in terms
of the provisions of Section 15HA of SEBI Act, 1992.
6. On appeal by the respondent, Securities Appellate Tribunal
(SAT) set aside the order of the Adjudicating Officer and held that
NIFTY is a large well diversified index of stocks which is not capable of
being influenced. SAT further held that the thirteen trades in the
58
NIFTY options executed by the respondent had no impact on the
market and those transactions did not influence the NIFTY index in
any manner. SAT held that the impugned transactions do not become
illegal merely because they were executed for tax planning as they did
not influence the market. Holding that there has been no violation of
any regulation of SEBI, SAT set aside the order of the Adjudicating
Officer. Being aggrieved, SEBI has preferred this statutory appeal
under Section 15Z of SEBI Act, 1992.
RELEVANT PROVISIONS OF THE SEBI ACT AND THE REGULATIONS
7. Section 12-A contained in Chapter V-A of the SEBI Act, 1992
deals with “Prohibition of manipulative and deceptive devices, insider
trading and substantial acquisition of securities or control” and reads
as follows:
12A. Prohibition of manipulative and deceptive devices,
insider trading and substantial acquisition of securities or
control.—No person shall directly or indirectly—
(a) use or employ, in connection with the issue, purchase
or sale of any securities listed or proposed to be listed
on a recognised stock exchange, any manipulative or
deceptive device or contrivance in contravention of
the provisions of this Act or the rules or the
regulations made thereunder;
(b) employ any device, scheme or artifice to defraud in
connection with issue or dealing in securities which
59
are listed or proposed to be listed on a recognised
stock exchange;
(c) engage in any act, practice, course of business which
operates or would operate as fraud or deceit upon
any person, in connection with the issue, dealing in
securities which are listed or proposed to be listed on
a recognised stock exchange, in contravention of the
provisions of this Act or the rules or the regulations
made thereunder;
(d) engage in insider trading;
(e) deal in securities while in possession of material or
non-public information or communicate such material
or non-public information to any other person, in a
manner which is in contravention of the provisions of
this Act or the rules or the regulations made
thereunder;
(f) acquire control of any company or securities more
than the percentage of equity share capital of a
company whose securities are listed or proposed to
be listed on a recognised stock exchange in
contravention of the regulations made under this Act.
8. Section 30 of the SEBI Act reads as follows:-
30. Power to make regulations.- (1) The Board may, with the
previous approval of the Central Government by notification, make
regulations consistent with this Act and the rules made thereunder
to carry out the purposes of this Act.
...........
9. Section 15HA of the Act which deals with penalty for fraudulent
and unfair trade practices, Section 15HB which deals with penalty for
contravention where no separate penalty has been provided and
Section 15J which lays down the factors to be taken into account while
adjudging the quantum of penalty read as follows:
60
15HA. Penalty for fraudulent and unfair trade practices.—If any
person indulges in fraudulent and unfair trade practices relating to
securities he shall be liable to a penalty of twenty-five crore rupees
or three times the amount of profits made out of such practices,
whichever is higher.
15HB. Penalty for contravention where no separate penalty
has been provided.- Whoever fails to comply with any provision of
this Act, the rules or the regulations made or directions issued by
the Board thereunder for which no separate penalty has been
provided, shall be liable to a penalty which may extend to one crore
rupees.
15J. Factors to be taken into account by the adjudicating
officer.—While adjudging the quantum of penalty under Section
15-I, the adjudicating officer shall have due regard to the following
factors, namely—
(a) the amount of disproportionate gain or unfair advantage,
wherever quantifiable, made as a result of the default;
(b) the amount of loss caused to an investor or group of
investors as a result of the default;
(c) the repetitive nature of the default.
10. Section 12A has to be read along with the provisions of the
PFUTP Regulations, 2003, SEBI (Stockbrokers and Sub-Brokers)
Regulations, 1992 and the SEBI (Procedure for Holding Enquiry by
Enquiry Officer and Imposing Penalty) Regulations, 2002. Regulation 3
of the PFUTP Regulations, 2003 deals with "Prohibition of certain
dealings in securities". Regulation 4 deals with "Prohibition of
manipulative, fraudulent and unfair trade practices". Regulation 2 (1)(c)
defines "fraud". For relevant Capital Market Terms, I have made
reference to SEBI Act and K. Sekar's Guide to SEBI, Capital Issues,
Debentures & Listing, Lexis Nexis fourth Edition 2017 and Economics
61
of Derivatives by Cambridge University Press by T.V. Somanathan and
V. Anantha Nageswaran. To avoid repetition, I refrain from referring to
the explanation of the relevant Capital Market Terms.
11. Re-Contention: The impugned trades were normal transactions
traded on the system and not fictitious transactions:- Contention of
the respondent is that the impugned trades were normal transactions
traded on the system maintaining complete anonymity and the trades
were not illegal and the respondent has not violated the provisions of
SEBI Regulations. Respondent-Rakhi Trading Pvt. Ltd. contended that
the trading was done on automated screen based trading and it was
not possible for them to know who the counter party was and
therefore, the synchronization of trade was a mere coincidence. Per
contra, SEBI maintained that the respondent-Rakhi Trading and the
counter party-Kasam Holding Pvt. Ltd. had prior understanding and
have thwarted the checks and balances of the trading system by
executing non-genuine transactions with ulterior purpose.
12. To appreciate the contentious issues raised by the parties, I refer
to the impugned reversal trade transactions:
Trade Date
and Time
Buy Order
Time
Sell Order
Time
Time diff
between
Buy &
Sell
Order
Strike
Price
Trade
Price
Buy
Client
Name
Sell Client
Name
Total
traded
volume
Diff. in
price of 2
legs of
the trade
Close out
Difference
%
Market
Gross
21-Mar-07 14:50:28 14:50:27 0:00:01 3,930.00 270.00 KASAM
HOLDING
RAKHI
TRADING
10000 160 40.82
62
14:50:28 PVT. LTD PVT LTD
21-Mar-07
15:06:45
15:06:42 15:06:45 0:00:03 3,930.00 110.00 RAKHI
TRADING
PVT LTD
KASAM
HOLDING
PVT. LTD
10000 1600000
21-Mar-07
11:37:43
11:37:43 11:37:37 0:00:06 3,730.00 112.00 KASAM
HOLDING
PVT. LTD
RAKHI
TRADING
PVT LTD
4750 45 49.74
21-Mar-07
12:04:05
12:04:05 12:04:05 0:00:00 3,730.00 67.00 RAKHI
TRADING
PVT LTD
KASAM
HOLDING
PVT. LTD
4750 213750
21-Mar-07
14:33:19
14:33:19 14:33:18 0:00:01 # 120 12.25 SPARK
SECURITI
ES P LTD
RAKHI
TRADING
PVT LTD
80000 10 31.5
21-Mar-07
14:53:18
14:53:16 14:53:18 0:00:02 # 120 2.25 RAKHI
TRADING
PVT LTD
SPARK
SECURITI
ES P LTD
80000 800000
21-Mar-07
12:04:51
12:04:51 12:04:50 0:00:01 3,650.00 115.00 RAKHI
TRADING
PVT LTD
KASAM
HOLDING
PVT. LTD
10000 58 49.02
21-Mar-07
12:52:19
12:52:19 12:52:18 0:00:01 3,650.00 173.00 KASAM
HOLDING
PVT. LTD
RAKHI
TRADING
PVT LTD
8000 50
21-Mar-07
13:07:20
13:07:20 13:07:19 0:00:01 3,650.00 165.00 KASAM
HOLDING
PVT. LTD
RAKHI
TRADING
PVT LTD
2000 564000
22-Mar-07
14:02:25
14:02:25 14:02:23 0:00:02 4,190.00 410.00 KASAM
HOLDING
PVT. LTD
RAKHI
TRADING
PVT LTD
11500 125 38.59
22-Mar-07
11:39:28
11:39:28 11:39:26 0:00:02 4,190.00 285.00 RAKHI
TRADING
PVT LTD
KASAM
HOLDING
PVT. LTD
11500 1437500
22-Mar-07
15:02:37
15:02:37 15:02:36 0:00:01 3,960.00 190.00 KASAM
HOLDING
PVT. LTD
RAKHI
TRADING
PVT LTD
11700 89 50
22-Mar-07
15:23:15
15:23:15 15:23:15 0:00:00 3,960.00 101.00 RAKHI
TRADING
PVT LTD
KASAM
HOLDING
PVT. LTD
11700 1041300
Trade Date
and Time
Buy Order
Time
Sell Order
Time
Time diff
between
Buy &
Sell
Order
Strike
Price
Trade
Price
Buy
Client
Name
Sell Client
Name
Total
traded
volume
Diff. in
price of 2
legs of
the trade
Close out
Difference
%
Market
Gross
22-Mar-07
10:15:21
10:15:21 10:15:21 0:00:00 4,050.00 200.00 RAKHI
TRADING
PVT LTD
KASAM
HOLDING
PVT. LTD
10500 85 35.84
22-Mar-07
11:37:08
11:37:08 11:37:07 0:00:01 4,050.00 285.00 KASAM
HOLDING
PVT. LTD
RAKHI
TRADING
PVT LTD
10500 892500
23-Mar-07
10:22:37
10:22:37 10:22:37 0:00:00 3,880.00 190.00 KASAM
HOLDING
PVT. LTD
RAKHI
TRADING
PVT LTD
11600 133 30.05
23-Mar-07
11:14:05
11:14:05 11:14:04 0:00:01 3,880.00 57.00 RAKHI
TRADING
PVT LTD
KASAM
HOLDING
PVT. LTD
 11600 1542800
23-Mar-07
13:18:21
13:18:18 13:18:21 0:00:03 3,930.00 32.00 RAKHI
TRADING
PVT LTD
KASAM
HOLDING
PVT. LTD
10500 54 30
23-Mar-07
14:16:36
14:16:36 14:16:35 0:00:01 3,930.00 86.00 KASAM
HOLDING
PVT. LTD
RAKHI
TRADING
PVT LTD
10500 567000
23-Mar-07
13:19:06
13:19:06 13:19:05 0:00:01 3,960.00 63.00 RAKHI
TRADING
PVT LTD
KASAM
HOLDING
PVT. LTD
10700 52 31.6
23-Mar-07
14:17:49
14:17:49 14:17:49 0:00:00 3,960.00 115.00 KASAM
HOLDING
PVT. LTD
RAKHI
TRADING
PVT LTD
10700 556400
23-Mar-07
12:17:02
12:16:59 12:17:02 0:00:03 4,050.00 155.00 RAKHI
TRADING
PVT LTD
KASAM
HOLDING
PVT. LTD
11500 72 41.07
23-Mar-07
13:15:42
13:15:42 13:15:41 0:00:01 4,050.00 227.00 KASAM
HOLDING
PVT. LTD
RAKHI
TRADING
PVT LTD
11500 828000
23-Mar-07
12:17:44
12:17:44 12:17:44 0:00:00 4,150.00 230.00 RAKHI
TRADING
PVT LTD
KASAM
HOLDING
PVT. LTD
11600 72 50
63
23-Mar-07
13:16:19
13:16:19 13:16:19 0:00:00 4,150.00 302.00 KASAM
HOLDING
PVT. LTD
RAKHI
TRADING
PVT LTD
11600 835200
30-Mar-07
11:36:40
11:36:37 11:36:40 0:00:03 3,810.00 80.25 RAKHI
TRADING
PVT LTD
KASAM
HOLDING
PVT. LTD
8950 39.75 49.58
30-Mar-07
11:48:44
11:48:44 11:48:44 0:00:00 3,810.00 120.00 KASAM
HOLDING
PVT. LTD
RAKHI
TRADING
PVT LTD
8950 355762.5
30-Mar-07
14:30:04
14:30:04 14:30:04 0:00:00 3,550.00 270.00 RAKHI
TRADING
PVT LTD
KASAM
HOLDING
PVT. LTD
11900 29 46.21
30-Mar-07
14:43:02
14:43:00 14:43:02 0:00:02 3,550.00 299.00 KASAM
HOLDING
PVT. LTD
RAKHI
TRADING
PVT LTD
11900 345100
13. Synchronized Trading: As per the Oxford dictionary the word
'synchronize' means "cause to occur at the same time; be
simultaneous". A synchronized trade is one where the buyer and seller
enter the quantity and price of the shares they wish to transact at
substantially the same time. This could be done through the same
broker (termed a cross deal) or through two different brokers. [Ketan
Parekh v. SEBI, Manu/SB/0229/2006]
14. Synchronized trade is one wherein 'buy and sell' orders are
placed simultaneously for the same quantity and price they wish to
transact at substantially the same time. Synchronized trades are not
illegal provided that they are executed on the screens of the exchange
in the price and order matching mechanism of the exchanges just like
any other normal trade. As per SEBI's circular No.SMDRP/
POLICY/CIR-32/99 dated 14.09.1999, "All negotiated deals...... shall
be executed only on the screens of the exchanges in the price and
order matching mechanism of the exchanges just like any other
64
normal trade.". In the said circular, it was stated that "The above
decision was taken as negotiated deals avoid transparency
requirements, do not contribute to price discovery and some investors
do not have benefit of the best possible price and militate against the
basic concept of stock exchanges, which are meant to bring together a
large number of buyers and sellers in an open manner.". (Reference:
https://www.sebi.gov.in/legal/circulars/sep-1999/negotiated-deals_186
29. html)
15. In Ketan Parekh v. SEBI Manu/SB/0229/2006, the Securities
Appellate Tribunal (SAT) has considered the circumstances under
which "Synchronized trade" will be legal and held as under:
"There are yet another type of transactions which are commonly
called synchronized deals. The word 'synchronise' according to the
Oxford dictionary means "cause to occur at the same time; be
simultaneous". A synchronized trade is one where the buyer and
seller enter the quantity and price of the shares they wish to transact
at substantially the same time. This could be done through the same
broker (termed a cross deal) or through two different brokers. Every
buy and sell order has to match before the deal can go through. This
matching may take place through the stock exchange mechanism or
off market. When it matches through the stock exchange, it may or
may not be a synchronized deal depending on the time when the buy
and sell orders are placed. There are deals which match off market
i.e., the buyer and the seller agree on the price and quantity and
execute the transaction outside the market and then report the same
to the exchange. These are also called negotiated transactions...... It
has recently issued a circular requiring all bulk deals to be transacted
through the exchange even if the price and quantity are settled
outside the market. When such deals go through the exchange, they
are bound to synchronise. It would, therefore, follow that a
synchronized trade or a trade that matches off market is per se not
illegal. Merely because a trade was crossed on the floor of the stock
65
exchange with the buyer and seller entering the price at which they
intended to buy and sell respectively, the transaction does not
become illegal. A synchronized transaction even on the trading
screen between genuine parties who intend to transfer beneficial
interest in the trading stock and who undertake the transaction only
for that purpose and not for rigging the market is not illegal and
cannot violate the regulations...." [underlining added]
16. A synchronized transaction will become illegal or violative of the
Regulations if it is executed with a view to manipulate the market or if it
results in circular trading or is dubious in nature and with a view to
manipulate the price or volume of the scrip or with some ulterior
purpose. In Ketan Parekh case, SAT held as under:
"..... A synchronized transaction will, however, be illegal or violative
of the Regulations if it is executed with a view to manipulate the
market or if it results in circular trading or is dubious in nature and is
executed with a view to avoid regulatory detection or does not
involve change of beneficial ownership or is executed to create
false volumes resulting in upsetting the market equilibrium. Any
transaction executed with the intention to defeat the market
mechanism whether negotiated or not would be illegal. Whether a
transaction has been executed with the intention to manipulate the
market or defeat its mechanism will depend upon the intention of
the parties which could be inferred from the attending
circumstances because direct evidence in such cases may not be
available. The nature of the transaction executed, the frequency
with which such transactions are undertaken, the value of the
transactions, whether they involve circular trading and whether
there is real change of beneficial ownership, the conditions then
prevailing in the market are some of the factors which go to show
the intention of the parties. This list of factors, in the very nature of
things, cannot be exhaustive. Any one factor may or may not be
decisive and it is from the cumulative effect of these that an
inference will have to be drawn." (underlining added)
17. In the present case, all the fourteen transactions (except one)
pertaining to Nifty were synchronized. Be it noted that as pointed out
by SAT in para (7) of its order, the respondent did not dispute the fact
66
that "....trades had been synchronized and reversed....". The
respondent only contended that the impugned "synchronized trade' did
not manipulate the market and that what is prohibited are only the
synchronized trades and that the impugned trades were normal
transactions and the respondent had not violated the provisions of
PFUTP Regulations. In the context of the stand taken by Rakhi
Trading before SAT, it is now not open to respondent Rakhi Trading to
contend that the transactions were not synchronized and reversed.
18. By perusal of details of 'buy and sell', 'volume of trade' and
'timing of trade' of the impugned transactions, it was observed that the
reversal trades were executed almost of the same quantity and the
trade was also within a short gap of few seconds with significant
variation of the price, though, there was no major variation in the
underlying price during that period. Upon examination of the trade
transactions, it was further observed that the respondent in the
impugned transactions had operated through Prashant Jayantilal Patel
as its broker and the counter party Kasam Holding Pvt. Ltd., which
executed those transactions through Vibrant Securities Pvt. Ltd. as its
broker. As pointed out in the tabular column, all reversed/closed out
transactions were executed at prices with significant variation within a
67
short period though there was no major variation in the underlying
price during that period.
19. For instance, let us refer to one of the impugned reversal trades.
On 21.03.2007 at 14:50:27, NIFTY 50 (Strike Price 3930) Options
(Trade volume 10,000) was sold within a second at 14:50:28 at Trade
Price of Rs.270/-. Within a short gap of time, at 15:06:42, the same
NIFTY 50 (Trade Volume 10,000) (Strike Price 3930) was bought by
the respondent within three seconds at Trade Price of Rs.110/- and the
price difference of two legs of the trade being Rs.160/- with COD
Rs.16,00,000/-. The percentage of the gross of the trade on that day
was 40.82%. As seen from the chart, the other reversal trade
transactions were also almost similar within a gap of few seconds,
between 'buy' and 'sell' order, with significant price variation, though no
major price variation in the underlying price. During examination of
those transactions, the Whole Time Member observed that the
synchronized transactions had a definite objective of enabling one
party (Rakhi Trading Pvt. Ltd.) to book profits and the other party
(Kasam Holding Pvt. Ltd.) to book losses in the close out difference.
Thirteen Options Contracts executed by respondent-Rakhi Trading in
the F & O Segment between March 21 and March 30, 2007 with a total
68
Close Out Difference (COD) of Rs.1,15,79,312.15 (Positive) showing a
net profit of Rs.115.79 lakhs to Rakhi Trading Pvt. Ltd. and loss to the
counter party i.e. Kasam Holding Pvt. Ltd.
20. The question whether there was fictitious transactions creating
illegal synchronization has to be gathered from the facts and
circumstances and intention of the parties. Acting in concert is
something about which it is difficult to obtain direct evidence. Proof of
manipulation might depend upon inferences drawn from factual details.
Such inferences could be gathered from pattern of trading data and
the nature of the transactions etc.
21. 'By manipulation and synchronization', it is meant that two
parties have pre-meditated; as such a drastic movement in price within
few seconds could have been only through prior understanding
between the parties concerned only to fulfill an unlawful objective
through misuse of the stock exchange. That is, prior arrangement/prior
understanding with each other wherein one will make profit and other
will lose and thereby as soon as one party opens up its trade in the
market, the other party will buy it. Though the trading is shown on the
screen, but prior arrangement is very well possible behind the screen.
This is what has been done in the case in hand. Buy and sell orders
69
were placed at a difference of few seconds/minutes, while 'sell' by
respondent to Kasam Holding at a high price and "buy" by the
respondent from Kasam Holding Pvt. Ltd. at a low price. The
transactions wherein the 'buy and sell' orders entered almost
simultaneously and the transactions matched in time and quantity with
significant price variation and respondent consistently making profit but
Kasam Holding Pvt. Ltd. consistently making loss. Number of reversal
trades between the respondent and Kasam Holding Pvt. Ltd. and such
reversal trade taking place repeatedly over a period of time only
indicates that there was pre-arrangement between the parties before
the trade was executed. The transactions involving only the same two
parties within few seconds with huge difference in 'buy and sell' value,
though there is no difference in the underlying security, can take place
only with prior understanding between the two parties. The Board who
is the regulator of the market, can always lift the veil of such
transactions to show the non-genuineness of such transactions.
22. Buying and selling of equal quantities within the day may not be
wrong but the trades with ulterior purpose are not genuine for sure. In
the present case, every time one party is making profit and other party
is facing loss. Further, there was proximity in the time of sell orders at
70
a high price to the party-Kasam Holding Pvt. Ltd. and the same
quantity being reversed by Kasam Holding Pvt. Ltd. to the same
party-Rakhi Trading Pvt. Ltd. at a low price through the same set of
brokers. As discussed earlier, during March, 2007 thirteen Nifty Option
Contracts got matched between the same parties through the same
brokers. I fail to understand as to why Kasam Holding has made the
transactions repeatedly by incurring losses. It seems improbable that
Kasam Holding which was facing loss in each transaction by trading
with the respondent, was still eager to trade with the same repeatedly
for about four days which is not in consonance with the market trend
and human conduct; more so, when there has not been any major
difference in the underlying price. It is thus difficult to accept that
several such sell and buy orders between the respondent and Kasam
Holding being within a gap of "1", "2" or "3" or few seconds were by
mere coincidence. As contended by the appellant-SEBI, it was too
much of coincidence that there were number of transactions of 'buy
and sell orders' between the same parties with same quantity of stock
with significant variation in price.
71
23. Insofar as synchronized trade involving same set of brokers and
meeting of minds, in Securities and Exchange Board of India v.
Kishore R. Ajmera (2016) 6 SCC 368, this Court held as under:
"29. This will take us to the second and third category of cases i.e.
Ess Ess Intermediaries (P) Ltd., Rajesh N. Jhaveri and Rajendra
Jayantilal Shah (second category) and Monarch Networth Capital
Ltd. (earlier known as Networth Stock Broking Ltd.) (third category).
In these cases the volume of trading in the illiquid scrips in question
was huge, the extent being set out hereinabove. Coupled with the
aforesaid fact, what has been alleged and reasonably established,
is that buy and sell orders in respect of the transactions were made
within a span of 0 to 60 seconds. While the said fact by itself i.e.
proximity of time between the buy and sell orders may not be
conclusive in an isolated case such an event in a situation where
there is a huge volume of trading can reasonably point to some
kind of a fraudulent/manipulative exercise with prior meeting of
minds. Such meeting of minds so as to attract the liability of the
broker/sub-broker may be between the broker/sub-broker and the
client or it could be between the two brokers/sub-brokers engaged
in the buy and sell transactions. When over a period of time such
transactions had been made between the same set of brokers or a
group of brokers a conclusion can be reasonably reached that there
is a concerted effort on the part of the brokers concerned to indulge
in synchronized trades the consequence of which is large volumes
of fictitious trading resulting in the unnatural rise in hiking the
price/value of the scrip(s). It must be specifically taken note of
herein that the trades in question were not “negotiated trades”
executed in accordance with the terms of the Board’s circulars
issued from time to time. A negotiated trade, it is clarified, invokes
consensual bargaining involving synchronising of buy and sell
orders which will result in matching thereof but only as per
permissible parameters which are programmed accordingly.
30. It has been vehemently argued before us that on a
screen-based trading the identity of the 2nd party be it the client or
the broker is not known to the first party/client or broker. According
to us, knowledge of who the 2nd party/client or the broker is, is not
relevant at all. While the screen-based trading system keeps the
identity of the parties anonymous it will be too naive to rest the final
conclusions on said basis which overlooks a meeting of minds
elsewhere. Direct proof of such meeting of minds elsewhere would
rarely be forthcoming. The test, in our considered view, is one of
preponderance of probabilities so far as adjudication of civil liability
72
arising out of violation of the Act or the provisions of the
Regulations framed thereunder is concerned. Prosecution under
Section 24 of the Act for violation of the provisions of any of the
Regulations, of course, has to be on the basis of proof beyond
reasonable doubt.
31. The conclusion has to be gathered from various
circumstances like that volume of the trade effected; the period of
persistence in trading in the particular scrip; the particulars of the
buy and sell orders, namely, the volume thereof; the proximity of
time between the two and such other relevant factors. The fact that
the broker himself has initiated the sale of a particular quantity of
the scrip on any particular day and at the end of the day
approximately equal number of the same scrip has come back to
him; that trading has gone on without settlement of accounts i.e.
without any payment and the volume of trading in the illiquid scrips,
all, should raise a serious doubt in a reasonable man as to whether
the trades are genuine. The failure of the brokers/sub-brokers to
alert themselves to this minimum requirement and their persistence
in trading in the particular scrip either over a long period of time or
in respect of huge volumes thereof, in our considered view, would
not only disclose negligence and lack of due care and caution but
would also demonstrate a deliberate intention to indulge in trading
beyond the forbidden limits thereby attracting the provisions of the
FUTP Regulations."[underlining added]
24. In Nirmal Bang Securities Private Ltd. v. The Chairman,
Securities and Exchange Board of India (MANU/SB/0206/2003), SAT
applied the test of price, quantity and time to hold that synchronized
trading in that case was violative of norms of trading in securities and
held as under:-
"249. BEB has been charged for synchronized deals with First
Global. I have examined the data provided by the parties on this
issue. I find many transactions between BEB and FGSB. There are
many instances of such transactions. I find the scrip, quantity and
price for these orders had been synchronized by the counter party
brokers. Such transactions undoubtedly create an artificial market
to mislead the genuine investors. Synchronized trading is violative
of all prudential and transparent norms of trading in securities.
Synchronized trading on a large scale, can create false volumes.
The argument that the parties had no means of knowing whether
73
any entity controlled by the client is simultaneously entering any
contra order elsewhere for the reason that in the online trading
system, confidentiality of counter parties is ensured, is untenable. It
was submitted by the Appellants that it was not possible for the
broker to know who the counter party broker is and that trades were
not synchronized but it was only a coincidence in some cases.
Theoretically this is OK. But when parties decide to synchronize the
transaction the story is different. There are many transactions
giving an impression that these were all synchronized, otherwise
there was no possibility of such perfect matching of quantity price
etc. As the Respondent rightly stated it is too much of a coincidence
over too long a period in too many transactions when both parties
to the transaction had entered buy and sell orders for the same
quantity of shares almost simultaneously. The data furnished in the
show cause notice certainly goes to prove the synchronized nature
of the transaction which is in violation of regulation 4 of the FUTP
Regulations. The facts on record categorically establishes that BEB
had indulged in synchronized trading in violation of regulation 47 of
the FUTP Regulations. In a synchronized trading intention is
implicit."
25. In the quasi-judicial proceeding before SEBI, the standard of
proof is preponderance of probability. In a case of similar synchronized
trading involving same set of brokers emphasizing that the standard of
proof is "preponderance of probability" in paras (26) and (27), in
Kishore R. Ajmera case, this Court held as under:-
"26. It is a fundamental principle of law that proof of an allegation
levelled against a person may be in the form of direct substantive
evidence or, as in many cases, such proof may have to be inferred
by a logical process of reasoning from the totality of the attending
facts and circumstances surrounding the allegations/charges made
and levelled. While direct evidence is a more certain basis to come
to a conclusion, yet, in the absence thereof the Courts cannot be
helpless. It is the judicial duty to take note of the immediate and
proximate facts and circumstances surrounding the events on
which the charges/allegations are founded and to reach what would
appear to the Court to be a reasonable conclusion therefrom. The
test would always be that what inferential process that a
reasonable/prudent man would adopt to arrive at a conclusion."
[underlining added]
74
26. There was no possibility of such perfect matching of quantity,
timing, prices etc. between the same parties unless there was prior
meeting of minds or a specific understanding/arrangement between
the parties. After referring to Ketan Parekh and Nirmal Bang cases, in
SEBI v. Accord Capital Markets Ltd. (MANU/SB/0136/2007), SEBI held
as under:-
"4.12 I note that most of the synchronized trades executed by the
Broker were perfectly matched with the counter party orders even
with respect of the price to the extent of two decimal points. The
proximity in placing the orders at the same price and for the same
quantity almost at the same time (in majority of the cases) resulted
in the matching of the aforesaid transactions, with all the
ingredients i.e. quantity, price and the time, required to conclude
the trades. The time difference (between the buy and sell orders) of
majority of the synchronized trades was very less with the price and
quantity matching. The said synchronization cannot take place in
the absence of any specific understanding/arrangement between
the clients at the first instance, especially when the shares of the
company were highly liquid at the time of the trades.
...........
4.24 The proof of manipulation in the circumstances always
depends on inferences drawn from a mass of factual details.
Findings must be gathered from patterns of trading data and the
nature of the transactions etc. Several circumstances of a
determinative character coupled with the inference arising from the
conduct of the parties in a major market manipulation could
reasonably lead to conclusion that the Broker was responsible in
the manipulation. The evidence, direct or circumstantial, should be
sufficient to raise a presumption in its favour with regard to the
existence of a fact sought to be proved. As pointed out by Best in
"Law of Evidence", the presumption of innocence is no doubt
presumption juris; but everyday practice shows that it may be
successfully encountered by the presumption of guilt arising from
circumstances, though it may be a presumption of fact. Since it is
exceedingly difficult to prove facts which are especially within the
knowledge of parties concerned, the legal proof in such
75
circumstances partakes the character of a prudent man's estimate
as to the probabilities of the case. Hon'ble Securities Appellate
Tribunal (SAT) has observed in the matter of Ketan Parekh v.
SEBI:
"...Whether a transaction has been executed with the
intention to manipulate the market or defeat its
mechanism will depend upon the intention of the
parties which could be inferred from the attending
circumstances because direct evidence in such cases
may not be available...."
4.25 Presumption plays a critical role in coming to a finding as to
the involvement or otherwise of a market participant in any
manipulation. For instance, while trading, a lip service can be paid
to a screen based trading system while agreement is reached
beforehand between brokers to effect the transaction. Anonymity
can be a cloak to cover anastomosis of interest. Therefore, the
hackneyed plea based on intentions in the market place cannot
pass muster in all circumstances, more so when such intentions are
in the special/peculiar knowledge of the parties to the transactions.
Also any suggestion attributing innocence to the parties involved in
such transactions would give rise to an untenable situation where
certain other third persons/entities alone would be responsible for
the manipulation and none else."
27. Applying the test laid down in Kishore R. Ajmera case to the
present case, I find that by cumulative analysis of the reversal
transactions between respondent and Kasam Holding, quantity, time
and significant variation of prices, without major variation in the
underlying price of the securities clearly indicate that the respondent's
trades are not genuine and had only misleading appearance of trading
in the securities market, without intending to transfer beneficial
ownership.
76
28. Contention of the appellant is that if the market starts moving or
there is a change in the perception of the market and the anticipated
future performance thereof, then the seller often gets very
apprehensive and may even panic, anticipating a substantial loss and
would want to square off his position to restrict a loss. I find no merit in
this contention. Insofar as the impugned transactions are concerned,
it is seen that the market of underlying shares had remained unmoved
altogether, then there was no question of getting panic. When there
were no other transactions in the market affecting the price of the
underlying shares or F & O Segment and the price in both the
segments had remained static, then there was no reasonable ground
to get apprehensive and panic. Therefore, squaring off the position
appears to adjust the financial results with a view to avoid the tax
incidence through an unfair trade practice or for some ulterior purpose.
29. On behalf of respondent, learned senior counsel Mr. P.
Chidambaram contended that securities like Nifty are vast pools and
Nifty has a dynamic index which evolves continuously and it is too
difficult for a manipulator to affect such prices. Further contention of
the respondent is that whether the impugned trades are synchronized
77
or not had no impact on the market and the respondent cannot be held
to have violated regulations.
30. On behalf of the respondent-Tungarli Tradeplace Pvt. Ltd., Mr.
Mehta learned counsel submitted that a person can be found to have
violated Regulations 3 and 4, he should have indulged in some
fraudulent practice with an intention to manipulate the securities
market and has drawn our attention to Regulation 2(c) of the SEBI
Regulations, 2003 in which 'fraud' has been defined. Learned counsel
submitted that for a person to be held liable for breach of the above
mentioned Regulations, SEBI has to establish the following:- (i) that
the party entered into the transactions with the intention to manipulate
the market; and (ii) that there is evidence that the market was in fact
manipulated.
31. Per contra, learned senior counsel for SEBI contended that SAT
had misconstrued the charge that the impugned synchronized trades
had no effect of manipulating the Nifty index and SAT was not right in
holding that only those synchronized transactions which have the
effect of manipulating the market are undesirable and prohibited. It
was contended that it was never the case of SEBI that Nifty was being
manipulated by the impugned trade executed by the respondent and
78
findings of SAT are not sustainable in law and would have serious
repercussion on the market integrity.
32. The respondent has made the transactions repeatedly by
incurring losses, particularly when there were no transactions made by
any third party in the market. Abnormal difference between the prices
at which the trades were executed without corresponding effect on the
price of the underlying security, shows that the option in which the
party traded was not in demand in the market. It is unusual that the
trades were transacted with such huge profits when there was no
change in the underlying prices. These trade transactions obviously
only aimed at carrying out manipulative objective.
33. Once the reversal transactions are shown to be non-genuine or
shown to be fictitious creating a false or misleading appearance in the
market for ulterior purpose and that the stock market was misused by
such manipulative device, this is in clear violation of the provisions of
PFUTP Regulations, 2003. Regulations 3(a), 4(1) and 4(2)(a) of
PFUTP Regulations prohibit such manipulative trades, unfair trade
practices.
34. SAT mainly proceeded that the impugned reversal trade
transactions had no impact on the market and it could have never
79
influenced the Nifty. After extracting the show cause notice, SAT, inter
alia, recorded the findings:- (i) The insinuation is that by executing
manipulative trades in the F & O segment, Nifty was sought to be
tampered with; (ii) It is a common case of the parties that the
appellant-Rakhi Trading traded only thirteen Nifty option contracts in
the F & O Segment; assuming these trades were manipulative, they
could have never influenced the Nifty; Nifty which consists of fifty well
diversified highly liquid stocks in the cash segment is a very large well
diversified index of stocks which is not capable of being influenced
much less manipulated by the movement of prices; and (iii) thirteen
impugned trades in Nifty options executed by the appellant had no
impact on the market or affected the investors in any way nor did they
influence the Nifty in any manner.
35. Regulation 3 deals with "Prohibition of certain dealings in
securities". Regulation 4 deals with "Prohibition of manipulative,
fraudulent and unfair trade practices". Regulation 4 starts as "Without
prejudice to the provisions of Regulation 3.....". Regulation 4(2) is an
inclusive provision. Regulation 4(2) stipulates that "Dealing in
securities shall be deemed to be a fraudulent or an unfair trade
practice if it involves fraud and may include all or any of the.....",
80
instances pointed out thereon. Regulation 4(2)(a) deals with ".....an
act which creates false or misleading appearance of trading in the
securities market". An act to fall within Regulation 4(2)(a), it is not
necessary that the transactions entered into by the party was with
intention to manipulate the market and that the market was in fact
manipulated. Market manipulation is a deliberate attempt to interfere
with the free and fair operation of the market and create artificial, false
or misleading appearances with respect to the price, market, product,
security and currency.
36. Respondent-Rakhi Trading and Kasam Holding on facts are
found to have been engaged in non-genuine transactions creating
appearance of trading. If the factum of manipulation is established, it
will necessarily follow that the investors in the market have been
induced to buy or sell and that no further proof in this regard is
required. The market, as already observed, is so widespread that it
may not be humanly possible for the Board to track the persons who
were actually induced to buy or sell securities as a result of
manipulation and the Board cannot be imposed with a burden which is
impossible to be discharged.
81
37. In the context of 1995 Regulations, old Regulation 4(2)(a), SAT,
observing that if the factum of manipulation is established, it will
necessarily follow that the investors in the market had been induced to
buy and sell and no further proof is required in this regard, in Ketan
Parekh's case (supra), held as under:-
"12. ....The stock exchange is also a platform for the fair price
discovery of a scrip based on the market forces of demand and
supply. Securities market is so wide spread and in a system of
screen based trading various potential investors who track the
scrips through the screens of the exchanges only see whether a
particular scrip is active or not, whether it is trading in large
volumes and whether the price is going up or down. Having regard
to these factors he makes up his mind to invest or disinvest in the
securities. When a person takes part in or enters into transactions
in securities with the intention to artificially raise or depress the
price he thereby automatically induces the innocent investors in the
market to buy/sell their stocks. The buyer or the seller is invariably
influenced by the price of the stocks and if that is being
manipulated the person doing so is necessarily influencing the
decision of the buyer/seller thereby inducing him to buy or sell
depending upon how the market has been manipulated....In other
words, if the factum of manipulation is established it will necessarily
follow that the investors in the market had been induced to buy or
sell and that no further proof in this regard is required. The market,
as already observed, is so wide spread that it may not be humanly
possible for the Board to track the persons who were actually
induced to buy or sell securities as a result of manipulation and law
can never impose on the Board a burden which is impossible to be
discharged. This, in our view, clearly flows from the plain language
of Regulation 4 (a) of the Regulations."
38. The smooth operation of the securities market and its healthy
growth and development depends upon large extent on the quality and
integrity of the market. Unfair trade practices affect the integrity and
82
efficiency of the securities market and the confidence of the investors.
Prevention of market abuse and preservation of market integrity are
the hallmark of securities law. In N. Narayanan v. Adjudicating Officer,
Securities and Exchange Board of India (2013) 12 SCC 152, it was
held as under:-
"33. Prevention of market abuse and preservation of market
integrity is the hallmark of securities law. Section 12-A read with
Regulations 3 and 4 of the 2003 Regulations essentially intended to
preserve “market integrity” and to prevent “market abuse”. The
object of the SEBI Act is to protect the interest of investors in
securities and to promote the development and to regulate the
securities market, so as to promote orderly, healthy growth of
securities market and to promote investors’ protection. Securities
market is based on free and open access to information, the
integrity of the market is predicated on the quality and the manner
on which it is made available to market. “Market abuse” impairs
economic growth and erodes investor’s confidence. Market abuse
refers to the use of manipulative and deceptive devices, giving out
incorrect or misleading information, so as to encourage investors to
jump into conclusions, on wrong premises, which is known to be
wrong to the abusers. The statutory provisions mentioned earlier
deal with the situations where a person, who deals in securities,
takes advantage of the impact of an action, may be manipulative,
on the anticipated impact on the market resulting in the “creation of
artificiality”. The same can be achieved by inflating the company’s
revenue, profits, security deposits and receivables, resulting in
price rise of the scrip of the company. Investors are then lured to
make their “investment decisions” on those manipulated inflated
results, using the above devices which will amount to market
abuse."
39. In an interview, Lawrence E. Harris, a former chief economist at
the Securities and Exchange Commission and now a Finance
Professor at the University of Southern California, has stated that the
difficulty in proving manipulation is probably an inherent feature of
83
modern markets. "Because the markets are so complex", he said,
".....It is relatively easy for traders engaged in manipulation to offer
alternative explanations for their behaviour that would make it difficult
to successfully prosecute them". Professor Harris nonetheless said
"when presented with the data suggesting manipulation by firm
proprietary traders, it is reasonable to expect that the S.E.C. would
consider investigation of the matter further". The S.E.C. had no
comment on the researchers' study. [Ref.:www.nytimes.com/2006/
05/07/business/yourmoney/07stra.html]
40. Stock market is regulated mainly by SEBI and to some extent by
the Departments of Economic Affairs and Company Affairs of
Government of India. Market manipulation can occur in a variety of
ways. Manipulations/unfair trade practices reduce the market efficacy.
Section 11 of the SEBI Act, 1992 provides for the functions of the
Board, as per which it shall be the duty of the Board to protect the
interests of the investors in securities and to promote the development
and to regulate the securities market by such measures as it thinks fit.
Main function of SEBI in this regard is to make inquiry, investigation
and to give directions, to promote the orderly and healthy growth of the
securities market. With a view to curb unfair trade practices, market
84
manipulation, price rigging and other frauds in securities market, SEBI
is empowered to make inquiries and inspection.
41. Section 12A of the SEBI Act, 1992 read with Regulations 3 and 4
of the PFUTP Regulations, 2003 are essentially intended to preserve
'market integrity' and to prevent 'market abuse'. The object of the SEBI
Act is to protect the interest of the investors in securities and to
promote the development and to regulate the securities market so as
to promote orderly, healthy growth of securities market and to promote
investor's protection. N. Narayanan case arose in connection with
violation of Section 12A of the SEBI Act as well as the relevant
provisions of PFUTP Regulations, 2003. In N. Narayanan's case, it was
found that the financial results of the company as disclosed to the
stock exchanges were inflated and the manipulation in financial results
of the company resulted in price rise of the scrip of the company and
that they did not represent the true state of affairs of the company and
which has enabled certain shareholders to raise financing of pledging
of shares. The director of the company was restrained in dealing with
the securities for a period of two years and also monetary penalty was
imposed on the appellant thereon which was affirmed by this Court.
The Supreme Court observed that message should go that our country
85
will not tolerate 'market abuse' and that the securities market abuse
and that fraud, deceit artificiality, have no place in the securities market
of the country and held as under:
"1. India’s capital market in the recent times has witnessed
tremendous growth, characterised particularly by increasing
participation of public. Investors’ confidence in the capital market
can be sustained largely by ensuring investors’ protection.
Disclosure and transparency are the two pillars on which market
integrity rests. Facts of the case disclose how the investors’
confidence has been eroded and how the market has been abused
for personal gains and attainments.
.....
11. We would like to demonstrate on the facts of this case as well
as law on the point that “market abuse” has now become a
common practice in the Indian security market and, if not properly
curbed, the same would result in defeating the very object and
purpose of the SEBI Act which is intended to protect the interests of
investors in securities and to promote the development of securities
market. Capital market, as already stated, has witnessed
tremendous growth in recent times, characterised particularly by
the increasing participation of the public. Investor’s confidence in
capital market can be sustained largely by ensuring investors’
protection.
.......
42. SEBI, the market regulator, has to deal sternly with companies
and their Directors indulging in manipulative and deceptive devices,
insider trading, etc. or else they will be failing in their duty to
promote orderly and healthy growth of the securities market.
Economic offence, people of this country should know, is a serious
crime which, if not properly dealt with, as it should be, will affect not
only the country’s economic growth, but also slow the inflow of
foreign investment by genuine investors and also cast a slur on
India’s securities market. Message should go that our country will
not tolerate “market abuse” and that we are governed by the “rule
of law”. Fraud, deceit, artificiality, SEBI should ensure, have no
place in the securities market of this country and “market security”
is our motto. People with power and money and in management of
the companies, unfortunately often command more respect in our
society than the subscribers and investors in their companies.
Companies are thriving with investors’ contributions but they are a
divided lot. SEBI has, therefore, a duty to protect investors,
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individual and collective, against opportunistic behaviour of
Directors and insiders of the listed companies so as to safeguard
market’s integrity." [underlining added]
The Supreme Court has also emphasized the duties of print and
electronic media, that they should not mislead the public who are
present and prospective investors, in their forecast on the securities
market.
42. The capital market regulator, SEBI has a significant role to play
in safeguarding the interest of investors and to ensure strict
compliance of all the relevant SEBI rules and regulations targeting at
safeguarding the interest of small investors. In order to protect the
interests of the investors and the integrity of the markets, as a
regulator, SEBI has to make the market place efficient and clean,
wherein all the participants play their role diligently and professionally
within the four corners of the system, without there being any scope for
market abuse. Where certain unscrupulous elements are trying to
manipulate the market to serve their own interest, it becomes
imperative on the part of SEBI to intervene and to curb further mischief
and to take necessary action to maintain public confidence in the
integrity of the securities market.
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43. In N. Narayanan's case, Supreme Court expressed a 'word of
caution' that SEBI-the regulator is to ensure stringent enforcement,
and efficacy of cleanliness of the market place; otherwise SEBI will be
failing in their duty to promote orderly and healthy growth of the
securities market. I am conscious as supervisory functionary/
regulating body, SEBI has the duty and obligation to protect ordinary
genuine investors and SEBI is empowered to do so under the SEBI
Act, 1992 so as to make security market a secure and safe place to
carry on the business in securities. At the same time, under the guise
of supervisory intervention, SEBI cannot affect the development of the
market or market oriented creativity. Intense supervision might distort
the path of securities market development; but SEBI cannot be a silent
spectator to unfair trade practices/manipulative market for some
ulterior purpose like tax evasion etc. To find the right balance between
market forces and Regulatory body's intervention, SEBI has to deal
sternly with those who indulge in manipulative trading and deceptive
devices to misuse the market and at the same time ensuring the
development of the market.
44. Before I conclude, it is necessary to refer to the findings of SAT
on 'tax planning'. SAT held that even assuming that non-genuine
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synchronized trades have been entered into for the purposes of tax
planning, such trade could be held objectionable only if they have
resulted in influencing the market in one way or other. For its finding
that every person is entitled to arrange his affairs as to avoid taxation,
SAT relied upon Viram Investment Pvt. Ltd. and Ors. v. Securities and
Exchange Board of India (MANU/SB/0046/2005) decided on
11.02.2005. Contention of the respondents is that transactions which
have been entered into with a view to achieve tax planning are not
illegal and respondents placed reliance upon Viram Investment Pvt.
Ltd. case. The learned counsel for SEBI contended that the market
cannot be manipulated by fictitious transactions either for tax planning
or for some ulterior purposes like money laundering etc.
45. No grounds have been raised in the show cause notice alleging
that the impugned fictitious transactions have been entered into with a
view to avoid payment of tax and was an act of tax planning.
Adjudicating officer also has not gone into this aspect. Hence, I am not
inclined to go into this aspect, whether the impugned transactions
were intended to reduce the brunt of taxation and an act of tax
planning. The correctness of findings of SAT in the case of Viram
Investment Pvt. Ltd. is left open.
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Conclusion:-
46. Considering the reversal transactions, quantity, price and time
and sale, parties being persistent in number of such trade transactions
with huge price variations, it will be too naïve to hold that the
transactions are through screen-based trading and hence anonymous.
Such conclusion would be over-looking the prior meeting of minds
involving synchronization of buy and sell order and not negotiated
deals as per the board's circular. The impugned transactions are
manipulative/deceptive device to create a desired loss and/or profit.
Such synchronized trading is violative of transparent norms of trading
in securities. If the findings of SAT are to be sustained, it would have
serious repercussions undermining the integrity of the market and the
impugned order of SAT is liable to be set aside. On the above
additional reasonings also, I agree with the conclusion allowing the
appeal preferred by SEBI against the traders. I also agree with the
conclusion dismissing the appeal preferred by the SEBI against the
brokers.
.………………………..J.
 [R. BANUMATHI]
New Delhi;
February 08, 2018
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