# SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI TRADING PRIVATE LTD

- **Citation:** [2018] 1 S.C.R. 937
- **Court:** Supreme Court of India
- **Decided:** 2018-02-08
- **Case number:** Civil Appeal No. 1969 of 2011
- **Bench:** Kurian Joseph, R. Banumathi
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/securities-and-exchange-board-of-india-v-rakhi-trading-private-ltd-32859
- **Pages:** 70

## Headnote

SEBI (Prohibition of Fraudulent and Unfair Trade Practices
relating to Securities Market) Regulations, 2003: Regns 3(a), (b),
(c) and 4(1), (2)(a), (b) - Synchronized trading - Synchronization
and reversal of trades, some in few seconds and majority, in any
case on the same day, without any significant change in the value
of underlying - As a result one party booking gains and the other
party booking a loss - In the show cause notice, allegation was
that the parties-traders were buying and selling securities in the
derivatives segment in synchronized and reverse transactions at a
price which did not reflect the value of the underlying - Assessing
Officer held that there was intention of creating false or misleading
appearance in the market and also that a manipulative/deceptive
device was used for synchronization of trades and trades were
fictitious in nature, amounting to violation of Regns 3(a), (b), (c)
and 4(1), (2)(a), (b) of the PFUTP Regulations - Securities Appellate
Tribunal (SAT) set aside the order of Assessing Officer holding that
in the Futures and Options (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 and in this view of the
matter, synchronized and reversed trades in Nifty options in F & O
segment can never manipulate the market which in the present
context means the value of Nifty index in cash segment - It further
held that since the trades were settled in cash through stock
exchange mechanism, they are genuine and did not create a false
and misleading appearance of trading in F & O segment - Appeal
by SEBI - Held: Trading is always with aim to make profits - But if
one party consistently makes loss and that too in preplanned and
rapid reverse trades, it is not genuine and would amount to an unfair
trade practice - In the instant case, through reverse trades, there
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was no genuine change of rights in the contract - SAT 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 - The traders in question
did not intend to transfer beneficial ownership - Rather than
allowing the market forces to operate in their natural course, the
traders repeatedly carried out the 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 - 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 was
carried out by the traders in the instant case, the price discovery
system itself was affected - The traders, thus, having engaged in a
fraudulent and unfair trade practice while dealing in securities,
are liable to be proceeded against for violation of Regns 3(a), 4(1)
and 4(2)(a) of PFUTP Regulations. (Kurian Joseph, J.)
SEBI (Prohibition of Fraudulent and Unfair Trade Practices
relating to Securities Market) Regulations, 2003: Regns. 3(a), (b),
(c) and 4(1), (2)(a), (b) - Fictitious transactions creating illegal
synchronization - Modus operandi - 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 manipu

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SECURITIES AND EXCHANGE BOARD OF INDIA
v.
RAKHI TRADING PRIVATE LTD.
(Civil Appeal No. 1969 of 2011)
FEBRUARY 08, 2018
[KURIAN JOSEPH AND R. BANUMATHI, JJ.]
SEBI (Prohibition of Fraudulent and Unfair Trade Practices
relating to Securities Market) Regulations, 2003: Regns 3(a), (b),
(c) and 4(1), (2)(a), (b) - Synchronized trading - Synchronization
and reversal of trades, some in few seconds and majority, in any
case on the same day, without any significant change in the value
of underlying - As a result one party booking gains and the other
party booking a loss - In the show cause notice, allegation was
that the parties-traders were buying and selling securities in the
derivatives segment in synchronized and reverse transactions at a
price which did not reflect the value of the underlying - Assessing
Officer held that there was intention of creating false or misleading
appearance in the market and also that a manipulative/deceptive
device was used for synchronization of trades and trades were
fictitious in nature, amounting to violation of Regns 3(a), (b), (c)
and 4(1), (2)(a), (b) of the PFUTP Regulations - Securities Appellate
Tribunal (SAT) set aside the order of Assessing Officer holding that
in the Futures and Options (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 and in this view of the
matter, synchronized and reversed trades in Nifty options in F & O
segment can never manipulate the market which in the present
context means the value of Nifty index in cash segment - It further
held that since the trades were settled in cash through stock
exchange mechanism, they are genuine and did not create a false
and misleading appearance of trading in F & O segment - Appeal
by SEBI - Held: Trading is always with aim to make profits - But if
one party consistently makes loss and that too in preplanned and
rapid reverse trades, it is not genuine and would amount to an unfair
trade practice - In the instant case, through reverse trades, there
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was no genuine change of rights in the contract - SAT 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 - The traders in question
did not intend to transfer beneficial ownership - Rather than
allowing the market forces to operate in their natural course, the
traders repeatedly carried out the 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 - 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 was
carried out by the traders in the instant case, the price discovery
system itself was affected - The traders, thus, having engaged in a
fraudulent and unfair trade practice while dealing in securities,
are liable to be proceeded against for violation of Regns 3(a), 4(1)
and 4(2)(a) of PFUTP Regulations. (Kurian Joseph, J.)
SEBI (Prohibition of Fraudulent and Unfair Trade Practices
relating to Securities Market) Regulations, 2003: Regns. 3(a), (b),
(c) and 4(1), (2)(a), (b) - Fictitious transactions creating illegal
synchronization - Modus operandi - 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. - '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 -
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Though the trading is shown on the screen, but prior arrangement
is very well possible behind the screen - This was done in the case
in hand - Buy and sell orders were placed at a difference of few
seconds/minutes, while 'sell' by respondent was at a high price and
"buy" by the respondent was 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 the other
party consistently making loss - 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 - Applying the test
laid down in Kishore R. Ajmera case to the instant case, by
cumulative analysis of the reversal transactions, quantity, time and
significant variation of prices, without major variation in the
underlying price of the securities 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. (Banumathi, J.)
Securities and Exchange Board of India (Stock Brokers and
Sub-brokers) Regulations, 1992: Regns. 7A, (2), (3), (4) -
Synchronization and reversal of trades by brokers on behalf of
their clients, some in few seconds and majority, in any case on the
same day, without any significant change in the value of underlying
- As a result one party booking gains and the other party booking
a loss - SAT held that merely because appellant acted as a broker
would not mean that it knew about the nature of transaction and
that there was no evidence of lack of due diligence while executing
the impugned transactions which could make the brokers guilty of
violating the code of conduct prescribed for the stock brokers -
Held: There was no evidence of involvement of brokers so as to
proceed against them for violation of Regn 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 did not provide any material to suggest
negligence or connivance on the part of the brokers - In the absence
of any material provided by SEBI to prove the charges against the
brokers, particularly regarding aiding and abetting fraudulent or
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unfair trade practices, the orders of SEBI against the brokers should
be interfered with - Securities Contracts (Regulation) Act, 1956 -
s.18A, 3(ac), 2(d). (Kurian Joseph, J.)
Securities and Exchange Board of India (Stock Brokers and
Sub-brokers) Regulations, 1992: Regns. 7A, (2), (3), (4) - Fictitious
transactions creating illegal synchronization - Allegation of SEBI
was that the traders and brokers at NSE were buying and selling
almost equal quantities of contracts within the day and that such
buy/sell orders were synchronized - Held: 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 naive 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
this additional reasonings also, conclusion allowing the appeal
preferred by SEBI against the traders is upheld - The conclusion
dismissing the appeal preferred by the SEBI against the brokers is
also upheld - SEBI Act, 1992 - ss.12A, 15HA. (Banumathi, J.)
Stock Exchange: Need for 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 - The observations made in Kishore R. Ajmera
and Kanaiyalal Patel regarding need for more comprehensive legal
framework governing the securities market, reiterated - SEBI Act,
1992. (Kurian Joseph, J.)
Stock Exchange: Circumstances under which synchronized
trade become illegal - Held: 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
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in nature and with a view to manipulate the price or volume of the
scrip or with some ulterior purpose. (Banumathi, J.)
Stock Exchange: Manipulation of market - 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 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. (Banumathi, J.)
Stock Exchange: Prevention of market abuse - 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
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. (Banumathi, J.)
Stock Exchange: Role of SEBI - Object of SEBI Act - Held:
The object of the SEBI Act is to protect the interest of the 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 - 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.
(Banumathi, J.)
Evidence: In the quasi-judicial proceeding before SEBI, the
standard of proof is preponderance of probability - Stock Exchange.
(Banumathi, J.)
Words and phrases: Synchronize, Synchronized Trading -
Meaning of, discussed.(Banumathi, J.)
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Disposing of the appeals, the Court
HELD:
Per Kurian Joseph, J.
HELD: 1. Regulation 4(1) in clear and unmistakable terms
provided that "no person shall indulge in a fraudulent or an unfair
trade practices in securities" 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 genuine; it is an unfair trade practice.
Securities market, as the Securities Contracts (Regulation) Act,
1956 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. [Paras 34, 35] [976-D-E; 977-D-G]
Ketan Parekh v. Securities and Exchange Board of
India Appeal No.2 of 2004 before SAT - referred to .
2. 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
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these orchestrated transactions, the intention of which was not
regular trading, other investors have been excluded from
participating in 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. [Para 36] [977-H; 978-A-B]
3. The stand of SAT that the rationale of change of beneficial
ownership does not arise in the derivatives segment is also not
correct. 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 the instant case, it
is clear that the traders in question did not intend to transfer
beneficial ownership and therefore these trades are non genuine.
Rather than allowing the market forces to operate in their
natural course, the traders repeatedly carried out the 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.
[Paras 37, 38] [978-B-C; 979-A-C]
4. 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. Regulation 3(a) expressly prohibits buying,
selling or otherwise dealing in securities in a fraudulent manner.
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Under Regulation 4(2) dealing in securities shall be deemed to
be fraudulent if the trader indulges in an act which creates a 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. [Paras 39, 40]
[979-C-G]
5. According to SAT, only if there is market impact on
account of sham transactions, could there be violation of the
PFUTP Regulations. The proposition is not convincing. SAT
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 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. 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. As
far as brokers are concerned, there is hardly any evidence on
their involvement so as to 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. 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, the orders of SEBI against the brokers
should be interfered with. [Paras 41, 43, 44] [979-G-H; 980-A-B;
981-B; C, D-F]
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6. There is need for 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. [Para 45] [981-G]
Securities And Exchange Board of India v. Kishore R.
Ajmera (2016) 6 SCC 368 : [2016] 1 SCR 1118 ;
Securities and Exchange Board of India and Ors. v.
Shri Kanaiyalal Baldevbhai Patel and Ors. 2017 SCC
Online SC 1148- relied on.
Per Banumathi, J. (Supplementing)
1. 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. 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. 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. [Paras 13, 14, 16] [989-A-C; 990-D-E]
Ketan Parekh v. SEBI, Manu/SB/0229/2006 - referred to.
2. The question whether there was fictitious 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
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of trading data and the nature of the transactions etc. '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 were placed at a
difference of few seconds/minutes, while 'sell' by respondent to
Kasam Holding was at a high price and "buy" by the respondent
from Kasam Holding Pvt. Ltd. was 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. [Paras 20, 21]
[992-D-H; 993-A-B]
3. 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 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. During March, 2007
thirteen Nifty Option Contracts got matched between the same
parties through the same brokers. There is no reason to
understand as to why Kasam Holding has made the transactions
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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. 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. [Para 22] [993-C-F]
4. In the quasi-judicial proceeding before SEBI, the
standard of proof is preponderance of probability. It was held in
Kishore R. Ajmera case that 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. 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. Applying the
test laid down in Kishore R. Ajmera case to the present case, 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. [Paras 25, 26, 27] [996-D-H; 996-H; 998-F]
5. 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. There is no merit in this contention. Insofar as the
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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. [Para 28] [998-F-H]
6. 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. 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. [Paras
32, 33] [999-F-H; 1000-A]
7. 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....", 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
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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.
[Para 35] [1000-E-G]
8. 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 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. [Para 36] [1000-H; 1001A]
9. 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 manipulation, price rigging and other frauds in securities
market, SEBI is empowered to make inquiries and inspection.
[Para 40] [1003-B-D]
10. 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
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI
TRADING PRIVATE LTD.
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promote orderly, healthy growth of securities market and to
promote investor's protection. 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. 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. 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. [Paras 41, 42, 43, 46] [1003-D-E;
1005-B-C, E-G; 1006-E-G]
Ketan Parekh v. SEBI (Appeal No. 2 of 2004) ; Ketan
Parekh v. SEBI, Manu/SB/0229/2006 ; Securities and
Exchange Board of India v. Kishore R. Ajmera (2016)
6 SCC 368 : [2016] 1 SCR 1118 ; Nirmal Bang
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Securities Private Ltd. v. The Chairman, Securities and
Exchange Board of India MANU/SB/0206/2003 ; SEBI
v. Accord Capital Markets Ltd. MANU/SB/0136/2007 ;
Narayanan v. Adjudicating Officer, Securities and
Exchange Board of India (2013) 12 SCC 152 ; Viram
Investment Pvt. Ltd. and Ors. v. Securities and Exchange
Board of India MANU/SB/0046/2005 - referred to.
Case Law Reference
Per Kurian Joseph, J.
[2016] 1 SCR 1118
 relied on
Para 42
 Per Banumathi, J.
[2016] 1 SCR 1118
 referred to
Para 42
(2013) 12 SCC 152
 referred to
Para 38
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1969
of 2011.
From the Judgment and Order dated 11.10.2010 of the Securities
Appellate Tribunal, Mumbai in Appeal No. 70 of 2009
WITH
Civil Appeal Nos. 3174-3177 and 3180 of 2011.
Gourab Banerji, Sr. Advs, Bhargava V. Desai, Sahil Tagotra, S. P.
Mukherjee, Akshat Malpani, Advs for the Appellant.
Shyam Divan, P. Chidambaram, Sr. Advs, Ms. Mumtaz Bhalla,
Ms. Abhilasha Vij, Ms. Samiksha Godiyal, Ms. Anisha Upadhyay, Nishant
Kumar, Aniket Gautam, Neerav Merchant, Somasekhar Sundaresan,
Mayank Mishra, Divyam Agarwal, Ritunjay Gupta, Dheeraj Nair,
Preteesh Kapur, Ranjit B. Raut, Ms. Surbhi Kapoor, Ms. Bina Gupta,
Vikram Mehta, Ms. Raka Chatterjee, Vikas Mehta, Abhay Kumar, Ms.
Mridula Ray Bharadwaj, Advs for the Respondents.
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI
TRADING PRIVATE LTD.
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The Judgment of the Court was delivered by
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 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
26.03.2009
11.10.2010
2.
Tungarli Tradeplace
 Private Limited
("Tungarli")
Trader
30.04.2010
16.11.2010
3.
TLB Securities
Limited
("TLB")
Trader
16.03.2009
26.10.2010
4.
Indiabulls Securities
Limited
("Indiabulls")
Broker
25.02.2009
26.10.2010
5.
Angel Capital and
Debt Market
Limited ("Angel")
Broker
22.05.2009
26.10.2010
6.
Prashant Jayantilal
Patel ("Prashant")
Broker
31.08.2009
26.10.2010
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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 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 bye-laws of such
stock exchange;
(c) between such parties and on such terms as the Central
Government may, by notification in the official Gazette, specify."
"Derivative" is defined under Section 2(ac) of the 1956 Act, which
read as under:
"2(ac)] "derivative" includes-
(A) a security derived from a debt instrument, share, loan, whether
secured or unsecured, risk instrument or contract for differences
or any other form of security;
(B) a contract which derives its value from the prices, or index of
prices, of underlying securities.
(C) commodity derivatives; and
(D) such other instruments as may be declared by the Central
Government to be derivatives;"
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI
TRADING PRIVATE LTD. [KURIAN, J.]
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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 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.