# SECURITIES AND EXCHANGE BOARD OF INDIA v. SHRI KANAIYALAL BALDEVBHAI PATEL

- **Citation:** [2017] 14 S.C.R. 268
- **Court:** Supreme Court of India
- **Decided:** 2017-09-20
- **Case number:** Civil Appeal No. 2595 of2013
- **Bench:** RANJAN GOGOi, N. V. Ramana
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/securities-and-exchange-board-of-india-v-shri-kanaiyalal-baldevbhai-patel-31972
- **Pages:** 33

## Headnote

Shares and Securities - Securities and Exchange Board of
India (Prohibition of Fraudulent And Unfair Trade Practices
Relating To Securities Market) Regulations, 2003 - Regns. 3(a).
C
(b). (c) and (d) and 4(1) '-- Fraudulent practice violating market
integrity - Non-intermediary front-running in security market -
Legality of - Allegations against the private individuals that they
parted with the privileged/confidential information about the
investments of their company' to other persons, who accordingly
traded and earned substantial profits - Held: The information of
D possible trades that the company is going to undertake is the
confidential information of the company concerned. which it has
absolute liberty to deal with - A person conveying confidential
information to another person (tippee) breaches his duty prescribed
by lmv and if the recipient of such information knows of the breach
E and trades, and there is an inducement to bring about an inequitable
result. then the recipient 'tippee may be said to have committed fraud
- Accordingly, non-intermediary front running may he brought
. under the prohibition prescribed under regulations 3 and 4(1). for
being fraudulent or unfair trade practice, provided ingredients
under those heads are satisfied - Further, the parting of information
· F and the subsequent transaction thereto are so intrinsically connected
that no other conclusion but one of joint liability of both the initiator
of the fraudulent practice and other party who had knowingly aided
in the same is possible - Words and Phrases - 'inducement' and
'fraud' - Meaning of.
G
Disposing of the appeals, the Court
HELD:
Per N.V. Ramana, J.:
Whether 'front running by non-intermediary' is a prohibited
H practice under regulations 3 (a), (b), (c) and (d) and 4(1) of
268
SECURITIES AND EXCHANGE BOARD OF INDIA v. SHRI
269
KANAlYALAL BALDEVBHAl PATEL
Securities and Exchange Board oflndia (Prohibition of Fraudulent A
And Unfair Trade Practices Relating To Securities Market)
Regulations, 2003 ?
·
1. As this case involves practice of 'front-running' in
security market, a reference may be made to various definitions
and meanings of front-running in Major Law Lexicon by P.
B
Ramanatha Aiyar, The Black's Law dictionary, an Article by Nancy
Folbre, Circular dated 25.05.2012 of SERI and Consultative Paper
issued by SERI. In actuality, front-running is more complicated
than these definitions suggest. It comprises of at least three forms
of conduct. They are: (1) trading by third parties who are tipped C
on an impending block trade ("tippee" trading); (2) transactions
in which the owner or purchaser of the block trade himself engages
in the offsetting futures or options transaction as a means of
"hedging" against price fluctuations caused by the block
transaction ("self-front-running"); and (3) transactions where a
intermediary with knowledge of an impending customer block · D
order trades ahead of that order for the intermediary's own profit
C'trading ahead"). In the instant case, the first and the last types
of trade i.e., tippee trading and trading ahead are under
consideration. [Para 19][284-F-G]
·Major Law Lexicon by P. Ramanatha Aiyar (41h Ed.
' '2010) The Blacks Law dictionary 91h Ed., Nancy Folbre,
· The Front-Runners of Wall Street, 07.04.2014 (The New
: York Times). Circular CIRIEFD/112012, dated
' ·' ' 25.05.2012 of SERI, Consultative Paper issued by
' · ' -· SEBI, pursuant to a Press release No. 34/95 dated
1; '
- March 16, 1995 - referred to.
2. There is no dispute as to the fact that fraud is
jurisprudentially very difficult to define or cloth it with particular
ingredients. A generalized meaning may be difficult to be
attributed, as human ingenuity would invent ways to bypass such
behaviour. [Para 26][287-E]
3. On a comparative analysis of the definition of "fraud" as
existing in the 1995 regulation and the subsequent amendments
i~ .the 2003 regulations, it can be seen that the original definition
.jof "fraud" under the FUT

## Text

_Characters 0–39,969 of 76,507. This is a partial read: ask again with offset=39969 for what follows._

[2017] 14 S.C.R. 268
A
SECURITIES AND EXCHANGE BOARD OF INDIA
B
v.
SHRI KANAIYALAL BALDEVBHAI PATEL
(Civil Appeal No. 2595 of2013)
SEPTEMBER 20, 2017
[RANJAN GOGOi AND N. V. RAMANA, JJ.)
Shares and Securities - Securities and Exchange Board of
India (Prohibition of Fraudulent And Unfair Trade Practices
Relating To Securities Market) Regulations, 2003 - Regns. 3(a).
C
(b). (c) and (d) and 4(1) '-- Fraudulent practice violating market
integrity - Non-intermediary front-running in security market -
Legality of - Allegations against the private individuals that they
parted with the privileged/confidential information about the
investments of their company' to other persons, who accordingly
traded and earned substantial profits - Held: The information of
D possible trades that the company is going to undertake is the
confidential information of the company concerned. which it has
absolute liberty to deal with - A person conveying confidential
information to another person (tippee) breaches his duty prescribed
by lmv and if the recipient of such information knows of the breach
E and trades, and there is an inducement to bring about an inequitable
result. then the recipient 'tippee may be said to have committed fraud
- Accordingly, non-intermediary front running may he brought
. under the prohibition prescribed under regulations 3 and 4(1). for
being fraudulent or unfair trade practice, provided ingredients
under those heads are satisfied - Further, the parting of information
· F and the subsequent transaction thereto are so intrinsically connected
that no other conclusion but one of joint liability of both the initiator
of the fraudulent practice and other party who had knowingly aided
in the same is possible - Words and Phrases - 'inducement' and
'fraud' - Meaning of.
G
Disposing of the appeals, the Court
HELD:
Per N.V. Ramana, J.:
Whether 'front running by non-intermediary' is a prohibited
H practice under regulations 3 (a), (b), (c) and (d) and 4(1) of
268
SECURITIES AND EXCHANGE BOARD OF INDIA v. SHRI
269
KANAlYALAL BALDEVBHAl PATEL
Securities and Exchange Board oflndia (Prohibition of Fraudulent A
And Unfair Trade Practices Relating To Securities Market)
Regulations, 2003 ?
·
1. As this case involves practice of 'front-running' in
security market, a reference may be made to various definitions
and meanings of front-running in Major Law Lexicon by P.
B
Ramanatha Aiyar, The Black's Law dictionary, an Article by Nancy
Folbre, Circular dated 25.05.2012 of SERI and Consultative Paper
issued by SERI. In actuality, front-running is more complicated
than these definitions suggest. It comprises of at least three forms
of conduct. They are: (1) trading by third parties who are tipped C
on an impending block trade ("tippee" trading); (2) transactions
in which the owner or purchaser of the block trade himself engages
in the offsetting futures or options transaction as a means of
"hedging" against price fluctuations caused by the block
transaction ("self-front-running"); and (3) transactions where a
intermediary with knowledge of an impending customer block · D
order trades ahead of that order for the intermediary's own profit
C'trading ahead"). In the instant case, the first and the last types
of trade i.e., tippee trading and trading ahead are under
consideration. [Para 19][284-F-G]
·Major Law Lexicon by P. Ramanatha Aiyar (41h Ed.
' '2010) The Blacks Law dictionary 91h Ed., Nancy Folbre,
· The Front-Runners of Wall Street, 07.04.2014 (The New
: York Times). Circular CIRIEFD/112012, dated
' ·' ' 25.05.2012 of SERI, Consultative Paper issued by
' · ' -· SEBI, pursuant to a Press release No. 34/95 dated
1; '
- March 16, 1995 - referred to.
2. There is no dispute as to the fact that fraud is
jurisprudentially very difficult to define or cloth it with particular
ingredients. A generalized meaning may be difficult to be
attributed, as human ingenuity would invent ways to bypass such
behaviour. [Para 26][287-E]
3. On a comparative analysis of the definition of "fraud" as
existing in the 1995 regulation and the subsequent amendments
i~ .the 2003 regulations, it can be seen that the original definition
.jof "fraud" under the FUTP regulation, 1995 adopts the definition
...J: -~-
E
F
G
H
270
SUPREME COURT REPORTS
[2017] 14 S.C.R.
A of "fraud" from the Indian Contract Act, 1872 whereas the
subsequent definition in the 2003 regulation is a variation of the
same and does not adopt the strict definition of "fraud" as present
under the Indian Contract Act. It includes many situations which
may not be a "fraud" under the Contract Act or the 1995
B
regulation, but nevertheless amounts to a "fraud" under the 2003
regulation. [Para 27)(287-G-H; 288-A]
4. The provisions of regulations 3 (a), (b), (c), (d) and 4(1)
of the 2003 Regulations arc couched in general terms to cover
diverse situations and possibilities. Once a conclusion, that fraud
C has been committed while dealing in securities, is arrived at, all
these provisions get attracted in a situation like the one under
consideration. [Para 37][291-C]
5. Regulations 3 and 4 (1) of the 2003 Regulations bars
persons from dealing in securities in a fraudulent manner or
indulging in unfair trade practice. Fairness in financial markets is
D offon expressed in terms of level playing field. A playing field
may be uneven because of varied reasons such as inequalities in
information etc. Possession of different information, which is a
pervasive feature of markets, may not always be objectionable.
Indeed, investors who invest resources in acquiring superior
E information are entitled to exploit this advantage, thereby making
markets more efficient. The unequal possession of information
is fraudulent only when the information has been acquired in bad
faith and thereby inducing an inequitable result for others. [Para
41][294-G-H]
F
6. The law of confidentiality has a bearing on this case
instant. "Confidential information acquired or compiled by a
corporation in the course and conduct of its business is a species
of property to which the corporation has the exclusive right and
benefit, and which a court of equity will protect through the
injunctive process or other appropriate remedy." The information
G of possible trades that the company is going to undertake is the
confidential information of the company concerned, which it has
absolute liberty to deal with. Therefore, a person conveying
confidential information to another person (tippee) breaches his
duty prescribed by law and if the recipient of such information
H knows of the breach and trades, and there is an inducement to
SECURITIES AND EXCHANGE BOARD OF INDIA v. SHRI
271
KANAIYALAL BALDEVBHAI PATEL
bring about an inequitable result, then the recipient tippee may A
be said to have committed the fraud. [Par~ 42)(294-H; 295-A-B)
· 7. Accordingly, non-intermediary front running may be
brought under the prohibition prescribed under regulations 3 and
4 (1), for being fraudulent or unfair trade practice, provided that
the ingredients under those heads are satisfied. It is clear that in B
order to establish charges against tippee, under regulations 3
(a), (b), (c) and (d) and 4 (1) of 2003 the Regulations, one needs
to prove that a person who had provided the tip was under a duty
to keep the non-public information under confidence, further such
breach of duty was known to the tippee and he still trades thereby
C
defrauding the person, whose orders were front-runned, by
inducing him to deal at the price he did. [Para 43][295-C-D]
8. Taking into consideration the facts and circumstance~
of this case and the law laid down herein above and SEBI v.
Kishore R. Ajmera can only lead to one conclusion that concerned
parties to the transaction were involved in an apparent fraudulent D
practice violating market integrity. The parting of information
with regard to an imminent bulk purchase and the subsequent
transaction thereto are so intrinsically conneded that no other
conclusion but one of joint liability of both the initiator of the ·
fraudulent practice and the other party who had knowingly aided
E
in the same is possible. [Para 44)(295-E]
Securities and Exchange Board of India v. Kishore R.
Ajmera (2016) 6 SCC 368 ! [2016] 1 SCR1118 -
relied on.
Govind Impex Pvt. Ltd. v. Income Tax Department
(2011) 1 sec 529 : [2010] 14 SCR 523; Krishi
Utpadan Mandi Samiti v. Pilibhit Pantnagar Bee} Ltd.
(2004) 1 sec 391 : [20JJJJ 6 suppl. scR 344; N.
·Narayanan v. adjudicating Officer, SEBI (2013) 12
SCC 152 : [2013) 6 SCR 391 - referred to.
Securities and Exchange Board of India vs. National ,
Securities, Inc., et al. 393 U.S. 453 (1969); David
Carpenter, Kenneth P. Fe/is and R. Foster Winans, v.
United States 484 U.S. 19; Vincent F. Chiarella v. United
States 445 U.S. 222 (1980) - referred to.
F
G
H
272
A
B
c
SUPREME COURT REPORTS
[2017] 14 S.C.R.
Per Ranjan Gogoi, J: (Concurring)
1. If Regulation 2(c) of the 2003 Regulations was to be
dissected and analyzed it is clear that any act, expression, omission
or concealment committed, whether in a deceitful manner or not,
by any person while dealing in securities to induce another person
to deal in securities would amount to a fraudulent act. The
emphasis in the definition in Regulation 2(c) of the 2003
Regulations is not, therefore, of whether the act, expression,
omission or concealment has been committed in a deceitful
manner but whether such act, expression, omission or
concealment has/had the effect of inducing another person to deal
in securities. [Para 5](297-C-D]
2. The definition of 'fraud', which is an inclusive definition
and, therefore, has to be understood to be broad and expansive,
contemplates even an action or omission, as may be committed,
even without any deceit if such act or omission has the effect of
D inducing another person to deal in securities: Certainly, the
definition expands beyond what can be normally understood to
be a 'fraudulent act' or a conduct amounting to 'fraud'. The
emphasis is on the act of inducement and the scrutiny must,
therefore, be on the meaning that must be attributed to the word
E "induc1!". [Para 6](297-E-F]
3. A person can be said to have induced another person to
act in a particular way or not to act in a particular way if on the
basis of facts and statements made by the first person the second
person commits an act or omits to perform any particular act.
F The test to determine whether the second person had been
induced to act in the manner he did or not to act in the manner
that he proposed, is whether but for the representation of the
facts made by the first person, the latter would not have acted in
the manner he did. This is also how the word inducement is
understood in criminal law. The difference between inducement
G in criminal law and the wider meaning thereof as in the present
case, is that to make inducement an offence the intention behind
the representation or misrepresentation of facts must be dishonest
whereas in the latter category of cases like the present the
element of dishonesty need not be present or proved and
H established to be present. In the latter category of cases, a mere
SECURITIES AND EXCHANGE BOARD OF INDIA v. SHRI
273
KANAIYALAL BALDEVBHAI PATEL
inference, rather than proof, that the person induced would not A
have acted in the manner that he did but for the inducement is
sufficient. No element of dishonesty or bad faith in the making of
the inducement would be required. !Para 8][298-A-D)
4. Adverting to the facts of the present case, if the
information with regard to acquisition of shares by M/s 'PI' was
B
parted with by 'DP' to 'KB' Patel and 'AB' and the latter had
transacted in huge volume of shares of the particular company/
scrip mentioned by 'DP' a little while before the bulk order was
placed by M/s. 'PI' and.the said persons had sold the same a
short-while later at an increased price, such increase being a
C
natural consequence of a huge investment made in the particular
scrip by M/s 'PI', surely, it can be held that by the conduct of
'DP', 'KB' Patel and 'AB' were induced to deal in securities. A
natural and logical inference that would follow is that the aforesaid
two latter persons would not have entered into the transactions
in question, had it not been for the information parted with by D
'DP'. The track record of earlier trading of the concerned two
persons docs not indicate trading in such huge volumes in their
normal course of business. Such an inference would be a
permissible mode of arriving at a conclusion with regard to the
liability, as held by this Court in Securities and Exchange Board.
of India vs. Kislwre R. Ajmera. The volume; the nature of the
E
trading and the timing of the transactions in question can leave
no manner of doubt that 'KB' Patel and 'AB' had acted in
connivance with 'DP' to encash the benefit of the information
parted with by 'DP' to them and, therefore, they arc parties to
the 'fraud' committed by 'DP' having aided and abetted the same.
F
[Para 10][298-F-H; 299-A-C)
5. To attract the rigor of Regulations 3 and 4 of the 2003
Regulations, mens rea is not an indispensable requirement and
the correct test is one of preponderance of probabilities. Merely
because the operation of the aforesaid two provisions of the 2003
G
Regulations invite penal consequences on the defaulters, proof
beyond reasonable doubt as held by this Court in Securities and
Exchange Board of India Vs. Kishore R. Ajmera is not an
indispensable requirement. The inferential conclusion from the
proved and admitted facts, so long the same are reasonable and
H
274
SUPREME COURT REPORTS
(2017] 14 S.C.R.
A can be legitimately a11rived at on a consideration of the totality of
the materials, would be permissible and legally justified. Having
regard to the facts of the present case~ i.e. the volume of shares
sold and purchased; the proximity of time between the transactions
of sale and purchase and the repeated nature of transactions on
B different dates, would irresistibly lead to an inference that the
conduct of the respondents in Appeal Nos.2595 of 2013, 2596 of
2013 and 2666 of 2013 and appellants in Appeal Nos.5829 of 2014
and 11195-11196 of 2014 were in breach of the code of business
integrity in the securities market. The consequences for such
breach including penal consequences under the provisions of
C Section 15HA of the SEBI Act must visit the concerned defaulters.
D
E
F
[Pal'a 14)(300-A-D)
Securities and Exchange Board of India v. Kishore R.
Ajmera (2016) 6 SCC 368 : [2016) 1 SCR 1118 -
relied on.
Case Law Reference
In the Judgment of N.V. Ramanai J.:
[2010) 14 SCR 523
referred to
Para 20
12003) 6 Suppl. SCR 344
referred to
Para20
[2016) 1 SCR 1118
relied on
Para 20
[2013] 6 SCR 391
referred to
Para 21
393 U.S. 453 (1969)
referred to
Para 38
484 U.S. 19
referred to
Para 38
445 U.S. 222 (1980)
referred to
Para 39
In the Judgment of Ranjan Gogoii J.:
[2016) 1 SCR 1118
relied on
Para 10
G
CIVIL APPELLATE WRISDICTION: Civil Appeal No. 2595
of2013.
H
From the impugned Judgment and final Order dated 09.11.20 I 2
passed by the Securities Appellate Tribunal, Mumbai in Appeal No. 7 4 of
2012.
.
SECURITIES AND EXCHANGE BOARD OF INDIA v. SHRI . 275
KANAIYALAL BALDEVBHAI PATEL
WITH
C.A. Nos. 2596 and 2666 of 2013, CA. Nos. 5829 and 1119511196 of2014
A
Arvind P. Datar, K.T.S. Tulsi, Sr. Advs., Pratap Venugopal,
Ms.Surekha Raman, Anuj Sarma, Ms. Niharika, Aman Shukla, Ms.
Kanika Kalaiyarasan (for Mis K.J. John & Co.), Gaurav Bhargava,
B
Kuber Boddh, Gagan Gupta, Mayank:Mishra, DivyamAgarwal, Ritunjay
Gupta, Dheeraj Nair, Ms.Hetu Arora Sethi, Yogcsh Jagia, Amit Sood,
Yogesh, Rajesh Agrawal, Rameshwar Prasad. Goyal, Advs. for the
appearing parties.
The Judgments of the Court were delivered by
N. V. RAMANA, J. 1. The important questionoflaw, arising in
these batch of cases, being similar and the facts involved being largely
comparable, all the appeals were heard together and are being decided
by this common judgment.
2. This case revolves round the legality of'non-intermediary frontrunning' in security market under the SECURITIES AND EXCHANGE BOARD
c
·D
OF INDIA (PROHIBITJON OF FRAUDULENT AND UNFAIR TRADE PRACTICES
RELATING TO SECURITIES MARKET) REGULATIONS, 2003 [hereinafter 'FUTP
2003 'for brevity]. As SEBI Appellate Tribunal [hereinafter 'SAT' for
brevity] has taken two different views in different cases appealed herein,
E
Securities and Exchange Board ofindia [herein after 'SEBI' for brevity]
as well as private individuals, who are alleged to have been involved in
front running, are in appeal before us.
3. A brief factual background would be necessary before we deal
with the question of law that has arisen in this case instant. Broadly to
understand the issue at hand, the facts in CIVIL APPEAL No. 2595 OF
2013 AND 2596 OF 2013 (related cases) may be stated in brief. SEBI
investigated into the activities ofShri Kanaiylilal Baldevbhai Patel [herein
after 'KB'for brevity] an individual trader. During the investigation, it
F
was found that KB was putting orders ahead of orders placed by Passport
G
India Investment (Mauritius) Ltd. [herein after 'PII' for brevity]. One
Dipak Patel, was the portfolio manager of PII, who also happens to be a
cousin of KB and one Shri Anandkumar Baldevbhai Patel [herein after
'AB' for brevity]. It was alleged that Dipak Patel provided information
to KB and AB regarding forthcoming trading activity of the PII. It is to
H
276
SUPREME COURT REPORTS
(2017] 14 S.C.R.
A
be noted that trades were executed using the telephone number registered
in the name of AB at the common residential address of KB and AB.
Taking advantage of the information received from Dipak Patel, KB
had indulged in trading before the PII and consequently squared off the
position when the order of PIT were placed in the market. It was estimated
B that the KB earned a total profit of Rs. 1,56,32,364.01/-from the alleged
trades. This Court in C1vn. APPEAL No. 2594 OF 2013, by order dated
05.04.2017, while remanding the matter back to the Appellate Tribunal
with respect to AB, held that there is no finding or conclusion recorded
with respect to AB in the following mannerc
D
E
Learned counsel for the appellant (SEBI) has vehemently urged
that such findings are recorded in the Adjudication Order and the
said order has merged with the order of the learned Appellate
Tribunal. We-disagree with the aforesaid contention urged by the
learned counsel for the appellant. In the appeal(s) filed by the
aggrieved pcrson(s) against the ordcr(s) of the Adjudicating
Officer, the learned Appellate Tribunal was expected to record its
own independent findings and arrive at its own conclusions for
holding the respondent liable for the penalty imposed. It seems
that the learned Appellate Tribunal has proceeded on the basis
that the case of the respondent is same and similar to the case of
Kanaiyalal Baldev Patel and Dipak Patel which, evidently, is not.
4. In C1v1L APPEAL No.2666 OF 2013, Sujit Karkera and Group
were trading through B.P. Equity Pvt. Ltd. SEBI alleges that they were
trading ahead of the trades of CITIGROUP Global Markets Mauritius
Pvt. Ltd.(CGMMPL) on the basis of information provided by Suresh
Menon (trader of CGMMPL) who was in possession of the orders of
F
CGMMPL for 6 scrip days. SEBI in its investigation had found that
there were several calls made between Suresh Menon and his family
friend Sujit Karkera during this time period of 6 days. In these telephonic
conversations, it was alleged that there was exchange of information
related to scrip name, order quantity, order timing, and order price of the
G orders placed by Suresh Menon for CGMMPL. Sujit Karkera utilized
the information provided by Suresh Menon to trade thereby making huge
profits.
5. In CIVIL APPEAL No.11195-96 OF 2014, Jitendra Kumar
Sharma was an equity dealer employed by the Central Bank of India.
H His responsibilities entailed preparation of charts for the chief equity
SECURITIES AND EXCHANGE BOARD OF INDIA v. SHRI
277
KANAIYALAL BALDEVBHAI PATEL [N. V. RAMANA, J.]
dealer and placing of orders based on instructions of the chief equity
A
dealer. Vibha Shanna, who is the wife of Jitcndra Kumar Shanna, was
a regular trader in the stock market and this fact was disclosed to Central
Bank of India as a good practice of making disclosure to the employer.
It is the allegation of SEBI that Vibha Shanna engaged herself in front
running Central Bank of India's large scale orders allegedly with the
B
knowledge obtained from her husband. Further the SEBI had alleged
that Vibha Shanna's trades substantially matched with the trades of the
bank during the relevant period thereby violating regulations 3(a), (b ),
(c), (d) and4(1) ofFUTP 2003.
6. In Civ11, APPEAL No. 5829 OF 2014, facts of the case arc that
appellant used to trade in scrips of four companies namely AmtekAuto
C
Ltd., Amtek India Ltd., Monnet Ispat Ltd. and Ahmednagar Forgings
Ltd. through Religare Securities Ltd., ISF Securities Ltd., India Infoline
Securities Ltd. and Narayan Securities Private Ltd. It is alleged against
the appellant that, she had bought and sold equal quantities of shares in
large volume in these four scrips by utilizing the infonnation provided by
D
.Decpak Khurana who was privy to certain confidential infonnation of
Religare. SEBI conducted an investigation in the trading of appellant
from June 1, 2008 to January 12, 2009. During the investigation,
SEBI noticed irregularities in her dealings in the scrips of above mentioned
four companies. A general trend of trading was noticed which further
E
revealed that the appellant was indulged in Front Running. It was found
that the appellant's sell orders (quantity and price) substantially matched
with the buy orders (quantity and price) of other traders and that her sell
order limit price was always above the sell LTP but was same or very
close to the buy limit price of other traders. Moreover the selling price,
quoted by her, was close to the highest price reached on market on
F
those days.
7. With this factual background, a reference needs to be made to
the scheme ofFUTP 2003. SEBI, by a notification under Section 30 of
the SEBIAct, 1992, dated 17.07.2003, formulated FUTP 2003.
8. Indisputably, the object and purpose of this regulation (FUTP
G
2003) is to safeguard the investing public and honest businessmen. The
aim is to prevent exploitation of the public by fraudulent schemes and
worthless securities through misrepresentation, to place adequate and
true infonnation before the investor, to protect honest enterprises seeking
capital by accurate disclosure, to prevent exploitation against the
H
278
SUPREME COURT REPORTS
[2017] 14 S.C.R.
A competition afforded by dishonest securities offered to the public and to
restore the confidence of the prospective investor in his ability to select
sound securities.
9. FUTP 2003 has three chapters, namely 'preliminary',
'prohibition of fraudulent and unfair trade pmctices relating to securities
B market' and 'investigation'. Regulation I contains the short title a';lct
commencement. Regulation 2 consists of certain definitions. Clause (b)
ofregulation 2 defines 'dealing in securities' which includes an act of
buying, selling or subscribing pursuant to any issue of any security or
agreeing to buy, sell or subscribe to any issue of any security or otherwise
C transacting in any way in any security by any person as principal, agent
or intermediary referred to in Section 12 of the SEBIAct. Clause (c) of
regulation 2 defines fraud in the following mannerD
E
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-
(1) a knowing misrepresentation of the truth or concealment of
material fact in order that ll!lOther 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 ofa fact by a person having knowledge
or belief of the fact;
F
(4) a promise made without any intention of performing it;
G
H
(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) d~ceptive behaviour by a person depriving another ofinformed
consent or full participation.
(8) a false statement made without-reasonable ground for believing
it to be true.
r
,___..,.,
,
SECURITIES AND EXCHANCrE BOAJ{I) OF INDIA v. ~llltl
KANAlYALAL 13ALDEVIUIAI PATEL IN. v. HAMANA, .1.'1
(9) The act of an issuer of' securities giving oul misinlhrnUtlion
A
thot uffecls the mnrkel price of the security, resulting in invc:ttorn
being effectively misled even though they did nol rely on the
statement it~mlf or nnylhing derived Ji·om it other thnn the murkcl
price.
And ''fraudulent" Hhall be construed accordingly;
Nothing contained in this clause 1-ihall apply to any general
comments made in good failh in regard to
.
(a) the economic policy orthe government
(b) the economic situation of the country
(c) trends in the sccm·itics market or
(d) any other matter of a like nature
whether such comments arc made in public or in private
B
c
10. Regulation 3 prohi~its certain dealings in securities, whereas
D
regulation 4 prohibits manipulative, fmudulcnt and unfair practices.
Regulation 5 deals with the power of the board to order investigation.
Regulation 6 elaborates on the power of the investigating authority.
11. It is important to note that SEBI has amended the regulation,
a number of times, to keep up with the technology and times. A reference
E
may be made to the amendments carried out to the regulation -·
Table No.1- comparison of relevant provisions
H
r
280
SUPREME COURT REPORTS
[2017] 14 S.C.R.
A
().).l\rlv 1udloct or emission a. !he
\l) A ruggestlO!l u to• factwhid .. u not
law ,.a.ny dtdatts to be frzudulmt;
trut by one 1'-hode<s not belie\'• it to
(6~ And ''fnudulmi' •hall be
bel!Uc;
C0111b:11edaccordinpy
(3) All~ .. con"'31meut of a fact by ..
personhavingtnowledg• <>< btli<f of
the fact;
! 4) Apromilomad. without any
. intflltion of perl'mning it;
(5) A reprmnt>tion made in .. recldes•
.2nd carcl.t3_, m.amtft whether rt ·be
B
tne or false;
(6) Ally1Uchoctoromi!sicuuny
othO!law ipecifu:>lly de&r.1 tobt
fnuduleut, .
(7) D<e<pti\-. bW>ior by a penon
dtpriving>nothor or infOIDJ.ci
c®umodull particip>tioll.
(S) A t'a!i< 1t>taumt made 1'i1hout
c
rwonzble grol!l1d for belie\ing it to
beuue.
(9) Tho >ct ohn issuer of securiti"
giving Q11t misinfoon>tion tlur
affects the. mzb!t price of the
I.airily ;mu!ting in inV<JtoH J>eing
effecth'ay misl<d mn though they
did not rely oμ: the •-titl.if er ·
>nything .i.tn'!d from it otha the.
D
1henurk<t nrioo.
~o person soa.u buy, sell or otherwise
Prohibition of ·c-ertain dtalings in No amcnCllD.cnts
deal in stcuritics in a fraudolent
ncuritits
to Section 3( c)
manner.
No person shall·dircctly orindimdy-
(a)bu:y, sell or otbcrnisc deal in securities
in a fraudulcntmann<r;
E
i
i
(b)use oremploy,in connection\\ith
i
E
~ issue, purchase or sale of any s~r:urity
' "
u :
listed or proposed to belisted in a
~
.E
rccogniz:cd stock exchange-, any
l~
l't
rilanipulativt ordCccpti\"c dc\ice or
¥
:3 I
contrivanc~in contraventionof tfic
..
...
provisions of the Act_ortbC rults or the
I
E regulations made there under;
b
(c).cmploy any deiice, scheme or artifice
u
~
... •
to dcfraudin·camccti<n with dealing in
li
= • or isruc of securities which arc.listed or
i!I:
i
~
:a
proposed to ho listed on areoognized
• stock exchange;
~
~
e..
F
~
"'
(~)engage in any ill!, practic~ coorse of
·~
I
'bu!iness which opcratos or would opcm
as"fraudor deecituponanyprrs<ilin
8 ronncctim with any dealing in orissuc of
S!
~ · m:uritics which :irefu1td or.proposed 10
G
b<listed on amog!lizcdstod< exchange
in contra,·cntim ofthc provisiais~of the
Act or tho rules and therogulati(llJ mad•
·there under.
H
sECURITIES AND EXCHANGE BOARD OF INDIA v. SHRI
281
_ -K.ANAIYALAL BALDEVBHAI PATEL [N. V. RAMANA, J.]
.
~
Nop!iiO~s~ill-
.
.
.
.~ ·.O>. \\~th~utl;.fejudic~.to.th~ J>tO}jl!om
Eip~:ln~tion.~F:or
·:.: .
t&J (a) Eff:'~~~p~ ?l: or·mm mto:
...
~ft~gul:~on J; uo ~on
sh2lfmdule:~
the ptirpOJes'of
··w'o
~
eitb~ ·dire¢y ormdir~dy, ...
• ... . 0
inamudulmroran .unf~ trc~e;
~
thilsub.
::i;·
~ ... ttaimticm in s~"iuiri:.!: wjth !he
:. ~
~~~.iin.truritles.
ree:~itatiolli for
~j intsrticn oi ~ci2n)·. rming 'cr
0 J~
(1). De~indn s~~~s 3hall he d~ro
..
. . ..
th:itemo,'al:or:
~
d:Ffess~g~~pri~~ ?H~~~3, \\~ith ·=
0 to b! a frauduimt or 'an imfcir: traiie;
do uti~ it is .
.
~~ .
~ th: int~ti9n of ~!lct~y ranmg or
pmti:e ifit lu\'olm fraUd and maj
clarified th3t tli~
1f deyrmin&th:~c~s ofJ~~el
.~d
~
· ·
j!i~u~e:.all'of any of tli~ follow~g.
acts or omil3ioris
~
11
: therebyinducmgth~ 3~~ crpurclili~
- ~ · · Dimel ':- ..
0
lil~d in· this sub~
• •• ~
0·
0 ~.
0
· - ,:.
0 .
0
0
0
(~~ ofs~tiei by my~cn; ·
·=m·:
(a.)Jndulgmgm a aci whi;hcr~t:.! ree:ublion 2ee not.
~! !bi lrululg,ina~y "-"!,_ u-hidii;
0
'
~~c~:Ill:~le~diljg ~eii2n'ce
~auun·e~d:
:·c·'o
J ~ C2lcuh~i to cmt~ a 12lse. or
··~ .·
oftr~dml? 1D the serunties.
that 2n xt or
tS! mi3leading.~peum~ oftr2.ding.on
•
• :( 0
. . mcr1:~·~ ~
.
omi3sionis
· .. i-1.
~-
oO mzk
; Z<.,
~->P.~i~·a·s.~·nq~
prohibited if it
i-6~ serunn~s • ·e~
'5·
·.
-~
~en (c) InduleeinDn\'·ictwhithin
~~~!:;
oliitended. to tfffct trw fer of
falli\vithin the
-?"''
0
--
·
"
~
..
. bid .. c ,.
~efiWi~~.~slilp~uJ · ·
purvien· of
:~~ :e~~~ ~iprt::-~ ci .s~~e;,~. ~:"' .
· .~·~·
f ~ cnlr.IIlcdicm thawenot'l':emim~
•.t~ll :
~f~de-Jtn.o~~e9!Jiy~;a ·
te~li0n3
~": ..
~143 tndetrcn··ctions' .
- ·
:~ ~ 0
;de\~~'tooinf!21 ~.--ck~en:er.: .
nonViih3't2iiilin~
.. ~..~
~~" .
, ) .
. .
: .... '
~ (d) &.reriniO ·apurdl~eo~sale of my
: ~ ·o•
eaweilu~iioru.'in iiie·pnce, of thai'~ is not
.w
o. ,.
~~
·~~s~~t~wrongful~. mduiiMUi .tiili
1Pi !~11riti~ ,not int$ded .to ill~t'
· ::~ : ..
~ tr.n3rer of~~crJ'o}\'li~li!pbi#
: ....... :
;orav6idmce oiloss; 0
su_O-reMalion or
i.;)" {!
(:f': ~:
. .
; . : . . .. .
is aBcnooo~ . :
~{ ~edto o~e<>~J:25 ~-d~y!~e~10~
=·z~ ~
ii.) :\iiyit o~ o~si6D:~~uliiin~
~1 ilie, depr~s= or cans.e il~~tlqns
i;< :}
beili~ i:bmnea.
!~1 itith~m2iketprite:ofs#~~;· _
~~· :
,., ...
.. .
~}('~
;t>iumiplihti9n oft1;ieP.fice:~.a
0 ~~Y9X:~~ ·
......... '·
. .... ...
.
-~! ~~ P~-~~er?I'~~ to.pay or.cffer.
,,;.: ,•
.S!Cilfl%.:
cc~gol}: or .
%:·'·
~: dit~}~Or~dtrtciyr t~ ~Y.~£U :.<·,:
, ..
P~9.J:1S.IIJ.~S·.
:· ~,-:
'i··
~ ~m.oney .ormoney~swo~fct ..
:::~·<··
(q:)'; Aidiiierittedim· btn1n~ or·
~11~-regill#on:
• t mdu:m2 ~Oiher. ~ion.fu t>urclwe er :.'s\ . · · ;sPlliri:1'icun~:m 1-afiiic:e'or:
.iffi ~~any~seowtpyithth~J.61~·
·
.. .... l.
3 si.tbjftntiil client ord&.or·
~ ~~
of~fi_.nn.!. dipiiuili!i lit.
-:C·:;
~h'mbv:s'fu'furu or o~no~·
'·=·-
.OJ C:CI13mgilUCIIWloni in lhimiD::t
~a>
'»osltioidi 'f3birab'orit an·:
·.-o::-
~~
•
'
{
0
0
:.:&r
iril~endin':in nnetion in' die:
~~ pn:.eo. 5e:uriti~~ -
irf.f -
.
~~,:}
·s~me'flr.rdattiHatureior·
~';
'·l!:'·'·
:~~dnris ~n·t~ct.
ll'
·:o :·,
~
1;·· .
: ~:
~i
0 .. <,
r-rf
-~
•.:
J o
..
<t: ~.
t~
· . ::: 0
~
.
· P= ~
~
i
12. Although aforesaid amendments are made to the regulation,
yet such amendments sometimes fail to live up to human ingenuity and
growth of technology. Usurpation of reprehensible profits by fraudsters,
Who are not entitled to them, must be made answerable by this Court as
'
~er established tenants of rule of law without leaving incentives for
1 raudulcnt practices, based on creativity of disingenuous, to survive the
1~~al gambits. Before embarking upon the necessary discussions, I would
~ e to record my views on a somewhat unclear picture that emerge
om Undefined concepts contained in the Act and the Regulations framed
A
B
c
D
E
F
G
H
282
SUPREME COURT REPORTS
[2017] 14 S.C.R.
A there under, a comprehensive legislation can bring about more clarity
and certainty on these aspects.
B
c
D
E
F
13. Submissions of Mr. K. T. S. Tulsi, learned senior advocate,
appearing on behalf of the appellant in C1v1LAPPEAL No. 5829 OF 2014.
)- The finding with regard to the appellant being guilty of fraud
under regulations 3 and 4 of FUTP 2003 is contrary to the
definition of fraud as contained in Regulation 2( 1 )( c) of the
said Regulations.
)- Sub-clauses (i), G), (1), (m), (p ), ( o) and ( q) of clause (2) of
regulation 4 expressly make themselves applicable only to the
case of intermediaries and not to individual buyers or sellers.
The rest of the sub-clauses being part of the scheme which
seeks to regulate the conduct of intermediaries, will be deemed
on their face, to pertain to activities undertaken by
intermediaries. Thus, the whole of Regulation 4 seems to be
inapplicable to the case()fthe applicant.
Submissions of Mr. Arvind P. Datar, learned senior advocate,
appearing on behalf of SEBI-
)- That the ambit of FUTP regulations has been substantially
increased from 1995 to 2003.
)- That inclusion of specific prohibition of front-running with
respect to intermediaries under Regulation 4 (2)( q) should not
whittle the scope ofregulation 4 of the FUTP 2003.
)- Moreover, 'Expressio Unius Est Exclusio Alterius' may not
be a safe principle to oust the liability for non-intermediary
front-running.
14. Other learned counsels appearing for parties have either
adopted the submissions made by the above named advocates or provided
alternative reasons for the conclusions reached by the abovementioned
adv9cates.
15. The question which has arisen for our consideration is whether
G 'front running by non-intermediary' is a prohibited practice under
regulations 3 (a), (b), (c) and (d) and 4(1) ofFUTP 2003?
H
16. As this case involves practice of 'front-running' in security
market, a reference may be made to various definitions and meanings of
front-running-
SECURITIES AND EXCHANGE BOARD OF INDIA v. SHRI
283
KANAIYALAL BALDEVBHAI PATEL [N. V. RAMANA, J.]
Major Law
LexiconbyP.
FRONT
RUNNING.-
Buying
or
selling
A
Ramanatha
Aiyar ( 4•h Ed.
(2010)
securities ahead of a large order so as to
benefit from the subsequent price move.
This denotes persons dealing in the maiket,
knowing that a large transaction will take
place in the near future and the parties are
likely to move in their favour.
B
·i
I
The Black's Law
dictionary (9'h
Ed,)
Nancy Folbre1
The illegal private trading by a broker or
market maker who has prior knowledge of a
forthcoming laige movement in prices
Front running, n. Securities. A broker's or
analyst's use of non-public infonnation to
acquire securities or enter into options or
futures contracts for his or her own benefit,
knowing that when the information becomes
public, the price of the securities will change
in a predictable manner. This practice is
illegal. Front-running can occur in many ways.
For example, a broker or analyst who works
for a brokerage firm may buy shares in a
company that the finn is about to recommend
as a strong buy or in which the firm is
planning to buy a large block of shares.
In the world of financial trading, a front-runner
is someone who gains an unfair advantage
with inside information
17. SEBI has defined front-running in one of its circular2 in the
following mannerFront-running; for the purpose of
this-circular, front running means
usage of non public information to .
directly or indirectly, buy or sell
securities or enter into options or
futures contracts, in advance of a
substantial order, on an impending
transaction, in the same or related
securities or futures or options
contracts,
in
anticipation that
when the information becomes
public; the price of such securities
or contracts may change.
1 NancyFolbre, The Front-Runners of Wall Street, 07.04.2014 (The NewYorkTimes).
2 CircularCIR/EFD/1/2012, dated 25.05.2012.
c
D
E
F
G
H
284
SUPREME COURT REPORTS
[2017] 14 S.C.R.
A
18. Further a consultative paper3 issued by SEBI had grouped
B
c
D
E
F
front running to be an undesirable manipulative practice in the following
manner-
'However, SEBI Act does not prescribe or
specify as to which practice would be
considered to be ftaudulent and unfair trade
practices. While the fraudulent and unfair
trade practices are commonly understood, it
would be desirable if these practices are
defined specifically .
. .this will bring about clarity among the
intermediaries, issuers, investors and other
connected persons in the securities marl<:ets
about
the
practices that are prohibited,
fraudulent and unfair .
.. . The draft defines fraudulent and unfair
trade practices. These regulations seek to
cover market manipulation on the stock
exchanges also. Practices like wash sales,
front-running,
price
rigging,
artificial
increasing or decreasing the prices of the
securities are brought within the ambit of
the regulations'
(emphasis added)
19. In actuality, front-running is more complicated than these
definitions suggest. It comprises of at least three forms of conduct. They
are: ( l) trading by third parties who are tipped on an impending block
trade ("tippee" trading); (2) transactions in which the owner or purchaser
of the block trade himself engages in the offsetting futures or options
transaction as a means of "hedging" against price fluctuations caused
by the block transaction ("self-front-running"); and (3) transactions where
a intermediary with knowledge of an impending customer block order
G trades ahead of that order for the intermediary's own profit ("trading
ahead"). In this batch of appeals we are concerned with the first and
the last types of trade i.e., tippee trading and trading ahead. It is important
to note that trading ahead has been explicitly recognized under regulation
4(2)(q) ofFUTP 2003.
' Consultative Paper issued by SEBI, pursuant to a Press release No. 34/95 dated
H
March 16, 1995.
SECURITIES AND EXCHANGE BOARD OF INDIA v. SHRI
285
KANAIYALAL BALDEVBHAI PATEL [N. V. RAMANA, J.]
20. A word on interpretation would be appropriate before I take A
up legal aspects of this case. Mr. K.T.S. Tulsi, learned senior counsel,
states that penal laws have to be strictly construed. He places reliance
on Govind lmpex Pvt. Ltd. v. Income Tax Department, Krishi
lltpadan Mandi Samiti v. Pilibhit Pantnagar Beej Ltd. 5 Although
strict construction is well established principle when interpreting a penal
provision, but such interpretation should not result in incongruence when
compared with the purpose of the regulation. In SEBJ v. Kishore R.
Ajmera, this Court observed thatthe SEBI Act and the Regulations framed there under
are intended to protect the interests of investors in
the Securities Market which has seen substantial growth
in tune with the parallel developments in the economy.
Investors' confidence in the Capital/Securities Market is
a reflection of the effectiveness of the regulatory
mechanism
in
force.
All
such
measures
are
intended to preempt manipulative trading and check all
kinds of impermissible conduct in order to boost the
investors' confidence in the Capital market. The
primaiy
purpose
of
the
statutory
enactments
is to provide an environment conductive to increased
part1c1pation
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 uuderstood and interpreted in the above
light.
6
..
· 21. The object and purpose of FUTP 2003 is to curb "market
manipulations". Market manipulation is normally regarded as an
"unwarranted" interference in the operation of ordinary market forces
of supply and demand and thus undermines the "integrity" and efficiency
of the market. 7 This Court in N. Narayanan v. adjudicating Officer,
SEBP, has laid down that-
'(2011 l 1 sec 529.
' (2004) 1 sec 391.
6 SERI v. Kishore R.