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

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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 B market.

42Copy pinpoint42. 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: C “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 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…”

4 H (2016) 6 SCC 368

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We do not think that those illustrations are exhaustive. There can A be several such situations, some of which we have discussed hereinabove.

43Copy pinpoint43. 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 B 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.

44Copy pinpoint44. As far as brokers are concerned, we are of the view that 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. 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. F

45Copy pinpoint45. 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 G principles for good governance in the stock market which ensure free and fair trading.

46Copy pinpoint46. There shall be no order as to costs.

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A R. BANUMATHI, J. 1. 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.

B 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 taken up the appeal arising out of Rakhi Trading Pvt. Ltd. as the lead case. C

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 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- G 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 H

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executed synchronized/matched/reversal trades and indulged in non- A 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 B 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 exchange for trading in Options Segment C 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 D 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/ E 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. F

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 NIFTY options G 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 H

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A 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

B 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, C 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 D 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 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; G (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; H

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(f) acquire control of any company or securities more than A 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:- B

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. C ...........

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:

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 G 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; H

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A (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 B 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 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 F 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 G refer to the impugned reversal trade transactions:

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13. Synchronized Trading: As per the Oxford dictionary the word A ‘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 B 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 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 E

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: F “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 G 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 H

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A 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 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. E 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 H

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there is real change of beneficial ownership, the conditions then A 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) B

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 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 C 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. D

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 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 G 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 H

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A 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 B 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 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 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 G 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 H over a period of time only indicates that there was pre-arrangement

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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 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.

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 G 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 H

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A 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 F 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 G preponderance of probabilities so far as adjudication of civil liability 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. H

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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 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 H

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A 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.”

D 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:- E “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 F 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 G test would always be that what inferential process that a reasonable/prudent man would adopt to arrive at a conclusion.” [underlining added]

26. There was no possibility of such perfect matching of quantity, timing, prices etc. between the same parties unless there was prior H meeting of minds or a specific understanding/arrangement between the

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parties. After referring to Ketan Parekh and Nirmal Bang cases, in A 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. B 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 C 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. ........... D

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 E 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 F “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 G 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: H

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A “...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....” B 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.

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.

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29. On behalf of respondent, learned senior counsel Mr. P. A 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 or not had no impact on the market and the respondent cannot be held to have B 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, C 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. D

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 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 H

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A 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 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 E “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 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

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to buy or sell and that no further proof in this regard is required. The A 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.

37. In the context of 1995 Regulations, old Regulation 4(2)(a), B 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 H

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A 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:- B “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 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 H “when presented with the data suggesting manipulation by firm

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proprietary traders, it is reasonable to expect that the S.E.C. would A 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 B 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 C 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. D

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 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: H

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A “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’ B 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. ....... E

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 F 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 G “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 H but they are a divided lot. SEBI has, therefore, a duty to protect

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investors, individual and collective, against opportunistic behaviour A 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. B

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, C 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.

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, F 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 G 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 synchronized trades have been entered into for the purposes of tax H

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A 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 B 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.

C 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. 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 F 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 G with the conclusion dismissing the appeal preferred by the SEBI against the brokers.

Devika Gujral Appeals disposed of.