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2010 (10) TMI 1186 - AT - Companies Law

Issues Involved:
1. Whether the appellant's transactions in the derivatives segment violated Regulations 3(a), (b), and (c) and 4(2)(a) and (b) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003.
2. Whether the synchronized and reversed trades executed by the appellant were fictitious and created a misleading appearance of trading.
3. Whether the appellant's trades influenced the Nifty index or the market.
4. Whether the appellant's trades were executed for tax planning purposes and if such trades are permissible.
5. Whether the appellant violated the NSE circular dated 10-3-2005.

Detailed Analysis:

1. Violation of Regulations 3(a), (b), and (c) and 4(2)(a) and (b):
The appellant was accused of violating these regulations by executing synchronized matched/reverse trades in the Futures and Options (F&O) segment. The adjudicating officer found the appellant guilty and imposed a penalty of Rs. 1,08,00,000. However, the Tribunal held that the appellant's trades did not manipulate the market or affect the investors or the Nifty index in any manner. The Tribunal emphasized that market manipulation must be evident to uphold such charges, and no such evidence was found in this case. Therefore, the charge of violating these regulations failed.

2. Synchronized and Reversed Trades:
The Tribunal acknowledged that the appellant's trades were synchronized and reversed but noted that such trades are not illegal per se unless they manipulate the market. Citing previous judgments, the Tribunal reiterated that only synchronized trades that manipulate the market are prohibited. Since the appellant's trades did not impact the market, they did not violate the regulations.

3. Influence on Nifty Index or Market:
The Tribunal discussed the nature of the Nifty index and concluded that it is almost impossible to manipulate the Nifty index through trades in the F&O segment. The appellant's 13 Nifty option contracts could not influence the Nifty index, which is determined by the performance of fifty highly liquid stocks in the cash segment. Therefore, the charge that the appellant's trades influenced the market or the Nifty index was deemed farfetched and dismissed.

4. Trades Executed for Tax Planning:
The Tribunal noted that the appellant's trades were executed at the end of the financial year for tax planning purposes. It was observed that the trades were synchronized and reversed to book profits and losses for effective tax planning. The Tribunal held that such trades do not become illegal merely because they were executed for tax planning, as long as they did not influence the market. The Tribunal cited previous judgments to support the view that trades for tax planning are permissible if they do not manipulate the market.

5. Violation of NSE Circular Dated 10-3-2005:
The Tribunal found that the NSE circular advising members to desist from entering into reversing transactions was not legally binding and did not cite any specific rule or regulation violation. Moreover, the advisory was issued to member brokers and not directly enforceable against the appellant. The Tribunal also noted that the Bombay Stock Exchange did not issue a similar advisory, indicating inconsistency in enforcement. Therefore, the charge of violating the NSE circular was dismissed.

Conclusion:
The Tribunal concluded that the appellant's transactions did not violate the regulations. The appeal was allowed, and the impugned order was set aside with no order as to costs.

 

 

 

 

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