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TMI Blog2018 (2) TMI 580X X X X Extracts X X X X X X X X Extracts X X X X ..... , integrity and transparency are the hallmarks of the stock market in India. The Securities and Exchange Board of India (hereinafter referred to as "SEBI") is the vigilant watchdog. Whether the factual matrix justified the watchdog's bite is the issue arising for consideration in this case. 2. There are two sets of party respondents - the traders and the brokers. SEBI proceeded against the traders for violation of Regulations 3(a), (b) and (c) and 4 (1), (2)(a) and (b) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereinafter referred to as "the PFUTP Regulations"). In the case of brokers, the charge is that they also violated Regulations 7A (1), (2), (3) and (4) of the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992. 3. As the matter before us involves three traders and three brokers, for convenience, we have extracted the dates of the decision of the Adjudicating Officer (hereinafter referred to as "A.O.") and the Securities Appellate Tribunal (hereinafter referred to as "the SAT") in the table below: S.No. Name of the Party Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ans a contract for the purchase or sale of a right to buy or sell, or a right to buy and sell, securities in future, and includes a teji, a mandi, a teji mandi, a galli, a put, a call or a put and call in securities." 7. The term "securities" is defined under Section 2(h) of the 1956 Act, which reads as under: "2(h) "securities" include- (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate. xxx xxx xxx (ia) derivative;" 8. In 1992, the SEBI Act was introduced "...to provide for the establishment of a Board, to protect the interest of investors in securities and to promote the development of and to regulate, the securities mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here under; (c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange; (d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under. "4. Prohibition of manipulative, fraudulent and unfair trade practices (1) Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice insecurities. (2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:- (a) indulging in an act which creates false or misleading appearance of trading in the securities market; (b) dealing in a security not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress or cause fluctuations in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be true. (9) the act of an issuer of securities giving out misinformation that affects the market price of the security, resulting in investors being effectively misled even though they did not rely on the statement itself or anything derived from it other than the market price. And "fraudulent" shall be construed accordingly; Nothing contained in this clause shall apply to any general comments made in good faith in regard to- (a) the economic policy of the government (b) the economic situation of the country (c) trends in the securities market; (d) any other matter of a like nature whether such comments are made in public or in private; xxx xxx xxx (e) "securities" means securities as defined in section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956)." 15. The Securities and Exchange Board of India (Stock brokers and Sub-brokers) Regulations, 1992 in Schedule II deals with the code of conduct for stockbrokers which reads as follows: "SCHEDUL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specified date. While a buyer of an option pays the premium and buys his right to exercise his option, the writer of an option is the one who receives the option premium and is therefore obliged to sell or buy the asset as per the option exercised by the buyer. Options are of two types, 'Call' and 'Put'. Call Option gives the buyer the right but not the obligation to buy a given quantity of the underlying asset at a given price on or before a given future date. Put Option gives the buyer the right, but not obligation to sell a given quantity of underlying asset at a given price on or before a given future date. 20. The impugned SAT order in the case of Rakhi Trading has succinctly dealt with the working of options: "2. ...The seller in an options contract sells a right to the buyer and since nothing can be sold without a cost, the former charges an amount from the latter which is called the premium. It is this premium which is the only negotiable element in an options contract that is negotiated on the trading screen of the stock exchange. At the beginning of every trading cycle which is fixed by the concerned stock exchange, it (stock exchange) prescribes in the case of stock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rary to his expectations, he may, in his anxiety to cap his losses, take a reverse position. He would then put in an offer or accept an offer of a higher premium for the same option and this in effect would result in his repurchasing the contract at a higher rate/premium to avoid greater losses." (Emphasis supplied) 21. Index - a stock market index is a measure of the relative value of a group of stocks in numerical terms. As the stocks within an index change value, the index value changes. NIFTY 50 is an index on National Stock Exchange which tracks the behaviour of 50 companies covering different sectors of the Indian economy. 22. Trading in Index - an investor can trade even the entire stock market by buying index futures instead of buying individual securities. The advantages of trading in index futures are- the contracts are highly liquid, the index futures provide higher leverage than any other stocks, it requires comparatively low initial capital investment (only the premium), it has lower risk than buying and holding stocks, it is just as easy to trade the short side as the long side, the trader needs to study only one index instead of several stocks and finally, the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s order notes that the trades were reversed in all the cases in a matter of few seconds showing significant difference between the buy and sell trade prices. The change in positions took place without any significant change/negligible change in the price of the underlying security. The trades took place on 12.03.2007, 15.03.2007, 23.03.2007, 26.03.2007 and 28.03.2007 and the total profit made by Tungarli was Rs. 64.52 lakhs. TLB: The SCN was issued to TLB on 05.10.2007. The trades pertained to future scrips. As per the A.O.'s order, TLB traded through stock broker SMC Global Securities Ltd and the same broker is the counter party broker as well, trading on behalf of different clients. All the transactions undertaken by TLB resulted in loss to TLB and the total loss was Rs. 38.69 lakhs. The trades in question took place on 22.01.2007, 23.01.2007, 31.01.2007, 01.02.2007, 05.02.2007 and 06.02.2007. The A.O.'s order notes that in many cases, the trades were reversed in a matter of minutes showing significant difference in prices without any significant change in value of the underlying. The A.O.'s order notes that during investigation, it was also seen that when the time was not match ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disclosed to substantiate the said allegation of "synchronization" of any trades. 23. On analysis of the reversal transactions undertaken by the noticee, it is seen that the percentage to market gross is in the range of 30 percent to 50 percent in the 14 contracts executed by the noticee. In two contracts of NIFTY, the percentage to market gross reached 50 percent. This accounts for a significant percentage of trades on the concerned days and the traded value was Rs. 95.75 lakhs for those two reversal trades. The trade quantities are also high. The total traded value is Rs. 503.00 lakh in a matter of just 4 (four) trading days. As submitted by the noticee, NIFTY moves constantly. Also, NIFTY is the most active of the options contracts traded on the exchange and it has contributed to 92.21 percent of the contracts traded in the Options segment during March 2007. Further, the NIFTY options contracts contributed to 99.97 percent of the total Index Options contracts traded in March 2007 (source: NSE website). In such a scenario it is seen that the noticee's counter party to all the trades in NIFTY contracts is Kasam Holding Pvt. Ltd. (trading through the broker Vibrant Securities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n economy. The eligibility of a particular stock for being selected for Nifty index depends on the liquidity of the stock as well as the floating stock of the company. Nifty, therefore, is a very dynamic index which is not constant but evolves continuously. Obviously, to manipulate such a diverse and changing portfolio of stocks in the cash segment is extremely difficult, if not impossible by trading in the F & O segment. It is also NSE's stated position on its website that "stock index is difficult to manipulate as compared to stock prices, more so in India and the possibility of cornering is reduced. This is partly because an individual stock has a limited supply which can be cornered". It is obvious that when Nifty is traded in options contracts, the movement of prices in that segment cannot have any impact on the price discovery system in the cash segment which is one of the allegations brought out in the ad-interim ex-parte order and the show cause notice. The charge against the appellant in the show cause notice is that by executing trades in Nifty options in the F & O segment "the original trades were closed out during the day at a price which was significantly above or belo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause Nifty as an index is not capable of being traded in the cash segment. What is traded in the cash segment are the fifty stocks which constitute Nifty. To say that some manipulative trades in Nifty options in the F & O segment could influence the Nifty index is too farfetched to be accepted. The only way Nifty index could be influenced is through manipulation of the prices of all or majority of the scrips in the cash segment that constitute Nifty. This is extremely difficult, if not impossible. It is common case of the parties that the appellant traded only 13 Nifty option contracts in the F & O segment. Assuming these trades were manipulative, could these ever influence the Nifty index. As already observed, Nifty index is a very large well diversified portfolio of stocks which is not capable of being influenced much less manipulated by the movement of prices in the F & O segment particularly by the handful of trades executed by the appellant. In this view of the matter, we have no hesitation to hold that the 13 trades in Nifty options executed by the appellant had no impact on the market or affected the investors in any way nor did these influence the Nifty index in any manne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and a manipulative device was used for synchronizing the trades. The learned senior counsel appearing for the appellant did not dispute the fact that the trades had been synchronized and reversed but he argued that these did not manipulate the market and that only the synchronized trades which manipulate the market are prohibited. He placed reliance on a judgment of this Tribunal in Ketan Parekh vs. Securities and Exchange Board of India, Appeal No.2 of 2004 decided on 14.7.2006. He also referred to the order passed by the Board in the case of ICICI Brokerage Services Ltd. wherein a similar view had been taken and strenuously argued that since the synchronized trades of the appellant did not manipulate the market, the impugned order deserves to be set aside. We find merit in this contention. The fact that the trades executed by the appellant had been synchronized with the counter party is not really in dispute before us. We have already held that the 13 trades in Nifty options executed by the appellant had no impact on the market or affected the investors or the Nifty index in any manner. In Ketan Parekh's case (supra) this Tribunal had observed that synchronized trades per se ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cash segment, the trade is described as a fictitious trade creating false volumes which manipulates the market. The scenario in the F & O segment, particularly in the options contracts with which we are concerned in the present case, is altogether different from that of the cash segment. In the F & O segment there is no concept of "change of beneficial ownership" since what is traded in this segment are contracts and not the underlying stock or index and it is only through cash settlement that the trade is concluded and no physical delivery of any asset is involved. In this view of the matter, synchronized and reversed trades in Nifty options in the F & O segment can never manipulate the market which, in the present context, means the value of the Nifty index in the cash segment. To repeat, we may again observe that it is almost impossible to manipulate the Nifty index which consists of fifty well diversified highly liquid stocks in the cash segment. Since the trades of the appellant were settled in cash through the stock exchange mechanism, they were genuine and these could not create a false or misleading appearance of trading in the F & O segment. It is the Board's own case th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the market. The learned counsel for the respondent Board drew our attention to Regulation 3(a), (b) & (c) and Regulation 4(1) and 4(2)(a) & (b) of the Regulations to contend that the trades of the appellant were in violation of these provisions. We cannot agree with him. Regulation 3 of the Regulations prohibits a person from buying, selling or otherwise dealing in securities in a fraudulent manner or using or employing in connection with purchase or sale of any security any manipulative or deceptive device in contravention of the Act, Rules or Regulations. Similarly, Regulation 4 prohibits persons from indulging in fraudulent or any unfair trade practices in securities which include creation of false or misleading appearance of trading in the securities market or dealing in a security not intended to effect transfer of beneficial ownership. Having carefully considered these provisions, we are of the view that market ma- nipulation of whatever kind, must be in evidence before any charge of violating these Regulations could be upheld. We see no trace of any such evidence in the instant case. We have, therefore, no hesitation in holding that the charge against the appellant for vio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned counsel for the parties and after going through the record we are satisfied that this link is missing. There is no material on record to show that the appellant as a broker knew that the trades were fictitious or that the buyer and the seller were the same persons. Trading was through the exchange mechanism and was online where the code number of the broker alone is known and the learned counsel for the parties are agreed that it is not possible for anyone to ascertain from the screen as to who the clients were. This is really a unique feature of the stock exchange where, unlike other moveable properties, securities are bought and sold between the unknowns through the exchange mechanism without the buyer or the seller ever getting to meet. Therefore it was not possible for the broker to know who the parties were. Merely because the appellant acted as a broker cannot lead us to the conclusion that it must have known about the nature of the transaction. There has to be some other material on the record to prove this fact. The Board could have examined someone from KIL to find out whether the appellant knew about the nature of the transactions but it did not do so. As a brok ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd its clients has been established, let alone any relation with the counter parties or the counter party brokers. Moreover, the appellant executed only 23 trades on behalf of 15 clients with a total close out difference of Rs. 35.44 lacs (positive) which have been called in question. Having regard to the fact that the appellant had executed 1,69,71,078 trades for 1,21,306 clients with a turnover of Rs. 1,11,659 crores during the investigation period we are of the view that in terms of materiality and substance this miniscule number of trades done on behalf of 15 clients were not likely to raise any alarm for the appellant with a client base of over 4,70,000 clients. In these circumstances, we cannot hold the appellant liable for the impugned trades. 8. The other additional reason for which we cannot hold the appellant liable is that out of the 23 impugned trades that it executed on behalf of its clients, 17 were executed directly by the clients through the Internet. NSE by its circular of August 24, 2000 has set detailed guidelines on Internet based trading through order routing system which route client orders to the exchange trading system and the software for this service has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... late the market in any manner and induce investors. It has also taken a view that there being no physical delivery of any asset, there is no change of beneficial ownership and what is traded in the F&O segment are only contracts and hence, such synchronised and reverse trades in NIFTY options in the F&O segment "can never manipulate the market". It has also held that the trades being settled in cash through a stock exchange mechanism, are genuine and therefore cannot create a false or misleading appearance of trading in the F&O segment. Further, any trade to be objectionable must result in influencing the market one way or the other. SAT held that these trades were for the purpose of tax planning which is not violative of any regulation. We are not inclined to get in to the issue of tax planning as it was not mentioned in the show cause notices. 33. We find it difficult to appreciate the stand taken by the SAT which is endorsed by the learned senior counsel appearing for the respondents. Mr. Chidambaram, learned senior counsel appearing for Rakhi Trading argues that the SAT decision is valid and proper. Reliance is also placed on the case of Ketan Parekh (supra) in which SAT held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a defined expression, has to be understood comprehensively to include any act beyond a fair conduct of business including the business in sale and purchase of securities. However the said question, as suggested by my learned Brother, Ramana, J. is being kept open for a decision in a more appropriate occasion as the resolution required presently can be made irrespective of a decision on the said question." 35. Having regard to the fact that the dealings in the stock exchange are governed by the principles of fair play and transparency, one does not have to labour much on the meaning of unfair trade practices in securities. Contextually and in simple words, it means a practice which does not conform to the fair and transparent principles of trades in the stock market. In the instant case, one party booked gains and the other party booked a loss. Nobody intentionally trades for loss. An intentional trading for loss per se, is not a genuine dealing in securities. The platform of the stock exchange has been used for a non-genuine trade. Trading is always with the aim to make profits. But if one party consistently makes loss and that too in preplanned and rapid reverse trades, it is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed with a view to avoid regulatory detection or does not involve change of beneficial ownership or is executed to create false volumes resulting in upsetting the market equilibrium. Any transaction executed with the intention to defeat the market mechanism whether negotiated or not would be illegal. Whether a transaction has been executed with the intention to manipulate the market or defeat its mechanism will depend upon the intention of the parties which could be inferred from the attending circumstances because direct evidence in such cases may not be available. The nature of the transaction executed, the frequency with which such transactions are undertaken, the value of the transactions, whether they involve circular trading and whether there is real change of beneficial ownership, the conditions then prevailing in the market are some of the factors which go to show the intention of the parties. This list of factors, in the very nature of things, cannot be exhaustive. Any one factor may or may not be decisive and it is from the cumulative effect of these that an inference will have to be drawn." (Emphasis Supplied) From the facts before us, it is clear that the traders in q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... practice. The field is open to all the investors. By synchronization and rapid reverse trade, as has been carried out by the traders in the instant case, the price discovery system itself is affected. Except the parties who have pre-fixed the price nobody is in the position to participate in the trade. It also has an adverse impact on the fairness, integrity and transparency of the stock market. 42. We are fortified in our conclusion by the judgment of this Court in Securities And Exchange Board of India v. Kishore R. Ajmera (2016) 6 SCC 368, though it is a case pertaining to brokers, wherein it has been held at paragraph 25: "25. The SEBI Act and the Regulations framed thereunder are intended to protect the interests of investors in the Securities Market which has seen substantial growth in tune with the parallel developments in the economy. Investors' confidence in the capital/securities market is a reflection of the effectiveness of the regulatory mechanism in force. All such measures are intended to pre-empt manipulative trading and check all kinds of impermissible conduct in order to boost the investors' confidence in the capital market. The primary purpose of the statutory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 45. Before concluding, we would like to reiterate the observations made by this Court in Kishore R. Ajmera (supra) and Kanaiyalal Patel (supra) regarding the need for a more comprehensive legal framework governing the securities market. As the market grows, ingenuous means of manipulation are also employed. In such a scenario, it is essential that SEBI keeps up with changing times and develops principles for good governance in the stock market which ensure free and fair trading. 46. There shall be no order as to costs. JUDGMENT R. BANUMATHI, J. I have gone through the judgment proposed by His Lordship Justice Kurian Joseph. I am in agreement with the conclusion arrived at by His Lordship. However, in view of the importance of the issues involved, I prefer to give my own additional reasonings also for my concurrence. 2. Since the issues involved in all the appeals a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... khs, thereby violating Regulations 3(a), 4(1) and 4(2)(a) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (for short "PFUTP Regulations"). On the show cause notice, the respondent, inter alia, contended that the impugned transactions were genuine trades, traded on the screen in anonymity in compliance with the rules and regulations of the exchange for trading in Options Segment and the said transactions in no manner undermined price discovery or influenced the market. 5. Upon consideration of the findings in the preliminary enquiry and submissions of the respondent, the Adjudicating Officer found that most of the trades i.e. buying and selling of contracts within a gap of few seconds between the same parties through same set of brokers matched and found that it is unrealistic that the orders would match exactly both the quantity and price and with the same party again and again. The Adjudicating Officer further held that manipulative device was used for synchronization of trades and the trades were fraudulent/fictitious in nature. After referring to SAT's judgment in Ketan Parekh v. SEBI (Appeal No. 2 of 2004) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material or non-public information or communicate such material or non-public information to any other person, in a manner which is in contravention of the provisions of this Act or the rules or the regulations made thereunder; (f) acquire control of any company or securities more than the percentage of equity share capital of a company whose securities are listed or proposed to be listed on a recognised stock exchange in contravention of the regulations made under this Act. 8. Section 30 of the SEBI Act reads as follows:- 30. Power to make regulations.- (1) The Board may, with the previous approval of the Central Government by notification, make regulations consistent with this Act and the rules made thereunder to carry out the purposes of this Act. ........... 9. Section 15HA of the Act which deals with penalty for fraudulent and unfair trade practices, Section 15HB which deals with penalty for contravention where no separate penalty has been provided and Section 15J which lays down the factors to be taken into account while adjudging the quantum of penalty read as follows: 15HA. Penalty for fraudulent and unfair trade practices.-If any person indulges in fraudulent an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the synchronization of trade was a mere coincidence. Per contra, SEBI maintained that the respondent-Rakhi Trading and the counter party-Kasam Holding Pvt. Ltd. had prior understanding and have thwarted the checks and balances of the trading system by executing non-genuine transactions with ulterior purpose. 12. To appreciate the contentious issues raised by the parties, I refer to the impugned reversal trade transactions: Trade Date and Time Buy Order Time Sell Order Time Time diff between Buy & Sell Order Strike Price Trade Price Buy Client Name Sell Client Name Total traded volume Diff. in price of 2 legs of the trade Close out Difference % Market Gross 21-Mar-07 14:50:28 14:50:28 14:50:27 0:00:01 3,930.00 270.00 KASAM HOLDING PVT LTD RAKHI TRADING PVT. LTD 10000 160 40.82 21-Mar-07 15:06:45 15:06:42 15:06:45 0:00:03 3,930.00 110.00 RAKHI TRADING PVT LTD KASAM HOLDING PVT. LTD 10000 1600000 21-Mar-07 11:37:43 11:37:43 11:37:37 0:00:06 3,730.00 112.00 KASAM HOLDING PVT. LTD RAKHI TRADING PVT LTD 4750 45 49.74 21-Mar-07 12:04:05 12:04:05 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 13:18:21 13:18:18 13:18:21 0:00:03 3,930.00 32.00 RAKHI TRADING PVT LTD KASAM HOLDING PVT. LTD 10500 54 30 23-Mar-07 14:16:36 14:16:36 14:16:35 0:00:01 3,930.00 86.00 KASAM HOLDING PVT. LTD RAKHI TRADING PVT LTD 10500 567000 23-Mar-07 13:19:06 13:19:06 13:19:05 0:00:01 3,960.00 63.00 RAKHI TRADING PVT LTD KASAM HOLDING PVT. LTD 10700 52 31.6 23-Mar-07 14:17:49 14:17:49 14:17:49 0:00:00 3,960.00 115.00 KASAM HOLDING PVT. LTD RAKHI TRADING PVT LTD 10700 556400 23-Mar-07 12:17:02 12:16:59 12:17:02 0:00:03 4,050.00 155.00 RAKHI TRADING PVT LTD KASAM HOLDING PVT. LTD 11500 72 41.07 23-Mar-07 13:15:42 13:15:42 13:15:41 0:00:01 4,050.00 227.00 KASAM HOLDING PVT. LTD RAKHI TRADING PVT LTD 11500 828000 23-Mar-07 12:17:44 12:17:44 12:17:44 0:00:00 4,150.00 230.00 RAKHI TRADING PVT LTD KASAM HOLDING PVT. LTD 11600 72 50 23-Mar-07 13:16:19 13:16:19 13:16:19 0:00:00 4,150.00 302.00 KASAM HOLDING PVT. LTD RAKHI TRADING PVT LTD 11600 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which are commonly called synchronized deals. The word 'synchronise' according to the Oxford dictionary means "cause to occur at the same time; be simultaneous". A synchronized trade is one where the buyer and seller enter the quantity and price of the shares they wish to transact at substantially the same time. This could be done through the same broker (termed a cross deal) or through two different brokers. Every buy and sell order has to match before the deal can go through. This matching may take place through the stock exchange mechanism or off market. When it matches through the stock exchange, it may or may not be a synchronized deal depending on the time when the buy and sell orders are placed. There are deals which match off market i.e., the buyer and the seller agree on the price and quantity and execute the transaction outside the market and then report the same to the exchange. These are also called negotiated transactions...... It has recently issued a circular requiring all bulk deals to be transacted through the exchange even if the price and quantity are settled outside the market. When such deals go through the exchange, they are bound to synchronise. It wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifty 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 synchronized trades and that the impugned trades were normal transactions and the respondent had not violated the provisions of PFUTP Regulations. In the context of the stand taken by Rakhi Trading before SAT, it is now not open to respondent Rakhi Trading to contend that the transactions were not synchronized and reversed. 18. By perusal of details of 'buy and sell', 'volume of trade' and 'timing of trade' of the impugned transactions, it was observed that the reversal trades were executed almost of the same quantity and the trade was also within a short gap of few seconds with significant variation of the price, though, there was no major variation in the underlying price during that period. Upon examination of the trade transactions, it was further observed that the respondent in the impugned transactions had operated through Pra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice 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 Pvt. Ltd. at a low price. The transactions wherein the 'buy and sell' orders entered almost simultaneously and the transactions matched in time and quantity with significant price variation and respondent consistently making profit but Kasam Holding Pvt. Ltd. consistently making loss. Number of reversal trades between the respondent and Kasam Holding Pvt. Ltd. and such reversal trade taking place repeatedly over a period of time only indicates that there was p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry). In these cases the volume of trading in the illiquid scrips in question was huge, the extent being set out hereinabove. Coupled with the aforesaid fact, what has been alleged and reasonably established, is that buy and sell orders in respect of the transactions were made within a span of 0 to 60 seconds. While the said fact by itself i.e. proximity of time between the buy and sell orders may not be conclusive in an isolated case such an event in a situation where there is a huge volume of trading can reasonably point to some kind of a fraudulent/manipulative exercise with prior meeting of minds. Such meeting of minds so as to attract the liability of the broker/sub-broker may be between the broker/sub-broker and the client or it could be between the two brokers/sub-brokers engaged in the buy and sell transactions. When over a period of time such transactions had been made between the same set of brokers or a group of brokers a conclusion can be reasonably reached that there is a concerted effort on the part of the brokers concerned to indulge in synchronized trades the consequence of which is large volumes of fictitious trading resulting in the unnatural rise in hiking the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ligence 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rive 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 meeting of minds or a specific understanding/arrangement between the parties. After referring to Ketan Parekh and Nirmal Bang cases, in SEBI v. Accord Capital Markets Ltd. (MANU/SB/0136/2007), SEBI held as under:- "4.12 I note that most of the synchronized trades executed by the Broker were perfectly matched with the counter party orders even with respect of the price to the extent of two decimal points. The proximity in placing the orders at the same price and for the same quantity almost at the same time (in majority of the cases) resulted in the matching of the aforesaid transactions, with all the ingredients i.e. quantity, price and the time, required to conclude the trades. The time difference (between the buy and sell orders) of majority of the synchronized trades was very less with the price and quantity matching. The said synchronization cannot take place in the absence of any specific understanding/arrangement between the clients at the first instance, especially when the shares of the company w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits when there was no change in the underlying prices. These trade transactions obviously only aimed at carrying out manipulative objective. 33. Once the reversal transactions are shown to be non-genuine or shown to be fictitious creating a false or misleading appearance in the market for ulterior purpose and that the stock market was misused by such manipulative device, this is in clear violation of the provisions of PFUTP Regulations, 2003. Regulations 3(a), 4(1) and 4(2)(a) of PFUTP Regulations prohibit such manipulative trades, unfair trade practices. 34. SAT mainly proceeded that the impugned reversal trade transactions had no impact on the market and it could have never 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... flated 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 "when presented with the data suggesting manipulation by firm proprietary traders, it is reasonable to expect that the S.E.C. would consider investigation of the matter further". The S.E.C. had no comment on the researchers' study. [Ref.:www.nytimes.com/2006/ 05/07/business/yourmoney/07stra.html] 40. Stock market is regulated mainly by SEBI and to some extent by the Departments of Economic Affairs and Company Affairs of Government of India. Market manipulation can occur in a variety of ways. Manipulations/unfair trade practices reduce the market efficacy. Section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Facts of the case disclose how the investors' confidence has been eroded and how the market has been abused for personal gains and attainments. ..... 11. We would like to demonstrate on the facts of this case as well as law on the point that "market abuse" has now become a common practice in the Indian security market and, if not properly curbed, the same would result in defeating the very object and purpose of the SEBI Act which is intended to protect the interests of investors in securities and to promote the development of securities market. Capital market, as already stated, has witnessed tremendous growth in recent times, characterised particularly by the increasing participation of the public. Investor's confidence in capital market can be sustained largely by ensuring investors' protection. ....... 42. SEBI, the market regulator, has to deal sternly with companies and their Directors indulging in manipulative and deceptive devices, insider trading, etc. or else they will be failing in their duty to promote orderly and healthy growth of the securities market. Economic offence, people of this country should know, is a serious crime which, if not properly dealt with, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enuine investors and SEBI is empowered to do so under the SEBI Act, 1992 so as to make security market a secure and safe place to carry on the business in securities. At the same time, under the guise of supervisory intervention, SEBI cannot affect the development of the market or market oriented creativity. Intense supervision might distort the path of securities market development; but SEBI cannot be a silent spectator to unfair trade practices/manipulative market for some ulterior purpose like tax evasion etc. To find the right balance between market forces and Regulatory body's intervention, SEBI has to deal sternly with those who indulge in manipulative trading and deceptive devices to misuse the market and at the same time ensuring the development of the market. 44. Before I conclude, it is necessary to refer to the findings of SAT on 'tax planning'. SAT held that even assuming that non-genuine synchronized trades have been entered into for the purposes of tax planning, such trade could be held objectionable only if they have resulted in influencing the market in one way or other. For its finding that every person is entitled to arrange his affairs as to avoid ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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