TMI Blog2020 (11) TMI 1111X X X X Extracts X X X X X X X X Extracts X X X X ..... by its promoter RIL would cause a flutter in the stock market and would not be in the interest of the investors - short positions taken - differences of views within the three-member Bench. Appellants are prohibited from dealing in equity derivatives in F O segment of Stock Exchanges, directly or indirectly, for a period of one year from the date of the order and shall disgorge an amount alongwith interest @12% p.a. w.e.f. 29.11.2017 onwards till the date of payment Whether the Principal-Agent model/ agency model‛ adopted by appellant no. 1 RIL and implemented with the help of other 11 appellants (because of merger of 2 of the original 12 other Noticees, there are 11 other appellants) in cornering huge position limits in the 2007 November single stock futures contract in the shares of Reliance Petroleum Ltd. ( RPL for short) and the offloading of substantial quantities of RPL shares in the cash segment of the stock exchanges in the last 10 minutes (effectively 8.40 minutes) of the trading hours on 29 November, 2007, the settlement day, allegedly with an intention to artificially depress the price in the cash segment to make larger gains in the future contracts, are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dy there is no question of that being harsh or a penal action. Given the aforesaid reasons, appeal lacks any merit and is hereby dismissed. No orders on costs. Appellant no. 1 is directed to make payment of the disgorged amount of Rs. 447.27 Crore along with simple interest calculated at the rate of 12% p.a. with effect from November 29, 2007 till the actual date of payment to SEBI within 60 days from the date of this Order. In view of the majority opinion, the appeal is dismissed with no order as to costs. Appellant no. 1 is directed to make payment of the disgorged amount of Rs. 447.27 Crore along with simple interest calculated at the rate of 12% p.a. with effect from November 29, 2007 till the actual date of payment to SEBI within 60 days from the date of this Order. - JUSTICE TARUN AGARWALA, PRESIDING OFFICER, DR. C. K. G. NAIR, MEMBER AND JUSTICE M.T. JOSHI, JUDICIAL MEMBER For the Appellant : Mr. Harish Salve, Senior Advocate with Mr. Janak Dwarkadas, Senior Advocate, Mr. Raghav Shankar, Mr. Rohan Rajadhyaksha, Mr. Ashwath Rav, Mr. Kashish Batia, Mr. Vivek Shetty, Mr. Amey Nabar, Mr. Geetanjali Sharma, Ms. Arundhati Kelkar, Mr. Armaan Patkar, Ms. Cheryl Fe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... drop, it was decided to sell 5% of its shareholdings in RPL which roughly worked out to 22.5 Cr shares. The decision to sell the shares was based on the premise that the shares of RPL were overvalued. 5. Offloading 5% of the shares in RPL by its promoter RIL would cause a flutter in the stock market and would not be in the interest of the investors. Selling approx 22.5 Cr shares would make the price of the share of RPL to fall significantly. Keeping this in mind, the appellant no. 1 was required to sell the shares in an orderly manner that would protect the integrity of the market and consequently appointed 12 agents, namely appellants 2 to 13 under a written agreement to take aggregate net short position of 9.92 Cr shares in Nov 2007 RPL Futures between 1.11.2007 and 6.11.2007 as a hedge against the proposed sale in the cash segment. The settlement period for the Nov 2007 RPL Futures was from 1.11.2007 to 29.11.2007. 6. On 1.11.2007 the share price of RPL touched a high of Rs 294/-. It is at this point, a decision was taken to sell the shares of RPL. The agents of appellant no. 1 took short positions between 1.11.2007 and 6.11.2007. From 6.11.2007 to 29.11.2007, RIL sold 20. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Insider Trading) Regulations 1992. RIL filed their appropriate response. It transpires that based on the reply filed by RIL, SEBI conducted a reinvestigation in the transactions done by RIL and its agents, pursuant to which a Second Show Cause Notice dt 16.12.2010 was issued to all the appellants in supersession to the first Show Cause Notice and corrigendum notice. 13. The Show Cause Notice alleged that; (i) The appellants have violated the provisions of the SEBI Act, 1992, Securities Contracts (Regulation) Act, 1956, SEBI (Prevention of Fraudulent and Unfair Trade Practices) Regulations, 2003 and Rules, Regulations and Bye-laws of the National Stock Exchange of India Limited pertaining to F O trading in particular, Section 11 of the SEBI Act, 1992, Section 11B of the SEBI Act, 1992, Section 12A of the SEBI Act, 1992, Section 12A of the Securities Contracts (Regulation) Act, 1956, Sections 18A of the Securities Contracts (Regulation) Act, 1956, Regulation 3(a), (b), (c), (d) and Regulation 4(1), 4(2)(d), (e) of SEBI (Prevention of Fraudulent and Unfair Trade Practices) Regulations, 2003, SEBI circular no. SMDRP/DC/CIR-10/01 dated November 2, 2001, NSE Circular no. NSE/CMPT/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (Regulation) Act, 1956 and SEBI (PFUTP relating to Securities market) Regulations, 2003 should not be initiated. 14. The allegations in the Show Cause Notice are summarized as under:- (a) RIL took massive short positions through the 12 named entities in November 2007 RPL Futures, in breach of the position limits prescribed in circulars issued by SEBI, NSE and National Securities Clearing Corporation Limited (NSCCL) with the knowledge of the impending sales in the cash market. This was a well-planned, fraudulent, manipulative trading scheme and unfair trade practice violating PFUTP Regulations. (b) RIL s trades in the F O segments are illegal and invalid under Section 18A of the Securities Contracts (Regulations) Act, 1956 (SCRA), which provides conditions for contracts in derivative to be legal and valid. (c) RIL depressed the settlement price of futures by dumping large number of shares in the last 10 minutes of trading in the cash segment on November 29, 2007 and thereby earned an unjust profit of Rs 513.12 Cr. (d) The futures transactions carried out by the 12 Named Entities are benami transactions and thus illegal and void. 15. After considering the written ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere breach of position limits by the clients attracting penalty under the exchange circulars. (iii) On the basis of the analysis of the trading strategy/pattern adopted by appellant no.1 in the cash market during the month of Nov 2007 and specifically on the 29th of Nov 2007, being the expiry day of the November Futures of RPL, it was found that there had been a manipulation of the last half an hour settlement price. (iv) The actions of appellant No. 1 and appellant No. 2-13, as stated above constitute a violation of the provisions of section 12A of SEBI Act, 1992 read with regulations 3, 4(1) and 4(2)(e) of the SEBI (PFUTP) Regulations, 2003 and that appellants Nos. 2 to 13 have also violated provisions of the SEBI circular No. SMDRP/DC/CIR-10/01 dt Nov 2, 2001 and NSE circular no. NSE/CMPT/2982 dt Nov 7, 2001. 18. Based on the above findings, the WTM issued certain direction which has been stated earlier in the proceeding paragraphs. 19. The findings of the WTM is based on the following: (a) RIL s act of employing 12 Named Entities to take separate short positions (aggregating to 9.92 Cr on Nov. 6, 2007 in Nov. 2007 RPL Futures), breaching the client-wise position ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. 22. The Intervener Arun Kumar Agarwal contends that he is a pro bono lawyer taking up causes of economic injustice to the people of the country as enshrined in the Constitution. He has taken up the challenge in the Enron project, in the iron ore scam, in the 2G scam and other ponzi schemes. The Intervener further contends that he is involved with SEBI and appellant No.1 in five High Courts where the matters are pending. It was contended that Intervener had applied for a copy of the investigation report, but SEBI has refused to supply. It was contended that there are glaring omissions in the investigation report which has led underreporting of the unlawful gains made by appellant No.1. According to the Intervener the unlawful gains should have been Rs.3500 crores instead of Rs.513 crore as computed in the impugned order. It was contended that SEBI has made a shoddy investigation against the appellants and have deliberately not been charged with insider trading. In fact, SEBI and appellant No.1 are in collusion and are keen that the investigation report should not come out in the public domain. It was urged that if the investigation report is placed, the Tribunal would find t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hareholder and, therefore, this Tribunal should protect the minority shareholders and that the applicant should be allowed to intervene in the appeal. 24. The Intervener contended that one of the appellants, namely appellant No.8 Motech Software Pvt. Ltd. could not have filed an appeal as his name was struck off by the Registrar of Companies, Mumbai from the record of the ROC. Since it is no longer an existing company, no appeal could have been filed by a non-existing company. It was asserted that even SEBI could not have passed an order against the non-existing company. On this, it was contended that this crucial fact was neither brought to the knowledge of SEBI nor to this Tribunal and, therefore, for concealment of this material fact, the appeal should be dismissed and criminal prosecution should be launched against the appellants. 25. It was categorically made clear to the two interveners that they cannot be impleaded as parties to the appeal but they would be heard as Interveners. Accordingly, the two Interveners were heard at length. The said Interveners have filed their written submissions. Insofar as Arun Kumar Agarwal, the submissions made by him and in his written ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts have vehemently opposed the Intervention Applications contending that the present appeal is a continuation of the proceedings passed by SEBI. The Interveners were not a party in the proceedings before SEBI and thus, cannot be made a party in the appeal filed by the appellants. It was contended that the Interveners are not necessary parties and their applications should be summarily rejected. It was further contended that the appeal cannot be treated as a public interest litigation‛ which the Interveners are trying to project. It was urged that the allegations made in the Intervention Applications are beyond the scope of the appeal. It was contended that baseless allegations are being made against the appellants as well as against SEBI which should not be allowed by this Tribunal and that the Tribunal must protect the corporate industry and its reputation from such Interveners making such slanders / wild allegations without any basis and without any evidence. It was contended that the Interveners are acting as a super regulators over and above SEBI projecting that SEBI is incompetent and, therefore, the matter should be reinvestigated under the aegis of this Tribunal. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be a probe with regard to the price manipulation in the shares of the scrip of RPL which rose from Rs.65 to Rs.295 or the fact that the minority shareholders are being oppressed because of the mismanagement by the majority shareholders of appellant No.1 company, are questions which are beyond the pale jurisdiction of this Tribunal. Such issues raised by the two Interveners in their Intervention Applications and which have also been stated in their written submissions are outside the scope of the appeal and cannot be entertained. 30. Reliance has been made by the Interveners to a decision of the Supreme Court in Clariant International Limited vs. SEBI, (2004) 8 SCC 524 wherein the Supreme Court held that the powers of the Tribunal are not fettered and that the Tribunal exercises all the jurisdiction as that of the Board (SEBI). The Supreme Court held: 74. The jurisdiction of the Appellate Authority under the Act is not in any way fettered by the statute and, thus, it exercises all the jurisdiction as that of the Board. It can exercise its discretionary jurisdiction in the same manner as the Board. 75. The SEBI Act confers a wide jurisdiction upon the Board. Its duties and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court itself in National Securities Depository Ltd. v. SEBI (2017) 5 Supreme Court Cases 517 to the effect that the appeal being a continuation of the proceedings before the Board, the proceedings can only be quasi judicial in nature, namely that the appeal is only against the quasi judicial order of the Adjudicatory Authority. Other administrative orders/circulars are not under the purview of an appeal before the Tribunal. 33. In the light of the aforesaid, direction to reinvestigate the matter because something has been left out in the investigation does not come within the jurisdiction of the Tribunal. The Tribunal is also confined to consider the scope of the appeal within the four corners of the allegations set out in the show-cause notice pursuant to which the allegations culminated in a finding in the impugned order. The appeal being a continuation of the adjudicatory proceedings is only confined to the validity and legality of the impugned order which has to be tested on the basis of the grounds set out in the memo of appeal. Thus, in our opinion, the scrutiny which the Tribunal is required to make is limited only to the veracity of the finding given in the impugned o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RPL shares which worked out to 22.5 Cr shares which fact is not disputed by the company. Further, selling large quantities on the Stock Exchange would definitely dip the price and thus there was an existing risk of loss due to price fluctuations. The learned senior counsel thus contended that the circumstances existed for the appellants 2 to 12 to take a hedge by taking short position in Nov 2007 RPL Future on the sales side by placing half the quantity as a hedge and leaving the balance as unhedged. Sri Salve contended that this strategy made sense because the sale price for half of the quantity got locked in. It was contended that if the RPL share price went upwards, the unhedged price quantity would realize such higher price in the cash segment. On the other hand, if the RPL shares went down below the price fixed under hedging, the hedged quantity would realize a higher price. It was thus urged that the hedging done was to safeguard the interest of the shareholders as well as of the investors and the hedging done was perfectly valid and genuine. 37. The learned senior counsel further submitted that where the liquidity of the shares is volatile and selling a large quantity of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. The balance 7.97 Cr shares were closed out on 29.11.2007 at the settlement price. Sri Salve contended that physical delivery of the shares were not allowed in the futures segment otherwise RIL would have delivered 9.92 Cr shares at the hedged price and would have made more gains than it did. Since, physical delivery were prohibited at that stage, the short positions taken in the futures segment had to be cash settled after squaring off or closing out on the last day of settlement. 39. The learned senior counsel thus contended that the trades made by appellants in the futures segment as well as in the cash segment were bonafide trades and were not speculative, or fraudulent or manipulative as held by the WTM. The learned senior counsel submitted that a bonafide hedge was made in the futures segment and that the WTM committed an error in holding that the trades done in the futures segment was not a valid hedge. It was contended that the finding given by the WTM on this aspect was wholly untenable and unsustainable. 40. In so far as the cash segment was concerned, it was urged by Shri Salve, that there is no law, or requirement under the SEBI laws to disclose an entity s inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cate fraudulent practice adopted by RIL to depress the price in the cash segment. 44. The learned senior counsel submitted that there was no fraudulent or manipulative tactics adopted by RIL. RIL had 4.46 Cr shares yet to be sold in the cash segment. The market price on 29.11.2007 rose from Rs 193.80 per share to Rs 224.90 per share. RIL had last sold the shares on 23rd Nov 2007 at Rs 210 per share. Since then the price had gone down below Rs 210 per share to a low of Rs 193.80 per share. Thus when the price rose to Rs 224.90 per share during the last 10 minutes of trading, RIL exited the market at this stage and tried to sell off the remaining shares but could only sell 2.25 Cr shares out of 4.46 Cr shares. Selling shares in the last 10 min was not a crime and, in any case cannot be termed fraudulent or manipulative. 45. Shri Salve future contended that there is no embargo upon an investor to sell his shares below the Last Traded Price. In the cash segment trading is done on screen based trading system of the Stock Exchanges where a seller or a buyer has the benefit of not only viewing the Last Traded Price but also the quantity as well as the price at which buy or sell orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pite of offering a lower price than LTP, 5.71 lac shares remained unsold showing demand only at lesser price. d) At 3:24:33 p.m., LTP was Rs 218.55/-, RIL placed order of 10 lac shares above LTP at Rs 220/- per share. No shares were sold thereby indicating that there was no demand. e) At 3:24:26 p.m., LTP was Rs 218.90/-, RIL placed order for 30 lac shares at Rs 218/- per share, i.e. 90 paisa less than LTP. Only 8 lac shares were sold and 22 lac shares remained unsold. This showed that there were not many buyers at LTP. 47. It was thus urged from the above that what RIL did was only to match the prices at which demand existed. The sale price offered were reasonable and given the circumstances, even though at some stage, sell orders were below LTP, the same was not manipulative nor a malpractice. It was thus contended that matching the demand in terms of price and quantity was not a manipulation. It was urged that merely because RIL had placed sell orders below the LTP it cannot automatically lead to a conclusion that RIL was manipulating the price of the scrip nor did it lead to an artificial depression of the share price. 48. Shri Dwarkads as well as Shri Salve contend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it exceeds 15% of the Open Interest. It was thus contended that even under the 1999 SEBI circular, there was no prohibition for persons to act in concert. Acting in concert was not a violation. Only a disclosure was required where the intention was to rope in persons acting in concert. This was, however done away in the subsequent position limit circulars which specifically provided client/customer wise position limits. It was also contended that the circulars did not envisage aggregation of position limits as is clear from the model client broker agreement prescribed for derivatives segment. The learned senior counsel stressed that after 2007, the Stock Exchanges amended the model client broker agreement which included a clause, namely, that a client/customer acting alone or in concert with others, directly or indirectly hold and control in excess of the permitted limits and shall not exercise a long or short position in excess of the prescribed limits. The learned senior counsel, thus urged that the model agreement applicable in 2007 clearly showed that neither the bye laws nor the client member agreement provided for aggregation of limits of a group of persons acting in concert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sole view to make unlawful gains by the expected drop in the price of RPL shares in the cash market. It was urged that absence of a hedging policy cannot lead to the transaction being manipulative or fraudulent. The learned senior counsel contended that a transaction in the F O segment is a hedge if there is an underlying exposure/risk which in the instant case was existing, namely the sale of 22.5 Cr shares in the cash segment. Thus the hedge was neither speculative nor ceased to become a hedge. It was contended that there is no rule/regulation/circular stipulating that throughout the period of hedge, the open positions should be equal to the underlying risk. In fact the F O segment rules clearly allow either closure of position by purchases in the F O segment or allow open position to be closed out on the last day which in the instant case was done bonafidely. It was thus contended that the short position taken by the 12 agents was a genuine, valid and a bonafide hedge. 55. Shri Salve contended that the finding on fraud is misplaced. Before a person can be found guilty of fraud, the element of inducement must exist which in the instant case was non existing. The learned senior ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock market system. 59. Shri Khambatta submitted that appointing 12 agents by RIL in order to take up short positions in RPL Futures was in clear violation of the circulars. It was submitted that the agreements entered by RIL with the 12 agents were identical. All profit or losses was to be borne by RIL. The agreement further provided that any transaction executed by the agent was required to be approved by RIL. The strategy adopted by RIL was that through the 12 agents, the trades could be executed at higher levels without disturbing the client wise position limits provided by the circular dt 7.11.2001 and 2.11.2001. 60. It was submitted that as the SEBI and NSE circulars dt 2.11.2001 and 7.11.2001 imposed client wise position limits in respect of single stock futures. These circulars were in fact issued as part of risk containment measures‛ and to deter and detect concentration of positions and market manipulation‛. As per these circulars, the gross open position of a customer/client should not exceed the higher of 1% of the free float market capitalization (in terms of number of shares) or 5% of the open interest in the derivative. Shri Khambatta submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed to be done indirectly, that would be an evasion of the statute.‛ 62. It was thus submitted that where several clients or customers act on behalf of one common beneficiary, separate position limits would not apply to each of them. It was urged that since RIL could not have crossed the position limits in its individual capacity, if would not employ agents to indirectly overcome the position limits. The learned senior counsel strenuously urged that the concept of acting in concert‛ was illusory and not applicable in the instant case as it was a case of principal and agents. Once the principal-agency relationship is accepted, the limits prescribed in the position limit circulars will apply to RIL for acts done by its agents. It was contended that the acts of all the 12 agents are the acts of RIL itself. The principle of persons acting in concert‛ was therefore irrelevant. 63. Shri Khambatta contended that the appellant s contention that the circulars merely triggered a disclosure requirement is incorrect in as much as the language of the circular made it absolutely clear that there was an explicit prohibition for breaching the position limits. According to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares in the last ten minutes of trading on 29.11.2007 was with the sole purpose to manipulate the settlement price of the RPL Futures contracts. Such manipulation amounted to a fraudulent act. The learned senior counsel contended that on 29.11.2007, RPL scrip opened at Rs 193.80 and at 3:00 p.m. rose to Rs 208.20 and thereafter rose to Rs 224.35 at 3:20 p.m. The learned senior counsel contended that the graph of RPL share price during the last half hour showed that the price was rising steadily. It was submitted that the continuous price rise was not suiting RIL in as much as a rise in price of the RPL shares in the cash segment would mean reduction in RIL s realization on the open position in the RPL Futures. The learned senior counsel, thus, submitted that in order to avert this situation, RIL started dumping RPL shares in the cash segment during the last 10 minutes of the trading. This dumping was with a view to reverse the rising trend in RPL s share price. 66. It was further contended that between 3:21:40 and 3:28:55 p.m. RIL placed 17 sell orders for 2.43 Cr shares in which 12 out of 17 orders were placed at prices lower than Last Traded Price (LTP). As a result of placing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned senior counsel contended that the short position taken by the 12 agents of RIL was not a hedge transaction. 68. The learned senior counsel placed reliance on a decision of the FB of the Gujarat High Court in Pankaj Oil Mills vs Comm. of Income Tax, AIR 1978 Guj. 226 which distinguished hedging from speculative transactions as the genuine transactions entered into for purposes of insuring against adverse price fluctuations‛ and further held in order to be genuine and valid hedging contracts of sales, the total of such transactions should not exceed the total stocks of the raw materials or the merchandise on hand which would include existing stocks as well as the stocks acquired under the firm contracts of purchases.‛ 69. The learned senior counsel also placed reliance on a decision of the Supreme Court of Canada in Ontario (Minister of Finance) vs Placer Dome Canada Ltd, 2006 SCC Online Can SC 20, which has explained the difference between hedging and speculation in the following terms: 29 .This distinction between speculation and hedging is an important one. A transaction is a hedge where the party to it genuinely has assets or liabilities exposed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fluctuations; (v) Hedge transactions would normally be unwound almost simultaneously with the sale of the underlying in the cash market; (vi) If, after a trader has actually sold the underlying in the cash market and he does not square-up an equal quantity of his hedge in the futures market, the transaction would no longer be a hedge and would amount to speculating. 73. The learned senior counsel contended that the transactions undertaken by the 12 agents in the F O segment can never be treated as a hedge transaction for the following reasons; namely: a) On 6 Nov2007, RIL achieved a net short position of 9.92 Cr shares in RPL shares in the Nov. Futures market. This net position was achieved by selling 11:45 Cr shares between 1st to 6th Nov 2007 and purchasing 1.53 Cr shares again between 1st to 6th Nov 2007. When sale and purchase is made, it shows that it was not a genuine hedge. Further, purchasing 1.53 Cr shares in the futures without any counterbalancing sale of shares in the cash segment shows that the transaction in the Futures segment was not a genuine hedge. b) Between 13th Nov 2007 to 15th Nov 2007, RIL sold total of 5.97 Cr RPL shares in the cash segment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gard to payment of interest to shareholders of a target Co. as compensation on account of failure to make a public announcement under the Takeover Code. The learned senior counsel placed reliance on a decision of this Tribunal in Sterlite Industries (India) Ltd. vs SEBI (2001) SCC Online SAT 28 and LKP Securities Ltd V/s SEBI (2002) SCC Online SAT 31 wherein it was held that a statutory order cannot be supplemented by fresh reasons and that one cannot go beyond the impugned order. 76. Shri Salve contended vehemently that the position limits circulars have been issued under SCR Act and the Rules made thereunder. The learned senior counsel submitted that assuming without admitting that the position limits were breached it cannot attract Regulation 3(b) of PFUTP Regulation. The learned senior counsel submitted that the ingredient of fraud was missing in Regulation 3(b). The learned senior counsel further contended that the essential element of inducement‛ in fraud is required to be established which in the instant case was lacking. It was thus urged that mere manipulation is not sufficient for issuing a direction for disgorgement and that reliance on the decision in Sandee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that neither there was any misrepresentation to the market nor any fraud was played since the 12 agents did not corner the market. The contention of SEBI that people trading with another person are entitled to know how many positions have been taken by the other person is misplaced. The learned senior counsel submitted that there is no law which requires a trader to disclose in advance the number of shares he intends to buy or sell. Further there is no requirement that a trader must know whether a person has exceeded his limit or not or whether the positions were taken individually or in concert. On the contrary, in terms of NSE (F O segment) Trading Regulations, a trading member is prohibited from disclosing the name and beneficial identity of the client. 80. The learned senior counsel also pointed out that now the NSE Model Client Broker Agreement has been amended which includes an undertaking by the client that he is not acting in concert with any other person. This requirement indicates that Circular relied upon at the given point of time did not have the requirement of disclosing persons acting in concert‛. 81. Shri Salve again reiterated that the Nov 2007 RPL Fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ettlement, is the closing price of the underlined on the day of the exercise or such other price as may be decided by the Relevant Authority from time to time. Reg. 1.3.53 defines Short Position: Short Position in a derivatives contract means outstanding Sell obligations in respect of a permitted derivatives at any point of time. Reg. 1.3.61 defines Underlined Securities: Underlined Securities means a security in reference to which a derivatives contract is permitted to be traded on the Futures Options segment of the exchange from time to time. 83. In order to deal with the issues raised, it is essential to first deal with the transactions executed in the F O segment, namely whether such transactions were in the nature of hedging transactions. Before we dwell into the nature of the transactions, it is essential to understand the meaning of the word hedge‛ or hedging transactions‛. 84. Black s Law Dictionary (11th Edition) defines Hedging Contract as A contract of purchase or sale that amounts to insurance against changing prices by which a dealer contracts to buy or sell for future delivery the same amount of a commodity as he or she is buying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion is the degree to which a hedger engages in derivatives transactions with a notional value in excess of its actual risk exposure‛. 89. L.C. Gupta Committee Report states: The test of whether a futures transaction is for hedging or for speculation hinges on whether there already exists a related commercial position which is exposed to risk of loss due to price movement.‛ The report further went on to state; The Committee strongly favors the introduction of financial derivatives in order to provide the facility for hedging in the most cost efficient way against market risk. This is an important economic purpose. At the same time, it recognizes that in order to make hedging possible, the market should also have speculators who are prepared to be counter parties to hedgers. A derivative market wholly or mostly consisting of speculators is unlikely to be a sound economic institution. A soundly based derivatives market requires the presence of both hedgers and speculators‛ and went further to hold Hedging will not be possible if there are no speculators‛. 90. From the aforesaid, the key elements of a hedge transaction and speculative transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t circumstances existed for the appellant no. 2 to 12 to take a hedge by taking short positions in Nov. 2007 RPL Futures on the sale side by placing half the quantity as a hedge and leaving the balance as unhedged. Thus, in our opinion, creation of short positions of 9.92 Cr RPL shares over a period of four trading days was clearly a hedge transaction. We are further of the opinion that by taking short position during 1st to 6th Nov 2007, the impact got minimized when shares were sold in the cash segment. Looking from another angle, if the short positions taken was not a hedge, there was nothing to stop the appellants from off loading its shares from 6th Nov onwards. The short positions were taken on the sales side at Rs 265.67 per share. Table 1 2 of Vol 3 indicates that the weighted average price on 07.11.2007 was Rs 219.21 in the cash segment and Rs 215.78 in the Futures segment. If the short positions were squared off on 07.11.2007, the appellants would have made far more than by holding it out till the end. Table 1 2 further indicates that the prices kept on dipping and it would have been easier for the appellants to square off the short positions and make large profits. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons done in the F O segment with the intention of speculation is not prohibited nor can such speculation be termed as manipulation or fraudulent. We are saying this, since physical deliveries in F O segment was not permitted and therefore, trading done in F O segment always had an element of speculation. We reiterate that what starts as a hedge continues as a hedge irrespective of imperfections. A perfect hedge is only possible when it is settled by delivery. Thus any deviation from a perfect hedge cannot be termed as an invalid hedge nor can it be termed as speculative and therefore, fraudulent. If at the beginning it was a valid hedge, the same does not become an invalid hedge merely because Open Interest positions was not closed simultaneously with the cash segment or that the Open Interest exceeded the quantity remaining to be sold in the cash segment. At best a valid hedge could become an imperfect hedge at a later point of time but it cannot be called an invalid hedge. 97. Similarly, the purchase of 1.53 Cr shares between 1st Nov 2007 to 6th Nov 2007 are not speculative transactions since it was to ensure compliance of the individual position limits of the 12 agents which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , RIL would have delivered the 9.92 Cr short positions. It is worth mentioning that the stock exchange rules, progressively from July 2018 made it mandatory for physical deliveries of specified scrips in the F O segment and significantly from October 2019 onwards any outstanding short positions in any scrip has to be mandatorily settled by physical delivery. There is no closing out of outstanding positions which was the case in 2007. It cannot be denied that RIL would have simply made physical delivery of 9.92 Cr shares on November 29, 2007 and earned Rs 265.67 per share had physical deliveries been allowed in 2007. 103. There is another aspect. What has been achieved by RIL through the transactions undertaken in the November 2007 RPL Futures? It is simple. RIL realized Rs 221 per share on the sale of 20.29 Cr shares in the cash segment. The hedges in the Nov 2007 RPL Futures helped RIL to realise an additional Rs 26 per share on the 20.29 Cr shares, taking up the average realization to Rs 247. Nothing more. This realization of Rs 247 per share must be looked at from the following perspective:- (i) When RIL entered the F O segment, the high price was Rs 295.40. (ii) When R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat imperfection in a hedge transaction will always exist when created or squared up in derivative market. Further, L. C. Gupta s report clearly indicates that the derivative market was created for speculation and, therefore, if hedge is combined with speculation, the same is not illegal. 108. Thus, we hold that a transaction in the F O segment is a hedge if there is an underlying exposure/ risk. In this case it cannot be denied that there was an underlying exposure/ risk, namely, the potential sale of 22.5 Cr shares in the cash segment. This is an identified and existing risk. A hedge even assuming it is imperfect, does not and cannot cease to be a hedge nor becomes speculative. There is no need for a simultaneous closure of the open positions along with the reduction in the exposure. An underlying risk has to be present at the time of taking the positions. There is nothing wrong nor there are any rules which prescribes that there has to be a simultaneous closure of the open position in the F O segment. As long as the underlying exposure/ risk continues, the hedge can continue. Neither the extent of the hedge transaction nor the extent of the outstanding hedge oppositions need ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to determine whether position limits are required at this level to guard against situations where a very large open interest leads to attempts to manipulate the underlying market.‛ The aforesaid circular indicates that no customer level position limits nor any market level position limits were prescribed. The circular only required that a disclosure should be made for any person or persons acting in concert who together own 15% or more of the Open Interest. The circular further provided that failure to disclose the aforesaid fact would attract a penalty. Thus, this circular of July 1999, did not place a ban on large Open Interest positions but only required it to make a disclosure. 111. In respect of Single Stock Futures, SEBI issued a circular dt 02.11.2001, the relevant portion is extracted hereunder:- Position Limits: On the introduction of index futures contracts, index options contracts and stock options contracts the trading ember level and the market wide position limits were prescribed. However, with the introduction of Single Stock Futures contracts, a customer level position limit is also prescribed to deter and detect concentration of positions an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontracts on a particular underlying stock. 113. In the light of the aforesaid, as per circular of 2001, for the Nov 2007 Futures, the client wise position limit of RPL shares comes to 1.09 Cr shares as on 6.11.07 and 90 lac shares as on 29.11.2007. We find from the record that appellant no. 2 to 13, held short position which was nearly equal to the maximum that was allowed to them. Breach of this limit invites penalty as per NSE circular of 2004 under the SCR Act. Appellant no. 1 admits that the 12 named entities (appellant 2 to 13) were its agents. The appellant no. 1, however contends that the position limits are applicable to a client/customer and every agent was an independent client/customer of the broker since the concept of acting in concert was wanting and no disclosure was required, each and every agent of appellant no. 1 was validly as well as legally entitled to take short positions within the limits prescribed as per circular of 2001. The circular specifically stated that there was no ban on taking up positions by persons acting in concert. The circular makes it clear that the 12 agents could validly take individual position limits without disclosing that they were a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent‛ is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is represented, is called the principal‛. We find that the maxim qui tacit per alium facit per se‛ is fully applicable, namely, whatever a person has power to do himself, he may do so by appointing an agent. Conversely, what a person cannot do himself, he cannot do so by means of an agent. 118. Thus even though the 12 agents, appellant 2 to 13 had validly taken individual position limits in the Nov 2007 RPL Futures as per the circulars which are applicable to a client/ customer, and even though they were not required to disclose that they were acting in concert at the behest of appellant no. 1 RIL, yet in the given facts and circumstances of the case, since the 12 agents were acting on behalf of the principal RIL who was the ultimate beneficiary, the separate position limits would not apply to each of them. The logic is simple. Since RIL could not have crossed the position limits in its individual capacity, it could not cross the position limits through its agents. The principle that what could not be done d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f any contravention of the bye-laws. For facility, Section 9(3) of the SCRA is extracted hereunder:- 9.(3) The bye-laws made under this section may (a) specify the bye-laws the contravention of which shall make a contract entered into otherwise than in accordance with the bye-laws void under sub-section (1) of section 14; (b) provide that the contravention of any of the bye-laws shall render the member concerned liable to one or more of the following punishments, namely: (i) fine, (ii) expulsion from membership, (iii) suspension from membership for a specified period, (iv) any other penalty of a like nature not involving the payment of money.‛ 121. A perusal of Section 9(3) provides that in the event of a contravention, a fine, expulsion from membership, suspension from membership for a specified period or any other penalty of a like nature not involving the payment of money, can be imposed. Based on the aforesaid, various circulars have been issued by the Respondent and by the Stock Exchange under the SCR Act providing monetary penalties for violating the position limits. 122. Thus, from a perusal of Section 9(2) and 9(3) of the SCR Act, we find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts moved to 93.63% on 29.11.07 on account of the fact that this increase could be attributed to others who had closed their Open Interest during this period. Thus without investigating this aspect, the WTM could not attribute the amassing of the Open Interest positions to the actions of the 12 agents. 126. It may be noted here that the position limit circulars specifically states that the client wise/customer wise position limits were being prescribed to deter and detect concentration of positions and market manipulations‛. We find that as per the circular on position limits, the prescription of position wide limit is only to deter and detect market manipulation. Assuming that during the course of investigation the concentration was detected, we are of the opinion that neither in terms of the circular, nor in terms of the PFUTP Regulation, such concentration would automatically amount to manipulation. Concentration by itself does not become manipulation unless a separate act is established. If the legislative intent was that concentration itself was manipulative, the framers would have prescribed disclosure by persons acting in concert and also determined the extent of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the first instance when queries were made by SEBI. It is not a case when SEBI discovered these agreements during the course of its investigation. We find that these agreements were never hidden and were disclosed by RIL at the first opportune moment. 129. The finding that these agreements were executed for the purpose of circumventing the regulatory framework and that it was a premeditated exercise is purely based on surmises and conjectures. The stand of RIL from the very beginning was clear, namely, that they had to sell 22.5 Cr shares of RPL and therefore executed the agreements with the 12 entities so that they could individually take position limits within the framework of the circulars. Nothing was an afterthought nor can such agreement be called a sham agreement. 130. The WTM held that the cash segment trades of appellant No.1 on 29/11/2007 during the last ten minutes of trading hours is fraudulent and manipulative in nature as contemplated under the PFUTP Regulations. In our view, this finding is purely based on conjectures and is not based on sound reasoning. How are the trades done in the last 10 minutes are fraudulent and manipulative has not been disclosed. The fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the choice of an investor to enter the market and trade and, such decision is, based on the understanding of the securities market. A person may trade on one day and thereafter may not trade for many days. It is the choice of an investor for whatever compulsion he may have. Thus, not trading from 24th November till the last 10 minutes of 29th November 2007 does not create a suspicion. 133. In this regard, we find that the appellant had traded on 23/11/2007. As per Table 5 of the Vo. III of the Compilation of Documents, the appellant had traded 0.52 crore RPL shares at an average price of Rs.209.62. It may be noted here that 24/11/2007 and 25/11/2007 were Saturday and Sunday. No trades were possible on these two days on account of the closure of the Stock Exchange. On 26th November 2007, the opening price was Rs.213 per share and the closing price was Rs.204.05. The appellant chose not to enter the market on 27th and 28th November 2007, the weighted average price was only Rs.197.79 and Rs.194.17. Further, only 2.68 cr and 3.08 cr shares respectively were traded on these days which indicates that not many trades were done at or above Rs.200/-. It may be noted here that appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares from 3.00 p.m. onwards since it is common knowledge that the last half hours weighted average price is the settlement price. But the same was not done and only when the price rose to Rs.224.90 at 3:21:40 p.m. the appellant No.1 entered the market in order to reap the average in the cash segment. 136. There is yet another angle to it. On 29/11/2007, total shares traded were 17.66 crore. Appellant traded 2.25 crore shares and delivered 2.25 crore shares. Others traded 15.41 cr shares but delivered 2.78 cr shares which is a mere 17.68% against 100% delivery by appellant no.1. This shows that the sales made by appellant No.1 were genuine and the trades made by others were speculative. In this view of the matter, SEBI should have conducted an investigation as to why the RPL shares were moving up at such a rapid pace from 3.00 p.m. to 3.20 p.m. The price was Rs.208.10 at 3.00 p.m. and rose to Rs.224.7 at 3:21:40. We find it strange that this sudden increase in the price in the last half hour did not create suspicion nor raised an eyebrow. There was ever likelihood that some forces were trying to raise the price in order to close the gap between the settlement price and the ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s sale bids at a price below the LTP but rather would place his bids at a higher price than the LTP there is a demand for a share and a seller puts the ask price at below LTP and finds that his entire sell order has got executed at a price above the ask price, the next sell order placed by him normally will not be lower than LTP. However, if the seller persistently puts lower ask price again and again, it would create suspicion that the seller is depressing the price for whatever reasons which would ultimately lead to manipulation. In the instant case, when we analyze Table 12 of Vol.III of the Compilation of Documents, we do not find that by placing sell orders at below LTP, the appellant were trying to depress the price for the following reasons:- i) The first sell order at 3:21:40 pm for 20 lac was at an ask price of Rs.222 against LTP of 224.70. In spite of quoting a lower price, all the orders (namely, 3.5 lac shares) were not executed. ii) The third sell order for 10 lac shares was at a higher ask price of Rs.220/- against LTP of Rs.219.70. Only 1,53,478 shares were sold and approx. 8.5 lac shares did not get sold. iii) The sell order for 8.33 lac shares was at an as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bability lies in favor of appellant No.1. 140. We may observe here that if all the transactions were manipulative, then there is no logic as to why the WTM has found that the trades of 1.09 cr shares were lawful. This is inconsistent with the conclusions drawn by the WTM. This clearly means that the order for disgorgement of alleged profits pertains to the balance 7.42cr shares only on the basis of exceeding the position limits. As held earlier, exceeding the position limits will not attract Sec.11B of the SEBI Act. The order for disgorgement is thus illegal. 141. The finding that all the transactions taken together was a well planned fraudulent manipulative scheme by appellant no. 1 to earn undue profits based on manipulation and fraud is erroneous. We have already held that the transactions made by appellants were not manipulative in nature. We find that the element of fraud has to be established which in the instant case the respondent has miserably failed. 142. Establishment of fraud requires a higher degree of proof than what is made out in the impugned order. The impugned order establishes fraud on the basis of motive and nothing else. In this regard, fraud‛ i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Baldevbhai Patel and others (2017) 15 SCC 1 which in our opinion does not support the stand of the respondent in the instant case. The Supreme Court in the said decision held that fraud‛ is one which has the effect of inducing another in dealing in securities. In the instant case, there is no finding given by the WTM that the appellant had induced others in dealing in securities. Thus, the respondent has failed to established inducement and accordingly failed to discharge its burden. In this regard, we may also point out that the WTM in the impugned order has held that the charge under regulation 4(2)(b) of the PFUTP regulations, expressly requires inducement as a prerequisite condition. 144. In Price Waterhouse Co. vs SEBI, 2019 SCC Online SAT 165, this tribunal held that inducement is an essential element to constitute fraud. The said decision is squarely applicable in the instant case. 145. The contention of the respondent that the Regulation 3(b) of the PFUTP Regulations is squarely applicable as it does not require the element of fraud and inducement. The contention of the respondent that the employment of 12 agents is a device to exceed the position limits a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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.‛ Regulations 3 4(1),(2)(d) (e) of the PFUTP 3. Prohibition of certain dealings in securities No person shall directly or indirectly (a) buy, sell or otherwise deal in securities in a fraudulent manner; (b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made there 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the charge levelled in the show-cause notice regarding violation of Regulation 4(2)(d) has not been made out, namely, the charge of inducement. If inducement is not made out or proved then the charge of fraud or fraudulent action automatically fails. Thus, in our opinion, Section 12A read with Regulations 3 4 of the PFTP Regulations, are not made out. 149. It was contended by the respondent that the charge under Regulation 3(b) of the PFUTP is made out which provision does not require the element of fraud and inducement to be proved. It was contended that employment of 12 agents was the device to exceed the position limits and therefore there was a contravention of the SEBI Act and the Regulations is, in our view, erroneous. As we have held the violation of the position limits circulars which are issued under the SCR Act does not attract provisions of Regulation 3(b) of the Regulations framed under the SEBI Act. Since the burden of proving inducement has not been proved which is an essential ingredient to establish a fraud, we are of the opinion that no fraud has been made out and therefore Regulation 3(b) is not applicable for violation of position limits. Since the position ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... escape for the respondents from satisfactorily explaining before the Tribunal as to how these allegations would not result in fully establishing the guilt as prescribed under sub-clauses (a), (b) and (c) of Section 12-A. Similar will be the situation for answering the definition under Regulations 2(1)(b), (c), 3, 4(1), (2)(a), (b), (c), (d), (e), (f), (k) and (r) of the 2003 Regulations, apart from taking required penal action against those who are involved in any fraud being played in the creation of securities.‛ 152. In N. Narayanan vs Securities and Exchange Board of India, (2013) 12 SCC 152 the Supreme Court held:- 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide powers under Section 11, 11A and 11B to protect the interests of the investors in the securities market by taking such measures as it thinks fit. In Securities and Exchange Board of India vs Pan Asia Advisors Limited and Others (2015) 14 SCC 77, the Supreme Court held:- 75. On a reading of the above statutory provisions, we find under Section 11(1) of the SEBI Act, 1992, a duty has been cast on SEBI to protect the interest of the investors in securities and also to promote the development of the securities market as well as for regulating the same by taking such measures as it thinks fit. The paramount purpose has been shown as protection of interest of investors on the one hand and also simultaneously for promoting the development as well as orderly regulation of the security market. By way of elaboration under Sections 11(2)(a) to (e) it is stipulated that the duty of SEBI would include regulating the business in the stock exchanges and any other securities market which would include the working of stockbrokers, share transfer agents and similarly placed other functionaries associated with securities market in any manner, registering and regulating the working of the depo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te that the respondent has failed to discharge the burden of establishing manipulation. No case of manipulation or fraudulent transactions in the last ten minutes of trading has been made out. The violation of the circulars only invites a penalty under the SCR Act. 157. In the absence of any contravention, the direction issued under Section 11-B of the SEBI Act to the appellant no.1 to disgorge an amount of Rs.447.27 cr. alongwith interest is without any authority of law and, to that extent, the order is set aside. 158. In the result, the appeal is allowed in part. In the circumstances of the case, parties shall bear their own costs. Justice Tarun Agarwala Presiding Officer PER: DR. C.K.G NAIR, MEMBER 159. We are unable to agree with the findings and conclusions reached by the Honourable Presiding Officer in his Order. Therefore, we proceed to write a separate Order in this matter. 160. This appeal has been filed aggrieved by the order of the Whole Time Member ( WTM for short) of the Securities and Exchange Board of India ( SEBI for short) dated March 24, 2017. By the said order the appellants have been prohibited from dealing in equity derivatives in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to Appellant no.1. After some correspondence a corrigendum dated October 8, 2009 was issued. Upon consideration of the reply and the material found during investigation, in suppression of the above SCN, a fresh SCN dated December 16, 2010 was issued by respondent SEBI to the appellant no.1 as well as to 12 other entities. 164. It is the case of the appellants that, on 29 March 2007, the Board of Directors of Appellant No.1 decided to raise resources, inter alia, by offloading approximately 5% of its holdings of equity shares of Reliance Petroleum Limited (RPL), a subsidiary of RIL. While Appellant No.1 undertook the transactions in the cash segment of RPL in November 2007, it enlisted the services of other 12 Noticees, as agents to operate on its behalf in the single stock futures segment of RPL. During November 1, 2007 and November 6, 2007 these 12 entities took substantial short-sell positions in the November Futures contract of RPL. Appellant No.1, RIL itself did not take any position in the Futures segment. As a result, on November 06, 2007, the open position in the RPL November Futures reached 95% of the market-wide position limit (MWPL) thereby leading to ban by the NSE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of Appellants that these 12 entities were in fact engaged by RIL for taking positions in the November futures contracts of RPL and the details of their trading etc. are not disputed, we do not propose to elaborate on this issue. However, it is important to note that, admittedly, these 12 front entities were engaged on a commission basis and the entire profit and loss emanating from their trading activities would flow to the accounts of RIL. It is also to be noted that the entire trading activities of these front entities were executed by an employee (Mr. Sandeep Agarwal) of a wholly owned subsidiary of RIL, who also placed orders in the cash market for selling the RPL shares. Information available on records also shows that RPL, a subsidiary of RIL, got listed in May 2006 when it came out with an Initial Public Offer (IPO) of equity shares at the rate of Rs. 60/- which reached the peak price of Rs. 294/- on November 1, 2007, the date on which RIL entered the RPL stock futures segment through its enlisted agents/entities. RIL, at the relevant time held 75% of the equity shares of RPL, from which it had decided to sell approximately 5% of the shares in its Board meeting held on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 read with Regulations 3(a),(b),(c) and (d) and 4(1) and 4(2)(d) and (e) of the SEBI (Prevention of Fraudulent and Unfair Trade Practices) Regulations. Accordingly, the Noticees were called upon to show cause as to why all or any of the actions, including disgorgement of the undue and illegal profits made, and such other measures as deemed fit, in terms of the SEBI Act, the SCRA 1956 and SEBI (PFUTP) Regulations, 2003 should not be initiated against them. 168. Based on an evaluation of the facts and circumstances brought out in the SCN and, the replies submitted, the impugned order has been passed with the following findings: (i) Noticee no.1 by employing 12 agents to take separate position limits of Open Interest on its behalf by executing separate agreements with each one of them and cornering 93.63% of the November futures of RPL, has acted in a fraudulent manner while dealing in RPL scrip. (ii) The Noticee No.1, by manipulating the F O segment through 12 of its agents (Noticees Nos. 2 -13) and allowing them to hold the contracts till the last day of expiry and thereafter by closing out the derivative contracts on the 29th of November, 2007 has engaged in a pre-planned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed provisions of 2001 SEBI Circular and 2001 NSE Circular relating to position limits in single stock futures segment. 170. Since charges/allegations relating to Benami transactions raised in the SCN were dropped by the WTM we do not propose to deal with the same in this Order. 171. We have heard Mr. Harish Salve, learned Senior Advocate along with Mr. Janak Dwarkadas, learned Senior Advocate, Mr. Raghav Shankar, Mr. Rohan Rajadhyaksha, Mr. Ashwath Rav, Mr. Kashish Batia, Mr. Vivek Shetty, Mr. Amey Nabar, Mr. Geetanjali Sharma, Ms. Arundhati Kelkar, Mr. Armaan Patkar, Ms. Cheryl Fernandes and Mr. Vedant Jalan, learned Advocates for appellants. We have also heard Mr. Darius Khambata, learned Senior Advocate with Mr. Gaurav Joshi, learned Senior Advocate, Mr. Aditya Mehta, Mr. Mihir Mody and Mr. Shehaab Roshan, learned Advocates for the respondent. 172. In addition, we have also heard two individual Interveners, Mr. Arun Kumar Agarwal and Mr. Shailesh Mehta, who appeared before us in person. Before we proceed with the submission made by the appellants and the respondent on the merit of the matter, we proceed to deal with the submissions made by the Interveners. Apart from se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt to the matter in hand as well as the mandate assigned to this Tribunal. Similarly, issue such as oppression of minority shareholders and mismanagement are not within the purview of this Tribunal and this Tribunal has to go by the mandate assigned to it under Section 15T of the SEBI Act, 1992 as Section 15T(4) states that this Tribunal may pass orders confirming, modifying or setting aside the order appealed against. This is the crux of the decisions in Clariant (supra), which though relied on but not correctly interpreted by the Interveners. The decision in the case of Clariant (supra) is explained by the Supreme Court in the case of National Securities Depository Ltd. vs. SEBI (2017) SCC Online 256 wherein in para no.24 the Supreme Court clarified as under:- 24. It may be stated that both Rules made under Section 29 as well as Regulations made under Section 30 (of SEBI Act) have to be placed before Parliament under Section 31 of the Act. It is clear on a conspectus of the authorities that it is orders referable to Sections 11(4), 11(b), 11(d), 12(3) and 15-I of the Act, being quasi-judicial orders, and quasi judicial orders made under the Rules and Regulations that are the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;, i.e. without the corresponding underlying exposure and that any hedge position left open like the one RIL did is termed as a naked hedge transaction‛. A naked hedge transaction is a recognised concept and Reserve Bank of India also permits naked hedge derivative transaction in forex to continue until the maturity date in relation to the hedge transaction. To buttress the said submission the Master circular dated 5th July, 2016 issued by Reserve Bank of India was placed before us. The circular inter alia provides as under:- i) Forward Foreign Exchange Contracts Participants Market-makers - AD Category I banks Users - Persons resident in India Purpose a) To hedge exchange rate risk in respect of transactions for which sale and /or purchase of foreign exchange is permitted under the FEMA 1999, or in terms of the rules/ regulations/directions/orders made or issued there under. b) To hedge exchange rate risk in respect of the market value of overseas direct investments (in equity and loan). i) Contracts covering overseas direct investment (ODI) can be cancelled or rolled over on due dates. If a hedge becomes naked in part or full owing to contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ban on acting in concert or on aggregation of positions; therefore, there is no violation of position limit related laws by RIL when it engaged 12 front entities to take positions on its behalf in the futures segment. Even if it is held to be a position limit violation, without admitting the same, at worst it is a case of position limit violation under relevant stock exchange circulars and only a penalty under the said circulars/Exchange Rules can be imposed on the appellant. 181. According to him, there is no fraud, no manipulation, no attempt to deceive the market and the impugned order has failed miserably to prove even by a whisper how exceeding position limits in the face of substantial exposure of the underlying, is market manipulation and fraud as defined under Section 12A of SEBI Act, 1992 and under the stated provisions of the PFUTP Regulations as wrongfully held in the impugned order. Accordingly, the finding in the impugned order that the appellants have violated provisions relating to PFUTP Regulations is patently erroneous and based on conjectures and surmises. 182. He further contended that for proving fraud an element of inducement has to be proved which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued by the AO of SEBI with a view to impose penalty. Reading of the Office note of respondent SEBI dated November 6, 2009 would show that a personal hearing in the case was scheduled before the WTM on November 7, 2009 at 2.30 p.m. The advocate of the respondent SEBI was briefed for presenting the case on behalf of SEBI. However, the Advocate had advised to obtain certain information from appellant no.1 in order to strengthen the evidence against the entity . Therefore, vide the office note it was decided that the respondent SEBI would seek adjournment of the hearing to be held on November 7, 2009. On the strength of this material, Mr. Salve submitted that the very act of the respondent of collecting information with a view to strengthen the evidence against appellant no.1‛ would show that the respondent SEBI instead of acting as an independent regulator was bent upon collecting evidence against the appellant. Therefore, he submitted that the order of the WTM is also on the similar lines. 185. As regards the last 10 minutes trades which is also found by the Respondent SEBI to be contravening provisions of SEBI Act, 1992 and PFUTP Regulations, the learned senior counse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en Section 12A of SEBI Act reads as below and states that the said section can be invoked only when provisions of the SEBI Act and Rules are violated, not for violation of other laws. 12A. 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 recognized 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; (emphasis added by the appellant) 188. It was vehemently contended that possible SCRA violation of position limits cannot be artificially converted into PFUTP violations under the SEBI Act, particularly when no fraud or inducement has been proved in the impugned order. 189. Learned senior counsel for the appellant further submitted that the WTM, while summarizing the case at para no.5.4, had declared that the appellants have violated the provisions of Section 12A of Securities and Exchange Board of India Act, 1992 read with Regulation 3, 4(1) and 4(2)(e) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Sections 11 and 11B of SEBI Act could not have been issued against the appellants and no penalty/disgorgement could have been ordered. Without admitting, it was contended, that the actions of the Appellants may be at worst interpreted as a position limit violation under the relevant exchange circulars and a penalty under the same could have been the only punishment, if at all any, that could have imposed on the appellants. 193. On the other hand, the learned senior counsel Mr. Darius Khambata appearing for the respondent SEBI strongly contended that the scheme perpetrated by the appellants was an unparalleled manipulation of the securities market. The magnitude of the offence is clear from one single fact that effectively one party (RIL), through a clandestine scheme of engaging 12 front entities cornered 93.6% of the open interest on the settlement day of November futures contract and as on November 6, 2007 it had cornered 61.5% of the open interest. In terms of numbers the net short position of the appellants was 9.92 crore as on November 6, 2007 and 7.97 crore shares on the settlement day. Client level maximum position limit that could have been taken as on these dates wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r SEBI contended that when a Principal-Agent model was used by the appellants they could not have adopted the argument that there is no prohibition on acting in concert or aggregation in the SEBI / NSE circulars, though such an interpretation of the Circulars would be a complete misreading to totally undermine the principles behind imposing position limits in the derivatives market as a major risk management strategy. 197. As regards manipulation and violation of Section 12A of SEBI Act, 1992 read with Regulation 3, 4(1) and 4(2) (e) of the PFUTP Regulations the learned senior counsel submitted that once manipulation was established inducement would automatically follow. By the manipulative activities of the appellants integrity of the market in RPL shares in November 2007 was compromised and market integrity is essential for a market to perform its functions in a normal fashion. It was a vitiated market because of the manipulation perpetuated by the appellants in terms of taking huge net short positions through a manipulative scheme of a Principal-Agent arrangement set up at the back of the market participants. Since the market was already manipulated rest of the market partici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the action of RIL in dumping of 2.25 Cr shares (with most of the orders placed well below LTP) in the last ten minutes of trading on 29 November, 2007 was with the sole purpose of manipulating the settlement price of the RPL Futures contracts. Such manipulation amounted to a fraudulent act. He stated that on 29 November, 2007, RPL scrip opened at Rs 193.80 and rose to Rs 208.20 at 3:00 p.m. and thereafter increased further to Rs 224.35 at 3:20 p.m. The graph of RPL share price during the last half hour showed that the price was rising steadily. Such continuous price rise was not suiting RIL, as a rise in price of the RPL shares in the cash segment would mean reduction in RIL s realization on its open position in the RPL Futures segment. The learned senior counsel, thus, submitted that in order to avert a situation of reduced margin on their locked in price in the futures segment, RIL started dumping RPL shares in the cash segment during the last 10 minutes of trading. This dumping was with a view to reverse the rising trend in RPL s share price. All these activities, according to Mr. Khambata debunks the defense of hedging taken by the Appellant No. 1. 201. It was further con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expected RPL prices to fall when shares were sold in the cash segment was nothing but an afterthought. The learned senior counsel placed reliance on a decision of the Gujarat High Court in Pankaj Oil Mills vs Comm. of Income Tax, AIR 1978 Guj. 226 which distinguished hedging from speculative transactions as the genuine transactions entered into for purposes of insuring against adverse price fluctuations‛ and further held in order to be genuine and valid hedging contracts of sales, the total of such transactions should not exceed the total stocks of the raw materials or the merchandise on hand which would include existing stocks as well as the stocks acquired under the firm contracts of purchases.‛ 204. The learned senior counsel also placed reliance on a decision of the Supreme Court of Canada in Ontario (Minister of Finance) vs Placer Dome Canada Ltd, 2006 SCC Online Can SC 20, which has explained the difference between hedging and speculation in the following terms: 29 This distinction between speculation and hedging is an important one. A transaction is a hedge where the party to it genuinely has assets or liabilities exposed to market fluctuations, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urities listed or proposed to be listed on a recognized 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; PFUTP Regulations, 2003 Prohibition of certain dealings in securities 3. No person shall directly or indirectly (a) buy, sell or otherwise deal in securities in a fraudulent manner. (b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e considerable extent of risks associated with derivatives products. The impugned order itself explains the sanctity of position limits in preserving the integrity of derivatives market and to minimize risk as under: - 4. A.11 Position limits define the maximum position, either total or net long / short that may be held or controlled by one entity or one class of traders. The concept of client level position limits‛ in equity derivatives markets stems from the prime objective of avoiding / limiting concentration of positions in a few hands and ensuring a wide dispersal of positions. Section 18A was introduced in the SCRA with effect from 22.2.2000 enabling the trading in derivative contracts subject to those contracts being traded on the stock exchanges in accordance with the rules and bye-laws of such stock exchanges. The SEBI and NSE circulars issued in this connection in the year 2001, empowered the stock exchanges to introduce position limits with respect to derivative futures to prevent market manipulation, distortion as well as excessive speculation. The SCRA and the circulars / exchange bye laws require the exchanges to put in place (more stringent) position lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not in a case where several clients or customers were acting on behalf of one common ultimate beneficiary. If the argument of Noticee No.1 is adopted, the stipulation of a client-wise limit in the relevant circular itself becomes irrelevant and redundant. Further, it would throw open the possibility of grave misuse by a person to multiply his position by enlisting agents to act on his behalf rather than to limit itself to the stipulated criteria laid down in law. Such a concentration of the position limits by one person deprives the other market players of the availability of the OI in a particular scrip. If a client corners position by procuring position limits clandestinely from their trading members showing different names and identities, it is nothing but perpetration of a large scale fraud on the market including the trading members, the public shareholders in the scrip and the investors in general. The other arguments of the noticees relating to aggregation of holdings of a client not being provided in law, does not merit any consideration in view of the above observations. 4.A.15 The circulars authorizing exchanges to impose penalty for breaches committed with respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llants contended that since all their trades were in accordance with the conditions specified therein those trades were legal and hence the finding in the impugned order that the trades were illegal is patently wrong. A reading of the said Section, 18A reproduced below, would make such an argument hollow. Contracts in derivative. 18A. Notwithstanding anything contained in any other law for the time being in force, contracts in derivative shall be legal and valid if such contracts are (a) traded on a recognised stock exchange; (b) settled on the clearing house of the recognised stock exchange, or in accordance with the rules and bye-laws of such stock exchange. (c) between such parties and on such terms as the Central Government may, by notification in the Official Gazette, specify.‛ 211. Section 18A was introduced in SCRA to provide legality to derivatives contracts which had been otherwise considered wagering contracts which were illegal. Therefore, exchange trading and clearing house settlement were made necessary conditions for making derivatives contracts legal. Any person entering into dealing in the derivate segment of the stock exchange is unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity. In fact, when one of the entities (Appellant no.12 -Dharti Investment and Holding Private Ltd.) exceeded the maximum permissible position limit of 101 lakh shares on November 6, 2007 when its net short position became 104.79 lakh shares, a penalty was imposed by the NSE on it. Therefore, the contention of the appellant that when an entity exceeds the permissible position limits only a penalty under the exchange rules is applicable has already been implemented in the case of one entity. This is not the case when a device, a scheme, a manipulative arrangement of a principal-agent model was innovated and implemented by the appellants at the back of the exchanges and other securities market participants at great cost to the latter and for the short-term gains of the appellants. Such a scheme, a device would squarely fall within the ambit of Section 12A of the SEBI Act, 1992 and under the many provisions in Regulation 3 and 4 of the PFUTP Regulations. Therefore, we have no doubt in our mind that the route taken by the appellant RIL with the help of other appellants/Noticees who perpetuated the scheme in cornering a substantive portion of the market-wide position limit in the range ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Not that all the listed securities are in the derivatives segment providing the exiting/diluting promoters or other investors in such shares any hedging option/tool. Therefore, the submission that a promoter entity trying to offload a large quantity of its equity holding of a subsidiary company in the cash segment can effectively hedge their exposure in one single contract (like the November future contracts) is a wild dream and efforts in achieving the same through devious, manipulative schemes would fall in a rare breed of serious PFUTP violations Further, the scheme was hoisted on the market in a fraudulent fashion and it continued as such. The underlying exposure limit and the position limit crossed each other on November 15, 2007 and therefore even assuming its submission of hedge, as a hedger, appellant should have reduced their position limit more or less concomitantly, even if not on exact proportional basis, with their underlying exposure. However, the appellants decided to retain 7.97 crore shares as their net open position as naked hedge‛ from November 16 till the expiry of the contract on November 29. The finding that this was done deliberately to reap the differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... timates. However, there should be periodical review of the estimates. c) Foreign currency loans/bonds will be eligible for hedge only after final approval is accorded by the Reserve Bank, where such approval is necessary or Loan Registration Number is allotted by the Reserve Bank.‛ Thus, the operational guidelines of RBI provide that the maturity of the hedge should not exceed the maturity of the underlying transactions. Further there should be correlation, may be approximate, between the position held in derivate and the intended transaction. Periodic review is also required in this regard. Only when due to unforeseen and unavoidable market conditions as detailed earlier in the master circular, if the hedge becomes naked the continuation of transaction in derivative is permitted. 215. In the present case, however, we have to find the intention of the appellant no. 1 in cornering the F O market i.e. whether it was a hedge transaction with innocent breach simplicitor of the SEBI circular providing for position limit or with an intention to manipulate the market. Appellant no 1 deliberately held on to far excessive open position in the F O segment even after sale of su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns were only illustrative and there were many more manipulative transactions. In this background this Tribunal referred the ratio of the case of Mohinder Singh Gill and at Paragraph no. 96 observed as under 96. Shri Dada had submitted that the two transactions are only illustrative and there are other instances as well to show manipulation by the appellant. I am afraid this is a new finding, not found in the order. In this connection I fully agree with Shri Sundaram that a statutory order issued by an authority cannot be supplemented by fresh reasons. This position is clear from the following observation made by the Hon'ble Supreme Court in Mohinder Singh Gill's case (supra): .‛ 219. Thus, in Sterlite Respondent SEBI tried to bring new material not found in the SCN and consequently not found in the impugned order. This tribunal therefore rejected the same. In the case of Mohinder Sing Gill the Supreme Court was dealing with a Writ Petition where in a statutory order of the Election Commission of India directing re-polling was in question. Further additional reasons beyond record were argued in the writ petition. In the present appeal under Section 15T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of the impugned order as a whole would show that the learned WTM had concluded that the appellants indulged in manipulative and fraudulent practices. As regards the mistake of giving concession regarding one position limit we are of the view that once the learned WTM came to the conclusion that the act of the appellants in cornering the F O segment and the attempt to depress the share price in cash segment during the last 10 minutes amounted to fraudulent activities, merely because a concession of one position limit was granted on some wrong notion would not lead us to jump to the conclusion that the WTM concluded that the transactions in question were not fraudulent. It was merely a mistake. However, in an appeal by the party who has been granted the said concession, it is not expedient to increase the amount of disgorgement. Therefore, we do not deem it fit to interfere with the impugned Order. 221. Learned Senior Counsel for the Appellants has raised an issue of bias by the Respondent. In our view however, no bias is traceable in the impugned order. In fact, it was noted in the SCN, respondent SEBI had come with a case that appellant nos.2 to 12 were the green horns who c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant No 1, as a responsible promoter, was executing its trading with minimum market disruption falls flat the way the entire scheme was implemented: adoption of the principal- agent model for cornering position limits and the last 10 minutes trading in the cash segment. If the appellant was a responsible promoter, the appellant would have spread its sales, of the 5% equity of RPL they were planning to offload, across a much longer period. The decision to sell shares was admittedly taken on March 29, 2007. A well calibrated strategy of sale would have involved a reasonably long period during which they could have disposed off those shares in relatively smaller lots. At the same time, they could have also hedged those positions in the futures contract of multiple months (after all there were other than November contracts running concurrently) without violating any position limits or hoisting a manipulative scheme for the same. We do not want to convey the message that we are tutoring the appellants on dealing in the market, when they are the experts and we do not have any experience for the same; but we are forced to explain in the face of the strong contentions that the appellant has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is not on a legal requirement, but a practical business sense for a big Company who tries to enter the market to sell huge stakes of a subsidiary and deciding to hedge ought to have a well-documented hedging strategy, irrespective of whether there is a mandating law or not. 226. In none of the arguments / submissions the appellant No 1 has clarified to us on why it was in a tearing hurry to do everything relating to sale of the 5% of their equity holding in one trading month i.e. November 2007, though according to it the decision to sell shares was taken long back in March 2007, and the sale could have been spread for several months, except stating that share price of RPL was overvalued in the findings by three analysts. It is an irony that outside analysts, who basically produce their reports for general investors, and not for promoters who are insiders, knew more than the insiders and the insiders placed their full bet on such analyst reports. Even ignoring this irony; the first analyst report came in September, 2007 and Appellant 1 could have started trading soon thereafter itself because the board decision and authorization etc. were admittedly already there. Moreover, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1956/2013. Therefore, if the nature of the violations specified in any legislations spills over to the mandate under another legislation, SEBI is fully within its rights to invoke the provisions of both/all those legislations. In the instant matter, therefore, when it was held that the position limit violation had been achieved through a dubious, manipulative scheme or a device, such an act would squarely fall within the provisions of SEBI Act and PFUTP Regulations. We, therefore, find no error or mistake on the part of the WTM in invoking the relevant provisions of SCRA, SEBI Act and the PFUTP Regulations, 2003 and in passing the Order under section 11 and 11B of SEBI Act accordingly. 228. It was contended that disgorgement is a punishment/penalty, while powers granted to SEBI under Section 11B of SEBI Act are remedial in nature. Therefore, no order for disgorgement could have been passed as the same is a penalty imposed on the appellant no. 1. We do not agree with this contention at all. In the Securities Laws (Amendment) Act, 2014 effected from July 18, 2013, it is clearly stated that power of disgorgement, an amount equivalent to the wrongful gain made or loss averted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is an equitable remedy; not a penal action. Moreover, equity is further served when the disgorged amount is credited to the Investor Protection Fund of SEBI, for the benefit of the market participants, particularly small investors; not to the Consolidated Fund of India as in the case of fine/penalty. Therefore, both the contentions that disgorgement is a penalty and SEBI does not have the power to impose disgorgement under section 11B of SEBI Act are contrary to the expressly stated provisions of the SEBI Act and therefore have no merit and are rejected forthwith. 230. Further, fact that disgorgement of Rs. 447.27 crore (+interest) imposed on the appellant no. 1 is a sizable sum does not make that direction harsh both because (1) it is only a remedial action and (2) what is disgorged is only what has been gorged by contravention of the specified laws. Nothing has been taken out of the appellant s own funds/assets in the process. Since it is only an equitable remedy there is no question of that being harsh or a penal action. 231. Given the aforesaid reasons, appeal lacks any merit and is hereby dismissed. No orders on costs. Appellant no. 1 is directed to make payment of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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