2017 (9) TMI 1269 - SC - Companies Law

Legality of non-intermediary front running in security market under the SECURITIES AND EXCHANGE BOARD OF INDIA (PROHIBITION OF FRAUDULENT AND UNFAIR TRADE PRACTICES RELATING TO SECURITIES MARKET) REGULATIONS, 2003 FUTP 2003 - Held that - To attract the rigor of Regulations 3 and 4 of the 2003 Regulations, mens rea is not an indispensable requirement and the correct test is one of preponderance of probabilities. Merely because the operation of the aforesaid two provisions of the 2003 Regulations invite penal consequences on the defaulters, proof beyond reasonable doubt as held by this Court in Securities and Exchange Board of India Vs. Kishore R. Ajmera (2016 (2) TMI 723 - SUPREME COURT) is not an indispensable requirement. The inferential conclusion from the proved and admitted facts, so long the same are reasonable and can be legitimately arrived at on a consideration of the totality of the materials, would be permissible and legally justified. Concerned parties to the transaction were involved in an apparent fraudulent practice violating market integrity. The parting of information with regard to an imminent bulk purchase and the subsequent transaction thereto are so intrinsically connected that no other conclusion but one of joint liability of both the initiator of the fraudulent practice and the other party who had knowingly aided in the same is possible Having regard to the facts of the present cases i.e. the volume of shares sold and purchased; the proximity of time between the transactions of sale and purchase and the repeated nature of transactions on different dates, in considered view, would irresistibly lead to an inference that the conduct of the respondents were in breach of the code of business integrity in the securities market. The consequences for such breach including penal consequences under the provisions of Section 15HA of the SEBI Act must visit the concerned defaulters for which reason the orders passed by the Appellate Tribunal are set aside and the findings recorded and the penalty imposed by the Adjudicating Officer are restored.

Summary

Issues Involved:
1. Legality of 'non-intermediary frontrunning' under FUTP 2003.
2. Interpretation of regulations 3 and 4 of FUTP 2003.
3. Definition and scope of 'fraud' and 'unfair trade practices' under FUTP 2003.
4. Applicability of Regulation 4(2)(q) to non-intermediaries.
5. Standard of proof required for establishing charges under FUTP 2003.

Detailed Analysis:

1. Legality of 'Non-Intermediary Frontrunning' under FUTP 2003:
The case revolves around whether 'non-intermediary frontrunning' is prohibited under the SECURITIES AND EXCHANGE BOARD OF INDIA (PROHIBITION OF FRAUDULENT AND UNFAIR TRADE PRACTICES RELATING TO SECURITIES MARKET) REGULATIONS, 2003 (FUTP 2003). The Supreme Court considered several appeals where SEBI alleged that individuals engaged in frontrunning by using non-public information to trade securities ahead of substantial orders, thereby making profits.

2. Interpretation of Regulations 3 and 4 of FUTP 2003:
Regulation 3 prohibits fraud in dealing with securities, while Regulation 4 prohibits manipulative, fraudulent, and unfair trade practices. The Court emphasized that these regulations are broad and inclusive, designed to cover a wide range of fraudulent activities. The Court noted that the definition of 'fraud' in Regulation 2(c) is expansive, including acts committed in a deceitful manner or not, that induce another person to deal in securities.

3. Definition and Scope of 'Fraud' and 'Unfair Trade Practices' under FUTP 2003:
The Court analyzed the definition of 'fraud' under Regulation 2(c), which includes any act, expression, omission, or concealment committed while dealing in securities to induce another person to deal in securities. The Court highlighted that the definition is broad and includes specific instances such as knowing misrepresentation, active concealment, and deceptive behavior. The Court also noted that 'unfair trade practice' is not specifically defined but should be understood comprehensively to include any act beyond fair business conduct.

4. Applicability of Regulation 4(2)(q) to Non-Intermediaries:
The Court rejected the argument that Regulation 4(2)(q), which explicitly prohibits frontrunning by intermediaries, implies that non-intermediaries are excluded from the regulation's scope. The Court held that the intention of the regulation is to provide a catchall provision, and the deeming provision under Regulation 4(2)(q) was specifically provided for intermediaries due to their fiduciary relationship with clients.

5. Standard of Proof Required for Establishing Charges under FUTP 2003:
The Court stated that the standard of proof for establishing charges under FUTP 2003 is the preponderance of probabilities rather than proof beyond a reasonable doubt. The Court emphasized that the provisions of Regulations 3 and 4 are couched in general terms to cover diverse situations. The Court held that once it is established that fraud has been committed while dealing in securities, all these provisions get attracted.

Conclusion:
The Supreme Court concluded that non-intermediary frontrunning is prohibited under Regulations 3 and 4(1) of FUTP 2003, provided the ingredients of fraud and unfair trade practices are satisfied. The Court held that the actions of the individuals involved in the appeals amounted to fraudulent practices violating market integrity. Consequently, the appeals filed by SEBI were allowed, and the findings and penalties imposed by the Adjudicating Officer were restored. The appeals filed by the individuals were dismissed.