2018 (2) TMI 580 - SC - Companies Law

Buying and selling securities in the derivatives segment - manipulation and synchronization in trading of shares - violation of transparent norms of trading in securities - Held that - I fail to understand as to why Kasam Holding has made the transactions repeatedly by incurring losses. It seems improbable that Kasam Holding which was facing loss in each transaction by trading with the respondent, was still eager to trade with the same repeatedly for about four days which is not in consonance with the market trend and human conduct; more so, when there has not been any major difference in the underlying price. It is thus difficult to accept that several such sell and buy orders between the respondent and Kasam Holding being within a gap of 1 , 2 or 3 or few seconds were by mere coincidence. As contended by the appellant-SEBI, it was too much of coincidence that there were number of transactions of 'buy and sell orders' between the same parties with same quantity of stock with significant variation in price. Considering the reversal transactions, quantity, price and time and sale, parties being persistent in number of such trade transactions with huge price variations, it will be too na ve to hold that the transactions are through screen-based trading and hence anonymous. Such conclusion would be over-looking the prior meeting of minds involving synchronization of buy and sell order and not negotiated deals as per the board's circular. The impugned transactions are manipulative/deceptive device to create a desired loss and/or profit. Such synchronized trading is violative of transparent norms of trading in securities. If the findings of SAT are to be sustained, it would have serious repercussions undermining the integrity of the market and the impugned order of SAT is liable to be set aside. On the above additional reasonings also, agree with the conclusion allowing the appeal preferred by SEBI against the traders. Also agree with the conclusion dismissing the appeal preferred by the SEBI against the brokers.

Issues Involved:
1. Whether the factual matrix justified SEBI’s action against the traders and brokers.
2. Interpretation and application of the Securities Contracts (Regulation) Act, 1956, SEBI Act, 1992, and PFUTP Regulations, 2003.
3. Legality of synchronized and reversal trades in the F&O segment.
4. The role and liability of brokers in facilitating alleged non-genuine trades.
5. Impact of alleged non-genuine trades on market integrity and investor protection.
6. The relevance of tax planning in the context of alleged non-genuine trades.

Detailed Analysis:

1. Whether the factual matrix justified SEBI’s action against the traders and brokers:
The Supreme Court examined whether SEBI's actions against the traders and brokers were justified based on the factual matrix. SEBI had proceeded against the traders for violations of Regulations 3(a), (b), (c), and 4(1), (2)(a), (b) of the PFUTP Regulations, 2003, and against the brokers for violations of Regulations 7A(1), (2), (3), (4) of the SEBI (Stock Brokers and Sub-brokers) Regulations, 1992. The Court found that the trades executed by the traders were non-genuine, synchronized, and reversed within a short period, indicating a pre-arranged plan to create a misleading appearance of trading in the market.

2. Interpretation and application of the Securities Contracts (Regulation) Act, 1956, SEBI Act, 1992, and PFUTP Regulations, 2003:
The Court analyzed the legal framework governing the securities market, including the Securities Contracts (Regulation) Act, 1956, SEBI Act, 1992, and PFUTP Regulations, 2003. It emphasized that the SEBI Act was introduced to protect investors' interests and regulate the securities market. The PFUTP Regulations prohibit fraudulent and unfair trade practices. The Court held that the impugned trades violated these regulations as they were orchestrated to create a false or misleading appearance in the market.

3. Legality of synchronized and reversal trades in the F&O segment:
The Court distinguished between legitimate synchronized trades and those executed with manipulative intent. It held that synchronized trades per se are not illegal, but they become illegal if executed to manipulate the market. The impugned trades were found to be non-genuine, as they involved pre-arranged transactions with significant price differences executed within seconds, without any significant change in the underlying value. The Court concluded that these trades were orchestrated to create a misleading appearance of trading, thus violating the PFUTP Regulations.

4. The role and liability of brokers in facilitating alleged non-genuine trades:
The Court examined the liability of brokers in facilitating the alleged non-genuine trades. It held that merely acting as a broker does not make one liable for the clients' actions unless there is evidence of negligence or connivance. The Court found no material to suggest that the brokers were aware of the non-genuine nature of the trades or that they aided and abetted the fraudulent activities. Therefore, the appeals against the brokers were dismissed.

5. Impact of alleged non-genuine trades on market integrity and investor protection:
The Court emphasized that the securities market must operate on principles of fairness, integrity, and transparency. It held that orchestrated trades, like the ones in question, misuse the market mechanism and affect market integrity. Such trades exclude other investors from participating in the market, thereby undermining the price discovery system and investor confidence. The Court concluded that the impugned trades violated the ethical standards and good faith dealings expected in the securities market.

6. The relevance of tax planning in the context of alleged non-genuine trades:
The Court noted that the issue of tax planning was not raised in the show cause notices or the adjudicating officer's order. However, it observed that even if the trades were executed for tax planning purposes, they would still be objectionable if they involved non-genuine transactions that manipulated the market. The Court held that the impugned trades were not genuine and were executed to create a misleading appearance in the market, irrespective of any tax planning motives.

Conclusion:
The Supreme Court allowed the appeals filed by SEBI against the traders, setting aside the orders of the Securities Appellate Tribunal and restoring SEBI's orders. The appeals against the brokers were dismissed due to the lack of evidence suggesting their involvement in the fraudulent activities. The Court reiterated the need for a comprehensive legal framework to govern the securities market and ensure free and fair trading.

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