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TMI Blog2018 (2) TMI 580X X X X Extracts X X X X X X X X Extracts X X X X ..... ntity 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. - Civil Appeal No. 1969 of 2011, Civil Appeal Nos. 3174-3177 of 2011 And Civil Appeal No. 3180 of 2011 - - - Dated: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tungarli Tradeplace Private Limited ( Tungarli ) Trader 30.04.2010 16.11.2010 3. TLB Securities Limited ( TLB ) Trader 16.03.2009 26.10.2010 4. Indiabulls Securities Limited ( Indiabulls ) Broker 25.02.2009 26.10.2010 5. Angel Capital and Debt Market Limited ( Angel ) Broker 22.05.2009 26.10.2010 6. Prashant Jayantilal Patel ( Prashant ) Broker 31.08.2009 26.10.2010 SAT set aside the decisions of the A.O. in all the aforementioned cases. Aggrieved, SEBI is before this Court under Section 15Z of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as the SEBI Act ). 4. Both the facts and the law are complex, and hence, we shall first analyse the legal framework. 5. The Securities Contracts (Regulation) Act, 1956 was introduced to prevent undesirab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alty for fraudulent and unfair trade practices. The provision reads as under: 15HA. Penalty for fraudulent and unfair trade practices.- If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher. 10. Adjudication is provided under Section 15I. Section 15T provides for appeal to SAT against any order made by an Adjudicating Officer and Section 15Z provides for an appeal to Supreme Court against an order passed by the SAT ... on any question of law arising out of such order .. 11. Under Section 30 of the SEBI Act . the Board may, by notification, make regulations consistent with this Act and the Rules made thereunder to carry out the purposes of this Act . The PFUTP Regulations were notified on 17.07.2003. 12. Regulation 2(1)(b) of the PFUTP Regulations provides the definition of dealing in securities , which reads as under: 2(1)(b) dealing in securities includes an act of buying, selling or subscribing pursuant to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xxx xxx (e) any act or omission amounting to manipulation of the price of a security; xxx xxx xxx (g) entering into a transaction in securities without intention of performing it or without intention of change of ownership of such security; 14. The Regulations do not provide a definition for unfair trade practices but fraud and fraudulent have been defined under Regulation 2(1)(c), which reads as under: 2(1)(c) fraud includes any act, expression, omission or concealment committed whether in a deceitful manner or not by a person or by any other person with his connivance or by his agent while dealing in securities in order to induce another person or his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss, and shall also include: (1) a knowing misrepresentation of the truth or concealment of material fact in order that another person may act to his detriment; (2) a suggestion as to a fact which is not true by one who does not believe it to be true; (3) an active concealment of a fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unctioning of the market. A stockbroker shall not involve himself in excessive speculative business in the market beyond reasonable levels not commensurate with his financial soundness. (5) Compliance with statutory requirements: A stock-broker shall abide by all the provisions of the Act and the rules, regulations issued by the Government, the Board and the Stock Exchange from time to time as may be applicable to him. 16. As the facts pertain to transactions involving certain technical terms, we will have to necessarily deal with their meaning and content. 17. Derivatives Derivatives are a form of financial instruments which are traded in the securities market and whose values are derived from the value of the underlying variables like the share price of a particular scrip in the cash segment of the market or the stock index of a portfolio of stocks. Derivative trading is governed by Section 18A of the 1956 Act. There are two types of derivative instruments - futures and options . In futures and options, the trading can either be of individual stocks or of indices like NIFTY, Bank NIFTY etc. 18. Futures - a future contract is an agreement between two parties t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He can then buy or sell a call Option or a Put Option . A Call Option is an option to buy , that is, the contract is to buy the shares on a settlement date at the selected strike rate. A Put Option is an option to sell, that is, the contract is to sell the shares on the settlement date at the selected strike rate. In case the price of the underlying or the value of the index in the cash segment goes below the selected strike rate/exercise price, the buyer will have no attraction to exercise his option under the contract and will allow the contract to lapse and thereby lose whatever premium was paid by him. Premium amount is the maximum that the buyer can lose in case the market moves contrary to his perception. In case the price of the underlying or the index value in the cash segment were to go beyond the selected strike rate/exercise price, the buyer would certainly exercise his option under the contract depending upon how high the price or the stock index has gone after adjusting the premium amount. These are some of the motivating factors which weigh with the investors in the options contracts. It is a one sided contract where the loss suffered, if any, by the buyer is l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing may take place through the stock exchange mechanism or off market. When it matches through the stock exchange, it may or may not be a synchronised deal depending on the time when the buy and sell orders are placed. Facts : 24. As mentioned before, this case involves three traders and three brokers. Traders: Rakhi Trading : Rakhi Trading was issued a show cause notice (hereinafter referred to as SCN ) on 05.10.2007 alleging execution of non genuine transactions in the Futures and Options segment (hereinafter referred to as the F O segment ). The trades in question pertain to NIFTY options. In his decision, the A.O. analysed the trade logs and observed that the trades executed by Rakhi Trading matched with the counter-party Kasam Holding Private Limited in a few seconds. The counter-party to all the trades in the NIFTY contract was Kasam Holding Pvt. Ltd. and the reversals took place in a matter of minutes/hours. The A.O. also noted that on various occasions, when the time was not matched by the respective parties, the first order was placed at an unattractive price relative to market price. These transactions took place on 21.03.2007, 22.03.2007 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s per the A.O., these trades were reversed in a matter of a few minutes/ hours. However, the A.O. noted the positive steps taken by Angel in curbing such trades (post reversal trades) and submitted proof of its actions in this regard and therefore, a lesser penalty was imposed on Angel. Prashant Jayantilal : The SCN was dated 05.10.2007. The case pertains to 19 reversal trades wherein the original trades were closed out during the day at a price which was significantly above or below the price at which the first/original transaction was executed. 25. The crux of the allegations in the show cause notices is that the parties were buying and selling securities in the derivatives segment at a price which did not reflect the value of the underlying in synchronised and reverse transactions. 26. After affording an opportunity for filing reply to the SCNs and a personal hearing, the A.O. passed a detailed order dated 26.03.2009 in the case of Rakhi Trading. Paragraphs 22 to 24 read as follows: 22. If the individual trades are seen from the order log provided to the noticee, it is seen that the time difference between the buy and sell order is only in seconds. Most of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a matter of minutes/hours, at a profit of ₹ 107.79 lakh without any significant change in the value of the underlying security. This raises doubts about the genuineness of the transactions. The fact that such transactions took place repeatedly over a period of time reinstates the fraudulent nature of such trades. Thus, according to the A.O. a manipulative/deceptive devise was used for synchronization of trades and the trades were fraudulent/fictitious in nature. It was found that there is violation of Regulations 3(a), (b) and (c) and 4(1), (2)(a) and (b) of the PFUTP Regulations, 2003. Consequently, a penalty of ₹ 1,08,00,000/- was imposed under Section 15HA of the SEBI Act, 1992. Appeal was filed under Section 15T before the SAT. An appeal was disposed of by order dated 11.10.2010 whereby SAT set aside the order of SEBI. The detailed consideration is available at paragraphs 5 to 8 of the SAT order in Rakhi Trading, which read as follows: 5. Index in a capital market is a statistical indicator of how the market is functioning and acts as a barometer for market behaviour. It is not a product but a measure expressed in numbers and a benchmark against which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions in the cash market are based on the current market price of the underlying derived by the principle of demand and supply and in the case of an index, the value depends on the performance of the stocks that constitute it, the pricing in the F O segment is based on future expected events which may or may not happen. Anticipated future events may not have a discernible effect on the cash segment today where delivery of shares is given/taken immediately. Such events may have a great impact on perceptions in the F O market where the investor holds an open position and a continuous liability during the currency of the contract which is generally for one to three months with anticipation of future events which are always pregnant with all sorts of possibilities. Again, volatility and potential for greater losses may trigger movements in the F O market without any equivalent cash market movements. Further, the cash market may move up today but the prediction for the F O market could be that at the end of a month, two months or three months the market may move down. Only short term investors like speculators trade in the F O market whereas in the cash market long terms inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent constituted 30 to 50 per cent of the market gross in that segment though nifty is the most active of the options contracts traded on the exchange and contributed 92.21 per cent of the trades during March, 2007. This is indicative of the fact that the number of players in the options segment is very less. Artificial/fictitious trades in the cash segment do give a false appearance of active trading in a particular scrip by increasing volumes which tend to lure the lay investors to invest in that scrip . The impression given to the investors is that the scrip is highly liquid and much in demand and this interferes with the price discovery mechanism of the exchange and it is for this reason that such trades are held illegal in the cash segment. This, however, cannot be the case in the F O segment. Since all the trades are executed through the stock exchange and settled in cash through its mechanism they cannot be said to be artificial trades creating a misleading appearance of trading in the options. The charge is misconceived. 7. This brings us to the issue of synchronization of the buy and sell orders in the Nifty option contracts executed by the appellant where the count ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and hence undesirable and prohibited. We have reproduced the observations from the order of the Board only to highlight that the Board also understands that the law is that only such synchronized trades violate the Regulations which manipulate the market. Since the impugned trades of the appellant in the F O segment had no impact on the market, we hold that they did not violate the Regulations. Shri Kumar Desai learned counsel for the respondent was equally emphatic in arguing that the appellant had not only executed synchronized trades but had also reversed them during the course of the trading with the same counter party and, therefore, the trades were fictitious and non-genuine and that the adjudicating officer was justified in holding so and imposing the monetary penalty for violating the Regulations. He placed strong reliance on the observations of the Tribunal in Ketan Parekh s case (supra) wherein it has been held that reversal of trades between the same parties results in fictitious trades and they are illegal. We are unable to agree with him. The observations in Ketan Parekh s case were made with reference to the trades that were executed in the cash segment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of tax planning. The arrangement between the parties was that profits and losses would be booked by each of them for effective tax planning to ease the burden of tax liability and it is for this reason that they synchronized the trades and reversed them. They have played in the market without violating any rule of the game. This Tribunal in Viram Investment Pvt. Ltd. vs. Securities and Exchange Board of India, Appeal no.160 of 2004 decided on February 11, 2005 while dealing with a contention as to whether trades could be executed through the stock exchange for tax planning, made the following observations which are relevant for our purpose:- Even if we consider transactions undertaken for tax planning as being non genuine trades, such trades in order to be held objectionable, must result in influencing the market one way or the other. We do not find any evidence of that either in the investigation conducted by the Bombay Stock Exchange, copy of which has been an- nexed to the memorandum of appeal or in the impugned order that there was any manipulation. Trading in securities can take place for any number of reasons and the authorities enquire into such trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I-the Regulator can issue and should issue such directions. 28. SAT, in the case of Tungarli, squarely followed its decision in Rakhi Trading. In TLB Securities also, after briefly discussing the facts, SAT relied on Rakhi Trading to set aside the SEBI order. 29. As far as the brokers are concerned, in addition to relying on its decision in Rakhi Trading, SAT held in Indiabulls Securities that the brokers must succeed for two additional reasons. To quote: 7. The appellant before us which is a stock broker must also succeed for two additional reasons as well. The appellant is said to have executed 23 trades on behalf of its clients which were reversed between the same parties. Assuming that these trades were manipulative and had been executed by the clients with a premeditated plan, the fact still remains that the appellant only acted as a broker and carried out the directions of its clients which it ought to. Could the appellant be held liable merely because it acted as a broker? This question has come up for the consideration of this Tribunal time and again and this is what was held in Kasat Securities Pvt. Ltd. vs. Securities and Exchange Board of India, Appeal No. 27 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed as under:- Merely because two clients have executed matched trades, it does not follow that their brokers were necessarily a party to the game plan. On a screen based trading through the price order matching mechanism of the exchange, it is not possible for either of the brokers (or sub-brokers) to know who the counter party or his broker (or sub broker) is and when the trade is executed, their names or codes do not appear on the screen. A unique feature of the stock exchange is that, unlike other moveable properties, securities are bought and sold among the unknowns who never get to meet and they are traded at prices determined by the forces of demand and supply. If the Board is to hold the broker (or the sub-broker) responsible for a matching trade, it has to allege and establish that the broker (or the sub-broker) was aware of the counter party or his broker at the time when the trade was executed. There is no such allegation in this case. The aforesaid observations apply with full force to the facts of the present case because the trading system is the same, both in the cash segment as well as in the F O segment. As already observed, even if we assume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the appellant with no credit defaults at any stage and that all the trades were settled in cash through the clearing system of the exchange. In this background, we find no evidence of lack of due diligence on the part of the appellant while executing the impugned transactions which could make him guilty of violating the code of conduct prescribed for the stock brokers. The charge must, therefore, fail. 30. Aggrieved by the SAT orders, SEBI is before us under Section 15Z of the SEBI Act. 31. We have extensively heard learned senior counsel and other counsel appearing on both sides. SEBI has assailed the SAT order on the ground that SAT has misunderstood SEBI s case. It is the submission of Mr. Gourab Banerji, learned Senior Counsel appearing for SEBI, that the stock exchange is a platform created to facilitate efficient and fair trading. However, the transactions between the parties were non-genuine and orchestrated which is prohibited under the PFUTP Regulations. The Show Cause Notice makes it clear that the transactions were a misuse of market mechanism as they were not genuine trades. The non-genuineness of these transactions is evident from the fact that there wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Shri Kanaiyalal Baldevbhai Patel and Ors. 2017 SCC Online SC 1148. , it has been held by this Court that a trade practice is unfair if the conduct undermines the ethical standards and good faith dealings between the parties engaged in business transactions. To quote: 31 . Although unfair trade practice has not been defined under the regulation, various other legislations in India have defined the concept of unfair trade practice in different contexts. A clear cut generalized definition of the unfair trade practice may not be possible to be culled out from the aforesaid definitions. Broadly trade practice is unfair if the conduct undermines the ethical standards and good faith dealings between parties engaged in business transactions. It is to be noted that unfair trade practices are not subject to a single definition; rather it requires adjudication on case to case basis. Whether an act or practice is unfair is to be determined by all the facts and circumstances surrounding the transaction. In the context of this regulation a trade practice may be unfair, if the conduct undermines the good faith dealings involved in the transaction. Moreover the concept of unfairne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s go beyond that. The trade reversals in this case indicate that the parties did not intend to transfer beneficial ownership and through these orchestrated transactions, the intention of which was not regular trading, other investors have been excluded from participating in these trades. The fact that when the trade was not synchronizing, the traders placed it at unattractive prices is also a strong indication that the traders intended to play with the market. 37. We also find it difficult to appreciate the stand of SAT that the rationale of change of beneficial ownership does not arise in the derivatives segment. No doubt, as in the case of trade in a scrip in the cash segment, there is no physical delivery of the asset. However, even in the derivative segment there is a change of rights in a contract. In the instant case, through reverse trades, there was no genuine change of rights in the contract. SAT has erred in its understanding of change in beneficial ownership in reverse trades. Even in derivatives, the ownership of the right is restored to the first party when the reverse trade occurs. In this context, the discussion in Ketan Parekh (supra) assumes significance: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s fraud. And under Regulation 2(1)(c)(8), a false statement without any reasonable ground for believing it to be true is also fraud. In a synchronised and reverse dealing in securities, with predetermined arrangement to book loss or gain between pre-arranged parties, all these vices are attracted. 40. Regulation 3(a) expressly prohibits buying, selling or otherwise dealing in securities in a fraudulent manner. Under Regulation 4(2) dealing in securities shall be deemed to be fraudulent if the trader indulges in an act which creates a false or misleading appearance of trading in the securities market. It is a deeming provision. Such trading also involves an act amounting to manipulation of the price of the security in the sense that the price has been artificially and apparently prefixed. The price does not at all reflect the value of the underlying asset. It is also a transaction in securities entered into without any intention of performing it and without any intention of effecting a change of ownership of such securities, ownership being understood in the limited sense of the rights in the contract. 41. According to SAT, only if there is market impact on account of sham tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reof; the proximity of time between the two and such other relevant factors We do not think that those illustrations are exhaustive. There can be several such situations, some of which we have discussed hereinabove. 43. The traders thus having engaged in a fraudulent and unfair trade practice while dealing in securities, are hence liable to be proceeded against for violation of Regulations 3(a), 4(1) and 4(2)(a) of PFUTP Regulations. Appeal Nos.1969/2011, 3175/2011 and 3180/2011 are hence allowed. The orders of the Securities Appellate Tribunal are set aside and that of the SEBI are restored to the extent indicated above. 44. As far as brokers are concerned, we are of the view that there is hardly any evidence on their involvement so as to proceed against them for violation of Regulation 7A of the Brokers Regulations and PFUTP Regulations. Merely because a broker facilitated a transaction, it cannot be said that there is violation of the Regulation. SEBI has not provided any material to suggest negligence or connivance on the part of the brokers. As held by this Court in Kishore R. Ajmera (supra), there are several factors to be considered. We would especially like ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n most of the cases, the same quantity and in few cases, substantially the same quantity of the original trade was closed out during the day at a price which was significantly above or below the price at which the first/original transaction was executed without significant variations in the traded price of the underlying security. After preliminary examination into the trading of F O contracts , SEBI identified that certain entities including the respondent-Rakhi Trading operating in the derivative segment had executed fictitious and non-genuine trades. Exercising its powers under Section 19 read with Section 11B and 11D of the Securities and Exchange Board of India Act, 1992, (for short 'SEBI Act, 1992') the Whole Time Member of the Board had passed an ex parte order directing the respondent and other entities to cease and desist from indulging in the violations till further orders as they were found indulging in non-genuine transactions. 4. Meanwhile, in terms of provisions of Rule 4(1) of the Securities and Exchange Board of India Rules, 1995, the Board issued a show cause notice to the respondent on 05.10.2007 alleging that the respondent executed synchronized/m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... planning as they did not influence the market. Holding that there has been no violation of any regulation of SEBI, SAT set aside the order of the Adjudicating Officer. Being aggrieved, SEBI has preferred this statutory appeal under Section 15Z of SEBI Act, 1992. RELEVANT PROVISIONS OF THE SEBI ACT AND THE REGULATIONS 7. Section 12-A contained in Chapter V-A of the SEBI Act, 1992 deals with Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control and reads as follows: 12A. Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control .- 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 recognised 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 exch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( a ) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; ( b ) the amount of loss caused to an investor or group of investors as a result of the default; ( c ) the repetitive nature of the default. 10. Section 12A has to be read along with the provisions of the PFUTP Regulations, 2003, SEBI (Stockbrokers and Sub-Brokers) Regulations, 1992 and the SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002. Regulation 3 of the PFUTP Regulations, 2003 deals with Prohibition of certain dealings in securities . Regulation 4 deals with Prohibition of manipulative, fraudulent and unfair trade practices . Regulation 2 (1)(c) defines fraud . For relevant Capital Market Terms , I have made reference to SEBI Act and K. Sekar's Guide to SEBI, Capital Issues, Debentures Listing, Lexis Nexis fourth Edition 2017 and Economics of Derivatives by Cambridge University Press by T.V. Somanathan and V. Anantha Nageswaran. To avoid repetition, I refrain from referring to the explanation of the relevant Capital Market Terms. 11. Re-Contention: The impugned trades wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12:04:05 0:00:00 3,730.00 67.00 RAKHI TRADING PVT LTD KASAM HOLDING PVT. LTD 4750 213750 21-Mar-07 14:33:19 14:33:19 14:33:18 0:00:01 #120 12.25 SPARK SECURITI ES P LTD RAKHI TRADING PVT LTD 80000 10 31.5 21-Mar-07 14:53:18 14:53:16 14:53:18 0:00:02 #120 2.25 RAKHI TRADING PVT LTD SPARK SECURITI ES P LTD 80000 800000 21-Mar-07 12:04:51 12:04:51 12:04:50 0:00:01 3,650.00 115.00 RAKHI TRADING PVT LTD KASAM HOLDING PVT. LTD 10000 58 49.02 21-Mar-07 12:52:19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,050.00 200.00 RAKHI TRADING PVT LTD KASAM HOLDING PVT. LTD 10500 85 35.84 22-Mar-07 11:37:08 11:37:08 11:37:07 0:00:01 4,050.00 285.00 KASAM HOLDING PVT. LTD RAKHI TRADING PVT LTD 10500 892500 23-Mar-07 10:22:37 10:22:37 10:22:37 0:00:00 3,880.00 190.00 KASAM HOLDING PVT. LTD RAKHI TRADING PVT LTD 11600 133 30.05 23-Mar-07 11:14:05 11:14:05 11:14:04 0:00:01 3,880.00 57.00 RAKHI TRADING PVT LTD KASAM HOLDING PVT. LTD 11600 1542800 23-Mar-07 13:18:21 13:18:18 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30-Mar-07 11:36:40 11:36:37 11:36:40 0:00:03 3,810.00 80.25 RAKHI TRADING PVT LTD KASAM HOLDING PVT. LTD 8950 39.75 49.58 30-Mar-07 11:48:44 11:48:44 11:48:44 0:00:00 3,810.00 120.00 KASAM HOLDING PVT. LTD RAKHI TRADING PVT LTD 8950 355762.5 30-Mar-07 14:30:04 14:30:04 14:30:04 0:00:00 3,550.00 270.00 RAKHI TRADING PVT LTD KASAM HOLDING PVT. LTD 11900 29 46.21 30-Mar-07 14:43:02 14:43:00 14:43:02 0:00:02 3,550.00 299.00 KASAM HOLDING PVT. LTD RAKHI TRADING PVT LTD 11900 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge mechanism or off market. When it matches through the stock exchange, it may or may not be a synchronized deal depending on the time when the buy and sell orders are placed. There are deals which match off market i.e., the buyer and the seller agree on the price and quantity and execute the transaction outside the market and then report the same to the exchange. These are also called negotiated transactions...... It has recently issued a circular requiring all bulk deals to be transacted through the exchange even if the price and quantity are settled outside the market. When such deals go through the exchange, they are bound to synchronise. It would, therefore, follow that a synchronized trade or a trade that matches off market is per se not illegal. Merely because a trade was crossed on the floor of the stock exchange with the buyer and seller entering the price at which they intended to buy and sell respectively, the transaction does not become illegal. A synchronized transaction even on the trading screen between genuine parties who intend to transfer beneficial interest in the trading stock and who undertake the transaction only for that purpose and not for rigging the market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g before SAT, it is now not open to respondent Rakhi Trading to contend that the transactions were not synchronized and reversed. 18. By perusal of details of 'buy and sell ', ' volume of trade ' and ' timing of trade ' of the impugned transactions, it was observed that the reversal trades were executed almost of the same quantity and the trade was also within a short gap of few seconds with significant variation of the price, though, there was no major variation in the underlying price during that period. Upon examination of the trade transactions, it was further observed that the respondent in the impugned transactions had operated through Prashant Jayantilal Patel as its broker and the counter party Kasam Holding Pvt. Ltd., which executed those transactions through Vibrant Securities Pvt. Ltd. as its broker. As pointed out in the tabular column, all reversed/closed out transactions were executed at prices with significant variation within a short period though there was no major variation in the underlying price during that period. 19. For instance, let us refer to one of the impugned reversal trades. On 21.03.2007 at 14:50:27 , NIFTY 50 (Strik ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ossible behind the screen. This is what has been done in the case in hand. Buy and sell orders were placed at a difference of few seconds/minutes, while 'sell' by respondent to Kasam Holding at a high price and buy by the respondent from Kasam Holding Pvt. Ltd. at a low price. The transactions wherein the 'buy and sell' orders entered almost simultaneously and the transactions matched in time and quantity with significant price variation and respondent consistently making profit but Kasam Holding Pvt. Ltd. consistently making loss. Number of reversal trades between the respondent and Kasam Holding Pvt. Ltd. and such reversal trade taking place repeatedly over a period of time only indicates that there was pre-arrangement between the parties before the trade was executed. The transactions involving only the same two parties within few seconds with huge difference in 'buy and sell' value, though there is no difference in the underlying security, can take place only with prior understanding between the two parties. The Board who is the regulator of the market, can always lift the veil of such transactions to show the non-genuineness of such transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted case such an event in a situation where there is a huge volume of trading can reasonably point to some kind of a fraudulent/manipulative exercise with prior meeting of minds. Such meeting of minds so as to attract the liability of the broker/sub-broker may be between the broker/sub-broker and the client or it could be between the two brokers/sub-brokers engaged in the buy and sell transactions. When over a period of time such transactions had been made between the same set of brokers or a group of brokers a conclusion can be reasonably reached that there is a concerted effort on the part of the brokers concerned to indulge in synchronized trades the consequence of which is large volumes of fictitious trading resulting in the unnatural rise in hiking the price/value of the scrip(s). It must be specifically taken note of herein that the trades in question were not negotiated trades executed in accordance with the terms of the Board s circulars issued from time to time. A negotiated trade, it is clarified, invokes consensual bargaining involving synchronising of buy and sell orders which will result in matching thereof but only as per permissible parameters which are programmed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onized trading in that case was violative of norms of trading in securities and held as under:- 249 . BEB has been charged for synchronized deals with First Global. I have examined the data provided by the parties on this issue. I find many transactions between BEB and FGSB. There are many instances of such transactions. I find the scrip, quantity and price for these orders had been synchronized by the counter party brokers. Such transactions undoubtedly create an artificial market to mislead the genuine investors. Synchronized trading is violative of all prudential and transparent norms of trading in securities. Synchronized trading on a large scale, can create false volumes. The argument that the parties had no means of knowing whether any entity controlled by the client is simultaneously entering any contra order elsewhere for the reason that in the online trading system, confidentiality of counter parties is ensured, is untenable. It was submitted by the Appellants that it was not possible for the broker to know who the counter party broker is and that trades were not synchronized but it was only a coincidence in some cases. Theoretically this is OK. But when parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld as under:- 4.12 I note that most of the synchronized trades executed by the Broker were perfectly matched with the counter party orders even with respect of the price to the extent of two decimal points. The proximity in placing the orders at the same price and for the same quantity almost at the same time (in majority of the cases) resulted in the matching of the aforesaid transactions, with all the ingredients i.e. quantity, price and the time, required to conclude the trades. The time difference (between the buy and sell orders) of majority of the synchronized trades was very less with the price and quantity matching. The said synchronization cannot take place in the absence of any specific understanding/arrangement between the clients at the first instance, especially when the shares of the company were highly liquid at the time of the trades. ........... 4.24 The proof of manipulation in the circumstances always depends on inferences drawn from a mass of factual details. Findings must be gathered from patterns of trading data and the nature of the transactions etc. Several circumstances of a determinative character coupled with the inference arising from the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad only misleading appearance of trading in the securities market, without intending to transfer beneficial ownership. 28. Contention of the appellant is that if the market starts moving or there is a change in the perception of the market and the anticipated future performance thereof, then the seller often gets very apprehensive and may even panic, anticipating a substantial loss and would want to square off his position to restrict a loss. I find no merit in this contention. Insofar as the impugned transactions are concerned, it is seen that the market of underlying shares had remained unmoved altogether, then there was no question of getting panic. When there were no other transactions in the market affecting the price of the underlying shares or F O Segment and the price in both the segments had remained static, then there was no reasonable ground to get apprehensive and panic. Therefore, squaring off the position appears to adjust the financial results with a view to avoid the tax incidence through an unfair trade practice or for some ulterior purpose. 29. On behalf of respondent, learned senior counsel Mr. P. Chidambaram contended that securities like Nifty are v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rket was misused by such manipulative device, this is in clear violation of the provisions of PFUTP Regulations, 2003. Regulations 3(a), 4(1) and 4(2)(a) of PFUTP Regulations prohibit such manipulative trades, unfair trade practices. 34. SAT mainly proceeded that the impugned reversal trade transactions had no impact on the market and it could have never influenced the Nifty. After extracting the show cause notice, SAT, inter alia, recorded the findings:- (i) The insinuation is that by executing manipulative trades in the F O segment, Nifty was sought to be tampered with; (ii) It is a common case of the parties that the appellant-Rakhi Trading traded only thirteen Nifty option contracts in the F O Segment ; assuming these trades were manipulative, they could have never influenced the Nifty; Nifty which consists of fifty well diversified highly liquid stocks in the cash segment is a very large well diversified index of stocks which is not capable of being influenced much less manipulated by the movement of prices; and (iii) thirteen impugned trades in Nifty options executed by the appellant had no impact on the market or affected the investors in any way nor did they inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar scrip is active or not, whether it is trading in large volumes and whether the price is going up or down. Having regard to these factors he makes up his mind to invest or disinvest in the securities. When a person takes part in or enters into transactions in securities with the intention to artificially raise or depress the price he thereby automatically induces the innocent investors in the market to buy/sell their stocks. The buyer or the seller is invariably influenced by the price of the stocks and if that is being manipulated the person doing so is necessarily influencing the decision of the buyer/seller thereby inducing him to buy or sell depending upon how the market has been manipulated....In other words, if the factum of manipulation is established it will necessarily follow that the investors in the market had been induced to buy or sell and that no further proof in this regard is required. The market, as already observed, is so wide spread that it may not be humanly possible for the Board to track the persons who were actually induced to buy or sell securities as a result of manipulation and law can never impose on the Board a burden which is impossible to be dischar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... culty in proving manipulation is probably an inherent feature of modern markets. Because the markets are so complex , he said, ..... It is relatively easy for traders engaged in manipulation to offer alternative explanations for their behaviour that would make it difficult to successfully prosecute them . Professor Harris nonetheless said when presented with the data suggesting manipulation by firm proprietary traders, it is reasonable to expect that the S.E.C. would consider investigation of the matter further . The S.E.C. had no comment on the researchers' study. [ Ref.:www.nytimes.com/2006/ 05/07/business/yourmoney/07stra.html ] 40. Stock market is regulated mainly by SEBI and to some extent by the Departments of Economic Affairs and Company Affairs of Government of India. Market manipulation can occur in a variety of ways. Manipulations/unfair trade practices reduce the market efficacy. Section 11 of the SEBI Act, 1992 provides for the functions of the Board, as per which it shall be the duty of the Board to protect the interests of the investors in securities and to promote the development and to regulate the securities market by such measures as it thin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... int that market abuse has now become a common practice in the Indian security market and, if not properly curbed, the same would result in defeating the very object and purpose of the SEBI Act which is intended to protect the interests of investors in securities and to promote the development of securities market. Capital market, as already stated, has witnessed tremendous growth in recent times, characterised particularly by the increasing participation of the public. Investor s confidence in capital market can be sustained largely by ensuring investors protection. ....... 42. SEBI, the market regulator, has to deal sternly with companies and their Directors indulging in manipulative and deceptive devices, insider trading, etc. or else they will be failing in their duty to promote orderly and healthy growth of the securities market. Economic offence, people of this country should know, is a serious crime which, if not properly dealt with, as it should be, will affect not only the country s economic growth, but also slow the inflow of foreign investment by genuine investors and also cast a slur on India s securities market. Message should go that our country will not tol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tervention, SEBI cannot affect the development of the market or market oriented creativity. Intense supervision might distort the path of securities market development; but SEBI cannot be a silent spectator to unfair trade practices/manipulative market for some ulterior purpose like tax evasion etc. To find the right balance between market forces and Regulatory body's intervention, SEBI has to deal sternly with those who indulge in manipulative trading and deceptive devices to misuse the market and at the same time ensuring the development of the market. 44. Before I conclude, it is necessary to refer to the findings of SAT on 'tax planning'. SAT held that even assuming that non-genuine synchronized trades have been entered into for the purposes of tax planning, such trade could be held objectionable only if they have resulted in influencing the market in one way or other. For its finding that every person is entitled to arrange his affairs as to avoid taxation, SAT relied upon Viram Investment Pvt. Ltd. and Ors. v. Securities and Exchange Board of India (MANU/SB/0046/2005) decided on 11.02.2005. Contention of the respondents is that transactions which have been ..... X X X X Extracts X X X X X X X X Extracts X X X X
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