9911796707
TMI Blog2020 (11) TMI 1111X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Armaan Patkar, Ms. Cheryl Fernandes and Mr. Vedant Jalan, Advocates i/b AZB For the Respondent : Mr. Darius Khambata, Senior Advocate with Mr. Gaurav Joshi, Senior Advocate, Mr. Aditya Mehta, Mr. Mihir Mody and Mr. Shehaab Roshan, Advocates i/b K. Ashar & Co. ORDER PER : JUSTICE TARUN AGARWALA, PRESIDING OFFICER 1. The appellants have preferred the present appeal against the order dt 24.03.2017 passed by the Whole Time Member (WTM) exercising the powers under section 11 & 11B of the Securities And Exchange Board Of India Act 1992 (SEBI Act), Section 12A of Securities Contract (Regulation) Act 1956 (SCR Act) read with Regulation 11 of Securities And Exchange Board Of India (Prohibition Of Fraudulent And Unfair Trade Practices Relating To Securities Market) Regulations 2003 (PFUTP Regulations). The WTM in its order issued the following directions, namely, (i) The 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. (ii) Appellant no. 1 shall disgorge an amount of Rs 447.27 Crs alongwith interest @12% p.a. w.e.f. 29.11.2017 onwards till the date of payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.29 Cr shares out of proposed 22.5 Cr shares in the cash segment of NSE and BSE out of which 2.25 Cr shares were sold in the last ten minutes, i.e. between 3.21.40 p.m. to 3.30.00 pm on 29.11.2007. The impugned order contains a factual error, namely, that 1.95 Cr shares were sold in the last 10 minutes. The correct figure is 2.25 Cr shares. 7. The sale of 20.29 Cr shares in the cash segment was done over a period of 11 trading days. 13.83 Cr shares were sold on the NSE platform and 6.46 Cr shares were sold on the BSE platform. 8. The short positions taken by the two agents, namely appellants no. 12 and 13 were squared off before 29.11.2007. However, the short positions taken by the remaining 10 agents were closed on 29.11.2007 at the settlement price, i.e. the last half an hour weighted average price in the cash segment on 29.11.2007. It may be noted here, that physical delivery of shares is not allowed in the futures segment under the SEBI laws and Regulations and Stock Exchanges bye laws. Positions taken in the futures segment has to be cash settled after squaring off or closing out on the last day of the settlement. 9. The appellant nos. 2 to 13 squared off 1.95 Cr shares sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vember 7, 2001, Regulation 3.2 of National Stock Exchange (Futures & Options segment) Trading Regulations and Byelaw 4 of Chapter VII of National Securities Clearing Corporation Limited (Futures & Options Segment) Bye Laws read with Byelaw 12 of Chapter I of National Securities Clearing Corporation Limited (Futures & Options Segment) Bye Laws. (ii) Appellants no. 1-13, in pursuance of the individual agreements between appellant no. 1 and appellants no. 2-13, by taking positions in the F&O segment of the scrip of RPL in excess of the limits specified vide SEBI circular no. SMDRP/DC/CIR-10/01 dated November 2, 2001 and NSE circular no. NSE/CMPT/2982 dated Nov 7, 2001, have violated SEBI circular no. SMDRP/DC/CIR-10/01 dated Nov 2, 2001, NSE circular no. NSE/CMPT/2982 dated Nov 7, 2001, Regulation 3.2 of National Stock Exchange (Futures & Options segment) Trading Regulations, Byelaw 4 of chapter VII of National Securities Clearing Corporation Limited (Futures & Options Segment) Bye laws read with Byelaw 12 of Chapter I of National Securities Clearing Corporation Limited (Futures & Options Segment) Bye laws, thus have rendered the futures contracts entered into by all of them in viol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and written submissions, and, after considering the material evidence on record, the Whole Time Member (WTM) passed the impugned order against which the present appeal has been filed. 16. The WTM in the impugned order, framed the following issues which arose for consideration, namely: (A) Whether the dealings of the appellants in the F&O Market amounts to the commission of a 'fraudulent and manipulative trade' in securities in terms of the SEBI (PFUTP) Regulations? (B) Whether appellant No. 1, by selling 1.95 Cr of RPL shares in the cash segment in the last ten minutes of the trading session on 29 Nov 2007 can be said to have acted fraudulently or manipulated the securities market, as per the SEBI (PFUTP) Regulations? (C) (i) Whether in terms of the scheme of provisions of SCRA, in particular, Sections 18A and the circulars issued thereunder, SEBI is empowered to take enforcement action for PFUTP against the appellants? (ii) Whether the Agency agreements executed by appellant No. 1 appointing appellants Nos 2-13 to act as its agents to trade in the F&O segment involve a violation of the provisions of Benami Transactions (Prohibitions) Act, 1988? (iii) Whether the requi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng that its planned sale of 22.5 Cr shares of RPL shares in Nov. 2007 will depress the RPL share price in the cash segment, is not a hedging strategy, but is a pre-planned fraudulent scheme for cornering positions and manipulation of Nov. 2007 RPL Futures to make unlawful gains. This cannot be construed as mere breach of position limits by the clients attracting penalty under the exchange circulars. (b) The sale of 1.95 Cr RPL shares in the cash segment by RIL during the last 10 minutes of trading on Nov. 29, 2007 have been done for depressing the last half an hour weighted average price (which is the settlement price for Nov. 2007 RPL Futures) to make gains on the 7.97 Cr outstanding short positions in Nov. 2007 RPL Futures is manipulative in nature as contemplated under PFUTP Regulations. (c) RIL made unlawful gains by this fraudulent and manipulative strategy/pattern of Rs 513 Cr. The actions of RIL and the 12 Named Entities constitute a violation of the provisions of Section 12A of the SEBI Act read with Regulations 3, 4(1) and 4(2)(e) of PFUTP Regulations. The 12 Named Entities have also violated provisions of 2001 SEBI Circular and 2001 NSE Circular. 20. We have heard Mr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestigation report. It was urged that since SEBI has conducted a shoddy investigation and has not investigated the price manipulation between the period September to October, 2007 when the price of the shares of RPL increased from Rs.66 to Rs.295. It was contended that the shortcoming in the investigation can be redressed by the Tribunal inasmuch as the Tribunal has coextensive powers as that of SEBI. It was further contended that SEBI has abysmal track record of conducting investigation. In the instant case, criminal investigation has not been recommended by SEBI. The Intervener, who has appeared in person, thus contended that in view of the decision of the Supreme Court in Clariant International Limited & anr. Vs. SEBI, (2004) 8 SCC 524 the error of fact can be corrected. Since the price manipulation was not investigated by SEBI, this Tribunal having coextensive power should direct SEBI to re-investigate the matter especially relating to price manipulation and the unlawful gains made by appellant No.1. It was also contended that appellant Nos. 2 to 13 were the agents of appellant No.1 and they had inside information which fact should also be investigated. Since the same was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvention Application which has been stated hereinabove. However, Shailesh Mehta in his written submission has stated the following facts:- (i) In addition to the concealment of the name of the appellant No.8 being struck off from the register of the Registrar of Companies, the said Intervener contended that a public issue of RPL was made in the year 2006. Money was generated which was not utilized for the project and the said money was diverted which in fact has not been investigated. Further, on account of issuance of the public issue and generation of money, there was no need for appellant no.1 to sell shares for the purpose of augmenting income for said projects. It was contended that combined appeal filed by appellant no.1 and other entities was not maintainable as one of the appellants had become a dead company. It was contended that appellant No.1 and SEBI are in collusion and that SEBI deliberately did not investigate the matter relating to insider trading for more than a year and it is only when the Parliament raised a question that SEBI investigated the matter which was conducted in a shoddy manner. It was contended that investigation of price manipulation should have be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing the process of the court and are only playing to the gallery. Their Intervention Applications are patently misconceived and should be rejected. 27. At the outset, the contention made by one of the Interveners that he is a minority shareholder and is adversely affected by the investigation and by the fraud committed by the wrongdoers who are in majority of and in control of the appellant No.1 and that the appeal would adversely affect the interest of the minority shareholders, in our opinion, is without any merit. We find that adverse orders have already been passed against appellant No.1 and the validity of that order has to be tested on the basis of grounds set out in the appeal filed by the appellants. It is for the company to address the merits of the case and not by the shareholders. Further, the appeal has been filed by the appellants against the order of SEBI. It is for SEBI to defend its orders by raising all relevant contentions as it deems fit. Therefore, the applicants who were not parties before SEBI have no locus standi to contend that they should be impleaded as a party / respondent. Since they are not necessary parties, their plea that they should be impleaded a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... separation of powers. Integration of power by vesting legislative, executive and judicial powers in the same body, in future, may raise several public law concerns as the principle of control of one body over the other was the central theme underlying the doctrine of separation of powers. 76. Our Constitution although does not incorporate the doctrine of separation of powers in its full rigour but it does make horizontal division of powers between the Legislature, Executive and Judiciary.[See Rai Sahib Ram Jawaya Kapur and Others Vs The State of Punjab, AIR 1955 SC 549]. 77. The Board exercises its legislative power by making regulations, executive power by administering the regulations framed by it and taking action against any entity violating these regulations and judicial power by adjudicating disputes in the implementation thereof. The only check upon exercise of such wide ranging power is that it must comply with the Constitution and the Act. In that view of the matter, where an expert Tribunal has been constituted, the scrutiny at its end must by held to be of wide import. The Tribunal, another expert body, must, thus, be allowed to exercise its own jurisdiction conferr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the memo of appeal. The reliefs sought by the Interveners as set out in their Intervention Applications and in their written submissions are beyond the scope of the memo of appeal. They are neither supporting the appellants nor supporting the SEBI and, as held in Saraswati Industrial Syndicate Ltd. (supra), the Interveners can only address arguments in support of the appellant or of the respondent and cannot enlarge the scope of the appeal. Thus, upon consideration, we are of the opinion that the Intervention Applications made by the Interveners are patently misconceived and are rejected. The submissions made and the reliefs sought cannot be granted and are rejected. 34. Sri Harish Salve, the learned Senior Counsel for the appellants stated that all the trades in the cash segment and in the Nov 2007 RPL Futures were conducted in an orderly manner which was genuine and legal. Considering that a large quantity of RPL shares were to be sold the appellants ensured that the integrity of the market and the interest of the investors and minority shareholders were protected and ensured that there was no knee jerk reaction in the market on account of selling large quantities of RPL share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsiderably, RIL decided to use this segment (namely Futures) since the trading and liquidity in this segment was higher. In this regard, the learned senior counsel placed relevance on Annex 2 and 3 of Vol III of the Compilation of Documents to drive home the point that trading in the Futures segment was more than in the cash segment during the last week of Oct 2007 and also in Nov 2007. This was therefore another reason to take short position in the Nov 2007 RPL Futures during 1st to 6th of Nov 2007 so that the impact was minimized when shares were sold in the cash segment. It was submitted that the 12 agents took net short positions of 9.92 Cr shares of RPL in an orderly manner over a period of 4 trading days which constituted a miniscule 8% of the total trades in the Nov 2007 RPL Futures. The learned senior counsel further submitted that the price of RPL had touched a high of Rs 294 on 01.11.2007 and there was nothing to stop RIL from offloading its shares from 1st Nov onwards. It was contended that if that was done RIL would have realized more money. However, the appellants created the hedge positions first between 1st to 6th Nov 2007 and thereafter sold shares in the cash segm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In fact, on the other hand, if an entity disclosed its intention to sell the shares, it would be looked with suspicion. 41. The learned senior counsel further submitted, but not vehemently, contending that the first Show Cause Notice was only against RIL and there was no allegation of fraud and only alleged manipulative activities by RIL to earn Rs 513 Cr. However, based on the replies given by RIL, a second Show Cause Notice was issued on the same facts not only against RIL but also against the 12 agents of RIL alleging massive short positions taken by the 12 agents. It was urged that the Show Cause Notice was on account of bias and prejudice on the part of SEBI against the appellants motivated solely on account of complaints made against them for vested reasons. 42. Shri Salve contended that the issues which arise for consideration can be narrowed down as under. (i) Whether the explanation given by RIL on taking hedging positions was satisfactory? (ii) Whether the appointment of the 12 agents by RIL by which RIL took positions in excess of the client wise position limits constituted fraudulent or manipulative trade practice or was it only violative of the circulars? (ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of buy orders at the Last Traded Price (LTP), it would be open to the investor to sell his chunk of shares below the LTP. It was contended that selling shares below the LTP could be viewed with suspicion but under no circumstances such sales made below LTP could be termed as fraudulent or manipulative. It was contended that the sales made by RIL were genuine sales followed by delivery of shares in the cash segment. Such sales can never be termed as fraudulent or manipulative. The price for sale of shares was placed below LTP on account of insufficient demand. The finding of the WTM that the market had sufficient depth to absorb all RIL sales orders was not based on any documentary evidence. Such bald finding is based on surmises and conjectures. Selling shares below the LTP cannot be termed as manipulative. 46. It was urged that the WTM committed a manifest error in treating the sales made by RIL in the last ten minutes as manipulative and a malpractice on the ground that 12 out of 19 times, the sale orders were placed below the LTP. It was urged that between 3:21:40 p.m. and 3:28:55 p.m. RIL placed 19 sell orders out of which 12 orders were placed below LTP. These sale orders be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dance with the circulars. The finding of the WTM that the positions taken by the 12 agents on behalf of RIL constitute a fraudulent or manipulative trade practice was patently erroneous. It was contended that none of the 12 agents exceeded the prescribed position limit. The finding of the WTM that taking position limit by the 12 agents was a well orchestrated scheme to defeat the position limits as per the circular was wholly erroneous. The finding of the WTM that it was done deliberately to take advantages of the sharp decline in price of the shares in the cash segment which was expected to be triggered by the proposed sale in the cash segment and was therefore fraudulent is based on surmises and conjectures. It was urged that there has been no fraudulent trades done by the appellant nor violated Section 12 A (1) to (3) of SEBI Act and/or Regulation 3 and 4 of PFUTP Regulation. 49. It was further contended that the finding of the WTM that the 12 agents were required to disclose the principal agency relationship with RIL was patently erroneous in as much as there was no requirement either under the Act or the Regulations to disclose such fact. The finding that RIL could not author ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ositions taken by RIL were not genuine hedge and were taken only to take advantage of the large dip in the share price of RPL once 22.5 Cr shares of RPL were sold in the cash market is patently misconceived and is based on surmises and conjectures. The finding of the WTM that short positions taken by the 12 agents were only to reap huge profit by cornering future position limits beyond the permissible limit is not based on any sound reasoning. The finding that RIL was required to have a hedging policy is patently erroneous in as much as there was no rule/regulation/circular which mandated any company to formulate a hedging policy. The accounting standards came much later and reliance on such accounting standards which did not exist on the date when the transactions took place indicates total non application of mind by the WTM. It was urged that the WTM committed a manifest error in holding that non compliance of hedging accounting norms takes away the character of a hedge and renders the trades not only speculative but also fraudulent. It was further urged that the WTM committed an error in holding that the RPL Futures should be closed simultaneously with the sale of the shares in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bquo;inducement‛. In the instant case all the trades in the Nov 2007 RPL Futures were undertaken at market prices which only formed 8% of the total trades. Further, the entire trade was made on screen based trading where the identity of the buyer and seller was not known to each other. Thus the question of inducing any person does not arise. 56. The learned senior counsel further urged that even though the appellants did not exceed the position limits, but assuming without admitting that the appellants exceeded the position limits in violation of the circulars, at best, it would only invite an imposition of penalty under SCR Act but under no circumstances it would be construed to violate PFUTP Regulation or SEBI Act. The learned senior counsel submitted that the exercise of powers under section 11B was not only excessive and unwarranted but also illegal. 57. The learned senior counsel submitted that the impugned order was based on no evidence and was liable to be set aside. It was submitted that the explanation to Sec 11B of SEBI Act is absolutely clear, namely, that the power to issue direction could only arise when there is a contravention of the SEBI Act or the Regulatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was 101 lakh shares as per Table (iv)-a of the Show Cause Notice and on 29.11.2007, the maximum permissible client wise position limit was 90 lac shares as is clear from Table (iv)-b of the Show Cause Notice. It was submitted that if RIL was to enter the F&O segment and take short position, the max position limit could not exceed 101 lac shares on 6.11.2007 or 90 lac shares on 29.11.2007. But by appointing 12 agents, RIL clandestinely accumulated position limits far in excess of the permissible limit available to a single client/customer. The accumulation of 992.2 lac shares by the 12 agents on behalf of RIL on 6.11.07 was in gross violation of the position limits available to single client/customer and thus was manipulative and fraudulent. 61. Shri Khambatta submitted that in law, the acts of the agent have the same consequences as though the acts had been done by the principal himself. Therefore, the futures contracts executed by RIL through its agents have the same legal effect as though they were executed by RIL itself. The fundamental principle of agency law enunciated in Section 226 of the Contract Act, 1872 which provides that ‚Contracts entered into through an agent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The gross open position across all derivative contracts on a particular underlying of a customer/ client should not exceed the higher.....‛ clearly indicates a prohibition from exceeding the position limits. The words ‚should not‛ is the same as ‚shall not‛ and therefore clearly mandatory and prohibitive as held by the Supreme Court in Mannalal Khetan vs Kedar Nath Khetan (1972) 2 SCC 426. 64. Shri Khambatta, the learned senior counsel for SEBI further submitted that the action of the 12 agents cornering massive short positions in RPL Futures was a fraudulent act. It was urged that an impression was given in the stock market that large open positions were held by 12 entities instead of just RIL. The amassing of open position by RIL was a manipulation of the market by circumventing the circulars with brazenness and thus misled the market. Therefore, RIL had breached the PFUTP Regulation by manipulating the market. Such manipulation was a fraudulent act violating Section 12A of SEBI Act read with Regulation 3, 4(1) and 4(2)(e) of the PFUTP Regulation. The learned senior counsel contended that once manipulation was established, the investors were automat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price Rs 224.35 price per share to the last half hour weighted average price to Rs 215.25 per share resulting RIL to make higher profits on RPL Futures. The learned counsel submitted that dumping of huge quantity of shares in the last 10 min, in the absence of any rational explanation was clearly manipulative and a fraud on the market, as it clearly influenced the settlement price in the F&O segment. In the absence of any plausible explanation, the WTM was justified in holding that the dumping of large quantity of shares in the last 10 minutes was to influence the settlement price in order to gain huge profits in the F&O segment. The said act was purely with a malafide intention. The learned senior counsel submitted that the contention of RIL that they were selling the shares in order to take advantage of the higher price in the last 10 minutes of the trading was totally erroneous. In fact the selling of the shares was only with the intention to manipulate the market in order to bring the price down. The learned senior counsel further stated that the action of RIL in not selling any shares from 23rd to 29th Nov, 2007 also speaks volumes by itself as on those days RIL could have go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... culation is ‚the degree to which a hedger engages in derivatives transactions with a notional value in excess of its actual risk exposure‛. 70. The learned senior counsel contended that there must be a correlation in the quantities of shares exposed to market fluctuations and the quantity of the hedge transaction undertaken in the futures market. If the quantities in the futures market exceed the quantity of shares actually exposed to market fluctuations then the transaction would not be a genuine hedge. Reliance was made of another decision of The Supreme Court of Montana in Whorley vs Patton-Kjose Co., Inc. 90 Mont. 461 in which it was held that: "Country elevator hedging involves a purchase of grain and a sale of a future as simultaneously as possible, as insurance against the fluctuation of the market between the time of purchase and the arrival of the grain in Minneapolis for sale, and, on arrival, an equally simultaneous executing of the reverse of these transactions. It is a hedge only in so far as the transactions are simultaneous and the amount of grain sold for future delivery offsets the grain purchased. If the operator, having sold his actual grain, fails ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly to the extent of 0.01 Cr shares i.e. on 15th Nov 2007 [Vol. I/pg 148/Table- see Columns (7) and (4)]. As a result, RIL's volume in the F&O segment had exceeded the quantity of RPL shares left to sell by 0.41 Cr RPL shares. In fact, from 15th Nov 2007 onwards, RIL's position in the F&O segment continued to be in excess of the quantity of RPL shares it had left to sell. c) Further, 0.02 Cr shares were sold on 19th and 27th Nov in the Futures segment which is inconsistent with hedging. d) RIL did not unwind its positions even when RPL share prices in the Futures segment fell to a low of Rs 185.50 on 28.11.2007. e) On 29.11.2007 RIL had 2.2 Cr RPL shares for sale but did not execute any fresh futures transactions. In fact RIL sold 2.25 Cr shares in the cash segment and cash settled the entire outstanding positions of 7.97 Cr shares in the Futures segment and did not enter into a fresh Futures contract of the balance 2.21 Cr shares. f) RIL had no hedging policy and the transaction in question was a ‚one off transaction‛ which was not part of the ordinary and regular business of RIL. g) Reliance on RBI guidelines is misplaced in as much as ‚naked‛ he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aced. The learned senior counsel further submitted that the decision of the Supreme Court in SEBI vs Rakhi Trading P Ltd. 2018 (13) SCC 753 had no application to the present facts and circumstances of the case. The learned senior counsel placed reliance on the decision of this Tribunal in Price Waterhouse and Co. wherein it was held that inducement was necessary as an element to constitute fraud under the Regulation. 77. Shri Salve contended that the contention of SEBI that the aggregate positions taken up by the 12 agents did not allow the market players from entering the market and that such concentration of position limits by appellants was a manipulative and a fraud on the market was totally misplaced and misconceived in as much as SEBI seems to be confused between ‚market wide limits‛ and ‚open limits‛. It was contended that on 06.11.2007, RIL had a position of 9.92 Cr, thereby had an aggregate position of 61.15% of open interest in Nov Futures Contract of RPL and 48.64% of open interest across all derivatives contracts in RPL. Thus other market players had 51.36% of balance market wide limits when other players could have taken. Similarly, on 29.11.20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were hedging transaction and there was no obligation for RIL to make an announcement that they were entering into a hedge transaction. The essential prerequisite of a valid hedge was existing which was sufficient to hold that the transaction were a valid hedge and thus the finding that these transactions were manipulative and fraudulent was wholly erroneous. The learned senior counsel reiterated that Regulation 3 (b) of PFUTP Regulation was not applicable in the instant case in as much as SEBI failed to establish ‚inducement‛ on the part of the appellants. The learned senior counsel distinguished the cases cited by SEBI and submitted that the said decisions had no relevance to the facts and circumstances in the appeal in question. 82. We have heard the learned counsel for the parties at length. Before proceeding it would be appropriate to define a few technical terms which are used in the impugned order as well as in this order. These technical terms are defined in the Regulations known as National Stock Exchange (Futures & Options) Trading Regulations 2000. Reg. 1.3.19 defines derivative contracts as: A contract which derives its value from the prices, or index of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt market.‛The circular of NCDEX on Hedge Policy defines hedge as ‚a hedge is a trade designed to reduce risk.‛ Further ‚a hedge is a futures transaction or position that normally represents a substitute for transactions to be made or positions to be taken at a later time in a physical market.‛ A hedge transaction is therefore taking a position either sale or purchase to reduce or extinguish a risk in an existing underlying exposure. 85. In Pankaj Oil Mills V/s CIT, AIR 1978 Guj. 226, a Full Bench of the Gujarat High Court held that a hedge contract is so called because it enables the persons dealing with the actual commodity to hedge themselves, i.e., to insure themselves against adverse price fluctuations. The Full Bench further held that in order to be genuine and valid hedging contracts of sales, the total of such transactions should not exceed the total stocks of the merchandise. 86. On the other hand, ‚speculation‛ or ‚speculative transactions‛ have not been defined under the SEBI Act and its Regulations.‚ Speculation‛ as per Law Lexicon by P. Ramanatha Aiyer, means ‚more or less risky investment of mon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction can be culled out as under: a) Hedging is a risk mitigating strategy for the purpose of insuring against adverse price fluctuations. b) A person engaged in hedging transactions must have assets or liabilities that are exposed to market fluctuations c) If the transaction is not settled by actual delivery of the commodity, it would be a speculative transaction. 91. Thus, from the aforesaid, it is clear that one of the purposes for establishment of the F&O segment was hedging as it was the most cost efficient way to insure against market risk. Since at the relevant moment of time, physical delivery of the goods was not permitted in the F&O segment, the transactions done in the F&O segment was also a speculative transaction. The test whether a transaction in the F&O segment is hedging or is for speculation hinges on a crucial fact, namely, whether there already existed a related commercial position which is exposed to a risk of loss due to price movement. 92. In the instant case, the admitted facts, which are not disputed by SEBI is, that a decision was taken by appellant no. 1 in its Boards meeting at 29.03.2007 to generate funds for completion of various projects. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peculation was the intention then definitely the appellants would have squared off the short positions between the 6th to 29th of Nov. But this was not the case. The appellants had taken a hedge position against the existing related commercial position which was exposed to the risk of loss due to price movement. 94. Whether a transaction in the F&O segment is a hedge or not is determined at the time the position is taken and not by interpreting in hindsight some of the actions in the course of sale in the cash segment and the closing out of positions. 95. The finding of the WTM that the Nov 2007 RPL Futures was not a hedge because the Open Interest positions were not closed simultaneously with the cash segment or that from 15 Nov 2007 onwards, the Open Interest's exceeded the quantity remaining to be sold in the cash segment, or that between 1st to 6th Nov, the 12 agents took short position of 11.45 Cr and closed out 1.53 Cr positions leading to a net short position of 9.92 Cr is erroneous. A hedge not properly closed out at best can be termed as an imperfect hedge. We are of the opinion that if there was an imperfect hedge it does not mean that there was no valid hedge nor can i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We find that the purchase of 0.62 Cr on 06.11.2007 was against the sale of 7 Cr shares made in the cash segment on that day. Thus, in our view, there was no unwinding of the futures position before the exposures were reduced. 98. The WTM in para 4.A.18 of the impugned order has explained the concept of hedging as under: 'Hedging is a strategy resorted by market entities to mitigate the price risk associated with sale or purchase transactions to be undertaken in the cash segment at a predetermined point of time in future by entering into a derivative transactions which enables to look into a price for a future date.‛ 99. The word ‚predetermined‛ assumes importance when a valid hedge is made, it is predetermined and the same does not become invalid merely because at some point of time in future, there is some variation. When a hedge is made the price is locked which cannot be varied and remains locked till the predetermined point of time fructifies. 100. The finding that sine appellant no. 1 did not have a consistent accounting policy throughout the life of the hedge, the transactions were not a valid hedge is patently erroneous and is also misconceived. At t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the cash segment, the high price was Rs 279.10. (iii) The average price in the F&O position of 9.92 Cr shares was Rs 265.67, much above the average realization of Rs 247. 104. The purchase of 1.53 Cr shares during the period Nov 1, 2007 to Nov 6, 2007 in the Nov 2007 RPL Futures are not speculative transactions as has been suggested by the respondent. The purchases on Nov 2, 2007 and Nov 5, 2007 aggregating to 0.91 Cr had to be done by one or more of the 12 agents to ensure compliance with the individual position limits. This is evident from the table at Paragraph 4.A.26 of the Impugned Order. The purchase of 0.62 Cr on Nov 6, 2007 is against the sale of 7 Cr shares made in the cash segment on that day. It is thus clear that there was no unwinding of the futures position before the exposures were reduced. 105. Reliance was made by the Respondent in the case of M/s. Pankaj Oil Mills vs. Commissioner of Income-Tax, Gujarat, AIR 1978 Guj 226 to contend that open interest positions should be closed simultaneously with the sales in the cash segment. This contention is totally misplaced for the reasons that hedge transactions are taken for the purpose of insuring against the adver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s co-relation with the underlying exposure/ risk. There is no rule which stipulates that throughout the period of the hedge, the open position 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 (in this case) or allow the open position to be closed out by the exchanges on the last day and this was done. 109. Before we deal with the issues on whether the agreements issued between appellant no. 1 with appellant no. 2 to 13 are benami contracts, and whether such arrangements were part of a scheme/article intended to manipulate and/or defraud the market or whether the execution of trades through the agreements was with the object of avoiding detection of the breach of the client wise position limits, it would be appropriate to place certain facts, and circulars issued by the respondent. 110. The trades in derivatives, namely, transactions in F&O segment was allowed when SEBI accepted the recommendation of L.C. Gupta Commission. The trades in derivatives were first allowed in the stock exchange indices, namely Index Futures. SEBI circular dt 28.07.1999 prescribed the risk containment measures. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in the case of stock specific derivative contract (both stock options and Single Stock Future) shall be applicable on the cumulative open positions in derivative contracts on that stock at an Exchange. The volumes in the derivative markets are growing steadily and therefore, position limits shall be reviewed by the Advisory Committee on Derivatives from time to time and also the Advisory Committee shall be empowered to weed out any operational issue in implementation of the position limits. Client/ Customer level position limits: The gross open position across all derivative contracts on a particular underlying 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 contracts on a particular underlying stock (in terms of number of contracts).' The aforesaid circular stipulated that gross Open positions across all derivative contracts on a particular 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 contracts on particular underlying sto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ggregated, and traded as though the aggregate open Interest of RIL. 114. Before we dwell further on these circulars and Open Interest position, it would be appropriate to take a look into the agreements executed by the 12 agents with RIL. From a perusal of the agreements, we find that the twelve agency agreements are identical. The trades done by the 12 agents in the F&O segment were only for the benefit of RIL. Clause 1.2 of the agreement provided that each transaction executed by the agent was to be approved by RIL and that the agents had no discretion to execute trades without RIL's authorization. Clause 3.2 of the agreement further provided that all the profits and losses arising out of the transactions would be to the account of RIL and that the 12 agents were only entitled to a commission. 115. In the light of the aforesaid, the WTM, in the impugned order held that the 12 agency agreements whereby the profits and losses of the 12 agents which were to be credited to the account of appellant no. 1 RIL were not benami contracts and were not violation of the provisions of the Benami Transactions (Prohibition) Act 1988. It is thus, not necessary for this Tribunal to dwell on thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y‛ is fully applicable in the instant case. Thus the open position limits taken by the 12 agents when aggregated violates the circular. 119. From a reading of the circulars, we find that the position limits are very clear. The position limits are applicable to a client/ customer. In the instant case every appellant no. 2 to 13 was an independent client/ customer of the broker. The circular of 2001 dispensed with the requirement of disclosure of persons acting in concert. The circular specifically stated that there was no ban on taking up positions by persons acting in concert. We however find that the twelve agents had exploited this loophole by validly taking open interest position within the permissible limits and since no disclosure was required, they validly executed the transactions without disclosing that they were acting in concert. This defect in the circular was exploited by the twelve agents. The breach of the position limits, in our view, being technical only invites a penalty under the circulars. 120. Thus, the trades made by the appellants in the Future Segment beyond position limits violates the circulars and bye-laws. In this regard, we need to refer to Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ye-laws under Section 14 are restrictive to the extent of the punishment depicted in Section 9(3) viz, fine, expulsion or suspension from membership or other non-monetary penalties could be imposed. The power cannot be extended for fraudulent trading practices under the SEBI Act and its Regulations. 123. In the instant case, we find that for violating the circulars, the WTM did not impose monetary penalty but chose to prohibit the appellants from dealing in equity derivatives in F&O segment of the Stock Exchange directly or indirectly for a period of one year which the appellants have undergone. Thus, the direction given by the WTM, in our opinion, is in consonance with Section 9(3)(iv) of the SCR Act. No further penalty can be imposed. 124. The WTM however did not end the matter here but went on to hold that the concentration of position limits by the 12 agents was with the intention to corner the F&O segment and was therefore fraudulent and manipulative in nature. The WTM held that agency agreement was a shield to cover up the unauthorized acts of the agents and therefore the agreement is a sham. The pattern of position limits assumed by the agents against the individually avai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion limit only attracts monetary penalty under the circular and cannot automatically attract PFUTP Regulations. 127. In this regard, we find that the contention of the respondent that the circulars mandated the appellant to make the disclosure and that such non disclosure amounted to misrepresentation and further amounted to manipulation is patently misconceived. At the risk of repetition, the position limit circulars does not prescribe any disclosure for person acting in concert in the case of Single Stock Futures unlike in the case of Index Futures. Even under the SEBI Act or under PFUTP Regulation, there is no provision for a disclosure requirement which clearly means that the exchange did not require disclosure. In this regard, we find that Regulation 4.3.5 (j) of NSE (F&O segment) Trading Regulations provides that the trading member shall not disclose the name and beneficial identity of a constituent to any person except to a F&O segment of the exchange as and when required by it. Therefore, there was no requirement for RIL to disclose that the 12 entities were its agents. We also find, in this regard, that the respondent having realized the loophole in their circular came ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose to depress the settlement price in the November, 2007 RPL Futures in order to make undue gains and is therefore fraudulent as well as manipulative and is not based on sound reasoning but is based on surmises and conjectures. We find that the findings of the WTM are basically on the basis of intentions, motives and suspicions. This in our view is not enough to establish fraud or manipulation. We are of the opinion that a manipulation of the share price has to be established and the burden is upon the respondent which they have failed miserably. 131. Admittedly, appellant No.1 sold and delivered 2.25 crore shares. These trades were genuine sales. There is no allegation that the trades done by appellant No.1 in the last 10 minutes were circular trades between appellant No.1 and a set of people resulting in no delivery of shares in the cash segment. There is no evidence to show that the sale of 2.25 crore shares were subsequently repurchased by appellant no.1 and therefore created suspicion on the genuineness of the trades. In the absence of any such evidence coming on record, the sales made by the appellant No.1 in the last ten minutes which resulted in the actual delivery ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 29/11/2007, the opening price was Rs.197.80 and remained below Rs.200/- till 3.00 p.m. on 29/11/2007 when it rose to Rs.208.10 and touched Rs.224.70 at 3:21:40 p.m. as is clear from para 4.B.4 of the impugned order. The appellant No.1 had last traded on 23/11/2007 at the average weighted price of Rs.208.79. Thus, when the price rose to Rs.224.7 at 3:21:40 it made prudent business sense to enter the market and sell the remaining shares in order to get a better price. Such entry in the last ten minutes was not done deliberately in order to depress the settlement price but was done in order to sell the scrips at a better and higher price. Such entry thus was a business decision and cannot be termed either manipulative or fraudulent. In our view, the motive of RIL was to sell RPL shares in the cash segment at a higher price rather than closing the Open Interest positions at lower prices. 134. There is another aspect. On 27/11/2007 and 28/11/2007 only 2.6 crore and 3.08 crore shares were traded. On 29/11/2007, 17.66 crore of shares were traded and appellant No.1 only traded 1.95 crore which were delivered. Thus, it cannot be said that a large quantity of shares were sold by appellant N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, cognizance has been taken for the trades done by appellant No.1 for manipulating and depressing the price from Rs.224.7 to Rs.209 at3.3.0 p.m. Between 3.00 p.m. to 3.30 p.m. 7.9 crore shares were traded (Table 13) out of which the appellant No.1only traded 2.25 crore shares. Thus, appellant No.1 was not alone in depressing the price. 137. It may be noted here that on 6/11/2007 the opening price on the NSE platform was Rs.271.70 and the high price was Rs.279.10. Appellant No.1 sold 4.67 crore shares out of 15.03 crore shares traded, the price came down to Rs.220.15 and the low price was Rs.214.10. There was a swing of Rs.64.55 between high price and low price. No eyebrow was raised by SEBI for depressing the price. No suspicion of manipulation or fraud was raised. On the other hand, much has been analyzed of the last 10 minutes of trades which are genuine sales and, are in any case, not fraudulent /manipulative or speculative. It is natural that when large quantities of shares are sold, such sales generally brings the prices down. Such drop in the price does not amount to manipulation nor such transaction amounts to a fraudulent act. The findings of the WTM are untenable and can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares were not executed. iv) The next sell order for 10 lac shares was at an ask price of Rs.220/- against LTP of Rs.218.55. No shares were executed. v) At 15:24:26 sell order of 30 lac shares were placed at Rs.218/- against LTP of Rs.218.90. Only 7.91 lac shares got executed and remaining 22.09 lac shares did not get executed. vi) At 15:25:08, a sell order for 10 lac shares was placed at Rs.215 against LTP of Rs.217/- but only 1.35 lac shares were executed. The aforesaid indicates that even when sell orders were placed below LTP, there was no demand for shares since majority of the shares were not executed. However, when trades were placed from 15:25:30 onwards at Rs.210 against the LTP of Rs.217.50, all the trades were executed. This by itself will not make the trades of appellant No.1 manipulative for the purpose of depressing the settlement price in the F&O segment. As held earlier, the trades made by the appellant were genuine trades in the absence of any finding that the said sell orders were brought subsequently. The contention of the appellant No.1 that it had to sell the shares at a lower price in order to get the sales executed seems to be plausible. In any case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o;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 by a person having knowledge or belief of the fact; (4) a promise made without any intention of performing it; (5) a representation made in a reckless and careless manner whether it be true or false; (6) any such act or omission as any other law specifically declares to be fraudulent, (7) deceptive behaviour by a person depriving another of informed consent or full participation, (8) a false statement made without reasonable ground for believing it to be true. (9) the act of an issuer of securities giving out misinformation that affects the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egulations. In our opinion, this contention is not correct. We have already held that the appellant have violated the circulars relating to the position limits and were thus liable for penalty as per the circulars. The circulars have been issued under the SCR Act and have not been issued under the SEBI Act or its rules and regulations. Thus, even if there is a violation of the position limits, it cannot attract the provisions of regulation 3 (b) of the PFUTP regulations which has been framed under the SEBI Act. The SCR Act prescribes penalty separately for violation of the position limits. Thus Regulation 3(b) is not applicable for violation of position limits. 146. The Respondents have taken recourse to Section 12A of the SEBI Act read with Regulation 3(a)(b)(c)(d) and 4(1) and 4(2)(d) and (e) of the PFUTP Regulations. In this regard, Section 12A of the SEBI Act and Regulations 3 & 4 of the PFUTP are extracted hereunder:- "Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control. 12A. No person shall directly or indirectly- (a) use or employ, in connection with the issue, purchase or sale of any securities liste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rade practices (1) Without prejudice to the provisions of regulation 3, no person shall indulge in a manipulative, fraudulent or an unfair trade practice in securities markets. (2) Dealing in securities shall be deemed to be a manipulative fraudulent or an unfair trade practice if it involves any of the following:- (a) inducing any person for dealing in any securities for artificially inflating, depressing, maintaining or causing fluctuation in the price of securities through any means including by paying, offering or agreeing to pay or offer any money or money's worth, directly or indirectly, to any person; (b) any act or omission amounting to manipulation of the price of a security including, influencing or manipulating the reference price or bench mark price of any securities; 147. A finding has been given by the WTM that the appellants have indulged in manipulative and fraudulent transactions and thus comes within the purview of Section 12A read with Regulations 3 & 4 of the PFUTP Regulations. In this regard, Section 12(A)(a) provides that the contravention with regard to the purchase and sale of any securities is to be made under the provisions of ‚this Act& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 12A of the SEBI Act and Reg. 3&4 of the PFUTP Reg. are thus not applicable. 150. The Respondents have exercised the powers under Section 11 and 11B in directing the appellant No.11 to disgorge an amount of Rs.447.27 crore along with interest. 151. In Securities and Exchange Board of India vs. Pan Asia Advisors Limited and Another, (2015) 14 SCC 71 the Supreme Court has set out the scope of Section 12A of the SEBI Act. The Supreme Court held:- "78. Section 12-A of the SEBI Act, 1992 creates a clear prohibition of manipulating and deceptive devices, insider trading and acquisition of securities. Sections 12-A(a), (b) and (c) are relevant, wherein, it is stipulated that no person should directly or indirectly indulge in such manipulative and deceptive devices either directly or indirectly in connection with the issue, purchase or sale of any securities, listed or proposed to be listed wherein manipulative or deceptive device or contravention of the Act, Rules or Regulations are made or employ any device or scheme or artifice to defraud in connection with any issue or dealing in securities or engage in any act, practice or course of business which would operate as fraud or decei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade available to market. ‚Market abuse‛ impairs economic growth and erodes investor's confidence. Market abuse refers to the use of manipulative and deceptive devices, giving out incorrect or misleading information, so as to encourage investors to jump into conclusions, on wrong premises, which is known to be wrong to the abusers. The statutory provisions mentioned earlier deal with the situations where a person, who deals in securities, takes advantage of the impact of an action, may be manipulative, on the anticipated impact on the market resulting in the ‚creation of artificiality‛. 153. Thus, Section 12A of the SEBI Act creates a clear prohibition of manipulative and deceptive devices, insider trading and acquisition of securities. Section 12A(a),(b) & (c) stipulates that no person should directly or indirectly indulge in such manipulative and deceptive devices in connection with the issue, purchase and sale of any securities or use any device or engage in any act which would operate as fraud or deceit on any person while dealing in securities. 154. The scope of PFUTP Regulations, 2003 has been set out by the Supreme Court in Kanaiyalal's case (sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal investors in 80 particular to ensure that fraudulent and unfair trade practices relating to securities markets are prohibited and also prohibiting insider trading in securities. 76. Under Sections 11(4)(a) and (b) apart from and without prejudice to the provisions contained in subsections (1), (2), (2-A) and (3) as well as Section 11-B, SEBI can by an order, for reasons to be recorded in writing, in the interest of the investors of securities market either by way of interim measure or by way of a final order after an enquiry, suspend the trading of any security in any recognised stock exchange, restrain persons from accessing the securities market and prohibiting any person associated with the securities market to buy, sell or deal in securities. On a careful reading of Section 11(4)(b), we find that the power invested with SEBI for passing such orders of restraint, the same can even be exercised against ‚any person‛. 77. Under Section 11-B, SEBI has been invested with powers in the interest of the investors or orderly development of the securities market or to prevent the affairs of any intermediary or other persons referred to in Section 11 in themselves cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for a period of one year, except for squaring off or closing out their existing open position and appellant no. 1, in addition, has been directed to disgorge an amount of Rs. 447.27 crore along with interest at the rate of 12% per annum calculated with effect from November 29, 2007 till the actual date of payment. The period of restraint of one year imposed on the appellants is over during the pendency of the appeal. 161. The core question raised in this appeal is 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 viol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ading in the derivatives segment. As part of the investigation which followed, price-volume trends in the cash market vis-a-vis the F&O segment of RPL shares were analyzed by SEBI to ascertain violations of the provisions of the SCRA, 1956; SEBI Act, 1992; and the Rules and Regulations framed thereunder especially with respect to the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (PFUTP Regulations) and the circulars on 'position limits' issued by SEBI and NSE relating to derivatives trading. After the investigation, SEBI issued the December SCN, which is the subject matter of the present proceedings. 165. In order to take short sell position in the November RPL futures contract, admittedly, Appellant No. 1 engaged the services of 12 front entities who, by trading through different brokers, took a total net short position of 9.92 crore shares of RPL and locked in an average price of Rs. 265.67 in four trading days between November 1 - 6, 2007. Thereafter Appellant No. 1 sold 20.29 crore shares of RPL in the cash segments of the stock exchange between November 6 - 29, 2007. Out of these 20.29 crore shares 2.24 crore shares were sold in the last 8.40 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been a number of correspondences between SEBI and RIL during the course of which only RIL disclosed the fact relating to the agency agreements with 12 front entities. Accordingly, on the basis of the information gathered SEBI issued a SCN on April 29, 2009 only against RIL alleging violation of SEBI Act, 1992 and PFUTP Regulations. Subsequently, on October 8, 2009 a corrigendum to the SCN was also issued to RIL asking to show cause why directions should not be issued under Regulation 11 of SEBI (Prohibition of Insider Trading) Regulations, 1992. Based on the replies filed by RIL, SEBI re-investigated the matter and issued a second SCN dated December 16, 2010 to RIL as well as to the 12 front entities in supersession of the first SCN dated April 29, 2009 and its corrigendum dated October 8, 2009. 167. Summary of the allegations in the SCN are:- (a) RIL took massive short positions through the 12 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attracting penalty under the exchange circulars. (iii) On the basis of the analysis of the trading strategy/pattern adopted by Noticee No.1 in the cash market during the month of November 2007 and specifically on the 29th of November 2007, being the expiry day of the November Futures of RPL, it is found that there has been a manipulation of the last half an hour settlement price. (iv) In short, the actions of Noticee No.1 and Noticees Nos.2-13, described in sub-paras (i), (ii) and (iii) 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. Noticees Nos. 2 to 13 have also violated provisions of the SEBI circular No. SMDRP/DC/CIR-10/01 dated November 2, 2001 and NSE circular No. NSE/CMPT/2982 dated November 7, 2001. 169. The crux of the findings and assessment of the WTM in the impugned Order are the following. (a) RIL's act of employing 12 entities to take separate short positions (aggregating to 9.92 Cr on Nov. 6, 2007 in Nov. 2007 RPL Futures), is not a hedging strategy, as claimed by RIL in reply to the SCN, but is a pre-planned fraudulent scheme for cornering positio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investigated the matter in its totality and covering a longer period it would have been clear that the extent of violations committed by appellant no. 1 would have been of a much higher magnitude. According to Intervener Mr. Arun Kumar Agarwal the unlawful gains made by RIL should have been Rs. 3500 crore and not Rs. 513 crore if SEBI had investigated the massive increase in the share prices of the RPL during September 2006 to October 2007 from Rs. 67/- to Rs. 295/-. Similarly, the insider trading angle also should have been investigated. Accordingly, investigation conducted by SEBI is faulty and the matter should therefore be remanded to SEBI for reinvestigation. 173. Intervener Mr. Shailesh Mehta, submitted that the appellants have concealed material facts in their appeal, including that one of the entities on appeal has been deleted from the list maintained by the Registrar of Companies (RoC) and all the trades done by the appellants between June 1, 2007 to December 31, 2007 should be annulled and monies refunded to the investors in the scrip of RPL. 174. Since the Interveners were not parties before SEBI, we did not consider it appropriate to make them party respondents to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Section 11(1) of the Act are obviously outside the appellate jurisdiction of the Tribunal for the reasons given by us above. Civil Appeal No.186 of 2007 is, therefore, allowed and the preliminary objection taken before the Securities Appellate Tribunal is sustained. The judgment of the Securities Appellate Tribunal is, accordingly, set aside.‛ 176. It would be seen that Securities Appellate Tribunal exercises its appellate powers as derived from Section 15T of the SEBI Act. Since only judicial and quasi-judicial orders passed by SEBI are appealable, direction to reinvestigate the case would be administrative in nature and therefore the plea of the interveners in this regard also cannot be accepted. Accordingly, after consideration of the submissions made by the Interveners, we reject the intervention applications. 177. Coming back to the merit of the appeal, Mr. Harish Salve, the learned Senior Counsel appearing on behalf of the appellants elaborately contended as follows: i. It is an undisputed fact that RIL, appellant no. 1 had decided to mobilize additional funds to the tune of about Rs. 87000 crore and one of the means of mobilizing part of the said funds was by o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... customer so desires. Rollovers on due date shall be permitted up to the extent of the market value as on that date.‛‛ 178. The learned senior counsel for the Appellants adverted our attention to the above clauses and contended that so far as forward foreign exchange contracts participants are concerned this circular provides that transaction to hedge exchange rate risk is permitted under the FEMA, 1999. More particularly clause (b) of the said circular permits continuation of holding position in derivative market even after the hedge has become 'naked'. A naked hedge transaction cannot be called illegal. 179. Learned senior counsel Mr. Salve further submitted that given the underlying exposure, RIL decided to take a reasonable level of hedge and therefore engaged 12 entities to take net short positions in the RPL November futures. Given the market position limits of about a crore shares applicable to each entity and since each entity remained within the position limited allowed them to take, a total net short position of only about 9.97 crore shares was taken though the decision was to sell about 22.5 crore shares in the cash segment. Therefore, the appellant no 1 wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ades undertaken by the appellants in RPL futures in November 2007 were to the tune of only 8% of the total trades in the futures market that too which was executed on the anonymous system with delivery / settlement. Therefore, the impugned trades were genuine trades conducted in an orderly and bona fide fashion. As a responsible promoter of RPL it was the duty of RIL to carry out its trading operations in an orderly fashion without adversely impacting the market and therefore the hedge in the futures segment and calibrated sale in the cash segment was for upholding that responsibility. 183. According to Mr. Salve, if the intention of RIL was to make money at any cost to the market and to the minority investors it could have offloaded the entire 22.5 crore shares on November 1, 2007 itself or on other days in November when the spot price was ruling high. Similarly, it could have squared off the positions in the futures segment on those days in November 2007 when the spot prices were low and thereby earned a much larger spread. The learned senior counsel produced various charts before us to show that sales in the cash segment and squaring off the futures positions on various dates i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y sold only 2.25 crore shares on the last day of trading. Therefore, if the intention, as alleged in the impugned order, was to suppress RPL spot prices and thereby to impact the settlement price in order to earn a larger spread on the remaining net short position of 7.97 crore shares in the futures segment it could have dumped more shares in the spot market / cash segment. 186. Regarding the allegation that the RIL was impacting the Last Traded Price (LTP) by placing sell orders below the LTP in the cash segment, it was contended that the impugned order failed to understand that when large orders are to be placed in the market price would fall and a counter party could be found only if big orders are placed a bit below the LTP. When some orders were placed at the LTP much could not be sold, as data would confirm. There is no manipulation in such a trading strategy as discovered by the impugned order. In fact, when the appellant placed 5 out of 17 orders in the last 10 minutes at LTP only limited quantity of shares could be sold and even in cases where orders were placed below LTP the full quantity could not be sold. The learned senior counsel produced the complete trail of the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ell was stated. Thus, the learned WTM did not find the appellants guilty of violation of the provisions of regulation 4(2)(d) of the SEBI PFUTP Regulations, 2003 which deals with engaging others to cause fluctuation in the security market. Therefore, the learned WTM did not find that the appellants had indulged into manipulative practices. 190. As far as the issue of fraud is concerned, it was argued as well as underlined in the written submissions by the appellant at page no.77 clause (1) that the learned WTM had for the purpose of disgorgement computed the purported profits made out of 7.42 crore shares (8.51 crore shares - 1.09 crore shares). This, concession of 1.09 crore shares was given on the basis that the average net short open position limit for one client during the period was 1.09 crore shares. Thus, the impugned order itself conceives that only the violation committed by the appellants is that of position limits under the position limit circulars and there has been no manipulation, much less fraud. 191. The learned senior counsel for appellants also objected to the proposal from the side of respondent SEBI during the latter's argument for rectification of the finding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icipants in the RPL counters and would spill on to the rest of the markets. Moreover, such a fraud was committed by employing a scheme and artifice of splitting the trades across 12 agents so that the market remained completely in the dark. The market equilibrium had been impacted by the fraudulent behavior of one single player accomplished through a 'principal-agent model' innovated and implemented by RIL. 194. In addition to violation of SEBI Act, 1992 and PFUTP Regulations, appointing 12 agents by RIL to take up short positions in RPL futures was a clear violation of the stock exchange circulars also, Mr. Khambata contended. This is clear from a reading of the SEBI circular dated November 2, 2001 and NSE Circular dated November 7, 2001 in respect of position limits for single stock futures as part of the ‚risk containment measures to deter and detect concentration of positions and market manipulation‛. As per these circulars the ‚maximum client wise position limits could have been the higher of 1% of the free float market capitalization or 5% of the open interest in a particular derivative‛. In terms of numbers the maximum client wise position limits cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specific finding is needed to prove ‚inducement‛ is patently erroneous. In order to prove this contention, the learned senior counsel relied on the decisions of the Apex Court in Securities and Exchange Board of India vs Rakhi Trading Private Ltd., (2018) 13 SCC 753 which established that once the factum of manipulation was proved no further proof was required that the investors were induced and consequentially fraud is deemed to be established. In fact, the learned senior counsel proceeded to emphasize that once fraud is established in terms of engaging an artificial device to defraud the market it becomes immaterial even whether positions limits have been violated or not because through such a device (clearly a PFUTP Regulations) the appellant had already tried to manipulate the market whether succeeded or not. 198. In answer to the submissions on omission of sub-Regulation 4(2)(d) of PFUTP Regulations, the learned senior counsel for the respondent contended that so far as the exclusion of Regulation 4(2)(d) of SEBI PFUTP Regulation, 2003 is concerned it was clearly a clerical mistake caused in the impugned order. The reasoning of the learned WTM recorded extensivel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t prices lower than Last Traded Price (LTP). As a result of placing sell orders below LTP, RIL managed to reduce the price of RPL shares from Rs 224.35 price per share to about Rs. 210 thereby lowering the last half hour weighted average price (settlement price) to Rs 215.25 per share resulting in RIL making higher profits on RPL Futures. The learned senior counsel submitted that dumping of huge quantity of shares in the last 10 minutes was clearly manipulative and a fraud on the market, as it clearly influenced the settlement price in the Futures segment. Therefore, the WTM was justified in holding that the dumping of large quantity of shares in the last 10 minutes was to influence the settlement price in order to gain huge profits in the F&O segment is the correct finding. The said act was solely with a mala fide intention. The learned senior counsel submitted that the contention of RIL that they were selling the shares in order to take advantage of the higher price in the last 10 minutes of the trading was totally erroneous. In fact, the selling of the shares was only with the intention to manipulate the market in order to bring the price down. 202. The learned senior counsel p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al risk exposure‛. 205. Accordingly, the learned senior counsel contended that, there must be a correlation in the quantities of shares exposed to market fluctuations and the quantity of the hedge transaction undertaken in the futures market. If the quantities in the futures market exceed the quantity of shares actually exposed to market fluctuations then the transaction would not be a genuine hedge. Reliance was also made on another decision of The Supreme Court of Montana in Whorley vs Patton-Kjose Co., Inc. 90 Mont.461 in which it was held that ‚Country elevator hedging involves a purchase of grain and a sale of a future as simultaneously as possible, as insurance against the fluctuation of the market between the time of purchase and the arrival of the grain in Minneapolis for sale, and, on arrival, an equally simultaneous executing of the reverse of these transactions. It is a hedge only in so far as the transactions are simultaneous and the amount of grain sold for future delivery offsets the grain purchased. If the operator, having sold his actual grain, fails to buy back his hedge in the future market, he is backing his individual judgment against the fluctuatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich are listed or proposed to be listed on a recognized stock exchange; (d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under. 4. Prohibition of manipulative, fraudulent and unfair trade practices (1) Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities. (2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:- (a) ....... (b) ....... (c) ....... (d) paying, offering or agreeing to pay or offer, directly or indirectly, to any person any money or money's worth for inducing such person for dealing in any security with the object of inflating, depressing, maintaining or causing fluctuation in the price of such security; (e) any act or omission amounting to manipulation of the price of a security; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on limits will naturally result in risk mitigation apart from bringing into play heterogeneity in views of market participants which will add an element of robustness to the price discovery process. This has also been echoed in many studies done in India prior to the introduction of derivative trading such as the LC Gupta Committee report and the Prof. J R Varma Committee report. Thus, in short, position limits are designed to deal with market integrity. Therefore, stock-wise, client-wise and broker/ member-wise position limits are recommended / prescribed by rules so as to reduce concentration risk. The position limit stipulation is one among the risk containment measures in the field of derivatives amongst others such as capital adequacy, stringent margin requirements, automatic disentitlement from trading when limits are crossed etc. 4.A.13 In para 12.2 of its reply, Noticee No.1 has submitted that ‚ the position limits for derivative contracts prescribed by stock exchanges and by SEBI are applicable to a customer/client and we believe that these limits apply to each customer / client individually and independently. In any event, the relevant circulars do not provide for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k and curb the perpetration of fraudulent and manipulative practices in the securities market and to protect and preserve the market integrity. From the manner and the time frame in which the agency agreements were executed, it is obvious that these agreements were executed by Noticee No. 1 for the purpose of circumventing the regulatory framework laid down to govern the transactions in the F&O segment. The whole exercise of position limit violation has been perpetrated from the time the noticees 2-13 were identified and appointed as agents by Noticee No.1 for the sake of taking positions in F&O segment. Therefore, this appears to be a premeditated and pre planned exercise of Noticee No.1 as alleged in the SCN. 209. The aforesaid clarifications and analysis of the principles behind the regulatory provisions relating to position limits answer a number of other contentions of the appellant. It was contended that the 1999 Circular relating to position limits in index futures and options did not even put any client level position limits and provided for aggregation, which only necessitated a disclosure. It is factually correct. However, the stipulations in the 1999 Circular was to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vatives contracts traded in stock exchanges and settled in clearing houses legal vis a vis wagering contracts, the section does not make trades done in violation of SCRA and SEBI Act and Rules and Regulations thereunder and Rules and bylaws of the Exchange/Clearing houses legal just because those trades had been done through the exchange/clearing house eco system. The contention of the appellant is both spurious and devious, striking at the very root of Section 18A. Therefore, when the WTM has held that since the appellants' trades were vitiated because of its fraudulence and hence illegal, such a finding is far from being faulty. 212. Moreover, the contention of the appellants that position limit violation, by whatsoever means, is a question of only violating the stock exchange circulars and thereby providing only a penalty to the exchange is a disastrous argument for derivatives market in particular and for securities market in general. In fact, the ensuing disaster will not be restricted to the securities market because there are derivatives market in currencies and in commodities, in addition to that in securities. Just to give an example of the potential disaster; assuming th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot be treated simply as a position limit violation, as has been argued before us. It is undoubtedly a pre-planned strategy of manipulation, with all actions done by a single entity, RIL, and hoisted upon an unsuspecting market, inducing other market participants to deal with a vitiated market. 213. Further, such a manipulative scheme, device used for cornering about 62/93 % (as on November 6/29) the market-wide position limit, cannot be camouflaged in the garb of 'hedging'. Every market participant having an underlying exposure is free to hedge its position if a hedging instrument (derivative contracts in the instance case) is available in the market. That does not mean that it would use a scheme or device and corner a substantial portion of the position limit thereby becoming a powerful tool to corner and squeeze the market. Such a scheme strikes at the very root of limits on position as a strategy for preserving derivatives market integrity. Any hedge has to be in tune with the underlying regulatory principles and such regulatory principles led to the creation of tools such as client level position limit, broker level position limit, market wide position limit etc. in promotin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scheme hoisted by appellant no. 1 and other appellants together was a fraudulent and manipulative scheme as defined under the provisions of Section 12 of SEBI Act, 1992 and under Regulation 3 and 4 of the PFUTP Regulations. The ratio of the Apex Court Judgment in Rakhi Trading (supra), that once the factum of manipulation was proved no further proof was required that the investors were induced and consequential fraud is deemed to be established, squarely applies to the matter. Similarly, once fraud is established in terms of engaging an artificial device to defraud the market it becomes immaterial even whether positions limits have been violated or not because through such a device (clearly a PFUTP Regulations) the appellant had already tried to manipulate the market whether succeeded or not. 214. Reliance placed by the appellants on the RBI Master Circular dated 05 July, 2016, is fallacious (apart from the fact that this circular came into effect 9 years after the violation in question) for the following reasons. Clause b(1) of the circular relates to the forward foreign exchange participants, clarifies that if a hedge becomes naked either in part or fully, ‚owing to contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces‛ as described in the Reserve Bank of India Circular quoted above but was deliberately ‚made naked‛ by holding on to the position in F& O segment far in excess of the pending sale of shares in cash market. 216. Reliance placed by the Learned Senior Counsel for the Appellants on the judgment of this Tribunal in Price Waterhouse & Co. vs Securities and Exchange Board of India (2019) SCC Online SAT 165 is distinguishable since the applicability of fraud to a matter concerned with trading in securities is not the same thing as to auditing entities who were not trading in securities and hence a higher degree of evidence about inducement and fraud was necessary in the case of an auditor as held by this tribunal as well as in the order of the High Court of Bombay in a related appeal filed by the Price Waterhouse & Co. 217. As regards the power and scope of this Appellate Tribunal to rectify/substitute or add reasons recorded by the original forum i.e. WTM of SEBI in the present case, reliance of the appellant in Mohinder Singh Gill (supra) and Sterlite (supra) has no merit. In the case of Mohinder Singh Gill (supra) the Hon'ble Supreme Court was hearing an appeal ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Respondent SEBI. These powers can be equated with the powers of an appellate Court as provided by Order XLI of Code of Civil Procedure. The appellate Court in suitable case can even allow amendment to the pleadings, accept additional evidence and documents. The very purpose of appeal is to test the correctness and validity of the impugned order. If the trial Court ignores some material on record, the appellate court can take it into consideration and arrive at its own conclusion. The powers of the first appellate Court are co-extensive to the powers of the trial Court. More particularly the powers of the appellate court can be underlined by reproducing the provisions of Rule 33 of Order XLI of Code of Civil Procedure as under - '33. Power of Court of Appeal- The Appellate Court shall have power to pass any decree and make any order which ought to have been passed or made and to pass or make such further or other decree or order as the case may require, and this power may be exercised by the Court notwithstanding that the appeal is as to part only of the decree and may be exercised in favour of all or any of the respondents or parties, although such respondents or parties may not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .1 through two entities namely NMSEZ and MSEZ. However, as noted earlier learned WTM did not even touch the said aspect in the impugned order. Therefore, only because of an office note in which the lawyer for the respondent advised for seeking further information from the appellant, that too at the early stages of the proceedings, cannot be used to conclude that the exercise of the respondent SEBI was biased. The impugned order read as a whole would show that in the proceedings before the WTM, while all the facts were admitted, the issue remained only of interpretation of the facts. In the circumstances, we do not find any substance in the submission of the appellant in this regard. 222. Similarly, the contention of the appellant that they entered the market in the last 10 minutes only to mobilize more funds as pre-decided, by selling at a reasonably high price in the cash segment, is devoid of any merit. It is an admitted position that the appellants did not sell any shares in the cash segment after November 23 till the last few minutes on November 29. It could have remained so even on November 29 and let the market to decide the settlement price but it woke up in the last 10 mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they would not have concentrated 100% of their trading activities in both the cash and F&O segments in one month and instead spread it across multiple months. 224. Simulation exercises produced by the appellants before us is without any merit. Tables showing what could have been done if the appellants had sold shares on other select days or if they had squared off their open positions on other days instead of holding till the expiry day more money could have been earned etc. have no merit since such events did not actually happen. It is a known fact that large transactions themselves would move the market (supply and demand) and the market prices. Therefore, on the basis of assumptions we cannot predict market movements with certainty. In any event those actions would not have erased the first leg of manipulation; that of taking a huge net short sell position of 9.92 crore shares of RPL by using a scheme of engaging 12 front entities masquerading as independent participants in the derivatives market. Similarly there is no merit in appellants' alternative contention and calculation of actual profits made on 29 November, at a small sum following a methodology they only invented. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge of Rs. 225-250 during December, 2007 and till 21 January 2008, whereafter it came to the 200 level. Therefore, there was a window of at least four months available after the analysts reports, when reasonable price was ruling. Further, as per the Board decision of RIL dated 29 March, 2007 funds were needed to be raised only within 2 years. For the next 7 months appellant no. 1 did nothing as regards the disposal of shares of RPL. All of a sudden, they decided to act in a hurry in the month of November 2007, and only in November, lock, stock and barrel. They decided to sell the entire 22.5 crore shares (5%) and to take a short sell position, in the name of hedge, in the futures segment, all in November itself as if there was not even a December, 2007 for RPL. Even if it was assessed, based on outside analysts' reports, that there would be no spring, a long winter was still available. Therefore, the entire argument of the need to compress the disposal of 5% shares to the month of November 2007 alone and therefore the need for 'aggregation' of short sell position in the futures segment, again only in November 2007 contract, is devoid of any merit and does not gel with any realistic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 11 of SEBI Act: 32. ‚ The amount disgorged, pursuant to a direction issued, under section 11B of this Act or section 12A of the Securities Contracts (Regulation) Act, 1956 or section 19 of the Depositories Act, 1996 , 33[or under a settlement made under section 15JB or section 23JA of the Securities Contracts (Regulation) Act, 1956 or section 19-IA of the Depositories Act, 1996,] as the case may be, shall be credited to the Investor Protection and Education Fund established by the Board and such amount shall be utilised by the Board in accordance with the regulations made under this Act.] Footnote 32: Inserted by the Securities Laws (Amendment) Act, 2014 w.e.f. 18-07-2013. 42[Power to issue directions 43[and levy penalty]. 11B. 44[(1)[ Save as otherwise provided in section 11, if after making or causing to be made an enquiry, the Board is satisfied that it is necessary,- (i) in the interest of investors, or orderly development of securities market; or (ii) to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interest of investors or securities market; or (iii) to secure the proper ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctual date of payment to SEBI within 60 days from the date of this Order. 232. Before parting we would also like to state that preparing and finalizing this Order took some time on account of the unexpected closure of the office of this Tribunal and other major disruptions on account of the Covid-19 pandemic, voluminous documents, including extensive written submissions, as well as differences of views within the three-member Bench. Dr. C.K.G Nair Member Justice M. T Joshi Judicial Member 233. 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. 234. This Order has been pronounced through video conference due to Covid-19 pandemic, since the matter had been reserved only a few weeks prior to the lockdown. At this stage it is not possible to sign a copy of this order nor a certified copy of this order could be issued by the registry. In these circumstances, this order will be digita ..... X X X X Extracts X X X X X X X X Extracts X X X X
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