Holding

Synchronized and pre‑planned reverse trades that consistently generate profit for one party and loss for the other constitute a fraudulent and unfair trade practice violating Regulations 3(a), 4(1) and 4(2)(a) of the PFUTP Regulations, and the SAT erred in setting aside the SEBI order; the penalty against the traders is restored while the orders against the brokers are dismissed.

Summary

The Securities and Exchange Board of India (SEBI) issued show‑cause notices to Rakhi Trading and other traders for executing synchronized buy‑sell and reverse transactions in Nifty options that consistently yielded profit for one party and loss for the other without any material change in the underlying index. The Adjudicating Officer held the trades to be fictitious and imposed a penalty under the SEBI Act, which the Securities Appellate Tribunal (SAT) later set aside, reasoning that derivative contracts do not involve a change of beneficial ownership and therefore cannot manipulate the market. SEBI appealed to the Supreme Court, arguing that the pre‑planned nature of the trades created a false and misleading appearance of market activity, violating Regulations 3(a), 4(1) and 4(2)(a) of the PFUTP Regulations. The Court held that even in the F&O segment, synchronized and reverse trades intended to pre‑arrange profit and loss constitute a fraudulent and unfair trade practice, affecting market integrity and price discovery. It restored the penalty against the traders and dismissed the appeals against the brokers, finding no evidence of broker complicity. The judgment clarifies that beneficial‑ownership concepts apply to derivative contracts and that market manipulation can be inferred from patterns, timing, and price differentials.

Issues considered

Whether synchronized and reverse trades in the futures and options segment amount to a fraudulent or unfair trade practice under the PFUTP Regulations.
Whether the concept of change of beneficial ownership applies to derivative contracts for the purpose of assessing market manipulation.
Whether such trades, even without affecting the underlying index, create a false or misleading appearance of trading and impair market integrity.
Whether brokers who merely facilitate such trades can be held liable under the Stock Brokers and Sub‑brokers Regulations.

Legislation cited

Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market Regulations, 2003 (PFUTP)s. 2(1)(c), s. 3(a), s. 4(1), s. 4(2)(a), s. 4(2)(b)
Securities and Exchange Board of India Act, 1992s. 12A, s. 15HA, s. 15I, s. 15T, s. 15Z, s. 30
Securities Contracts (Regulation) Act, 1956s. 18A, s. 2(ac), s. 2(d), s. 2(h)
Stock Brokers and Sub‑brokers Regulations, 1992s. 7A

Subjects

synchronized tradingreverse tradesderivativesmarket manipulationunfair trade practicebeneficial ownershipprice discoverytax planningbroker liabilitySEBI

Judgment

[2018] 1 S.C.R. 937 937

SECURITIES AND EXCHANGE BOARD OF INDIA A
v.
RAKHI TRADING PRIVATE LTD.
(Civil Appeal No. 1969 of 2011)
FEBRUARY 08, 2018 B
[KURIAN JOSEPH AND R. BANUMATHI, JJ.]
SEBI (Prohibition of Fraudulent and Unfair Trade Practices
relating to Securities Market) Regulations, 2003: Regns 3(a), (b),
(c) and 4(1), (2)(a), (b) – Synchronized trading – Synchronization
C
and reversal of trades, some in few seconds and majority, in any
case on the same day, without any significant change in the value
of underlying – As a result one party booking gains and the other
party booking a loss – In the show cause notice, allegation was
that the parties-traders were buying and selling securities in the
derivatives segment in synchronized and reverse transactions at a D
price which did not reflect the value of the underlying – Assessing
Officer held that there was intention of creating false or misleading
appearance in the market and also that a manipulative/deceptive
device was used for synchronization of trades and trades were
fictitious in nature, amounting to violation of Regns 3(a), (b), (c)
E
and 4(1), (2)(a), (b) of the PFUTP Regulations – Securities Appellate
Tribunal (SAT) set aside the order of Assessing Officer holding that
in the Futures and Options (F & O) segment, there is no concept of
“change of beneficial ownership” since what is traded in this
segment are contracts and not the underlying stock or index and it
is only through cash settlement that the trade is concluded and no F
physical delivery of any asset is involved and in this view of the
matter, synchronized and reversed trades in Nifty options in F & O
segment can never manipulate the market which in the present
context means the value of Nifty index in cash segment – It further
held that since the trades were settled in cash through stock
G
exchange mechanism, they are genuine and did not create a false
and misleading appearance of trading in F & O segment – Appeal
by SEBI – Held: Trading is always with aim to make profits – But if
one party consistently makes loss and that too in preplanned and
rapid reverse trades, it is not genuine and would amount to an unfair
trade practice – In the instant case, through reverse trades, there H
937
938 SUPREME COURT REPORTS [2018] 1 S.C.R.

A was no genuine change of rights in the contract – SAT 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 – The traders in question
did not intend to transfer beneficial ownership – Rather than
allowing the market forces to operate in their natural course, the
B
traders repeatedly carried out the impugned transactions which
deprived other market players from full participation – The repeated
reversals and predetermined arrangement to book profits and losses
respectively, made it clear that the parties were not trading in the
normal sense and ordinary course – Resultantly, there has clearly
C been a restriction on the free and fair operation of market forces in
the instant case – The stock market is not a platform for any
fraudulent or unfair trade practice – The field is open to all the
investors – By synchronization and rapid reverse trade, as was
carried out by the traders in the instant case, the price discovery
system itself was affected – The traders, thus, having engaged in a
D
fraudulent and unfair trade practice while dealing in securities,
are liable to be proceeded against for violation of Regns 3(a), 4(1)
and 4(2)(a) of PFUTP Regulations. (Kurian Joseph, J.)
SEBI (Prohibition of Fraudulent and Unfair Trade Practices
relating to Securities Market) Regulations, 2003: Regns. 3(a), (b),
E (c) and 4(1), (2)(a), (b) – Fictitious transactions creating illegal
synchronization – Modus operandi – The question whether there
was fictitious transactions creating illegal synchronization has to
be gathered from the facts and circumstances and intention of the
parties – Acting in concert is something about which it is difficult to
F obtain direct evidence – Proof of manipulation might depend upon
inferences drawn from factual details – Such inferences could be
gathered from pattern of trading data and the nature of the
transactions etc. – ‘By manipulation and synchronization’, it is meant
that two parties have pre-meditated; as such a drastic movement in
price within few seconds could have been only through prior
G understanding between the parties concerned only to fulfill an
unlawful objective through misuse of the stock exchange – That is,
prior arrangement/prior understanding with each other wherein
one will make profit and other will lose and thereby as soon as one
party opens up its trade in the market, the other party will buy it –
H
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 939
TRADING PRIVATE LTD.

Though the trading is shown on the screen, but prior arrangement A
is very well possible behind the screen – This was done in the case
in hand – Buy and sell orders were placed at a difference of few
seconds/minutes, while ‘sell’ by respondent was at a high price and
“buy” by the respondent was at a low price – The transactions
wherein the ‘buy and sell’ orders entered almost simultaneously and
B
the transactions matched in time and quantity with significant price
variation and respondent consistently making profit but the other
party consistently making loss – There was no possibility of such
perfect matching of quantity, timing, prices etc. between the same
parties unless there was prior meeting of minds or a specific
understanding/arrangement between the parties – Applying the test C
laid down in Kishore R. Ajmera case to the instant case, by
cumulative analysis of the reversal transactions, quantity, time and
significant variation of prices, without major variation in the
underlying price of the securities indicate that the respondent’s trades
are not genuine and had only misleading appearance of trading in
D
the securities market, without intending to transfer beneficial
ownership. (Banumathi, J.)
Securities and Exchange Board of India (Stock Brokers and
Sub-brokers) Regulations, 1992: Regns. 7A, (2), (3), (4) –
Synchronization and reversal of trades by brokers on behalf of
their clients, some in few seconds and majority, in any case on the E
same day, without any significant change in the value of underlying
– As a result one party booking gains and the other party booking
a loss – SAT held that merely because appellant acted as a broker
would not mean that it knew about the nature of transaction and
that there was no evidence of lack of due diligence while executing F
the impugned transactions which could make the brokers guilty of
violating the code of conduct prescribed for the stock brokers –
Held: There was no evidence of involvement of brokers so as to
proceed against them for violation of Regn 7A of the Brokers
Regulations and PFUTP Regulations – Merely because a broker
facilitated a transaction, it cannot be said that there is violation of G
the Regulation – SEBI did not provide any material to suggest
negligence or connivance on the part of the brokers – In the absence
of any material provided by SEBI to prove the charges against the
brokers, particularly regarding aiding and abetting fraudulent or
H
940 SUPREME COURT REPORTS [2018] 1 S.C.R.

A unfair trade practices, the orders of SEBI against the brokers should
be interfered with – Securities Contracts (Regulation) Act, 1956 –
s.18A, 3(ac), 2(d). (Kurian Joseph, J.)
Securities and Exchange Board of India (Stock Brokers and
Sub-brokers) Regulations, 1992: Regns. 7A, (2), (3), (4) – Fictitious
B transactions creating illegal synchronization – Allegation of SEBI
was that the traders and brokers at NSE were buying and selling
almost equal quantities of contracts within the day and that such
buy/sell orders were synchronized – Held: Considering the reversal
transactions, quantity, price and time and sale, parties being
persistent in number of such trade transactions with huge price
C variations, it will be too naive 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
D 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
this additional reasonings also, conclusion allowing the appeal
E preferred by SEBI against the traders is upheld – The conclusion
dismissing the appeal preferred by the SEBI against the brokers is
also upheld – SEBI Act, 1992 – ss.12A, 15HA. (Banumathi, J.)
Stock Exchange: Need for comprehensive legal framework
governing the securities market – As the market grows, ingenuous
F means of manipulation are also employed – In such a scenario, it is
essential that SEBI keeps up with changing times and develops
principles for good governance in the stock market which ensure
free and fair trading – The observations made in Kishore R. Ajmera
and Kanaiyalal Patel regarding need for more comprehensive legal
G framework governing the securities market, reiterated – SEBI Act,
1992. (Kurian Joseph, J.)
Stock Exchange: Circumstances under which synchronized
trade become illegal – Held: A synchronized transaction will become
illegal or violative of the Regulations if it is executed with a view to
H manipulate the market or if it results in circular trading or is dubious
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 941
TRADING PRIVATE LTD.

in nature and with a view to manipulate the price or volume of the A
scrip or with some ulterior purpose. (Banumathi, J.)
Stock Exchange: Manipulation of market – If the factum of
manipulation is established, it will necessarily follow that the
investors in the market have been induced to buy or sell and that
no further proof in this regard is required – The market is so B
widespread 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 the Board cannot be imposed with a
burden which is impossible to be discharged. (Banumathi, J.)
Stock Exchange: Prevention of market abuse – The smooth C
operation of the securities market and its healthy growth and
development depends upon large extent on the quality and integrity
of the market – Unfair trade practices affect the integrity and
efficiency of the securities market and the confidence of the investors
– Prevention of market abuse and preservation of market integrity
are the hallmark of securities law. (Banumathi, J.) D

Stock Exchange: Role of SEBI – Object of SEBI Act – Held:
The object of the SEBI Act is to protect the interest of the investors
in securities and to promote the development and to regulate the
securities market so as to promote orderly, healthy growth of
securities market and to promote investor’s protection – In order to E
protect the interests of the investors and the integrity of the markets,
as a regulator, SEBI has to make the market place efficient and
clean, wherein all the participants play their role diligently and
professionally within the four corners of the system, without there
being any scope for market abuse – Where certain unscrupulous F
elements are trying to manipulate the market to serve their own
interest, it becomes imperative on the part of SEBI to intervene and
to curb further mischief and to take necessary action to maintain
public confidence in the integrity of the securities market.
(Banumathi, J.)
G
Evidence: In the quasi-judicial proceeding before SEBI, the
standard of proof is preponderance of probability – Stock Exchange.
(Banumathi, J.)
Words and phrases: Synchronize, Synchronized Trading –
Meaning of, discussed.(Banumathi, J.)
H
942 SUPREME COURT REPORTS [2018] 1 S.C.R.

A Disposing of the appeals, the Court
HELD:
Per Kurian Joseph, J.
HELD: 1. Regulation 4(1) in clear and unmistakable terms
B provided that “no person shall indulge in a fraudulent or an unfair
trade practices in securities” Having regard to the fact that the
dealings in the stock exchange are governed by the principles of
fair play and transparency, one does not have to labour much on
the meaning of unfair trade practices in securities. Contextually
and in simple words, it means a practice which does not conform
C to the fair and transparent principles of trades in the stock market.
In the instant case, one party booked gains and the other party
booked a loss. Nobody intentionally trades for loss. An intentional
trading for loss per se, is not a genuine dealing in securities. The
platform of the stock exchange has been used for a non-genuine
D trade. Trading is always with the aim to make profits. But if one
party consistently makes loss and that too in preplanned and rapid
reverse trades, it is not genuine; it is an unfair trade practice.
Securities market, as the Securities Contracts (Regulation) Act,
1956 provides in the preamble, does not permit “undesirable
transactions in securities”. The Act intends to prevent
E undesirable transactions in securities by regulating the business
of dealing therein. Undesirable transactions would certainly
include unfair practices in trade. The SEBI Act, 1992 was enacted
to protect the interest of the investors in securities. Protection
of interest of investors should necessarily include prevention of
F misuse of the market. Orchestrated trades are a misuse of the
market mechanism. It is playing the market and it affects the
market integrity. [Paras 34, 35] [976-D-E; 977-D-G]
Ketan Parekh v. Securities and Exchange Board of
India Appeal No.2 of 2004 before SAT – referred to .
G 2. Ordinarily, the trading would have taken place between
anonymous parties and the price would have been determined
by the market forces of demand and supply. In the instant case,
the parties did not stop at synchronised trading. The facts go
beyond that. The trade reversals in this case indicate that the
parties did not intend to transfer beneficial ownership and through
H
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 943
TRADING PRIVATE LTD.

these orchestrated transactions, the intention of which was not A
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. [Para 36] [977-H; 978-A-B]
B
3. The stand of SAT that the rationale of change of beneficial
ownership does not arise in the derivatives segment is also not
correct. 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 C
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 the instant case, it
is clear that the traders in question did not intend to transfer D
beneficial ownership and therefore these trades are non genuine.
Rather than allowing the market forces to operate in their
natural course, the traders repeatedly carried out the impugned
transactions which deprived other market players from full
participation. The repeated reversals and predetermined
arrangement to book profits and losses respectively, made it clear E
that the parties were not trading in the normal sense and
ordinary course. Resultantly, there has clearly been a restriction
on the free and fair operation of market forces in the instant case.
[Paras 37, 38] [978-B-C; 979-A-C]
4. Regulation 2(1)(c) defines fraud. Under Regulation F
2(1)(c)(2) a suggestion as to a fact which is not true while he
does not believe it to be true is fraud. Under Regulation 2(1)(c)(7),
a deceptive behaviour of one depriving another of informed
consent or full participation is fraud. And under Regulation
2(1)(c)(8), a false statement without any reasonable ground for G
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. Regulation 3(a) expressly prohibits buying,
selling or otherwise dealing in securities in a fraudulent manner.
H
944 SUPREME COURT REPORTS [2018] 1 S.C.R.

A 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
B
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. [Paras 39, 40]
C [979-C-G]
5. According to SAT, only if there is market impact on
account of sham transactions, could there be violation of the
PFUTP Regulations. The proposition is not convincing. SAT
missed the crucial factors affecting the market integrity, which
D may be direct or indirect. The stock market is not a platform for
any fraudulent or unfair trade practice. The field is open to all the
investors. By synchronization and rapid reverse trade, as has
been carried out by the traders in the instant case, the price
discovery system itself is affected. Except the parties who have
pre-fixed the price nobody is in the position to participate in the
E trade. It also has an adverse impact on the fairness, integrity and
transparency of the stock market. 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. As
F far as brokers are concerned, 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
G connivance on the part of the brokers. In the absence of any
material provided by SEBI to prove the charges against the
brokers, particularly regarding aiding and abetting fraudulent or
unfair trade practices, the orders of SEBI against the brokers
should be interfered with. [Paras 41, 43, 44] [979-G-H; 980-A-B;
H 981-B; C, D-F]
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 945
TRADING PRIVATE LTD.

6. There is need for more comprehensive legal framework A
governing the securities market. As the market grows,
ingenuous means of manipulation are also employed. In such a
scenario, it is essential that SEBI keeps up with changing times
and develops principles for good governance in the stock
market which ensure free and fair trading. [Para 45] [981-G]
B
Securities And Exchange Board of India v. Kishore R.
Ajmera (2016) 6 SCC 368 : [2016] 1 SCR 1118 ;
Securities and Exchange Board of India and Ors. v.
Shri Kanaiyalal Baldevbhai Patel and Ors. 2017 SCC
Online SC 1148– relied on.
C
Per Banumathi, J. (Supplementing)
1. Synchronized Trading: As per the Oxford dictionary the
word ‘synchronize’ means “cause to occur at the same time; be
simultaneous”. A synchronized trade is one where the buyer and
seller enter the quantity and price of the shares they wish to D
transact at substantially the same time. This could be done through
the same broker (termed a cross deal) or through two different
brokers. Synchronized trade is one wherein ‘buy and sell’ orders
are placed simultaneously for the same quantity and price they
wish to transact at substantially the same time. Synchronized
trades are not illegal provided that they are executed on the E
screens of the exchange in the price and order matching
mechanism of the exchanges just like any other normal trade. A
synchronized transaction will become illegal or violative of the
Regulations if it is executed with a view to manipulate the market
or if it results in circular trading or is dubious in nature and with F
a view to manipulate the price or volume of the scrip or with
some ulterior purpose. [Paras 13, 14, 16] [989-A-C; 990-D-E]
Ketan Parekh v. SEBI, Manu/SB/0229/2006 – referred to.
2. The question whether there was fictitious transactions
creating illegal synchronization has to be gathered from the facts G
and circumstances and intention of the parties. Acting in concert
is something about which it is difficult to obtain direct evidence.
Proof of manipulation might depend upon inferences drawn from
factual details. Such inferences could be gathered from pattern
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946 SUPREME COURT REPORTS [2018] 1 S.C.R.

A of trading data and the nature of the transactions etc. ‘By
manipulation and synchronization’, it is meant that two parties
have pre-meditated; as such a drastic movement in price within
few seconds could have been only through prior understanding
between the parties concerned only to fulfill an unlawful objective
through misuse of the stock exchange. That is, prior
B
arrangement/prior understanding with each other wherein one
will make profit and other will lose and thereby as soon as one
party opens up its trade in the market, the other party will buy it.
Though the trading is shown on the screen, but prior arrangement
is very well possible behind the screen. This is what has been
C 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 was at a high price and “buy” by the respondent
from Kasam Holding Pvt. Ltd. was 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
D
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
E 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
F
to show the non-genuineness of such transactions. [Paras 20, 21]
[992-D-H; 993-A-B]
3. In the present case, every time one party is making
profit and other party is facing loss. Further, there was proximity
in the time of sell orders at a high price to the party-Kasam
G Holding Pvt. Ltd. and the same quantity being reversed by Kasam
Holding Pvt. Ltd. to the same party-Rakhi Trading Pvt. Ltd. at a
low price through the same set of brokers. During March, 2007
thirteen Nifty Option Contracts got matched between the same
parties through the same brokers. There is no reason to
H understand as to why Kasam Holding has made the transactions
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 947
TRADING PRIVATE LTD.

repeatedly by incurring losses. It seems improbable that Kasam A
Holding which was facing loss in each transaction by trading with
the respondent, was still eager to trade with the same repeatedly
for about four days which is not in consonance with the market
trend and human conduct; more so, when there has not been any
major difference in the underlying price. It is thus difficult to
B
accept that several such sell and buy orders between the
respondent and Kasam Holding being within a gap of “1”, “2” or
“3” or few seconds were by mere coincidence. It was too much
of coincidence that there were number of transactions of ‘buy
and sell orders’ between the same parties with same quantity of
stock with significant variation in price. [Para 22] [993-C-F] C
4. In the quasi-judicial proceeding before SEBI, the
standard of proof is preponderance of probability. It was held in
Kishore R. Ajmera case that it is the judicial duty to take note of
the immediate and proximate facts and circumstances surrounding
the events on which the charges/allegations are founded and to D
reach what would appear to the Court to be a reasonable
conclusion therefrom. The test would always be that what
inferential process that a reasonable/prudent man would adopt
to arrive at a conclusion. There was no possibility of such perfect
matching of quantity, timing, prices etc. between the same parties
unless there was prior meeting of minds or a specific E
understanding/arrangement between the parties. Applying the
test laid down in Kishore R. Ajmera case to the present case, by
cumulative analysis of the reversal transactions between
respondent and Kasam Holding, quantity, time and significant
variation of prices, without major variation in the underlying price F
of the securities clearly indicate that the respondent’s trades are
not genuine and had only misleading appearance of trading in the
securities market, without intending to transfer beneficial
ownership. [Paras 25, 26, 27] [996-D-H; 996-H; 998-F]
5. Contention of the appellant is that if the market starts G
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. There is no merit in this contention. Insofar as the
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948 SUPREME COURT REPORTS [2018] 1 S.C.R.

A 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
B
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. [Para 28] [998-F-H]
6. The respondent has made the transactions repeatedly
C by incurring losses, particularly when there were no transactions
made by any third party in the market. Abnormal difference
between the prices at which the trades were executed without
corresponding effect on the price of the underlying security, shows
that the option in which the party traded was not in demand in the
D market. It is unusual that the trades were transacted with such
huge profits when there was no change in the underlying prices.
These trade transactions obviously only aimed at carrying out
manipulative objective. Once the reversal transactions are shown
to be non-genuine or shown to be fictitious creating a false or
misleading appearance in the market for ulterior purpose and
E that the stock market 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. [Paras
32, 33] [999-F-H; 1000-A]
F 7. Regulation 3 deals with “Prohibition of certain dealings
in securities”. Regulation 4 deals with “Prohibition of manipulative,
fraudulent and unfair trade practices”. Regulation 4 starts as
“Without prejudice to the provisions of Regulation 3....”. Regulation
4(2) is an inclusive provision. Regulation 4(2) stipulates that
G “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....”, instances pointed out thereon. Regulation 4(2)(a) deals
with “...an act which creates false or misleading appearance of
trading in the securities market”. An act to fall within Regulation
4(2)(a), it is not necessary that the transactions entered into by
H
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 949
TRADING PRIVATE LTD.

the party was with intention to manipulate the market and that A
the market was in fact manipulated. Market manipulation is a
deliberate attempt to interfere with the free and fair operation of
the market and create artificial, false or misleading appearances
with respect to the price, market, product, security and currency.
[Para 35] [1000-E-G]
B
8. Respondent-Rakhi Trading and Kasam Holding on facts
are found to have been engaged in non-genuine transactions
creating appearance of trading. If the factum of manipulation is
established, it will necessarily follow that the investors in the
market have been induced to buy or sell and that no further proof
in this regard is required. The market is so widespread that it C
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 the Board cannot be imposed with a burden
which is impossible to be discharged. [Para 36] [1000-H; 1001-
A] D
9. 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 E
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 thinks fit. Main function of SEBI
in this regard is to make inquiry, investigation and to give
directions, to promote the orderly and healthy growth of the F
securities market. With a view to curb unfair trade practices,
market manipulation, price rigging and other frauds in securities
market, SEBI is empowered to make inquiries and inspection.
[Para 40] [1003-B-D]
G
10. Section 12A of the SEBI Act, 1992 read with
Regulations 3 and 4 of the PFUTP Regulations, 2003 are
essentially intended to preserve ‘market integrity’ and to
prevent ‘market abuse’. The object of the SEBI Act is to protect
the interest of the investors in securities and to promote the
development and to regulate the securities market so as to H
950 SUPREME COURT REPORTS [2018] 1 S.C.R.

A promote orderly, healthy growth of securities market and to
promote investor’s protection. The capital market regulator, SEBI
has a significant role to play in safeguarding the interest of
investors and to ensure strict compliance of all the relevant SEBI
rules and regulations targeting at safeguarding the interest of
small investors. As supervisory functionary/ regulating body,
B
SEBI has the duty and obligation to protect ordinary genuine
investors and SEBI is empowered to do so under the SEBI Act,
1992 so as to make security market a secure and safe place to
carry on the business in securities. At the same time, under the
guise of supervisory intervention, SEBI cannot affect the
C 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
D
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. Considering the
reversal transactions, quantity, price and time and sale, parties
being persistent in number of such trade transactions with huge
E price variations, it will be too naïve 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
F
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. [Paras 41, 42, 43, 46] [1003-D-E;
G 1005-B-C, E-G; 1006-E-G]

Ketan Parekh v. SEBI (Appeal No. 2 of 2004) ; Ketan
Parekh v. SEBI, Manu/SB/0229/2006 ; Securities and
Exchange Board of India v. Kishore R. Ajmera (2016)
6 SCC 368 : [2016] 1 SCR 1118 ; Nirmal Bang
H
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 951
TRADING PRIVATE LTD.

Securities Private Ltd. v. The Chairman, Securities and A
Exchange Board of India MANU/SB/0206/2003 ; SEBI
v. Accord Capital Markets Ltd. MANU/SB/0136/2007 ;
Narayanan v. Adjudicating Officer, Securities and
Exchange Board of India (2013) 12 SCC 152 ; Viram
Investment Pvt. Ltd. and Ors. v. Securities and Exchange
B
Board of India MANU/SB/0046/2005 – referred to.

Case Law Reference

Per Kurian Joseph, J.
C
[2016] 1 SCR 1118 relied on Para 42

Per Banumathi, J.

[2016] 1 SCR 1118 referred to Para 42
D
(2013) 12 SCC 152 referred to Para 38

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1969
of 2011.

From the Judgment and Order dated 11.10.2010 of the Securities E
Appellate Tribunal, Mumbai in Appeal No. 70 of 2009

WITH

Civil Appeal Nos. 3174-3177 and 3180 of 2011.
F
Gourab Banerji, Sr. Advs, Bhargava V. Desai, Sahil Tagotra, S. P.
Mukherjee, Akshat Malpani, Advs for the Appellant.

Shyam Divan, P. Chidambaram, Sr. Advs, Ms. Mumtaz Bhalla,
Ms. Abhilasha Vij, Ms. Samiksha Godiyal, Ms. Anisha Upadhyay, Nishant
Kumar, Aniket Gautam, Neerav Merchant, Somasekhar Sundaresan, G
Mayank Mishra, Divyam Agarwal, Ritunjay Gupta, Dheeraj Nair,
Preteesh Kapur, Ranjit B. Raut, Ms. Surbhi Kapoor, Ms. Bina Gupta,
Vikram Mehta, Ms. Raka Chatterjee, Vikas Mehta, Abhay Kumar, Ms.
Mridula Ray Bharadwaj, Advs for the Respondents.
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952 SUPREME COURT REPORTS [2018] 1 S.C.R.

A The Judgment of the Court was delivered by
KURIAN, J. 1. Fairness, integrity and transparency are the
hallmarks of the stock market in India. The Securities and Exchange
Board of India (hereinafter referred to as “SEBI”) is the vigilant
watchdog. Whether the factual matrix justified the watchdog’s bite is
B the issue arising for consideration in this case.
2. There are two sets of party respondents – the traders and the
brokers. SEBI proceeded against the traders for violation of Regulations
3(a), (b) and (c) and 4 (1), (2)(a) and (b) of the Securities and Exchange
Board of India (Prohibition of Fraudulent and Unfair Trade Practices
C Relating to Securities Market) Regulations, 2003 (hereinafter referred
to as “the PFUTP Regulations”). In the case of brokers, the charge is
that they also violated Regulations 7A (1), (2), (3) and (4) of the
Securities and Exchange Board of India (Stock Brokers and Sub-brokers)
Regulations, 1992.
D 3. As the matter before us involves three traders and three
brokers, for convenience, we have extracted the dates of the decision of
the Adjudicating Officer (hereinafter referred to as “A.O.”) and the
Securities Appellate Tribunal (hereinafter referred to as “the SAT”) in
the table below:
S.No. Name of the Party Trader/Broker Date of Date of SAT’s
E A.O’s order decis ion
1. Rakhi Trading Trader 26.03.2009 11.10.2010
Private Limited
(“Rakhi Trading”)

2. Tungarl i Tradeplace Trader 30.04.2010 16.11.2010
Private Limi ted
F (“Tungarli”)

3. TLB Securities Trader 16.03.2009 26.10.2010
Li mited
(“TLB”)

4. Indiabulls Securities Broker 25.02.2009 26.10.2010
Li mited
G (“Indiabulls”)

5. Angel C apital and Broker 22.05.2009 26.10.2010
Debt Market
Li mited (“Angel ”)

6. Prashant Jayantilal Broker 31.08.2009 26.10.2010
Patel (“Prashant”)
H
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 953
TRADING PRIVATE LTD. [KURIAN, J.]

SAT set aside the decisions of the A.O. in all the aforementioned A
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. B
5. The Securities Contracts (Regulation) Act, 1956 was
introduced “… to prevent undesirable transactions in securities by
regulating the business of dealing therein, by providing for certain
other matters connected therewith”. Section 18A dealing with
contracts in derivatives was introduced with effect from 22.02.2000. C
The provision reads as follows:
“18A. Contracts in derivative.—Notwithstanding anything
contained in any other law for the time being in force, contracts in
derivative shall be legal and valid if such contracts are —
(a) traded on a recognised stock exchange; D
(b) settled on the clearing house of the recognised stock
exchange; or in accordance with the rules and bye-laws of such
stock exchange;
(c) between such parties and on such terms as the Central
E
Government may, by notification in the official Gazette, specify.”
“Derivative” is defined under Section 2(ac) of the 1956 Act, which
read as under:
“2(ac)] “derivative” includes—
(A) a security derived from a debt instrument, share, loan, whether F
secured or unsecured, risk instrument or contract for differences
or any other form of security;
(B) a contract which derives its value from the prices, or index of
prices, of underlying securities.
G
(C) commodity derivatives; and
(D) such other instruments as may be declared by the Central
Government to be derivatives;”

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954 SUPREME COURT REPORTS [2018] 1 S.C.R.

A 6. “Option in securities” is defined under Section 2 (d) of the
1956 Act, which reads as under:
“2(d) “option in securities” means a contract for the purchase or
sale of a right to buy or sell, or a right to buy and sell, securities in
future, and includes a teji, a mandi, a teji mandi, a galli, a put,
B a call or a put and call in securities.”
7. The term “securities” is defined under Section 2(h) of the 1956
Act, which reads as under:
“2(h) “securities” include—

C (i) shares, scrips, stocks, bonds, debentures, debenture stock or
other marketable securities of a like nature in or of any
incorporated company or other body corporate.
xxx xxx xxx
(ia) derivative;”
D
8. In 1992, the SEBI Act was introduced “…to provide for the
establishment of a Board, to protect the interest of investors in
securities and to promote the development of and to regulate, the
securities market and for matters connected therewith or incidental
thereto”.
E 9. Section 15HA of the SEBI Act provides for penalty 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
F 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
G 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
H
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 955
TRADING PRIVATE LTD. [KURIAN, J.]

made thereunder to carry out the purposes of this Act.” The PFUTP A
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 any issue of any security or agreeing to B
buy, sell or subscribe to any issue of any security or otherwise
transacting in any way in any security by any person as principal,
agent or intermediary referred to in section 12 of the Act.”
13. Chapter II of the PFUTP Regulations comprising Regulations
3 and 4 deals with the prohibition of fraudulent and unfair trade C
practices relating to securities in the market. Regulation 3 speaks of
prohibition about certain dealings in securities and Regulation 4 provides
for prohibition of manipulative, fraudulent and unfair trade practices.
The regulations relevant for the purpose of the present case read as
under: D
“3. Prohibition of certain dealings in securities
No person shall directly or indirectly—
(a) buy, sell or otherwise deal in securities in a fraudulent
manner;
E
(b) use or employ, in connection with issue, purchase or sale of
any security listed or proposed to be listed in a recognized
stock exchange, any manipulative or deceptive device or
contrivance in contravention of the provisions of the Act or
the rules or the regulations made there under;
F
(c) employ any device, scheme or artifice to defraud in
connection with dealing in or issue of securities which are
listed or proposed to be listed on a recognized stock exchange;
(d) engage in any act, practice, course of business which
operates or would operate as fraud or deceit upon any G
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.

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956 SUPREME COURT REPORTS [2018] 1 S.C.R.

A “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 insecurities.

(2) Dealing in securities shall be deemed to be a fraudulent or an
B unfair trade practice if it involves fraud and may include all or any
of the following, namely:—

(a) indulging in an act which creates false or misleading
appearance of trading in the securities market;

C (b) dealing in a security not intended to effect transfer of
beneficial ownership but intended to operate only as a device to
inflate, depress or cause fluctuations in the price of such security
for wrongful gain or avoidance of loss;

xxx xxx xxx
D
(e) any act or omission amounting to manipulation of the price of
a security;

xxx xxx xxx

E (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
F 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
G 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;
H
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 957
TRADING PRIVATE LTD. [KURIAN, J.]

(2) a suggestion as to a fact which is not true by one who does not A
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; B
(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,
C
(7) deceptive behavior 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 D
affects the market price of the security, resulting in investors being
effectively misled even though they did not rely on the statement
itself or anything derived from it other than the market price.
And “fraudulent” shall be construed accordingly;
Nothing contained in this clause shall apply to any general E
comments made in good faith in regard to—
(a) the economic policy of the government
(b) the economic situation of the country
(c) trends in the securities market; F
(d) any other matter of a like nature
whether such comments are made in public or in private;
xxx xxx xxx
(e) “securities” means securities as defined in section 2 of the G
Securities Contracts (Regulation) Act, 1956 (42 of 1956).”
15. The Securities and Exchange Board of India (Stock brokers
and Sub-brokers) Regulations, 1992 in Schedule II deals with the code
of conduct for stockbrokers which reads as follows:
H
958 SUPREME COURT REPORTS [2018] 1 S.C.R.

A “SCHEDULE II
Securities and Exchange Board of India
(Stock Brokers and Sub-brokers)
Regulations, 1992
CODE OF CONDUCT FOR STOCK BROKERS
[Regulation 7]
B
A. General.
(1) Integrity: A stock-broker, shall maintain high standards of
integrity, promptitude and fairness in the conduct of all his
business.
C (2) Exercise of due skill and care : A stock-broker shall act with
due skill, care and diligence in the conduct of all his business.
(3) Manipulation : A stock-broker shall not indulge in
manipulative, fraudulent or deceptive transactions or schemes or
spread rumours with a view to distorting market equilibrium or
D making personal gains.
(4) Malpractices: A stock-broker shall not create false market
either singly or in concert with others or indulge in any act
detrimental to the investors interest or which leads to
interference with the fair and smooth functioning of the market.
E 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
F 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
G 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’
H
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 959
TRADING PRIVATE LTD. [KURIAN, J.]

and ‘options’. In futures and options, the trading can either be of A
individual stocks or of indices like NIFTY, Bank NIFTY etc.
18. Futures - a future contract is an agreement between two
parties to buy or sell an asset at a certain time in the future at a certain
price agreed upon on the date of the contract. All the futures contracts
are settled in cash. B
19. Options – options are contracts between a buyer and the seller
which gives a right, but not an obligation, to buy or sell the underlying
asset at a stated price on or before a specified date. While a buyer of an
option pays the premium and buys his right to exercise his option, the
writer of an option is the one who receives the option premium and is C
therefore obliged to sell or buy the asset as per the option exercised by
the buyer.
Options are of two types, ‘Call’ and ‘Put’. Call Option gives the
buyer the right but not the obligation to buy a given quantity of the
underlying asset at a given price on or before a given future date. Put D
Option gives the buyer the right, but not obligation to sell a given quantity
of underlying asset at a given price on or before a given future date.
20. The impugned SAT order in the case of Rakhi Trading has
succinctly dealt with the working of options:
“2. …The seller in an options contract sells a right to the buyer E
and since nothing can be sold without a cost, the former charges
an amount from the latter which is called the premium. It is this
premium which is the only negotiable element in an options contract
that is negotiated on the trading screen of the stock exchange. At
the beginning of every trading cycle which is fixed by the concerned F
stock exchange, it (stock exchange) prescribes in the case of
stock options a series of strike rates based upon the prevailing
market price of particular shares that are allowed to be traded in
the F & O segment. In the case of index options, the strike rates
are determined with reference to the index value in the cash
segment. These strike rates are based on the general market G
perception both bullish and bearish. Equal number of strike rates
both upwards and downwards of the prevailing market price/index
value are fixed by the stock exchange. The stock exchange also
fixes the size of the contracts that are traded in lots. When an
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960 SUPREME COURT REPORTS [2018] 1 S.C.R.

A investor chooses to trade in the options contracts, he has to choose
a scrip or the Nifty, then assess whether the same will go up or
down on the next settlement date and by how much. That is his
gamble. Accordingly, he will select a strike rate which is the
exercise price. 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
B
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,
C 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
D
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
E where the loss suffered, if any, by the buyer is limited only to the
premium amount whereas the loss which could be suffered, if
any, by the buyer is limited only to the premium amount whereas
the loss which could be suffered by the writer of the contract
(seller) is limitless. If during the period of the contract the market
perception of the seller (writer) changes or the market starts
F
moving contrary to his expectations, he may, in his anxiety to cap
his losses, take a reverse position. He would then put in an offer
or accept an offer of a higher premium for the same option and
this in effect would result in his repurchasing the contract at a
higher rate/premium to avoid greater losses.”
G (Emphasis supplied)
21. Index - a stock market index is a measure of the relative
value of a group of stocks in numerical terms. As the stocks within an
index change value, the index value changes. NIFTY 50 is an index on
National Stock Exchange which tracks the behaviour of 50 companies
H covering different sectors of the Indian economy.
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 961
TRADING PRIVATE LTD. [KURIAN, J.]

22. Trading in Index – an investor can trade even the entire stock A
market by buying index futures instead of buying individual securities.
The advantages of trading in index futures are- the contracts are highly
liquid, the index futures provide higher leverage than any other stocks, it
requires comparatively low initial capital investment (only the premium),
it has lower risk than buying and holding stocks, it is just as easy to trade
B
the short side as the long side, the trader needs to study only one index
instead of several stocks and finally, the contracts are settled in cash in
the stock exchange and therefore, all problems related to bad delivery,
fake or forged certificate etc. can be avoided.1
23. The case at hand deals, inter alia, with questions related to
synchronised trading. The concept of synchronised trading has been C
explained by SAT in Ketan Parekh v. Securities and Exchange Board
of India2. To quote:
“20. …. “A synchronised trade is one where the buyer and seller
enter the quantity and price of the shares they wish to transact at
substantially the same time. This could be done through the same D
broker (termed a cross deal) or through two different brokers.
Every buy and sell order has to match before the deal can go
through. This matching 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 E
the time when the buy and sell orders are placed. …”
Facts:
24. As mentioned before, this case involves three traders and
three brokers.
F
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
G
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
1
This information has been extracted from the NSE Handbook on Derivatives Trading.
2
Appeal No. 2 of 2004 before SAT.
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962 SUPREME COURT REPORTS [2018] 1 S.C.R.

A 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. 23.03.2007 and 30.03.2007 and resulted in a
B
close out difference of Rs 115.79 lakhs without any significant change in
the value of the underlying.
Tungarli: The SCN was issued to Tungarli on 05.10.2007. The
allegation in the SCN was that through these synchronized transactions,
one party booked profits and the other party booked losses. The trades
C pertained to future scrips. The A.O.’s order notes that the trades were
reversed in all the cases in a matter of few seconds showing significant
difference between the buy and sell trade prices. The change in positions
took place without any significant change/negligible change in the price
of the underlying security. The trades took place on 12.03.2007,
D 15.03.2007, 23.03.2007, 26.03.2007 and 28.03.2007 and the total profit
made by Tungarli was Rs 64.52 lakhs.
TLB: The SCN was issued to TLB on 05.10.2007. The trades
pertained to future scrips. As per the A.O.’s order, TLB traded through
stock broker SMC Global Securities Ltd and the same broker is the
E counter party broker as well, trading on behalf of different clients. All
the transactions undertaken by TLB resulted in loss to TLB and the total
loss was Rs.38.69 lakhs. The trades in question took place on 22.01.2007,
23.01.2007, 31.01.2007, 01.02.2007, 05.02.2007 and 06.02.2007. The
A.O.’s order notes that in many cases, the trades were reversed in a
matter of minutes showing significant difference in prices without any
F significant change in value of the underlying. The A.O.’s order notes
that during investigation, it was also seen that when the time was not
matched by the respective parties, the first order that was placed was at
an unattractive price relative to the market price.
Brokers:
G
Indiabulls: The case pertains to 23 reverse trades in 21 futures
and 2 options on 22 different scrips and one Bank Nifty futures. The
A.O. takes into account the fact, that in many cases, the reversals took
place in a matter of seconds/minutes without change in the value of the
underlying. The A.O. records that the Indiabulls representative stated
H
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 963
TRADING PRIVATE LTD. [KURIAN, J.]

that they could not have known about the intention of the clients, however, A
the representative admitted that the trades were non-genuine and should
not have taken place.
Angel: In the SCN dated 05.10.2007, the charge is that as a
stock-broker, it executed 56 reversal trades. As per the A.O., these
trades were reversed in a matter of a few minutes/ hours. However, the B
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 C
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 D
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 E
to the noticee, it is seen that the time difference between the buy
and sell order is only in seconds. Most of the orders were matched
in a time gap of 1, 2 or 3 seconds and many orders have matched
to the exact second, i.e. time difference is 0 (zero). This is proof
enough to establish the existence of synchronization of trades; F
otherwise the trades would not have matched repeatedly to the
exact second in the NIFTY Contracts which is the most active
contract in the options segment. Hence it overrides the noticee’s
submission that no material or data has been disclosed to
substantiate the said allegation of “synchronization” of any trades.
23. On analysis of the reversal transactions undertaken by the G
noticee, it is seen that the percentage to market gross is in the
range of 30 percent to 50 percent in the 14 contracts executed by
the noticee. In two contracts of NIFTY, the percentage to market
gross reached 50 percent. This accounts for a significant
H
964 SUPREME COURT REPORTS [2018] 1 S.C.R.

A percentage of trades on the concerned days and the traded value
was Rs.95.75 lakhs for those two reversal trades. The trade
quantities are also high. The total traded value is Rs.503.00 lakh
in a matter of just 4 (four) trading days. As submitted by the
noticee, NIFTY moves constantly. Also, NIFTY is the most
active of the options contracts traded on the exchange and it has
B
contributed to 92.21 percent of the contracts traded in the
Options segment during March 2007. Further, the NIFTY options
contracts contributed to 99.97 percent of the total Index Options
contracts traded in March 2007 (source: NSE website). In such a
scenario it is seen that the noticee’s counter party to all the trades
C in NIFTY contracts is Kasam Holding Pvt. Ltd. (trading through
the broker Vibrant Securities Private Limited), this clearly gives
an indication to the existence of a pre-arrangement/
synchronization / matched trades between the clients. Otherwise
it does seem unrealistic that the orders should match exactly both
quantity and price wise, just as a matter of coincidence, with the
D
same party again and again. It is clear that there was an intention
of creating a false or misleading appearance in the market and
also that a manipulative /deceptive device was used for
synchronization of trades.
24. The trades executed by the noticee in all NIFTY contracts,
E matched with the counter party client, Kasam Holding Pvt. Ltd.
in less than a few seconds. It is pertinent to note here that the
noticee executed all the reversal trades in a matter of minutes/
hours, at a profit of Rs.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 transac-
F
tions 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
G Regulations 3(a), (b) and (c) and 4(1), (2)(a) and (b) of the PFUTP
Regulations, 2003. Consequently, a penalty of Rs.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
H
in Rakhi Trading, which read as follows:
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 965
TRADING PRIVATE LTD. [KURIAN, J.]

“5. Index in a capital market is a statistical indicator of how the A
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 financial or economic performance is
evaluated. Unlike stocks in the cash segment, it is not traded as
such though investors speculate on market behaviour using index
B
as the underlying in the F & O segment. Nifty, the stock index of
NSE, is computed using market capitalization weighted method
(share price x number of outstanding shares) of fifty stocks being
traded in the cash segment of NSE. It is a well diversified stock
index covering 22 different sectors of the Indian economy. The
eligibility of a particular stock for being selected for Nifty index C
depends on the liquidity of the stock as well as the floating stock
of the company. Nifty, therefore, is a very dynamic index which is
not constant but evolves continuously. Obviously, to manipulate
such a diverse and changing portfolio of stocks in the cash
segment is extremely difficult, if not impossible by trading in the
D
F & O segment. It is also NSE’s stated position on its website
that “stock index is difficult to manipulate as compared to stock
prices, more so in India and the possibility of cornering is reduced.
This is partly because an individual stock has a limited supply
which can be cornered”. It is obvious that when Nifty is traded in
options contracts, the movement of prices in that segment cannot E
have any impact on the price discovery system in the cash
segment which is one of the allegations brought out in the
ad-interim ex-parte order and the show cause notice. The charge
against the appellant in the show cause notice is that by executing
trades in Nifty options in the F & O segment “the original trades
F
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 without significant variations in the traded price of
the underlying security”. The insinuation is that by executing
manipulative trades in the F & O segment, Nifty index was sought
to be tampered with. This charge proceeds on the assumption G
that the movement of Nifty options in the F & O segment should
be in harmony with the movement of Nifty index in the cash
segment. This assumption is fallacious and we cannot agree.
Movement of index in the cash segment does influence the index
H
966 SUPREME COURT REPORTS [2018] 1 S.C.R.

A options in the F & O segment because the strike rate is directly
linked with the index value in the cash segment. However, the
converse is not always true. While transactions 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
B
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 i mmediately.
Such events may have a great impact on perceptions in the F &
C 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
D
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 investors also trade.
E We are, therefore, satisfied that the movement in the two
segments need not be in tandem. In the instant case the appellant
executed Nifty option contracts and it must be remembered that
Nifty index is determined by fifty highly liquid scrips which also
vary from time to time and the index moves on the basis of their
performance in the cash segment. These movements cannot be
F
in tandem with the movement of the price of Nifty options in the
F & O segment because Nifty as an index is not capable of being
traded in the cash segment. What is traded in the cash segment
are the fifty stocks which constitute Nifty. To say that some
manipulative trades in Nifty options in the F & O segment could
G influence the Nifty index is too farfetched to be accepted. The
only way Nifty index could be influenced is through manipulation
of the prices of all or majority of the scrips in the cash segment
that constitute Nifty. This is extremely difficult, if not impossible.
It is common case of the parties that the appellant traded only 13
H
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 967
TRADING PRIVATE LTD. [KURIAN, J.]

Nifty option contracts in the F & O segment. Assuming these A
trades were manipulative, could these ever influence the Nifty
index. As already observed, Nifty index is a very large well
diversified portfolio of stocks which is not capable of being
influenced much less manipulated by the movement of prices in
the F & O segment particularly by the handful of trades executed
B
by the appellant. In this view of the matter, we have no hesitation
to hold that the 13 trades in Nifty options executed by the
appellant had no impact on the market or affected the investors in
any way nor did these influence the Nifty index in any manner.
The charge in this regard must fail.
6. Another charge against the appellant is that its trades in Nifty C
options were fictitious transactions which were synchronized and
reversed resulting in the creation of misleading appearance of
trading in those options. Derivative segment is highly volatile and
involves a complexed form of trading with high risks and the
players in this segment do not follow the herd mentality as is D
often noticed in the cash segment but take decisions based on
their own perception of the market. The number of persons trading
in this segment is comparatively much less than those in the cash
segment. The Board has found that only 14 contracts executed
by the appellant in the options segment constituted 30 to 50 per
cent of the market gross in that segment though nifty is the most E
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 F
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 G
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.
H
968 SUPREME COURT REPORTS [2018] 1 S.C.R.

A 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 counter party in the 13 impugned transactions was the
same entity. Impugned order records that Nifty contracts which
are the most active contracts in the options segment cannot be
traded in the way the appellant has traded matching its orders to
B
seconds with the counter party client. This, according to the
adjudicating officer, was a pre-planned arrangement between the
appellant and its counter party and their intention was to create a
false and misleading appearance in the market and a manipula-
tive device was used for synchronizing the trades. The learned
C senior counsel appearing for the appellant did not dispute the fact
that the trades had been synchronized and reversed but he ar-
gued that these did not manipulate the market and that only the
synchronized trades which manipulate the market are prohibited.
He placed reliance on a judgment of this Tribunal in Ketan Parekh
vs. Securities and Exchange Board of India, Appeal No.2 of 2004
D
decided on 14.7.2006. He also referred to the order passed by the
Board in the case of ICICI Brokerage Services Ltd. wherein a
similar view had been taken and strenuously argued that since the
synchronized trades of the appellant did not manipulate the
market, the impugned order deserves to be set aside. We find
E merit in this contention. The fact that the trades executed by the
appellant had been synchronized with the counter party is not
really in dispute before us. We have already held that the 13 trades
in Nifty options executed by the appellant had no impact on the
market or affected the investors or the Nifty index in any manner.
In Ketan Parekh’s case (supra) this Tribunal had observed that
F
synchronized trades per se are not illegal but only those which
manipulate the market in any manner are the ones that are
prohibited and violate the Regulations. Relying upon the
observations made by this Tribunal in Nirmal Bang Securities
Pvt. Ltd. vs. Securities and Exchange Board of India [2004] 49
G SCL 421, the then chairman of the Board while dealing with the
synchronized trades executed by the appellant therein observed
as under:-
“For the above reason, although it cannot be said that
synchronized deals are pre se illegal, for the same reason, it
H
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 969
TRADING PRIVATE LTD. [KURIAN, J.]

cannot be said that all synchronized transactions are legal and A
permitted. All synchronized transactions which have the ef-
fect of manipulating the market are against fair market prac-
tices 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 B
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 C
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 D
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 and we are
clearly of the view that all those observations cannot apply to the E
trades executed in the F & O segment. Reverse trades in the
cash segment have been held to be illegal and violate the
Regulations because there is no “change of beneficial owner-
ship” in the traded scrip. Moreover, in the cash segment the scrip
is actually traded entailing not only “change of beneficial F
ownership” but also physical delivery/movement of the traded scrip.
When this does not happen in the cash segment, the trade is
described as a fictitious trade creating false volumes
which manipulates the market. The scenario in the F & O segment,
particularly in the options contracts with which we are concerned
in the present case, is altogether different from that of the cash G
segment. In the F & O segment there is no concept of “change of
beneficial ownership” since what is traded in this segment are
contracts and not the underlying stock or index and it is only
through cash settlement that the trade is concluded and no
H
970 SUPREME COURT REPORTS [2018] 1 S.C.R.

A physical delivery of any asset is involved. In this view of the matter,
synchronized and reversed trades in Nifty options in the F & O
segment can never manipulate the market which, in the present
context, means the value of the Nifty index in the cash segment.
To repeat, we may again observe that it is almost impossible to
manipulate the Nifty index which consists of fifty well diversified
B
highly liquid stocks in the cash segment. Since the trades of the
appellant were settled in cash through the stock exchange
mechanism, they were genuine and these could not create a false
or misleading appearance of trading in the F & O segment. It is
the Board’s own case that the appellant made profits in all these
C transactions and the counter party suffered losses.
8. When we analyse the nature of the trades executed by the
appellant, we find that it played in the derivative market neither as a
hedger nor as a speculator and not even as an arbitrageur. The question
that now arises is why did the appellant execute such trades with the
D counter party in which it continuously made profits and the other party
booked continuous losses. All these trades were transacted in March
2007 at the end of the financial year 2006-07. It is obvious and, this fact
was not seriously disputed by the learned senior counsel appearing for
the appellant, that the impugned trades were executed for the purpose
of tax planning. The arrangement between the parties was that profits
E 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,
F 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
G 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 annexed to the memorandum of appeal or
in the impugned order that there was any manipulation. ………
H
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 971
TRADING PRIVATE LTD. [KURIAN, J.]

Trading in securities can take place for any number of reasons A
and the authorities enquire into such transactions which
artificially influence the market and induce the investors to
buy or sell on the basis of such artificial transactions.”
The observations even though made in the context of the cash
segment are equally applicable to the F & O segment. We are in B
agreement with the aforesaid observations and relying thereon
we hold that the impugned transactions in the case before us do
not become illegal merely because they were executed for tax
planning as they did not influence the market. The learned
counsel for the respondent Board drew our attention to
Regulation 3(a), (b) & (c) and Regulation 4(1) and 4(2)(a) & (b) C
of the Regulations to contend that the trades of the appellant were
in violation of these provisions. We cannot agree with him.
Regulation 3 of the Regulations prohibits a person from buying,
selling or otherwise dealing in securities in a fraudulent manner or
using or employing in connection with purchase or sale of any D
security any manipulative or deceptive device in contravention of
the Act, Rules or Regulations. Similarly, Regulation 4 prohibits
persons from indulging in fraudulent or any unfair trade practices
in securities which include creation of false or misleading
appearance of trading in the securities market or dealing in a
security not intended to effect transfer of beneficial ownership. E
Having carefully considered these provisions, we are of the view
that market manipulation of whatever kind, must be in evidence
before any charge of violating these Regulations could be upheld.
We see no trace of any such evidence in the instant case. We
have, therefore, no hesitation in holding that the charge against F
the appellant for violating Regulations 3 and 4 must also fail.”
(Emphasis Supplied)
27. The SAT has also taken a view that the circular dated
10.03.2005 issued by the NSE was not legally binding. The members
were advised to desist from entering orders/transactions on illiquid G
securities/contracts where some set of members/clients executed
reversing transactions/both buy and sell at abnormal price differences
in premiums that had no relevance to the movement in prices of the
underlying. In the said circular, members were also advised to desist
from entering such orders which prima facie appeared to be H
972 SUPREME COURT REPORTS [2018] 1 S.C.R.

A non-genuine and further advised to put in appropriate internal systems
for checking such orders. SAT held that only SEBI-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,
B 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
C 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
D 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 of 2006 decided on June 20, 2006 wherein this
E Tribunal observed as under:-
“The trades, on the face of it, appear to be fictitious and we
shall proceed on that assumption. It is obvious that these trades
were executed by the clients and the appellant acted only as a
broker. If the appellant knew that the trades were fictitious
F then there would be no hesitation in upholding the finding of
the Board that it aided and abetted the parties to execute
fraudulent transactions. Having heard the learned counsel for
the parties and after going through the record we are satisfied
that this link is missing. There is no material on record to show
G that the appellant as a broker knew that the trades were fictitious
or that the buyer and the seller were the same persons. Trading
was through the exchange mechanism and was online where
the code number of the broker alone is known and the learned
counsel for the parties are agreed that it is not possible for
anyone to ascertain from the screen as to who the clients were.
H
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 973
TRADING PRIVATE LTD. [KURIAN, J.]

This is really a unique feature of the stock exchange where, A
unlike other moveable properties, securities are bought and
sold between the unknowns through the exchange mechanism
without the buyer or the seller ever getting to meet. Therefore
it was not possible for the broker to know who the parties
were. Merely because the appellant acted as a broker cannot
B
lead us to the conclusion that it must have known about the
nature of the transaction. There has to be some other material
on the record to prove this fact. The Board could have examined
someone from KIL to find out whether the appellant knew
about the nature of the transactions but it did not do so. As a
broker, the appellant would welcome any person who comes C
to buy or sell shares. The Board in the impugned order while
drawing an inference that the appellant must have known about
the nature of the transactions has observed that the appellant
failed to enquire from its clients as to why they were wanting
to sell the securities. We do not think that any broker would
D
ask such a question from its clients when he is getting business
nor is such a question relevant unless, of course, he suspects
some wrong doing for which there has to be some material on
the record.”
In Kishor R. Ajmera vs. Securities and Exchange Board of India,
Appeal No. 13 of 2007 decided on February 5, 2008 this Tribunal E
again 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 F
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 G
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
H
974 SUPREME COURT REPORTS [2018] 1 S.C.R.

A 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
B observed, even if we assume that the appellant’s clients had
executed reverse trades with the same counter party for some
mischief, we cannot impute knowledge of the same to the appellant
when the anonymity of the trading system does not allow a broker
to know who the counter party or counter party broker is. The
screen based trading system provides complete anonymity and
C the trades are executed through the price order matching
mechanism. In the instant case, no link other than broker client
relationship between the appellant and its clients has been
established, let alone any relation with the counter parties or the
counter party brokers. Moreover, the appellant executed only 23
D trades on behalf of 15 clients with a total close out difference of
Rs. 35.44 lacs (positive) which have been called in question. Having
regard to the fact that the appellant had executed 1,69,71,078
trades for 1,21,306 clients with a turnover of Rs. 1,11,659 crores
during the investigation period we are of the view that in terms of
materiality and substance this miniscule number of trades done
E on behalf of 15 clients were not likely to raise any alarm for the
appellant with a client base of over 4,70,000 clients. In these
circumstances, we cannot hold the appellant liable for the impugned
trades.
8. The other additional reason for which we cannot hold the
F appellant liable is that out of the 23 impugned trades that it executed
on behalf of its clients, 17 were executed directly by the clients
through the Internet. NSE by its circular of August 24, 2000 has
set detailed guidelines on Internet based trading through order
routing system which route client orders to the exchange trading
G system and the software for this service has to be in compliance
with the parameters set by the Board. The appellant as a broker
has very little direct control over such trades though it is recorded
as a broker in those trades. Having regard to the total volume of
trades executed by the appellant and the wide client base that it
has, the learned counsel for the appellant was right in contending
H
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 975
TRADING PRIVATE LTD. [KURIAN, J.]

that the appellant could not be expected to put every single trade A
under its scanner on a continuous basis particularly those executed
by the clients through the Internet and that the impugned trades
being so miniscule, there was no occasion for the appellant to get
a red alert. It is a fact that the clients had sufficient margins with
the appellant with no credit defaults at any stage and that all the
B
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.” C
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 D
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 E
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 was no commercial basis to suddenly, within a matter of minutes,
reverse a transaction when the value of the underlying had not undergone
any significant change.
F
32. According to SAT, the synchronization and reversal of trades
effected by the parties with a significant price difference, some in a few
seconds and majority, in any case, on the same day had no impact on the
market and it has not affected the NIFTY index in any manner or
induced investors. SAT has held that such trades are illegal only when
they manipulate the market in any manner and induce investors. It has G
also taken a view that there being no physical delivery of any asset,
there is no change of beneficial ownership and what is traded in the
F&O segment are only contracts and hence, such synchronised and
reverse trades in NIFTY options in the F&O segment “can never
manipulate the market”. It has also held that the trades being settled in H
976 SUPREME COURT REPORTS [2018] 1 S.C.R.

A cash through a stock exchange mechanism, are genuine and therefore
cannot create a false or misleading appearance of trading in the F&O
segment. Further, any trade to be objectionable must result in
influencing the market one way or the other. SAT held that these trades
were for the purpose of tax planning which is not violative of any
regulation. We are not inclined to get in to the issue of tax planning as it
B
was not mentioned in the show cause notices.
33. We find it difficult to appreciate the stand taken by the SAT
which is endorsed by the learned senior counsel appearing for the
respondents. Mr. Chidambaram, learned senior counsel appearing for
Rakhi Trading argues that the SAT decision is valid and proper. Reliance
C is also placed on the case of Ketan Parekh (supra) in which SAT held
that synchronised trades are not per se illegal. As far as reversal of
trades is concerned, the senior counsel has sought to distinguish Ketan
Parekh (supra) as it pertained to dealings in the cash segment whereas
the present case deals with the F&O segment. The learned senior counsel
D has strenuously argued that no rules of the game have been violated.
34. We are unable to agree with the arguments of the learned
senior counsel appearing for Rakhi Trading. Regulation 4(1) in clear and
unmistakable terms has provided that “no person shall indulge in a
fraudulent or an unfair trade practice in securities”. In Securities and
E Exchange Board of India and Ors. v. Shri Kanaiyalal Baldevbhai
Patel and Ors.3, 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
F 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
G 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
H 3
2017 SCC Online SC 1148
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 977
TRADING PRIVATE LTD. [KURIAN, J.]

be unfair, if the conduct undermines the good faith dealings involved A
in the transaction. Moreover the concept of ‘unfairness’ appears
to be broader than and includes the concept of ‘deception’ or
‘fraud’.
xxx xxx xxx
60. Coupled with the above, is the fact, the said conduct B
can also be construed to be an act of unfair trade
practice, which though not a defined expression, has to be
understood comprehensively to include any act beyond a fair
conduct of business including the business in sale and purchase of
securities. However the said question, as suggested by my learned
Brother, Ramana, J. is being kept open for a decision in a more C
appropriate occasion as the resolution required presently can be
made irrespective of a decision on the said question.”
35. Having regard to the fact that the dealings in the stock exchange
are governed by the principles of fair play and transparency, one does
not have to labour much on the meaning of unfair trade practices in D
securities. Contextually and in simple words, it means a practice which
does not conform to the fair and transparent principles of trades in the
stock market. In the instant case, one party booked gains and the other
party booked a loss. Nobody intentionally trades for loss. An intentional
trading for loss per se, is not a genuine dealing in securities. The platform E
of the stock exchange has been used for a non-genuine trade. Trading is
always with the aim to make profits. But if one party consistently makes
loss and that too in preplanned and rapid reverse trades, it is not genuine;
it is an unfair trade practice. Securities market, as the 1956 Act provides
in the preamble, does not permit “undesirable transactions in securities”.
The Act intends to prevent undesirable transactions in securities by F
regulating the business of dealing therein. Undesirable transactions would
certainly include unfair practices in trade. The SEBI Act, 1992 was
enacted to protect the interest of the investors in securities. Protection
of interest of investors should necessarily include prevention of misuse
of the market. Orchestrated trades are a misuse of the market
G
mechanism. It is playing the market and it affects the market integrity.
36. Ordinarily, the trading would have taken place between
anonymous parties and the price would have been determined by the
market forces of demand and supply. In the instant case, the parties did
not stop at synchronised trading. The facts go beyond that. The trade
reversals in this case indicate that the parties did not intend to transfer H
978 SUPREME COURT REPORTS [2018] 1 S.C.R.

A 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.
B 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
C 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:
D “20. …As already observed ‘synchronisation’ or a negotiated deal
ipso facto is not illegal. A synchronised transaction will, however,
be illegal or violative of the Regulations if it is executed with a
view to manipulate the market or if it results in circular trading or
is dubious in nature and is executed with a view to avoid regulatory
detection or does not involve change of beneficial ownership or is
E executed to create false volumes resulting in upsetting the market
equilibrium. Any transaction executed with the intention to defeat
the market mechanism whether negotiated or not would be illegal.
Whether a transaction has been executed with the intention to
manipulate the market or defeat its mechanism will depend upon
F the intention of the parties which could be inferred from the
attending circumstances because direct evidence in such cases
may not be available. The nature of the transaction executed, the
frequency with which such transactions are undertaken, the value
of the transactions, whether they involve circular trading and
whether there is real change of beneficial ownership, the
G conditions then prevailing in the market are some of the factors
which go to show the intention of the parties. This list of factors,
in the very nature of things, cannot be exhaustive. Any one factor
may or may not be decisive and it is from the cumulative effect of
these that an inference will have to be drawn.”
H (Emphasis Supplied)
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 979
TRADING PRIVATE LTD. [KURIAN, J.]

From the facts before us, it is clear that the traders in question did A
not intend to transfer beneficial ownership and therefore these trades
are non genuine.
38. Rather than allowing the market forces to operate in their
natural course, the traders repeatedly carried out the impugned
transactions which deprived other market players from full participation. B
The repeated reversals and predetermined arrangement to book profits
and losses respectively, made it clear that the parties were not trading in
the normal sense and ordinary course. Resultantly, there has clearly
been a restriction on the free and fair operation of market forces in the
instant case.
C
39. Regulation 2(1)(c) defines fraud. Under Regulation 2(1)(c)(2)
a suggestion as to a fact which is not true while he does not believe it to
be true is fraud. Under Regulation 2(1)(c)(7), a deceptive behaviour of
one depriving another of informed consent or full participation is 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 D
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 E
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 F
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.
G
41. According to SAT, only if there is market impact on account
of sham transactions, could there be violation of the PFUTP Regulations.
We find it extremely difficult to agree with the proposition. As already
noted above, SAT has missed the crucial factors affecting the market
integrity, which may be direct or indirect. The stock market is not a
H
980 SUPREME COURT REPORTS [2018] 1 S.C.R.

A platform for any fraudulent or unfair trade practice. The field is open to
all the investors. By synchronization and rapid reverse trade, as has
been carried out by the traders in the instant case, the price discovery
system itself is affected. Except the parties who have pre-fixed the
price nobody is in the position to participate in the trade. It also has an
adverse impact on the fairness, integrity and transparency of the stock
B
market.
42. We are fortified in our conclusion by the judgment of this
Court in Securities And Exchange Board of India v. Kishore R.
Ajmera4, though it is a case pertaining to brokers, wherein it has been
held at paragraph 25:
C
“25. The SEBI Act and the Regulations framed thereunder are
intended to protect the interests of investors in the Securities Market
which has seen substantial growth in tune with the parallel
developments in the economy. Investors’ confidence in the
capital/securities market is a reflection of the effectiveness of the
D regulatory mechanism in force. All such measures are intended
to pre-empt manipulative trading and check all kinds of
impermissible conduct in order to boost the investors’ confidence
in the capital market. The primary purpose of the statutory
enactments is to provide an environment conducive to increased
E participation and investment in the securities market which is vital
to the growth and development of the economy. The provisions of
the SEBI Act and the Regulations will, therefore, have to be
understood and interpreted in the above light.”
In this case it was also held that in the absence of direct proof of
F meeting of minds elsewhere in synchronised transactions, the test should
be one of preponderance of probabilities as far as adjudication of civil
liability arising out of the violation of the Act or the provision of the
Regulations is concerned. To quote:
“31. The conclusion has to be gathered from various circumstances
G like that volume of the trade effected; the period of persistence in
trading in the particular scrip; the particulars of the buy and sell
orders, namely, the volume thereof; the proximity of time between
the two and such other relevant factors…”

4
H (2016) 6 SCC 368
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 981
TRADING PRIVATE LTD. [KURIAN, J.]

We do not think that those illustrations are exhaustive. There can A
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 B
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 C
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 to D
refer to the case of Angel Trading wherein the broker repeatedly wrote
to the National Stock Exchange informing them about trades in the
options segment that were executed at unrealistic prices and requesting
them to put in mechanisms in the Options segment so that these trades
are not allowed to enter the system. In the absence of any material E
provided by SEBI to prove the charges against the brokers, particularly
regarding aiding and abetting fraudulent or unfair trade practices, we
are of the opinion that the orders of SEBI against the brokers should be
interfered with. Accordingly, the appeals filed against the brokers are
dismissed.
F
45. Before concluding, we would like to reiterate the
observations made by this Court in Kishore R. Ajmera (supra) and
Kanaiyalal Patel (supra) regarding the need for a more comprehensive
legal framework governing the securities market. As the market grows,
ingenuous means of manipulation are also employed. In such a scenario,
it is essential that SEBI keeps up with changing times and develops G
principles for good governance in the stock market which ensure free
and fair trading.
46. There shall be no order as to costs.

H
982 SUPREME COURT REPORTS [2018] 1 S.C.R.

A R. BANUMATHI, J. 1. I have gone through the judgment
proposed by His Lordship Justice Kurian Joseph. I am in agreement
with the conclusion arrived at by His Lordship. However, in view of the
importance of the issues involved, I prefer to give my own additional
reasonings also for my concurrence.
B 2. Since the issues involved in all the appeals are one and the
same, appeals filed by SEBI pertaining to the traders and the brokers
were heard together. For convenience and reference on facts, I have
taken up the appeal arising out of Rakhi Trading Pvt. Ltd. as the lead
case.
C
3. Brief facts of the case are that in 2007, SEBI had examined
the nature of transactions occurring in the derivative segment of the
capital market. Upon examination of the trading data of the Future and
Option Segment (herein after referred as “F & O Segment”) on the
NSE for the period January to March, 2007, it was observed that the
D brokers at NSE were buying and selling almost equal quantities of
contracts within the day. Moreover, it was noticed that such buy/sell
orders were synchronized [Synchronized trade is one where buy and
sell orders are placed simultaneously for the same volume]. In 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
E
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
F 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-
G
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
H
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 983
TRADING PRIVATE LTD. [R. BANUMATHI, J.]

executed synchronized/matched/reversal trades and indulged in non- A
genuine transactions with certain clients/stock brokers during the period
of examination in the F & O Segment by enclosing a report showing
fourteen Options Contracts executed by it in F & O Segment between
21st March to 30th March, 2007 with a total close out difference (COD)
of Rs. 1,15,79,312.15/- i.e. net profit of Rs. 115.79 lakhs, thereby violating
B
Regulations 3(a), 4(1) and 4(2)(a) of SEBI (Prohibition of Fraudulent
and Unfair Trade Practices relating to Securities Market) Regulations,
2003 (for short “PFUTP Regulations”). On the show cause notice, the
respondent, inter alia, contended that the impugned transactions were
genuine trades, traded on the screen in anonymity in compliance with
the rules and regulations of the exchange for trading in Options Segment C
and the said transactions in no manner undermined price discovery or
influenced the market.

5. Upon consideration of the findings in the preliminary enquiry
and submissions of the respondent, the Adjudicating Officer found that
most of the trades i.e. buying and selling of contracts within a gap of D
few seconds between the same parties through same set of brokers
matched and found that it is unrealistic that the orders would match
exactly both the quantity and price and with the same party again and
again. The Adjudicating Officer further held that manipulative device
was used for synchronization of trades and the trades were fraudulent/ E
fictitious in nature. After referring to SAT’s judgment in Ketan Parekh
v. SEBI (Appeal No. 2 of 2004) and other judgments, the Adjudicating
Officer found that the respondent has executed synchronized/reversal
trades, in violation of PFUTP Regulations, 2003 and imposed a penalty
of Rs.1,08,00,000/- on the respondent in terms of the provisions of Section
15HA of SEBI Act, 1992. F

6. On appeal by the respondent, Securities Appellate Tribunal
(SAT) set aside the order of the Adjudicating Officer and held that NIFTY
is a large well diversified index of stocks which is not capable of being
influenced. SAT further held that the thirteen trades in the NIFTY options G
executed by the respondent had no impact on the market and those
transactions did not influence the NIFTY index in any manner. SAT
held that the impugned transactions do not become illegal merely because
they were executed for tax planning as they did not influence the market.
Holding that there has been no violation of any regulation of SEBI, SAT
H
984 SUPREME COURT REPORTS [2018] 1 S.C.R.

A 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
B 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,
C
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
D 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
E listed or proposed to be listed on a recognised stock
exchange;

(c) engage in any act, practice, course of business which
operates or would operate as fraud or deceit upon any
person, in connection with the issue, dealing in securities
F
which are listed or proposed to be listed on a recognised
stock exchange, in contravention of the provisions of this
Act or the rules or the regulations made thereunder;

(d) engage in insider trading;
G
(e) deal in securities while in possession of material or non-
public information or communicate such material or non-
public information to any other person, in a manner which
is in contravention of the provisions of this Act or the
rules or the regulations made thereunder;
H
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 985
TRADING PRIVATE LTD. [R. BANUMATHI, J.]

(f) acquire control of any company or securities more than A
the percentage of equity share capital of a company whose
securities are listed or proposed to be listed on a recognised
stock exchange in contravention of the regulations made
under this Act.

8. Section 30 of the SEBI Act reads as follows:- B

30. Power to make regulations.- (1) The Board may, with the
previous approval of the Central Government by notification, make
regulations consistent with this Act and the rules made thereunder
to carry out the purposes of this Act.
C
...........

9. Section 15HA of the Act which deals with penalty for fraudulent
and unfair trade practices, Section 15HB which deals with penalty for
contravention where no separate penalty has been provided and Section
15J which lays down the factors to be taken into account while adjudging D
the quantum of penalty read as follows:

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 of twenty-five E
crore rupees or three times the amount of profits made out of
such practices, whichever is higher.

15HB. Penalty for contravention where no separate penalty
has been provided.- Whoever fails to comply with any provision
of this Act, the rules or the regulations made or directions issued F
by the Board thereunder for which no separate penalty has been
provided, shall be liable to a penalty which may extend to one
crore rupees.

15J. Factors to be taken into account by the adjudicating
officer.—While adjudging the quantum of penalty under Section G
15-I, the adjudicating officer shall have due regard to the following
factors, namely—

(a) the amount of disproportionate gain or unfair advantage,
wherever quantifiable, made as a result of the default;
H
986 SUPREME COURT REPORTS [2018] 1 S.C.R.

A (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
B 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
C 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
D from referring to the explanation of the relevant Capital Market Terms.

11. Re-Contention: The impugned trades were normal
transactions traded on the system and not fictitious transactions:-
Contention of the respondent is that the impugned trades were normal
transactions traded on the system maintaining complete anonymity and
E
the trades were not illegal and the respondent has not violated the
provisions of SEBI Regulations. Respondent-Rakhi Trading Pvt. Ltd.
contended that the trading was done on automated screen based trading
and it was not possible for them to know who the counter party was and
therefore, the synchronization of trade was a mere coincidence. Per
F contra, SEBI maintained that the respondent-Rakhi Trading and the
counter party-Kasam Holding Pvt. Ltd. had prior understanding and have
thwarted the checks and balances of the trading system by executing
non-genuine transactions with ulterior purpose.

12. To appreciate the contentious issues raised by the parties, I
G refer to the impugned reversal trade transactions:

H
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 987
TRADING PRIVATE LTD. [R. BANUMATHI, J.]

A

B

C

D

E

F

G

H
988 SUPREME COURT REPORTS [2018] 1 S.C.R.

A

B

C

D

E

F

G

H
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 989
TRADING PRIVATE LTD. [R. BANUMATHI, J.]

13. Synchronized Trading: As per the Oxford dictionary the word A
‘synchronize’ means “cause to occur at the same time; be
simultaneous”. A synchronized trade is one where the buyer and seller
enter the quantity and price of the shares they wish to transact at
substantially the same time. This could be done through the same broker
(termed a cross deal) or through two different brokers. [Ketan Parekh
B
v. SEBI, Manu/SB/0229/2006]
14. Synchronized trade is one wherein ‘buy and sell’ orders are
placed simultaneously for the same quantity and price they wish to transact
at substantially the same time. Synchronized trades are not illegal
provided that they are executed on the screens of the exchange in the
price and order matching mechanism of the exchanges just like any C
other normal trade. As per SEBI’s circular No.SMDRP/ POLICY/CIR-
32/99 dated 14.09.1999, “All negotiated deals...... shall be executed
only on the screens of the exchanges in the price and order matching
mechanism of the exchanges just like any other normal trade.”. In
the said circular, it was stated that “The above decision was taken as D
negotiated deals avoid transparency requirements, do not contribute
to price discovery and some investors do not have benefit of the
best possible price and militate against the basic concept of stock
exchanges, which are meant to bring together a large number of
buyers and sellers in an open manner.”. (Reference: https://
www.sebi.gov.in/legal/circulars/sep-1999/negotiated-deals_186 E
29. html)
15. In Ketan Parekh v. SEBI Manu/SB/0229/2006, the Securities
Appellate Tribunal (SAT) has considered the circumstances under which
“Synchronized trade” will be legal and held as under:
F
“There are yet another type of transactions which are commonly
called synchronized deals. The word ‘synchronise’ according to
the Oxford dictionary means “cause to occur at the same time;
be simultaneous”. A synchronized trade is one where the buyer
and seller enter the quantity and price of the shares they wish to
transact at substantially the same time. This could be done through G
the same broker (termed a cross deal) or through two different
brokers. Every buy and sell order has to match before the deal
can go through. This matching 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 synchronized deal H
990 SUPREME COURT REPORTS [2018] 1 S.C.R.

A 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
B
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
C 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 is not illegal
D
and cannot violate the regulations....” [underlining added]
16. A synchronized transaction will become illegal or violative of
the Regulations if it is executed with a view to manipulate the market or
if it results in circular trading or is dubious in nature and with a view to
manipulate the price or volume of the scrip or with some ulterior purpose.
E In Ketan Parekh case, SAT held as under:
“..... A synchronized transaction will, however, be illegal or violative
of the Regulations if it is executed with a view to manipulate the
market or if it results in circular trading or is dubious in nature and
is executed with a view to avoid regulatory detection or does not
F involve change of beneficial ownership or is executed to create
false volumes resulting in upsetting the market equilibrium. Any
transaction executed with the intention to defeat the market
mechanism whether negotiated or not would be illegal. Whether
a transaction has been executed with the intention to manipulate
G the market or defeat its mechanism will depend upon the intention
of the parties which could be inferred from the attending
circumstances because direct evidence in such cases may not be
available. The nature of the transaction executed, the frequency
with which such transactions are undertaken, the value of the
transactions, whether they involve circular trading and whether
H
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 991
TRADING PRIVATE LTD. [R. BANUMATHI, J.]

there is real change of beneficial ownership, the conditions then A
prevailing in the market are some of the factors which go to show
the intention of the parties. This list of factors, in the very nature
of things, cannot be exhaustive. Any one factor may or may not
be decisive and it is from the cumulative effect of these that an
inference will have to be drawn.” (underlining added)
B
17. In the present case, all the fourteen transactions (except one)
pertaining to Nifty were synchronized. Be it noted that as pointed out
by SAT in para (7) of its order, the respondent did not dispute the fact
that “....trades had been synchronized and reversed....”. The
respondent only contended that the impugned “synchronized trade’ did
not manipulate the market and that what is prohibited are only the C
synchronized trades and that the impugned trades were normal
transactions and the respondent had not violated the provisions of PFUTP
Regulations. In the context of the stand taken by Rakhi Trading before
SAT, it is now not open to respondent Rakhi Trading to contend that the
transactions were not synchronized and reversed. D
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 E
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 F
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 (Strike Price 3930)
Options (Trade volume 10,000) was sold within a second at 14:50:28 at G
Trade Price of Rs.270/-. Within a short gap of time, at 15:06:42, the
same NIFTY 50 (Trade Volume 10,000) (Strike Price 3930) was bought
by the respondent within three seconds at Trade Price of Rs.110/- and
the price difference of two legs of the trade being Rs.160/- with COD
Rs.16,00,000/-. The percentage of the gross of the trade on that day H
992 SUPREME COURT REPORTS [2018] 1 S.C.R.

A was 40.82%. As seen from the chart, the other reversal trade transactions
were also almost similar within a gap of few seconds, between ‘buy’
and ‘sell’ order, with significant price variation, though no major price
variation in the underlying price. During examination of those
transactions, the Whole Time Member observed that the synchronized
transactions had a definite objective of enabling one party (Rakhi Trading
B
Pvt. Ltd.) to book profits and the other party (Kasam Holding Pvt. Ltd.)
to book losses in the close out difference. Thirteen Options Contracts
executed by respondent-Rakhi Trading in the F & O Segment between
March 21 and March 30, 2007 with a total Close Out Difference (COD)
of Rs.1,15,79,312.15 (Positive) showing a net profit of Rs.115.79 lakhs
C to Rakhi Trading Pvt. Ltd. and loss to the counter party i.e. Kasam
Holding Pvt. Ltd.
20. The question whether there was fictitious transactions creating
illegal synchronization has to be gathered from the facts and
circumstances and intention of the parties. Acting in concert is something
D about which it is difficult to obtain direct evidence. Proof of manipulation
might depend upon inferences drawn from factual details. Such
inferences could be gathered from pattern of trading data and the nature
of the transactions etc.
21. ‘By manipulation and synchronization’, it is meant that two
E parties have pre-meditated; as such a drastic movement in price within
few seconds could have been only through prior understanding between
the parties concerned only to fulfill an unlawful objective through misuse
of the stock exchange. That is, prior arrangement/prior understanding
with each other wherein one will make profit and other will lose and
thereby as soon as one party opens up its trade in the market, the other
F party will buy it. Though the trading is shown on the screen, but prior
arrangement is very well possible 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
G 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
H over a period of time only indicates that there was pre-arrangement
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 993
TRADING PRIVATE LTD. [R. BANUMATHI, J.]

between the parties before the trade was executed. The transactions A
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
B
such transactions.
22. Buying and selling of equal quantities within the day may not
be wrong but the trades with ulterior purpose are not genuine for sure.
In the present case, every time one party is making profit and other
party is facing loss. Further, there was proximity in the time of sell
orders at a high price to the party-Kasam Holding Pvt. Ltd. and the C
same quantity being reversed by Kasam Holding Pvt. Ltd. to the same
party-Rakhi Trading Pvt. Ltd. at a low price through the same set of
brokers. As discussed earlier, during March, 2007 thirteen Nifty Option
Contracts got matched between the same parties through the same
brokers. I fail to understand as to why Kasam Holding has made the D
transactions repeatedly by incurring losses. It seems improbable that
Kasam Holding which was facing loss in each transaction by trading
with the respondent, was still eager to trade with the same repeatedly
for about four days which is not in consonance with the market trend
and human conduct; more so, when there has not been any major
difference in the underlying price. It is thus difficult to accept that several E
such sell and buy orders between the respondent and Kasam Holding
being within a gap of “1”, “2” or “3” or few seconds were by mere
coincidence. As contended by the appellant-SEBI, it was too much of
coincidence that there were number of transactions of ‘buy and sell
orders’ between the same parties with same quantity of stock with F
significant variation in price.
23. Insofar as synchronized trade involving same set of brokers
and meeting of minds, in Securities and Exchange Board of India v.
Kishore R. Ajmera (2016) 6 SCC 368, this Court held as under:
“29. This will take us to the second and third category of cases G
i.e. Ess Ess Intermediaries (P) Ltd., Rajesh N. Jhaveri and
Rajendra Jayantilal Shah (second category) and Monarch
Networth Capital Ltd. (earlier known as Networth Stock Broking
Ltd.) (third category). In these cases the volume of trading in the
illiquid scrips in question was huge, the extent being set out
H
994 SUPREME COURT REPORTS [2018] 1 S.C.R.

A hereinabove. Coupled with the aforesaid fact, what has been
alleged and reasonably established, is that buy and sell orders in
respect of the transactions were made within a span of 0 to 60
seconds. While the said fact by itself i.e. proximity of time between
the buy and sell orders may not be conclusive in an isolated case
such an event in a situation where there is a huge volume of
B
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
C 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
D
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
E which will result in matching thereof but only as per permissible
parameters which are programmed accordingly.
30. It has been vehemently argued before us that on a screen-
based trading the identity of the 2nd party be it the client or the
broker is not known to the first party/client or broker. According
F to us, knowledge of who the 2nd party/client or the broker is, is not
relevant at all. While the screen-based trading system keeps the
identity of the parties anonymous it will be too naive to rest the
final conclusions on said basis which overlooks a meeting of minds
elsewhere. Direct proof of such meeting of minds elsewhere would
rarely be forthcoming. The test, in our considered view, is one of
G preponderance of probabilities so far as adjudication of civil liability
arising out of violation of the Act or the provisions of the
Regulations framed thereunder is concerned. Prosecution under
Section 24 of the Act for violation of the provisions of any of the
Regulations, of course, has to be on the basis of proof beyond
reasonable doubt.
H
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 995
TRADING PRIVATE LTD. [R. BANUMATHI, J.]

31. The conclusion has to be gathered from various circumstances A
like that volume of the trade effected; the period of persistence in
trading in the particular scrip; the particulars of the buy and sell
orders, namely, the volume thereof; the proximity of time between
the two and such other relevant factors. The fact that the broker
himself has initiated the sale of a particular quantity of the scrip
B
on any particular day and at the end of the day approximately
equal number of the same scrip has come back to him; that trading
has gone on without settlement of accounts i.e. without any
payment and the volume of trading in the illiquid scrips, all, should
raise a serious doubt in a reasonable man as to whether the trades
are genuine. The failure of the brokers/sub-brokers to alert C
themselves to this minimum requirement and their persistence in
trading in the particular scrip either over a long period of time or
in respect of huge volumes thereof, in our considered view, would
not only disclose negligence and lack of due care and caution but
would also demonstrate a deliberate intention to indulge in trading
D
beyond the forbidden limits thereby attracting the provisions of
the FUTP Regulations.”[underlining added]
24. In Nirmal Bang Securities Private Ltd. v. The Chairman,
Securities and Exchange Board of India (MANU/SB/0206/2003),
SAT applied the test of price, quantity and time to hold that synchronized
trading in that case was violative of norms of trading in securities and E
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 F
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 G
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
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996 SUPREME COURT REPORTS [2018] 1 S.C.R.

A 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 decide
to synchronize the transaction the story is different. There are
many transactions giving an impression that these were all
synchronized, otherwise there was no possibility of such perfect
B
matching of quantity price etc. As the Respondent rightly stated it
is too much of a coincidence over too long a period in too many
transactions when both parties to the transaction had entered buy
and sell orders for the same quantity of shares almost
simultaneously. The data furnished in the show cause notice
C certainly goes to prove the synchronized nature of the transaction
which is in violation of regulation 4 of the FUTP Regulations. The
facts on record categorically establishes that BEB had indulged
in synchronized trading in violation of regulation 47 of the FUTP
Regulations. In a synchronized trading intention is implicit.”
D 25. In the quasi-judicial proceeding before SEBI, the standard of
proof is preponderance of probability. In a case of similar synchronized
trading involving same set of brokers emphasizing that the standard of
proof is “preponderance of probability” in paras (26) and (27), in Kishore
R. Ajmera case, this Court held as under:-
E “26. It is a fundamental principle of law that proof of an allegation
levelled against a person may be in the form of direct substantive
evidence or, as in many cases, such proof may have to be inferred
by a logical process of reasoning from the totality of the attending
facts and circumstances surrounding the allegations/charges made
and levelled. While direct evidence is a more certain basis to come
F to a conclusion, yet, in the absence thereof the Courts cannot be
helpless. It is the judicial duty to take note of the immediate and
proximate facts and circumstances surrounding the events on
which the charges/allegations are founded and to reach what would
appear to the Court to be a reasonable conclusion therefrom. The
G test would always be that what inferential process that a
reasonable/prudent man would adopt to arrive at a conclusion.”
[underlining added]
26. There was no possibility of such perfect matching of quantity,
timing, prices etc. between the same parties unless there was prior
H meeting of minds or a specific understanding/arrangement between the
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 997
TRADING PRIVATE LTD. [R. BANUMATHI, J.]

parties. After referring to Ketan Parekh and Nirmal Bang cases, in A
SEBI v. Accord Capital Markets Ltd. (MANU/SB/0136/2007), SEBI
held 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. B
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 C
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.
........... D

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 E
the conduct of the parties in a major market manipulation could
reasonably lead to conclusion that the Broker was responsible in
the manipulation. The evidence, direct or circumstantial, should
be sufficient to raise a presumption in its favour with regard to the
existence of a fact sought to be proved. As pointed out by Best in F
“Law of Evidence”, the presumption of innocence is no doubt
presumption juris; but everyday practice shows that it may be
successfully encountered by the presumption of guilt arising from
circumstances, though it may be a presumption of fact. Since it is
exceedingly difficult to prove facts which are especially within
the knowledge of parties concerned, the legal proof in such G
circumstances partakes the character of a prudent man’s estimate
as to the probabilities of the case. Hon’ble Securities Appellate
Tribunal (SAT) has observed in the matter of Ketan Parekh v.
SEBI:
H
998 SUPREME COURT REPORTS [2018] 1 S.C.R.

A “...Whether a transaction has been executed with the intention
to manipulate the market or defeat its mechanism will depend
upon the intention of the parties which could be inferred from
the attending circumstances because direct evidence in such
cases may not be available....”
B 4.25 Presumption plays a critical role in coming to a finding as to
the involvement or otherwise of a market participant in any
manipulation. For instance, while trading, a lip service can be paid
to a screen based trading system while agreement is reached
beforehand between brokers to effect the transaction. Anonymity
can be a cloak to cover anastomosis of interest. Therefore, the
C hackneyed plea based on intentions in the market place cannot
pass muster in all circumstances, more so when such intentions
are in the special/peculiar knowledge of the parties to the
transactions. Also any suggestion attributing innocence to the
parties involved in such transactions would give rise to an untenable
D situation where certain other third persons/entities alone would
be responsible for the manipulation and none else.”
27. Applying the test laid down in Kishore R. Ajmera case to the
present case, I find that by cumulative analysis of the reversal transactions
between respondent and Kasam Holding, quantity, time and significant
variation of prices, without major variation in the underlying price of the
E
securities clearly indicate that the respondent’s trades are not genuine
and had 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
F 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
G 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
H some ulterior purpose.
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 999
TRADING PRIVATE LTD. [R. BANUMATHI, J.]

29. On behalf of respondent, learned senior counsel Mr. P. A
Chidambaram contended that securities like Nifty are vast pools and
Nifty has a dynamic index which evolves continuously and it is too difficult
for a manipulator to affect such prices. Further contention of the
respondent is that whether the impugned trades are synchronized or not
had no impact on the market and the respondent cannot be held to have
B
violated regulations.
30. On behalf of the respondent-Tungarli Tradeplace Pvt. Ltd.,
Mr. Mehta learned counsel submitted that a person can be found to
have violated Regulations 3 and 4, he should have indulged in some
fraudulent practice with an intention to manipulate the securities market
and has drawn our attention to Regulation 2(c) of the SEBI Regulations, C
2003 in which ‘fraud’ has been defined. Learned counsel submitted that
for a person to be held liable for breach of the above mentioned
Regulations, SEBI has to establish the following:- (i) that the party entered
into the transactions with the intention to manipulate the market; and (ii)
that there is evidence that the market was in fact manipulated. D
31. Per contra, learned senior counsel for SEBI contended that
SAT had misconstrued the charge that the impugned synchronized trades
had no effect of manipulating the Nifty index and SAT was not right in
holding that only those synchronized transactions which have the effect
of manipulating the market are undesirable and prohibited. It was E
contended that it was never the case of SEBI that Nifty was being
manipulated by the impugned trade executed by the respondent and
findings of SAT are not sustainable in law and would have serious
repercussion on the market integrity.
32. The respondent has made the transactions repeatedly by F
incurring losses, particularly when there were no transactions made by
any third party in the market. Abnormal difference between the prices
at which the trades were executed without corresponding effect on the
price of the underlying security, shows that the option in which the party
traded was not in demand in the market. It is unusual that the trades
were transacted with such huge profits when there was no change in G
the underlying prices. These trade transactions obviously only aimed at
carrying out manipulative objective.
33. Once the reversal transactions are shown to be non-genuine
or shown to be fictitious creating a false or misleading appearance in the
market for ulterior purpose and that the stock market was misused by H
1000 SUPREME COURT REPORTS [2018] 1 S.C.R.

A 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
B 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
C 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
D or affected the investors in any way nor did they influence the Nifty in
any manner.
35. Regulation 3 deals with “Prohibition of certain dealings in
securities”. Regulation 4 deals with “Prohibition of manipulative,
fraudulent and unfair trade practices”. Regulation 4 starts as
E “Without prejudice to the provisions of Regulation 3.....”. Regulation
4(2) is an inclusive provision. Regulation 4(2) stipulates that “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.....”,
instances pointed out thereon. Regulation 4(2)(a) deals with “.....an act
which creates false or misleading appearance of trading in the
F securities market”. An act to fall within Regulation 4(2)(a), it is not
necessary that the transactions entered into by the party was with
intention to manipulate the market and that the market was in fact
manipulated. Market manipulation is a deliberate attempt to interfere
with the free and fair operation of the market and create artificial, false
G or misleading appearances with respect to the price, market, product,
security and currency.
36. Respondent-Rakhi Trading and Kasam Holding on facts are
found to have been engaged in non-genuine transactions creating
appearance of trading. If the factum of manipulation is established, it
H will necessarily follow that the investors in the market have been induced
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 1001
TRADING PRIVATE LTD. [R. BANUMATHI, J.]

to buy or sell and that no further proof in this regard is required. The A
market, as already observed, is so widespread 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 the Board cannot
be imposed with a burden which is impossible to be discharged.
37. In the context of 1995 Regulations, old Regulation 4(2)(a), B
SAT, observing that if the factum of manipulation is established, it will
necessarily follow that the investors in the market had been induced to
buy and sell and no further proof is required in this regard, in Ketan
Parekh’s case (supra), held as under:-
“12. ....The stock exchange is also a platform for the fair price C
discovery of a scrip based on the market forces of demand and
supply. Securities market is so wide spread and in a system of
screen based trading various potential investors who track the
scrips through the screens of the exchanges only see whether a
particular scrip is active or not, whether it is trading in large volumes
and whether the price is going up or down. Having regard to D
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 E
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 F
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 G
to be discharged. This, in our view, clearly flows from the plain
language of Regulation 4 (a) of the Regulations.”
38. The smooth operation of the securities market and its healthy
growth and development depends upon large extent on the quality and
integrity of the market. Unfair trade practices affect the integrity and
H
1002 SUPREME COURT REPORTS [2018] 1 S.C.R.

A efficiency of the securities market and the confidence of the investors.
Prevention of market abuse and preservation of market integrity are the
hallmark of securities law. In N. Narayanan v. Adjudicating Officer,
Securities and Exchange Board of India (2013) 12 SCC 152, it was
held as under:-
B “33. Prevention of market abuse and preservation of market
integrity is the hallmark of securities law. Section 12-A read with
Regulations 3 and 4 of the 2003 Regulations essentially intended
to preserve “market integrity” and to prevent “market abuse”.
The object of the SEBI Act is to protect the interest of investors
in securities and to promote the development and to regulate the
C securities market, so as to promote orderly, healthy growth of
securities market and to promote investors’ protection. Securities
market is based on free and open access to information, the
integrity of the market is predicated on the quality and the manner
on which it is made available to market. “Market abuse” impairs
D 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,
E takes advantage of the impact of an action, may be manipulative,
on the anticipated impact on the market resulting in the “creation
of artificiality”. The same can be achieved by inflating the
company’s revenue, profits, security deposits and receivables,
resulting in price rise of the scrip of the company. Investors are
F then lured to make their “investment decisions” on those
manipulated inflated results, using the above devices which will
amount to market abuse.”
39. In an interview, Lawrence E. Harris, a former chief economist
at the Securities and Exchange Commission and now a Finance Professor
at the University of Southern California, has stated that the difficulty in
G 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
H “when presented with the data suggesting manipulation by firm
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 1003
TRADING PRIVATE LTD. [R. BANUMATHI, J.]

proprietary traders, it is reasonable to expect that the S.E.C. would A
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 B
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 thinks fit. Main function of C
SEBI in this regard is to make inquiry, investigation and to give directions,
to promote the orderly and healthy growth of the securities market. With
a view to curb unfair trade practices, market manipulation, price rigging
and other frauds in securities market, SEBI is empowered to make
inquiries and inspection. D
41. Section 12A of the SEBI Act, 1992 read with Regulations 3
and 4 of the PFUTP Regulations, 2003 are essentially intended to preserve
‘market integrity’ and to prevent ‘market abuse’. The object of the
SEBI Act is to protect the interest of the investors in securities and to
promote the development and to regulate the securities market so as to E
promote orderly, healthy growth of securities market and to promote
investor’s protection. N. Narayanan case arose in connection with
violation of Section 12A of the SEBI Act as well as the relevant provisions
of PFUTP Regulations, 2003. In N. Narayanan’s case, it was found
that the financial results of the company as disclosed to the stock
exchanges were inflated and the manipulation in financial results of the F
company resulted in price rise of the scrip of the company and that they
did not represent the true state of affairs of the company and which has
enabled certain shareholders to raise financing of pledging of shares.
The director of the company was restrained in dealing with the securities
for a period of two years and also monetary penalty was imposed on the G
appellant thereon which was affirmed by this Court. The Supreme Court
observed that message should go that our country will not tolerate ‘market
abuse’ and that the securities market abuse and that fraud, deceit
artificiality, have no place in the securities market of the country and
held as under:
H
1004 SUPREME COURT REPORTS [2018] 1 S.C.R.

A “1. India’s capital market in the recent times has witnessed
tremendous growth, characterised particularly by increasing
participation of public. Investors’ confidence in the capital market
can be sustained largely by ensuring investors’ protection.
Disclosure and transparency are the two pillars on which market
integrity rests. Facts of the case disclose how the investors’
B
confidence has been eroded and how the market has been abused
for personal gains and attainments.
.....
11. We would like to demonstrate on the facts of this case as well
C as law on the point 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
D 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.
.......
E
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
F 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 tolerate “market abuse” and that we are governed by the
G “rule of law”. Fraud, deceit, artificiality, SEBI should ensure, have
no place in the securities market of this country and “market
security” is our motto. People with power and money and in
management of the companies, unfortunately often command more
respect in our society than the subscribers and investors in their
companies. Companies are thriving with investors’ contributions
H but they are a divided lot. SEBI has, therefore, a duty to protect
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAKHI 1005
TRADING PRIVATE LTD. [R. BANUMATHI, J.]

investors, individual and collective, against opportunistic behaviour A
of Directors and insiders of the listed companies so as to safeguard
market’s integrity.” [underlining added]
The Supreme Court has also emphasized the duties of print and
electronic media, that they should not mislead the public who are present
and prospective investors, in their forecast on the securities market. B
42. The capital market regulator, SEBI has a significant role to
play in safeguarding the interest of investors and to ensure strict
compliance of all the relevant SEBI rules and regulations targeting at
safeguarding the interest of small investors. In order to protect the
interests of the investors and the integrity of the markets, as a regulator, C
SEBI has to make the market place efficient and clean, wherein all the
participants play their role diligently and professionally within the four
corners of the system, without there being any scope for market abuse.
Where certain unscrupulous elements are trying to manipulate the market
to serve their own interest, it becomes imperative on the part of SEBI to
intervene and to curb further mischief and to take necessary action to D
maintain public confidence in the integrity of the securities market.
43. In N. Narayanan’s case, Supreme Court expressed a ‘word
of caution’ that SEBI-the regulator is to ensure stringent enforcement,
and efficacy of cleanliness of the market place; otherwise SEBI will be
failing in their duty to promote orderly and healthy growth of the securities E
market. I am conscious as supervisory functionary/ regulating body, SEBI
has the duty and obligation to protect ordinary genuine investors and
SEBI is empowered to do so under the SEBI Act, 1992 so as to make
security market a secure and safe place to carry on the business in
securities. At the same time, under the guise of supervisory intervention, F
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 G
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 H
1006 SUPREME COURT REPORTS [2018] 1 S.C.R.

A 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
B
entered into with a view to achieve tax planning are not illegal and
respondents placed reliance upon Viram Investment Pvt. Ltd. case.
The learned counsel for SEBI contended that the market cannot be
manipulated by fictitious transactions either for tax planning or for some
ulterior purposes like money laundering etc.
C 45. No grounds have been raised in the show cause notice alleging
that the impugned fictitious transactions have been entered into with a
view to avoid payment of tax and was an act of tax planning. Adjudicating
officer also has not gone into this aspect. Hence, I am not inclined to go
into this aspect, whether the impugned transactions were intended to
D reduce the brunt of taxation and an act of tax planning. The correctness
of findings of SAT in the case of Viram Investment Pvt. Ltd. is left
open.
Conclusion:-
46. Considering the reversal transactions, quantity, price and time
and sale, parties being persistent in number of such trade transactions
E
with huge price variations, it will be too naïve 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
F 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, I agree with the conclusion
allowing the appeal preferred by SEBI against the traders. I also agree
G
with the conclusion dismissing the appeal preferred by the SEBI against
the brokers.

Devika Gujral Appeals disposed of.

H