TaxTMI 
TaxTMI 
2018 (2) TMI 580
X X X X Extracts X X X X
X X X X Extracts X X X X
....rjee,Adv. And Mr. Vikas Mehta, AOR JUDGMENT 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 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 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. 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 r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ying securities. (C) commodity derivatives; and (D) such other instruments as may be declared by the Central Government to be derivatives;" 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, 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- (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 &nbs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y or indirectly- (a) buy, sell or otherwise deal in securities in a fraudulent manner; (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; (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 person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under. "4. Prohibition of manipulative, fraudulent and unfair trade practices (1) Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice insecurities. (2) Dealing in securitie....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (3) an active concealment of a fact by a person having knowledge or belief of the fact; (4) a promise made without any intention of performing it; (5) a representation made in a reckless and careless manner whether it be true or false; (6) any such act or omission as any other law specifically declares to be fraudulent, (7) deceptive 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 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 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; (d) any other matter of a like nature whether ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....io of stocks. Derivative trading is governed by Section 18A of the 1956 Act. There are two types of derivative instruments - 'futures' and 'options'. In futures and options, the trading can either be of individual stocks or of indices like NIFTY, Bank NIFTY etc. 18. Futures - a future contract is an agreement between two parties 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. 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 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 Option gives the buyer the right, but not oblig....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e rate/exercise price, the buyer would certainly exercise his option under the contract depending upon how high the price or the stock index has gone after adjusting the premium amount. These are some of the motivating factors which weigh with the investors in the options contracts. It is a one sided contract where the loss suffered, if any, by the buyer is 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 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." (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 i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ades 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 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 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, 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....earing, the A.O. passed a detailed order dated 26.03.2009 in the case of Rakhi Trading. Paragraphs 22 to 24 read as follows: "22. If the individual trades are seen from the order log provided to the noticee, it is seen that the time difference between the buy and sell order is only in seconds. Most of the 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; 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 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 percentage of trades on ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....consideration is available at paragraphs 5 to 8 of the SAT order in Rakhi Trading, which read as follows: "5. Index in a capital market is a statistical indicator of how the market is functioning and acts as a barometer for market behaviour. It is not a product but a measure expressed in numbers and a benchmark against which 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 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 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 impossi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... O market without any equivalent cash market movements. Further, the cash market may move up today but the prediction for the F & O market could be that at the end of a month, two months or three months the market may move down. Only short term investors like speculators trade in the F & O market whereas in the cash market long terms investors also trade. 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 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 influence the Nifty index is too farfetched to be accepted. The only way Nifty index could be influenced is through manipulation of the p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ecuted through the stock exchange and settled in cash through its mechanism they cannot be said to be artificial trades creating a misleading appearance of trading in the options. The charge is misconceived. 7. This brings us to the issue of synchronization of the buy and sell orders in the Nifty option contracts executed by the appellant where the 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 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 manipulative device was used for synchronizing the trades. The learned senior counsel appearing for the appellant did not dispute the fact that the trades had been synchronized and reversed but he argued that these did not manipulate the market and that only the synchronized trades which manipulate the market are prohibited. He placed re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the Regulations. He placed strong reliance on the observations of the Tribunal in Ketan Parekh's case (supra) wherein it has been held that reversal of trades between the same parties results in fictitious trades and they are illegal. We are unable to agree with him. The observations in Ketan Parekh's case were made with reference to the trades that were executed in the cash segment and we are clearly of the view that all those observations cannot apply to the 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 ownership" in the traded scrip. More- over, in the cash segment the scrip is actually traded entailing not only "change of beneficial 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 segment. In the F & O segment ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....held objectionable, must result in influencing the market one way or the other. We do not find any evidence of that either in the investigation conducted by the Bombay Stock Exchange, copy of which has been an- nexed to the memorandum of appeal or in the impugned order that there was any manipulation. ......... Trading in securities can take place for any number of reasons and the authorities enquire into such 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 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) 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed by the clients with a premeditated plan, the fact still remains that the appellant only acted as a broker and carried out the directions of its clients which it ought to. Could the appellant be held liable merely because it acted as a broker? This question has come up for the consideration of this Tribunal time and again and this is what was held in Kasat Securities Pvt. Ltd. vs. Securities and Exchange Board of India, Appeal No. 27 of 2006 decided on June 20, 2006 wherein this 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 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 that the appellant as a broker knew that the trades were fictitious or that the buyer and the seller were the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he sub-broker) responsible for a matching trade, it has to allege and establish that the broker (or the sub-broker) was aware of the counter party or his broker at the time when the trade was executed. There is no such allegation in this case." The aforesaid observations apply with full force to the facts of the present case because the trading system is the same, both in the cash segment as well as in the F&O segment. As already observed, even if we assume 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 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 trades on behalf of 15 clients with a total close ....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Gourab Banerji, learned Senior Counsel appearing for SEBI, that the stock exchange is a platform created to facilitate efficient and fair trading. However, the transactions between the parties were non-genuine and orchestrated which is prohibited under the PFUTP Regulations. The Show Cause Notice makes it clear that the transactions were a misuse of market mechanism as they were not genuine trades. The non-genuineness of these transactions is evident from the fact that there 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. 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 also taken a view that there being no physical delivery of any asset, there is no change of beneficial ownership and what is trade....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ween parties engaged in business transactions. It is to be noted that unfair trade practices are not subject to a single definition; rather it requires adjudication on case to case basis. Whether an act or practice is unfair is to be determined by all the facts and circumstances surrounding the transaction. In the context of this regulation a trade practice may be unfair, if the conduct undermines the good faith dealings involved in the transaction. Moreover the concept of '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 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 p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lay with the market. 37. We also find it difficult to appreciate the stand of SAT that the rationale of change of beneficial ownership does not arise in the derivatives segment. No doubt, as in the case of trade in a scrip in the cash segment, there is no physical delivery of the asset. However, even in the derivative segment there is a change of rights in a contract. In the instant case, through reverse trades, there was no genuine change of rights in the contract. SAT has erred in its understanding of change in beneficial ownership in reverse trades. Even in derivatives, the ownership of the right is restored to the first party when the reverse trade occurs. In this context, the discussion in Ketan Parekh (supra) assumes significance: "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 executed to create false volume....
X X X X Extracts X X X X
X X X X Extracts X X X X
....4(2) dealing in securities shall be deemed to be fraudulent if the trader indulges in an act which creates a false or misleading appearance of trading in the securities market. It is a deeming provision. Such trading also involves an act amounting to manipulation of the price of the security in the sense that the price has been artificially and apparently prefixed. The price does not at all reflect the value of the underlying asset. It is also a transaction in securities entered into without any intention of performing it and without any intention of effecting a change of ownership of such securities, ownership being understood in the limited sense of the rights in the contract. 41. According to SAT, only if there is market impact on account of sham 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 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 ou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f PFUTP Regulations. Appeal Nos.1969/2011, 3175/2011 and 3180/2011 are hence allowed. The orders of the Securities Appellate Tribunal are set aside and that of the SEBI are restored to the extent indicated above. 44. As far as brokers are concerned, we are of the view that there is hardly any evidence on their involvement so as to proceed against them for violation of Regulation 7A of the Brokers Regulations and PFUTP Regulations. Merely because a broker facilitated a transaction, it cannot be said that there is violation of the Regulation. SEBI has not provided any material to suggest negligence or connivance on the part of the brokers. As held by this Court in Kishore R. Ajmera (supra), there are several factors to be considered. We would especially like to 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 provided by SEBI to prove the charges against the brokers, particularly regardin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng the respondent-Rakhi Trading operating in the derivative segment had executed fictitious and non-genuine trades. Exercising its powers under Section 19 read with Section 11B and 11D of the Securities and Exchange Board of India Act, 1992, (for short 'SEBI Act, 1992') the Whole Time Member of the Board had passed an ex parte order directing the respondent and other entities to cease and desist from indulging in the violations till further orders as they were found indulging in non-genuine transactions. 4. Meanwhile, in terms of provisions of Rule 4(1) of the Securities and Exchange Board of India Rules, 1995, the Board issued a show cause notice to the respondent on 05.10.2007 alleging that the respondent executed synchronized/matched/reversal trades and indulged in non-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 Regulations 3(a), 4(1) and 4(2)(a) of SEBI (Prohi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stantial acquisition of securities or control" and reads as follows: 12A. Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control.-No person shall directly or indirectly- (a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognised stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder; (b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognised stock 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 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; (e) deal in securities while in possession of material or non-pub....
X X X X Extracts X X X X
X X X X Extracts X X X X
....(Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002. Regulation 3 of the PFUTP Regulations, 2003 deals with "Prohibition of certain dealings in securities". Regulation 4 deals with "Prohibition of manipulative, fraudulent and unfair trade practices". Regulation 2 (1)(c) defines "fraud". For relevant Capital Market Terms, I have made reference to SEBI Act and K. Sekar's Guide to SEBI, Capital Issues, Debentures & Listing, Lexis Nexis fourth Edition 2017 and Economics of Derivatives by Cambridge University Press by T.V. Somanathan and V. Anantha Nageswaran. To avoid repetition, I refrain from referring to the explanation of the relevant Capital Market Terms. 11. Re-Contention: The impugned trades 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 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 21-Mar-07 13:07:20 13:07:20 13:07:19 0:00:01 3,650.00 165.00 KASAM HOLDING PVT. LTD RAKHI TRADING PVT LTD 2000 564000 22-Mar-07 14:02:25 14:02:25 14:02:23 0:00:02 4,190.00 410.00 KASAM HOLDING PVT. LTD RAKHI TRADING PVT LTD 11500 125 38.59 22-Mar-07 11:39:28 11:39:28 11:39:26 0:00:02 4,190.00 285.00 RAKHI TRADING PVT LTD KASAM HOLDING PVT. LTD 11500 1437500 22-Mar-07 15:02:37 15:02:37 15:02:36 0:00:01 3,960.00 190.00 KASAM HOLDING PVT. LTD RAKHI TRADING PVT LTD 11700 89 50 22-Mar-07 15:23:15 15:23:15 15:23:15 0:00:00 3,960.00 101.00 RAKHI TRADING PVT LTD KASAM HOLDING PVT. LTD 11700 1041300 Trade Date and Time Buy Order Time Sell Order Time Time diff between Buy & Sell Order Strike Price Trade Price Buy Client Name Sell Client N....
X X X X Extracts X X X X
X X X X Extracts X X X X
....:00:00 4,150.00 302.00 KASAM HOLDING PVT. LTD RAKHI TRADING PVT LTD 11600 835200 30-Mar-07 11:36:40 11:36:37 11:36:40 0:00:03 3,810.00 80.25 RAKHI TRADING PVT LTD KASAM HOLDING PVT. LTD 8950 39.75 49.58 30-Mar-07 11:48:44 11:48:44 11:48:44 0:00:00 3,810.00 120.00 KASAM HOLDING PVT. LTD RAKHI TRADING PVT LTD 8950 355762.5 30-Mar-07 14:30:04 14:30:04 14:30:04 0:00:00 3,550.00 270.00 RAKHI TRADING PVT LTD KASAM HOLDING PVT. LTD 11900 29 46.21 30-Mar-07 14:43:02 14:43:00 14:43:02 0:00:02 3,550.00 299.00 KASAM HOLDING PVT. LTD RAKHI TRADING PVT LTD 11900 345100 13. 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and then report the same to the exchange. These are also called negotiated transactions...... It has recently issued a circular requiring all bulk deals to be transacted through the exchange even if the price and quantity are settled outside the market. When such deals go through the exchange, they are bound to synchronise. It would, therefore, follow that a synchronized trade or a trade that matches off market is per se not illegal. Merely because a trade was crossed on the floor of the stock exchange with the buyer and seller entering the price at which they intended to buy and sell respectively, the transaction does not become illegal. A synchronized transaction even on the trading screen between genuine parties who intend to transfer beneficial interest in the trading stock and who undertake the transaction only for that purpose and not for rigging the market is not illegal 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 vol....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ost of the same quantity and the trade was also within a short gap of few seconds with significant variation of the price, though, there was no major variation in the underlying price during that period. Upon examination of the trade transactions, it was further observed that the respondent in the impugned transactions had operated through Prashant Jayantilal Patel as its broker and the counter party Kasam Holding Pvt. Ltd., which executed those transactions through Vibrant Securities Pvt. Ltd. as its broker. As pointed out in the tabular column, all reversed/closed out transactions were executed at prices with significant variation within a short period though there was no major variation in the underlying price during that period. 19. For instance, let us refer to one of the impugned reversal trades. On 21.03.2007 at 14:50:27, NIFTY 50 (Strike Price 3930) Options (Trade volume 10,000) was sold within a second at 14:50:28 at 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y and the transactions matched in time and quantity with significant price variation and respondent consistently making profit but Kasam Holding Pvt. Ltd. consistently making loss. Number of reversal trades between the respondent and Kasam Holding Pvt. Ltd. and such reversal trade taking place repeatedly over a period of time only indicates that there was pre-arrangement between the parties before the trade was executed. The transactions involving only the same two parties within few seconds with huge difference in 'buy and sell' value, though there is no difference in the underlying security, can take place only with prior understanding between the two parties. The Board who is the regulator of the market, can always lift the veil of such transactions to show the non-genuineness of such 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 same quantity being reversed b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sactions. When over a period of time such transactions had been made between the same set of brokers or a group of brokers a conclusion can be reasonably reached that there is a concerted effort on the part of the brokers concerned to indulge in synchronized trades the consequence of which is large volumes of fictitious trading resulting in the unnatural rise in hiking the price/value of the scrip(s). It must be specifically taken note of herein that the trades in question were not "negotiated trades" executed in accordance with the terms of the Board's circulars issued from time to time. A negotiated trade, it is clarified, invokes consensual bargaining involving synchronising of buy and sell orders which will result in matching thereof but only as per permissible parameters which are programmed 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 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 wi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....chronized by the counter party brokers. Such transactions undoubtedly create an artificial market to mislead the genuine investors. Synchronized trading is violative of all prudential and transparent norms of trading in securities. Synchronized trading on a large scale, can create false volumes. The argument that the parties had no means of knowing whether any entity controlled by the client is simultaneously entering any contra order elsewhere for the reason that in the online trading system, confidentiality of counter parties is ensured, is untenable. It was submitted by the Appellants that it was not possible for the broker to know who the counter party broker is and that trades were not synchronized but it was only a coincidence in some cases. Theoretically this is OK. But when parties 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 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ctions, with all the ingredients i.e. quantity, price and the time, required to conclude the trades. The time difference (between the buy and sell orders) of majority of the synchronized trades was very less with the price and quantity matching. The said synchronization cannot take place in the absence of any specific understanding/arrangement between the clients at the first instance, especially when the shares of the company were highly liquid at the time of the trades. ........... 4.24 The proof of manipulation in the circumstances always depends on inferences drawn from a mass of factual details. Findings must be gathered from patterns of trading data and the nature of the transactions etc. Several circumstances of a determinative character coupled with the inference arising from the 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 "Law of Evidence", the presumption of innocence is no do....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al loss and would want to square off his position to restrict a loss. I find no merit in this contention. Insofar as the impugned transactions are concerned, it is seen that the market of underlying shares had remained unmoved altogether, then there was no question of getting panic. When there were no other transactions in the market affecting the price of the underlying shares or F & O Segment and the price in both the segments had remained static, then there was no reasonable ground to get apprehensive and panic. Therefore, squaring off the position appears to adjust the financial results with a view to avoid the tax incidence through an unfair trade practice or for some ulterior purpose. 29. On behalf of respondent, learned senior counsel Mr. P. Chidambaram contended that securities like Nifty are 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 violated regulations. 30. On behalf of the respondent-Tungarli Tradeplace Pvt. Ltd....
X X X X Extracts X X X X
X X X X Extracts X X X X
....acting the show cause notice, SAT, inter alia, recorded the findings:- (i) The insinuation is that by executing manipulative trades in the F & O segment, Nifty was sought to be tampered with; (ii) It is a common case of the parties that the appellant-Rakhi Trading traded only thirteen Nifty option contracts in the F & O Segment; assuming these trades were manipulative, they could have never influenced the Nifty; Nifty which consists of fifty well diversified highly liquid stocks in the cash segment is a very large well diversified index of stocks which is not capable of being influenced much less manipulated by the movement of prices; and (iii) thirteen impugned trades in Nifty options executed by the appellant had no impact on the market or affected the investors in any way nor did they 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 "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 de....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l their stocks. The buyer or the seller is invariably influenced by the price of the stocks and if that is being manipulated the person doing so is necessarily influencing the decision of the buyer/seller thereby inducing him to buy or sell depending upon how the market has been manipulated....In other words, if the factum of manipulation is established it will necessarily follow that the investors in the market had been induced to buy or sell and that no further proof in this regard is required. The market, as already observed, is so wide spread that it may not be humanly possible for the Board to track the persons who were actually induced to buy or sell securities as a result of manipulation and law can never impose on the Board a burden which is impossible to be 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 efficiency of the securities market and the confidence of the investors. Prevention of market abuse ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... traders, it is reasonable to expect that the S.E.C. would consider investigation of the matter further". The S.E.C. had no comment on the researchers' study. [Ref.:www.nytimes.com/2006/ 05/07/business/yourmoney/07stra.html] 40. Stock market is regulated mainly by SEBI and to some extent by the Departments of Economic Affairs and Company Affairs of Government of India. Market manipulation can occur in a variety of ways. Manipulations/unfair trade practices reduce the market efficacy. Section 11 of the SEBI Act, 1992 provides for the functions of the Board, as per which it shall be the duty of the Board to protect the interests of the investors in securities and to promote the development and to regulate the securities market by such measures as it 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 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. 41. Section 12A of the SEBI Act, 1992 read with Regulations 3 and 4 of the PFUTP ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... by the increasing participation of the public. Investor's confidence in capital market can be sustained largely by ensuring investors' protection. ....... 42. SEBI, the market regulator, has to deal sternly with companies and their Directors indulging in manipulative and deceptive devices, insider trading, etc. or else they will be failing in their duty to promote orderly and healthy growth of the securities market. Economic offence, people of this country should know, is a serious crime which, if not properly dealt with, as it should be, will affect not only the country's economic growth, but also slow the inflow of foreign investment by genuine investors and also cast a slur on India's securities market. Message should go that our country will not tolerate "market abuse" and that we are governed by the "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 wi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hose who indulge in manipulative trading and deceptive devices to misuse the market and at the same time ensuring the development of the market. 44. Before I conclude, it is necessary to refer to the findings of SAT on 'tax planning'. SAT held that even assuming that non-genuine synchronized trades have been entered into for the purposes of tax planning, such trade could be held objectionable only if they have resulted in influencing the market in one way or other. For its finding that every person is entitled to arrange his affairs as to avoid taxation, SAT relied upon Viram Investment Pvt. Ltd. and Ors. v. Securities and Exchange Board of India (MANU/SB/0046/2005) decided on 11.02.2005. Contention of the respondents is that transactions which have been 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. 45. No grounds have been raised in the show cause notice alleging that the impugned fictitious transa....