TaxTMI 
TaxTMI 
2020 (11) TMI 1111
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....li Sharma, Ms. Arundhati Kelkar, Mr. Armaan Patkar, Ms. Cheryl Fernandes and Mr. Vedant Jalan, Advocates i/b AZB For the Respondent : Mr. Darius Khambata, Senior Advocate with Mr. Gaurav Joshi, Senior Advocate, Mr. Aditya Mehta, Mr. Mihir Mody and Mr. Shehaab Roshan, Advocates i/b K. Ashar & Co. ORDER PER : JUSTICE TARUN AGARWALA, PRESIDING OFFICER 1. The appellants have preferred the present appeal against the order dt 24.03.2017 passed by the Whole Time Member (WTM) exercising the powers under section 11 & 11B of the Securities And Exchange Board Of India Act 1992 (SEBI Act), Section 12A of Securities Contract (Regulation) Act 1956 (SCR Act) read with Regulation 11 of Securities And Exchange Board Of India (Prohibition Of Fraudulent And Unfair Trade Practices Relating To Securities Market) Regulations 2003 (PFUTP Regulations). The WTM in its order issued the following directions, namely, (i) The appellants are prohibited from dealing in equity derivatives in F&O segment of Stock Exchanges, directly or indirectly, for a period of one year from the date of the order. (ii) Appellant no. 1 shall disgorge an amount of Rs 447.27 Crs alongwith interest @12%....
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.... 1.11.2007 and 6.11.2007. From 6.11.2007 to 29.11.2007, RIL sold 20.29 Cr shares out of proposed 22.5 Cr shares in the cash segment of NSE and BSE out of which 2.25 Cr shares were sold in the last ten minutes, i.e. between 3.21.40 p.m. to 3.30.00 pm on 29.11.2007. The impugned order contains a factual error, namely, that 1.95 Cr shares were sold in the last 10 minutes. The correct figure is 2.25 Cr shares. 7. The sale of 20.29 Cr shares in the cash segment was done over a period of 11 trading days. 13.83 Cr shares were sold on the NSE platform and 6.46 Cr shares were sold on the BSE platform. 8. The short positions taken by the two agents, namely appellants no. 12 and 13 were squared off before 29.11.2007. However, the short positions taken by the remaining 10 agents were closed on 29.11.2007 at the settlement price, i.e. the last half an hour weighted average price in the cash segment on 29.11.2007. It may be noted here, that physical delivery of shares is not allowed in the futures segment under the SEBI laws and Regulations and Stock Exchanges bye laws. Positions taken in the futures segment has to be cash settled after squaring off or closing out on the last day of the se....
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.... no. SMDRP/DC/CIR-10/01 dated November 2, 2001, NSE Circular no. NSE/CMPT/2982 dated November 7, 2001, Regulation 3.2 of National Stock Exchange (Futures & Options segment) Trading Regulations and Byelaw 4 of Chapter VII of National Securities Clearing Corporation Limited (Futures & Options Segment) Bye Laws read with Byelaw 12 of Chapter I of National Securities Clearing Corporation Limited (Futures & Options Segment) Bye Laws. (ii) Appellants no. 1-13, in pursuance of the individual agreements between appellant no. 1 and appellants no. 2-13, by taking positions in the F&O segment of the scrip of RPL in excess of the limits specified vide SEBI circular no. SMDRP/DC/CIR-10/01 dated November 2, 2001 and NSE circular no. NSE/CMPT/2982 dated Nov 7, 2001, have violated SEBI circular no. SMDRP/DC/CIR-10/01 dated Nov 2, 2001, NSE circular no. NSE/CMPT/2982 dated Nov 7, 2001, Regulation 3.2 of National Stock Exchange (Futures & Options segment) Trading Regulations, Byelaw 4 of chapter VII of National Securities Clearing Corporation Limited (Futures & Options Segment) Bye laws read with Byelaw 12 of Chapter I of National Securities Clearing Corporation Limited (Futures & Options S....
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....ut by the 12 Named Entities are benami transactions and thus illegal and void. 15. After considering the written replies, oral submissions and written submissions, and, after considering the material evidence on record, the Whole Time Member (WTM) passed the impugned order against which the present appeal has been filed. 16. The WTM in the impugned order, framed the following issues which arose for consideration, namely: (A) Whether the dealings of the appellants in the F&O Market amounts to the commission of a 'fraudulent and manipulative trade' in securities in terms of the SEBI (PFUTP) Regulations? (B) Whether appellant No. 1, by selling 1.95 Cr of RPL shares in the cash segment in the last ten minutes of the trading session on 29 Nov 2007 can be said to have acted fraudulently or manipulated the securities market, as per the SEBI (PFUTP) Regulations? (C) (i) Whether in terms of the scheme of provisions of SCRA, in particular, Sections 18A and the circulars issued thereunder, SEBI is empowered to take enforcement action for PFUTP against the appellants? (ii) Whether the Agency agreements executed by appellant No. 1 appointing appellants ....
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....following: (a) RIL's act of employing 12 Named Entities to take separate short positions (aggregating to 9.92 Cr on Nov. 6, 2007 in Nov. 2007 RPL Futures), breaching the client-wise position limit per client/customer, knowing that its planned sale of 22.5 Cr shares of RPL shares in Nov. 2007 will depress the RPL share price in the cash segment, is not a hedging strategy, but is a pre-planned fraudulent scheme for cornering positions and manipulation of Nov. 2007 RPL Futures to make unlawful gains. This cannot be construed as mere breach of position limits by the clients attracting penalty under the exchange circulars. (b) The sale of 1.95 Cr RPL shares in the cash segment by RIL during the last 10 minutes of trading on Nov. 29, 2007 have been done for depressing the last half an hour weighted average price (which is the settlement price for Nov. 2007 RPL Futures) to make gains on the 7.97 Cr outstanding short positions in Nov. 2007 RPL Futures is manipulative in nature as contemplated under PFUTP Regulations. (c) RIL made unlawful gains by this fraudulent and manipulative strategy/pattern of Rs 513 Cr. The actions of RIL and the 12 Named Entities constitu....
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....ct, SEBI and appellant No.1 are in collusion and are keen that the investigation report should not come out in the public domain. It was urged that if the investigation report is placed, the Tribunal would find that there are glaring omissions in the investigation report. It was urged that since SEBI has conducted a shoddy investigation and has not investigated the price manipulation between the period September to October, 2007 when the price of the shares of RPL increased from Rs.66 to Rs.295. It was contended that the shortcoming in the investigation can be redressed by the Tribunal inasmuch as the Tribunal has coextensive powers as that of SEBI. It was further contended that SEBI has abysmal track record of conducting investigation. In the instant case, criminal investigation has not been recommended by SEBI. The Intervener, who has appeared in person, thus contended that in view of the decision of the Supreme Court in Clariant International Limited & anr. Vs. SEBI, (2004) 8 SCC 524 the error of fact can be corrected. Since the price manipulation was not investigated by SEBI, this Tribunal having coextensive power should direct SEBI to re-investigate the matter especially relat....
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....eard as Interveners. Accordingly, the two Interveners were heard at length. The said Interveners have filed their written submissions. Insofar as Arun Kumar Agarwal, the submissions made by him and in his written submissions is the same as stated in his Intervention Application which has been stated hereinabove. However, Shailesh Mehta in his written submission has stated the following facts:- (i) In addition to the concealment of the name of the appellant No.8 being struck off from the register of the Registrar of Companies, the said Intervener contended that a public issue of RPL was made in the year 2006. Money was generated which was not utilized for the project and the said money was diverted which in fact has not been investigated. Further, on account of issuance of the public issue and generation of money, there was no need for appellant no.1 to sell shares for the purpose of augmenting income for said projects. It was contended that combined appeal filed by appellant no.1 and other entities was not maintainable as one of the appellants had become a dead company. It was contended that appellant No.1 and SEBI are in collusion and that SEBI deliberately did not invest....
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....idence. It was contended that the Interveners are acting as a super regulators over and above SEBI projecting that SEBI is incompetent and, therefore, the matter should be reinvestigated under the aegis of this Tribunal. It was contended that the Interveners are misusing the process of the court and are only playing to the gallery. Their Intervention Applications are patently misconceived and should be rejected. 27. At the outset, the contention made by one of the Interveners that he is a minority shareholder and is adversely affected by the investigation and by the fraud committed by the wrongdoers who are in majority of and in control of the appellant No.1 and that the appeal would adversely affect the interest of the minority shareholders, in our opinion, is without any merit. We find that adverse orders have already been passed against appellant No.1 and the validity of that order has to be tested on the basis of grounds set out in the appeal filed by the appellants. It is for the company to address the merits of the case and not by the shareholders. Further, the appeal has been filed by the appellants against the order of SEBI. It is for SEBI to defend its orders by raising....
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....ute and, thus, it exercises all the jurisdiction as that of the Board. It can exercise its discretionary jurisdiction in the same manner as the Board." 75. The SEBI Act confers a wide jurisdiction upon the Board. Its duties and functions thereunder, run counter to the doctrine of separation of powers. Integration of power by vesting legislative, executive and judicial powers in the same body, in future, may raise several public law concerns as the principle of control of one body over the other was the central theme underlying the doctrine of separation of powers. 76. Our Constitution although does not incorporate the doctrine of separation of powers in its full rigour but it does make horizontal division of powers between the Legislature, Executive and Judiciary.[See Rai Sahib Ram Jawaya Kapur and Others Vs The State of Punjab, AIR 1955 SC 549]. 77. The Board exercises its legislative power by making regulations, executive power by administering the regulations framed by it and taking action against any entity violating these regulations and judicial power by adjudicating disputes in the implementation thereof. The only check upon exercise of such wide r....
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....of the impugned order which has to be tested on the basis of the grounds set out in the memo of appeal. Thus, in our opinion, the scrutiny which the Tribunal is required to make is limited only to the veracity of the finding given in the impugned order as challenged by the appellants in the grounds set out in the memo of appeal. The reliefs sought by the Interveners as set out in their Intervention Applications and in their written submissions are beyond the scope of the memo of appeal. They are neither supporting the appellants nor supporting the SEBI and, as held in Saraswati Industrial Syndicate Ltd. (supra), the Interveners can only address arguments in support of the appellant or of the respondent and cannot enlarge the scope of the appeal. Thus, upon consideration, we are of the opinion that the Intervention Applications made by the Interveners are patently misconceived and are rejected. The submissions made and the reliefs sought cannot be granted and are rejected. 34. Sri Harish Salve, the learned Senior Counsel for the appellants stated that all the trades in the cash segment and in the Nov 2007 RPL Futures were conducted in an orderly manner which was genuine and legal....
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....he interest of the shareholders as well as of the investors and the hedging done was perfectly valid and genuine. 37. The learned senior counsel further submitted that where the liquidity of the shares is volatile and selling a large quantity of the shares would cause a disturbance and would fluctuate the price considerably, RIL decided to use this segment (namely Futures) since the trading and liquidity in this segment was higher. In this regard, the learned senior counsel placed relevance on Annex 2 and 3 of Vol III of the Compilation of Documents to drive home the point that trading in the Futures segment was more than in the cash segment during the last week of Oct 2007 and also in Nov 2007. This was therefore another reason to take short position in the Nov 2007 RPL Futures during 1st to 6th of Nov 2007 so that the impact was minimized when shares were sold in the cash segment. It was submitted that the 12 agents took net short positions of 9.92 Cr shares of RPL in an orderly manner over a period of 4 trading days which constituted a miniscule 8% of the total trades in the Nov 2007 RPL Futures. The learned senior counsel further submitted that the price of RPL had touched a....
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....he finding given by the WTM on this aspect was wholly untenable and unsustainable. 40. In so far as the cash segment was concerned, it was urged by Shri Salve, that there is no law, or requirement under the SEBI laws to disclose an entity's intention to sell the shares in the open market. No such disclosure is required. In fact, on the other hand, if an entity disclosed its intention to sell the shares, it would be looked with suspicion. 41. The learned senior counsel further submitted, but not vehemently, contending that the first Show Cause Notice was only against RIL and there was no allegation of fraud and only alleged manipulative activities by RIL to earn Rs 513 Cr. However, based on the replies given by RIL, a second Show Cause Notice was issued on the same facts not only against RIL but also against the 12 agents of RIL alleging massive short positions taken by the 12 agents. It was urged that the Show Cause Notice was on account of bias and prejudice on the part of SEBI against the appellants motivated solely on account of complaints made against them for vested reasons. 42. Shri Salve contended that the issues which arise for consideration can be narrowed down as....
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....to sell his shares below the Last Traded Price. In the cash segment trading is done on screen based trading system of the Stock Exchanges where a seller or a buyer has the benefit of not only viewing the Last Traded Price but also the quantity as well as the price at which buy or sell orders have been placed on the screen. It was submitted that if there were not sufficient number of buy orders at the Last Traded Price (LTP), it would be open to the investor to sell his chunk of shares below the LTP. It was contended that selling shares below the LTP could be viewed with suspicion but under no circumstances such sales made below LTP could be termed as fraudulent or manipulative. It was contended that the sales made by RIL were genuine sales followed by delivery of shares in the cash segment. Such sales can never be termed as fraudulent or manipulative. The price for sale of shares was placed below LTP on account of insufficient demand. The finding of the WTM that the market had sufficient depth to absorb all RIL sales orders was not based on any documentary evidence. Such bald finding is based on surmises and conjectures. Selling shares below the LTP cannot be termed as manipulative....
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.... and quantity was not a manipulation. It was urged that merely because RIL had placed sell orders below the LTP it cannot automatically lead to a conclusion that RIL was manipulating the price of the scrip nor did it lead to an artificial depression of the share price. 48. Shri Dwarkads as well as Shri Salve contended that the appointment of 12 agents which took positions in the Futures segment was valid and in accordance with the circulars. The finding of the WTM that the positions taken by the 12 agents on behalf of RIL constitute a fraudulent or manipulative trade practice was patently erroneous. It was contended that none of the 12 agents exceeded the prescribed position limit. The finding of the WTM that taking position limit by the 12 agents was a well orchestrated scheme to defeat the position limits as per the circular was wholly erroneous. The finding of the WTM that it was done deliberately to take advantages of the sharp decline in price of the shares in the cash segment which was expected to be triggered by the proposed sale in the cash segment and was therefore fraudulent is based on surmises and conjectures. It was urged that there has been no fraudulent trades don....
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....of the permitted limits and shall not exercise a long or short position in excess of the prescribed limits. The learned senior counsel, thus urged that the model agreement applicable in 2007 clearly showed that neither the bye laws nor the client member agreement provided for aggregation of limits of a group of persons acting in concert. 52. Shri Salve vehemently contended that the finding of the WTM to the effect that the positions taken by RIL were not genuine hedge and were taken only to take advantage of the large dip in the share price of RPL once 22.5 Cr shares of RPL were sold in the cash market is patently misconceived and is based on surmises and conjectures. The finding of the WTM that short positions taken by the 12 agents were only to reap huge profit by cornering future position limits beyond the permissible limit is not based on any sound reasoning. The finding that RIL was required to have a hedging policy is patently erroneous in as much as there was no rule/regulation/circular which mandated any company to formulate a hedging policy. The accounting standards came much later and reliance on such accounting standards which did not exist on the date when the transa....
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.... bonafidely. It was thus contended that the short position taken by the 12 agents was a genuine, valid and a bonafide hedge. 55. Shri Salve contended that the finding on fraud is misplaced. Before a person can be found guilty of fraud, the element of inducement must exist which in the instant case was non existing. The learned senior counsel submitted that there is no evidence on record to hold that the appellants are guilty of ‚inducement‛. In the instant case all the trades in the Nov 2007 RPL Futures were undertaken at market prices which only formed 8% of the total trades. Further, the entire trade was made on screen based trading where the identity of the buyer and seller was not known to each other. Thus the question of inducing any person does not arise. 56. The learned senior counsel further urged that even though the appellants did not exceed the position limits, but assuming without admitting that the appellants exceeded the position limits in violation of the circulars, at best, it would only invite an imposition of penalty under SCR Act but under no circumstances it would be construed to violate PFUTP Regulation or SEBI Act. The learned senior counsel ....
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....nt measures‛ and ‚to deter and detect concentration of positions and market manipulation‛. As per these circulars, the gross open position of a customer/client should not exceed the higher of 1% of the free float market capitalization (in terms of number of shares) or 5% of the open interest in the derivative. Shri Khambatta submitted that as per these circulars, the maximum permissible client wise position limit on 6.11.2007 was 101 lakh shares as per Table (iv)-a of the Show Cause Notice and on 29.11.2007, the maximum permissible client wise position limit was 90 lac shares as is clear from Table (iv)-b of the Show Cause Notice. It was submitted that if RIL was to enter the F&O segment and take short position, the max position limit could not exceed 101 lac shares on 6.11.2007 or 90 lac shares on 29.11.2007. But by appointing 12 agents, RIL clandestinely accumulated position limits far in excess of the permissible limit available to a single client/customer. The accumulation of 992.2 lac shares by the 12 agents on behalf of RIL on 6.11.07 was in gross violation of the position limits available to single client/customer and thus was manipulative and fraudulent. ....
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....s of RIL itself. The principle of ‚persons acting in concert‛ was therefore irrelevant. 63. Shri Khambatta contended that the appellant's contention that the circulars merely triggered a disclosure requirement is incorrect in as much as the language of the circular made it absolutely clear that there was an explicit prohibition for breaching the position limits. According to Shri Khambatta, the sentence in the circular, namely ‚The gross open position across all derivative contracts on a particular underlying of a customer/ client should not exceed the higher.....‛ clearly indicates a prohibition from exceeding the position limits. The words ‚should not‛ is the same as ‚shall not‛ and therefore clearly mandatory and prohibitive as held by the Supreme Court in Mannalal Khetan vs Kedar Nath Khetan (1972) 2 SCC 426. 64. Shri Khambatta, the learned senior counsel for SEBI further submitted that the action of the 12 agents cornering massive short positions in RPL Futures was a fraudulent act. It was urged that an impression was given in the stock market that large open positions were held by 12 entities instead of just RIL. The amass....
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....s situation, RIL started dumping RPL shares in the cash segment during the last 10 minutes of the trading. This dumping was with a view to reverse the rising trend in RPL's share price. 66. It was further contended that between 3:21:40 and 3:28:55 p.m. RIL placed 17 sell orders for 2.43 Cr shares in which 12 out of 17 orders were placed at prices lower than Last Traded Price (LTP). As a result of placing sell orders below LTP, RIL managed to reduce the price Rs 224.35 price per share to the last half hour weighted average price to Rs 215.25 per share resulting RIL to make higher profits on RPL Futures. The learned counsel submitted that dumping of huge quantity of shares in the last 10 min, in the absence of any rational explanation was clearly manipulative and a fraud on the market, as it clearly influenced the settlement price in the F&O segment. In the absence of any plausible explanation, the WTM was justified in holding that the dumping of large quantity of shares in the last 10 minutes was to influence the settlement price in order to gain huge profits in the F&O segment. The said act was purely with a malafide intention. The learned senior counsel submitted that the conte....
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....unsel also placed reliance on a decision of the Supreme Court of Canada in Ontario (Minister of Finance) vs Placer Dome Canada Ltd, 2006 SCC Online Can SC 20, which has explained the difference between hedging and speculation in the following terms: "29................This distinction between speculation and hedging is an important one. A transaction is a hedge where the party to it genuinely has assets or liabilities exposed to market fluctuations, while speculation is ‚the degree to which a hedger engages in derivatives transactions with a notional value in excess of its actual risk exposure‛. 70. The learned senior counsel contended that there must be a correlation in the quantities of shares exposed to market fluctuations and the quantity of the hedge transaction undertaken in the futures market. If the quantities in the futures market exceed the quantity of shares actually exposed to market fluctuations then the transaction would not be a genuine hedge. Reliance was made of another decision of The Supreme Court of Montana in Whorley vs Patton-Kjose Co., Inc. 90 Mont. 461 in which it was held that: "Country elevator hedging involves a purchase o....
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....ieved by selling 11:45 Cr shares between 1st to 6th Nov 2007 and purchasing 1.53 Cr shares again between 1st to 6th Nov 2007. When sale and purchase is made, it shows that it was not a genuine hedge. Further, purchasing 1.53 Cr shares in the futures without any counterbalancing sale of shares in the cash segment shows that the transaction in the Futures segment was not a genuine hedge. b) Between 13th Nov 2007 to 15th Nov 2007, RIL sold total of 5.97 Cr RPL shares in the cash segment against which it unwound its short position only to the extent of 0.01 Cr shares i.e. on 15th Nov 2007 [Vol. I/pg 148/Table- see Columns (7) and (4)]. As a result, RIL's volume in the F&O segment had exceeded the quantity of RPL shares left to sell by 0.41 Cr RPL shares. In fact, from 15th Nov 2007 onwards, RIL's position in the F&O segment continued to be in excess of the quantity of RPL shares it had left to sell. c) Further, 0.02 Cr shares were sold on 19th and 27th Nov in the Futures segment which is inconsistent with hedging. d) RIL did not unwind its positions even when RPL share prices in the Futures segment fell to a low of Rs 185.50 on 28.11.2007. e) On 29.1....
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....tted that assuming without admitting that the position limits were breached it cannot attract Regulation 3(b) of PFUTP Regulation. The learned senior counsel submitted that the ingredient of 'fraud' was missing in Regulation 3(b). The learned senior counsel further contended that the essential element of ‚inducement‛ in fraud is required to be established which in the instant case was lacking. It was thus urged that mere manipulation is not sufficient for issuing a direction for disgorgement and that reliance on the decision in Sandeep Paul's case (supra) was totally misplaced. The learned senior counsel further submitted that the decision of the Supreme Court in SEBI vs Rakhi Trading P Ltd. 2018 (13) SCC 753 had no application to the present facts and circumstances of the case. The learned senior counsel placed reliance on the decision of this Tribunal in Price Waterhouse and Co. wherein it was held that inducement was necessary as an element to constitute fraud under the Regulation. 77. Shri Salve contended that the contention of SEBI that the aggregate positions taken up by the 12 agents did not allow the market players from entering the market and that such conce....
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....ry, in terms of NSE (F&O segment) Trading Regulations, a trading member is prohibited from disclosing the name and beneficial identity of the client. 80. The learned senior counsel also pointed out that now the NSE Model Client Broker Agreement has been amended which includes an undertaking by the client that he is not acting in concert with any other person. This requirement indicates that Circular relied upon at the given point of time did not have the requirement of disclosing persons ‚acting in concert‛. 81. Shri Salve again reiterated that the Nov 2007 RPL Futures trades were hedging transaction and there was no obligation for RIL to make an announcement that they were entering into a hedge transaction. The essential prerequisite of a valid hedge was existing which was sufficient to hold that the transaction were a valid hedge and thus the finding that these transactions were manipulative and fraudulent was wholly erroneous. The learned senior counsel reiterated that Regulation 3 (b) of PFUTP Regulation was not applicable in the instant case in as much as SEBI failed to establish ‚inducement‛ on the part of the appellants. The learned senior couns....
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....ent of the exchange from time to time. 83. In order to deal with the issues raised, it is essential to first deal with the transactions executed in the F&O segment, namely whether such transactions were in the nature of hedging transactions. Before we dwell into the nature of the transactions, it is essential to understand the meaning of the word ‚hedge‛ or ‚hedging transactions‛. 84. Black's Law Dictionary (11th Edition) defines Hedging Contract as ‚A contract of purchase or sale that amounts to insurance against changing prices by which a dealer contracts to buy or sell for future delivery the same amount of a commodity as he or she is buying or selling in the present market.‛The circular of NCDEX on Hedge Policy defines hedge as ‚a hedge is a trade designed to reduce risk.‛ Further ‚a hedge is a futures transaction or position that normally represents a substitute for transactions to be made or positions to be taken at a later time in a physical market.‛ A hedge transaction is therefore taking a position either sale or purchase to reduce or extinguish a risk in an existing underlying exposure. 85. In Pankaj Oil....
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....mmittee strongly favors the introduction of financial derivatives in order to provide the facility for hedging in the most cost efficient way against market risk. This is an important economic purpose. At the same time, it recognizes that in order to make hedging possible, the market should also have speculators who are prepared to be counter parties to hedgers. A derivative market wholly or mostly consisting of speculators is unlikely to be a sound economic institution. A soundly based derivatives market requires the presence of both hedgers and speculators‛ and went further to hold ‚Hedging will not be possible if there are no speculators‛. 90. From the aforesaid, the key elements of a hedge transaction and speculative transaction can be culled out as under: a) Hedging is a risk mitigating strategy for the purpose of insuring against adverse price fluctuations. b) A person engaged in hedging transactions must have assets or liabilities that are exposed to market fluctuations c) If the transaction is not settled by actual delivery of the commodity, it would be a speculative transaction. 91. Thus, from the aforesaid, it is clear th....
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....1st to 6th Nov 2007, the impact got minimized when shares were sold in the cash segment. Looking from another angle, if the short positions taken was not a hedge, there was nothing to stop the appellants from off loading its shares from 6th Nov onwards. The short positions were taken on the sales side at Rs 265.67 per share. Table 1 & 2 of Vol 3 indicates that the weighted average price on 07.11.2007 was Rs 219.21 in the cash segment and Rs 215.78 in the Futures segment. If the short positions were squared off on 07.11.2007, the appellants would have made far more than by holding it out till the end. Table 1 & 2 further indicates that the prices kept on dipping and it would have been easier for the appellants to square off the short positions and make large profits. If speculation was the intention then definitely the appellants would have squared off the short positions between the 6th to 29th of Nov. But this was not the case. The appellants had taken a hedge position against the existing related commercial position which was exposed to the risk of loss due to price movement. 94. Whether a transaction in the F&O segment is a hedge or not is determined at the time the position ....
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.... possible when it is settled by delivery. Thus any deviation from a perfect hedge cannot be termed as an invalid hedge nor can it be termed as speculative and therefore, fraudulent. If at the beginning it was a valid hedge, the same does not become an invalid hedge merely because Open Interest positions was not closed simultaneously with the cash segment or that the Open Interest exceeded the quantity remaining to be sold in the cash segment. At best a valid hedge could become an imperfect hedge at a later point of time but it cannot be called an invalid hedge. 97. Similarly, the purchase of 1.53 Cr shares between 1st Nov 2007 to 6th Nov 2007 are not speculative transactions since it was to ensure compliance of the individual position limits of the 12 agents which was 0.91 Cr. We find that the purchase of 0.62 Cr on 06.11.2007 was against the sale of 7 Cr shares made in the cash segment on that day. Thus, in our view, there was no unwinding of the futures position before the exposures were reduced. 98. The WTM in para 4.A.18 of the impugned order has explained the concept of hedging as under: 'Hedging is a strategy resorted by market entities to mitigate the price ri....
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....g positions which was the case in 2007. It cannot be denied that RIL would have simply made physical delivery of 9.92 Cr shares on November 29, 2007 and earned Rs 265.67 per share had physical deliveries been allowed in 2007. 103. There is another aspect. What has been achieved by RIL through the transactions undertaken in the November 2007 RPL Futures? It is simple. RIL realized Rs 221 per share on the sale of 20.29 Cr shares in the cash segment. The hedges in the Nov 2007 RPL Futures helped RIL to realise an additional Rs 26 per share on the 20.29 Cr shares, taking up the average realization to Rs 247. Nothing more. This realization of Rs 247 per share must be looked at from the following perspective:- (i) When RIL entered the F&O segment, the high price was Rs 295.40. (ii) When RIL entered the cash segment, the high price was Rs 279.10. (iii) The average price in the F&O position of 9.92 Cr shares was Rs 265.67, much above the average realization of Rs 247. 104. The purchase of 1.53 Cr shares during the period Nov 1, 2007 to Nov 6, 2007 in the Nov 2007 RPL Futures are not speculative transactions as has been suggested by the respondent. The purch....
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....rlying exposure/ risk. In this case it cannot be denied that there was an underlying exposure/ risk, namely, the potential sale of 22.5 Cr shares in the cash segment. This is an identified and existing risk. A hedge even assuming it is imperfect, does not and cannot cease to be a hedge nor becomes speculative. There is no need for a simultaneous closure of the open positions along with the reduction in the exposure. An underlying risk has to be present at the time of taking the positions. There is nothing wrong nor there are any rules which prescribes that there has to be a simultaneous closure of the open position in the F&O segment. As long as the underlying exposure/ risk continues, the hedge can continue. Neither the extent of the hedge transaction nor the extent of the outstanding hedge oppositions need have any co-terminus co-relation with the underlying exposure/ risk. There is no rule which stipulates that throughout the period of the hedge, the open position should be equal to the underlying risk. In fact, the F&O segment rules clearly allow either closure of position by purchases in the F&O segment (in this case) or allow the open position to be closed out by the exchange....
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.... The circular only required that a disclosure should be made for any person or persons acting in concert who together own 15% or more of the Open Interest. The circular further provided that failure to disclose the aforesaid fact would attract a penalty. Thus, this circular of July 1999, did not place a ban on large Open Interest positions but only required it to make a disclosure. 111. In respect of Single Stock Futures, SEBI issued a circular dt 02.11.2001, the relevant portion is extracted hereunder:- "Position Limits: On the introduction of index futures contracts, index options contracts and stock options contracts the trading ember level and the market wide position limits were prescribed. However, with the introduction of Single Stock Futures contracts, a customer level position limit is also prescribed to deter and detect concentration of positions and market manipulation. The market wide position in the case of stock specific derivative contract (both stock options and Single Stock Future) shall be applicable on the cumulative open positions in derivative contracts on that stock at an Exchange. The volumes in the derivative markets are growing steadily....
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....that appellant no. 2 to 13, held short position which was nearly equal to the maximum that was allowed to them. Breach of this limit invites penalty as per NSE circular of 2004 under the SCR Act. Appellant no. 1 admits that the 12 named entities (appellant 2 to 13) were its agents. The appellant no. 1, however contends that the position limits are applicable to a client/customer and every agent was an independent client/customer of the broker since the concept of acting in concert was wanting and no disclosure was required, each and every agent of appellant no. 1 was validly as well as legally entitled to take short positions within the limits prescribed as per circular of 2001. The circular specifically stated that there was no ban on taking up positions by persons acting in concert. The circular makes it clear that the 12 agents could validly take individual position limits without disclosing that they were acting in concert and thus their position limits could not be aggregated, and traded as though the aggregate open Interest of RIL. 114. Before we dwell further on these circulars and Open Interest position, it would be appropriate to take a look into the agreements executed....
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....alium facit per se‛ is fully applicable, namely, whatever a person has power to do himself, he may do so by appointing an agent. Conversely, what a person cannot do himself, he cannot do so by means of an agent. 118. Thus even though the 12 agents, appellant 2 to 13 had validly taken individual position limits in the Nov 2007 RPL Futures as per the circulars which are applicable to a client/ customer, and even though they were not required to disclose that they were acting in concert at the behest of appellant no. 1 RIL, yet in the given facts and circumstances of the case, since the 12 agents were acting on behalf of the principal RIL who was the ultimate beneficiary, the separate position limits would not apply to each of them. The logic is simple. Since RIL could not have crossed the position limits in its individual capacity, it could not cross the position limits through its agents. The principle that ‚what could not be done directly, could not be done indirectly‛ is fully applicable in the instant case. Thus the open position limits taken by the 12 agents when aggregated violates the circular. 119. From a reading of the circulars, we find that the posi....
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....f which shall make a contract entered into otherwise than in accordance with the bye-laws void under sub-section (1) of section 14; (b) provide that the contravention of any of the bye-laws shall render the member concerned liable to one or more of the following punishments, namely:- (i) fine, (ii) expulsion from membership, (iii) suspension from membership for a specified period, (iv) any other penalty of a like nature not involving the payment of money.‛ 121. A perusal of Section 9(3) provides that in the event of a contravention, a fine, expulsion from membership, suspension from membership for a specified period or any other penalty of a like nature not involving the payment of money, can be imposed. Based on the aforesaid, various circulars have been issued by the Respondent and by the Stock Exchange under the SCR Act providing monetary penalties for violating the position limits. 122. Thus, from a perusal of Section 9(2) and 9(3) of the SCR Act, we find that breach of the contract for want of compliance with the bye-laws under Section 14 are restrictive to the extent of the punishment depicted in Section 9(3) viz, fine,....
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....t investigating this aspect, the WTM could not attribute the amassing of the Open Interest positions to the actions of the 12 agents. 126. It may be noted here that the position limit circulars specifically states that the client wise/customer wise position limits were being prescribed to ‚deter and detect concentration of positions and market manipulations‛. We find that as per the circular on position limits, the prescription of position wide limit is only to deter and detect market manipulation. Assuming that during the course of investigation the concentration was detected, we are of the opinion that neither in terms of the circular, nor in terms of the PFUTP Regulation, such concentration would automatically amount to manipulation. Concentration by itself does not become manipulation unless a separate act is established. If the legislative intent was that concentration itself was manipulative, the framers would have prescribed disclosure by persons acting in concert and also determined the extent of concentration which would amount to manipulation. Breaching position limit only attracts monetary penalty under the circular and cannot automatically attract PFUTP R....
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.... agreements were never hidden and were disclosed by RIL at the first opportune moment. 129. The finding that these agreements were executed for the purpose of circumventing the regulatory framework and that it was a premeditated exercise is purely based on surmises and conjectures. The stand of RIL from the very beginning was clear, namely, that they had to sell 22.5 Cr shares of RPL and therefore executed the agreements with the 12 entities so that they could individually take position limits within the framework of the circulars. Nothing was an afterthought nor can such agreement be called a sham agreement. 130. The WTM held that the cash segment trades of appellant No.1 on 29/11/2007 during the last ten minutes of trading hours is fraudulent and manipulative in nature as contemplated under the PFUTP Regulations. In our view, this finding is purely based on conjectures and is not based on sound reasoning. How are the trades done in the last 10 minutes are fraudulent and manipulative has not been disclosed. The finding that the appellant's trading in the last 10 minutes was only for the purpose to depress the settlement price in the November, 2007 RPL Futures in order to mak....
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....and thereafter may not trade for many days. It is the choice of an investor for whatever compulsion he may have. Thus, not trading from 24th November till the last 10 minutes of 29th November 2007 does not create a suspicion. 133. In this regard, we find that the appellant had traded on 23/11/2007. As per Table 5 of the Vo. III of the Compilation of Documents, the appellant had traded 0.52 crore RPL shares at an average price of Rs.209.62. It may be noted here that 24/11/2007 and 25/11/2007 were Saturday and Sunday. No trades were possible on these two days on account of the closure of the Stock Exchange. On 26th November 2007, the opening price was Rs.213 per share and the closing price was Rs.204.05. The appellant chose not to enter the market on 27th and 28th November 2007, the weighted average price was only Rs.197.79 and Rs.194.17. Further, only 2.68 cr and 3.08 cr shares respectively were traded on these days which indicates that not many trades were done at or above Rs.200/-. It may be noted here that appellant No.1 never sold the shares below Rs.200/- from 6/11/2007 till 29/11/2007. On 29/11/2007, the opening price was Rs.197.80 and remained below Rs.200/- till 3.00 p.m.....
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....nly when the price rose to Rs.224.90 at 3:21:40 p.m. the appellant No.1 entered the market in order to reap the average in the cash segment. 136. There is yet another angle to it. On 29/11/2007, total shares traded were 17.66 crore. Appellant traded 2.25 crore shares and delivered 2.25 crore shares. Others traded 15.41 cr shares but delivered 2.78 cr shares which is a mere 17.68% against 100% delivery by appellant no.1. This shows that the sales made by appellant No.1 were genuine and the trades made by others were speculative. In this view of the matter, SEBI should have conducted an investigation as to why the RPL shares were moving up at such a rapid pace from 3.00 p.m. to 3.20 p.m. The price was Rs.208.10 at 3.00 p.m. and rose to Rs.224.7 at 3:21:40. We find it strange that this sudden increase in the price in the last half hour did not create suspicion nor raised an eyebrow. There was ever likelihood that some forces were trying to raise the price in order to close the gap between the settlement price and the open interest positions taken by the 12 appellants in the F&O segment. On the other hand, cognizance has been taken for the trades done by appellant No.1 for manipulat....
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.... below LTP and finds that his entire sell order has got executed at a price above the ask price, the next sell order placed by him normally will not be lower than LTP. However, if the seller persistently puts lower ask price again and again, it would create suspicion that the seller is depressing the price for whatever reasons which would ultimately lead to manipulation. In the instant case, when we analyze Table 12 of Vol.III of the Compilation of Documents, we do not find that by placing sell orders at below LTP, the appellant were trying to depress the price for the following reasons:- i) The first sell order at 3:21:40 pm for 20 lac was at an ask price of Rs.222 against LTP of 224.70. In spite of quoting a lower price, all the orders (namely, 3.5 lac shares) were not executed. ii) The third sell order for 10 lac shares was at a higher ask price of Rs.220/- against LTP of Rs.219.70. Only 1,53,478 shares were sold and approx. 8.5 lac shares did not get sold. iii) The sell order for 8.33 lac shares was at an ask price of Rs.219 against LTP of Rs.219.50. only 2.82 lac shares were executed and 5.71 lac shares were not executed. iv) The next sell o....
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.... is no logic as to why the WTM has found that the trades of 1.09 cr shares were lawful. This is inconsistent with the conclusions drawn by the WTM. This clearly means that the order for disgorgement of alleged profits pertains to the balance 7.42cr shares only on the basis of exceeding the position limits. As held earlier, exceeding the position limits will not attract Sec.11B of the SEBI Act. The order for disgorgement is thus illegal. 141. The finding that all the transactions taken together was a well planned fraudulent manipulative scheme by appellant no. 1 to earn undue profits based on manipulation and fraud is erroneous. We have already held that the transactions made by appellants were not manipulative in nature. We find that the element of fraud has to be established which in the instant case the respondent has miserably failed. 142. Establishment of fraud requires a higher degree of proof than what is made out in the impugned order. The impugned order establishes fraud on the basis of motive and nothing else. In this regard, ‚fraud‛ is defined under regulation 2(1)(c) of PFUTP regulations, which states as under:- "2(1)(c). ‚fraud‛ in....
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....ch in our opinion does not support the stand of the respondent in the instant case. The Supreme Court in the said decision held that ‚fraud‛ is one which has the effect of inducing another in dealing in securities. In the instant case, there is no finding given by the WTM that the appellant had induced others in dealing in securities. Thus, the respondent has failed to established inducement and accordingly failed to discharge its burden. In this regard, we may also point out that the WTM in the impugned order has held that the charge under regulation 4(2)(b) of the PFUTP regulations, expressly requires inducement as a prerequisite condition. 144. In Price Waterhouse & Co. vs SEBI, 2019 SCC Online SAT 165, this tribunal held that inducement is an essential element to constitute fraud. The said decision is squarely applicable in the instant case. 145. The contention of the respondent that the Regulation 3(b) of the PFUTP Regulations is squarely applicable as it does not require the element of fraud and inducement. The contention of the respondent that the employment of 12 agents is a device to exceed the position limits and is thus a misrepresentation which is in c....
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....ies more than 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.‛ Regulations 3 & 4(1),(2)(d)&(e) of the PFUTP "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; (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....
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....roved in the absence of any finding on inducement. Admittedly, the WTM has found that the charge levelled in the show-cause notice regarding violation of Regulation 4(2)(d) has not been made out, namely, the charge of inducement. If inducement is not made out or proved then the charge of fraud or fraudulent action automatically fails. Thus, in our opinion, Section 12A read with Regulations 3 & 4 of the PFTP Regulations, are not made out. 149. It was contended by the respondent that the charge under Regulation 3(b) of the PFUTP is made out which provision does not require the element of fraud and inducement to be proved. It was contended that employment of 12 agents was the device to exceed the position limits and therefore there was a contravention of the SEBI Act and the Regulations is, in our view, erroneous. As we have held the violation of the position limits circulars which are issued under the SCR Act does not attract provisions of Regulation 3(b) of the Regulations framed under the SEBI Act. Since the burden of proving inducement has not been proved which is an essential ingredient to establish a fraud, we are of the opinion that no fraud has been made out and therefore R....
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....r as well as all the other allegations fall under Sections 12-A(a), (b) and (c), there will be no escape for the respondents from satisfactorily explaining before the Tribunal as to how these allegations would not result in fully establishing the guilt as prescribed under sub-clauses (a), (b) and (c) of Section 12-A. Similar will be the situation for answering the definition under Regulations 2(1)(b), (c), 3, 4(1), (2)(a), (b), (c), (d), (e), (f), (k) and (r) of the 2003 Regulations, apart from taking required penal action against those who are involved in any fraud being played in the creation of securities.‛ 152. In N. Narayanan vs Securities and Exchange Board of India, (2013) 12 SCC 152 the Supreme Court held:- '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 securities market, so as to promote orderly, he....
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....in the operation of ordinary market forces of supply and demand and thus undermines the ‚integrity‛ and efficiency of the market‛ 155. SEBI under the SEBI Act enjoys wide powers under Section 11, 11A and 11B to protect the interests of the investors in the securities market by taking such measures as it thinks fit. In Securities and Exchange Board of India vs Pan Asia Advisors Limited and Others (2015) 14 SCC 77, the Supreme Court held:- '75. On a reading of the above statutory provisions, we find under Section 11(1) of the SEBI Act, 1992, a duty has been cast on SEBI to protect the interest of the investors in securities and also to promote the development of the securities market as well as for regulating the same by taking such measures as it thinks fit. The paramount purpose has been shown as protection of interest of investors on the one hand and also simultaneously for promoting the development as well as orderly regulation of the security market. By way of elaboration under Sections 11(2)(a) to (e) it is stipulated that the duty of SEBI would include regulating the business in the stock exchanges and any other securities market which would inclu....
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....d not punitive. 156. In view of the aforesaid there is no manipulative or fraudulent transaction which comes under the purview of Sec.12A of the SEBI Act read with Reg. 3&4 of the PFUTP Regulations. We reiterate that the respondent has failed to discharge the burden of establishing manipulation. No case of manipulation or fraudulent transactions in the last ten minutes of trading has been made out. The violation of the circulars only invites a penalty under the SCR Act. 157. In the absence of any contravention, the direction issued under Section 11-B of the SEBI Act to the appellant no.1 to disgorge an amount of Rs.447.27 cr. alongwith interest is without any authority of law and, to that extent, the order is set aside. 158. In the result, the appeal is allowed in part. In the circumstances of the case, parties shall bear their own costs. Justice Tarun Agarwala Presiding Officer PER: DR. C.K.G NAIR, MEMBER 159. We are unable to agree with the findings and conclusions reached by the Honourable Presiding Officer in his Order. Therefore, we proceed to write a separate Order in this matter. 160. This appeal has been filed aggrieved by the order of the Whole Time....
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....le and therefore, on 7th November, 2007, further increase in open position was banned by the NSE. This has alerted SEBI and an investigation was directed. A Show Cause Notice (SCN) dated April 29, 2009 was issued to Appellant no.1. After some correspondence a corrigendum dated October 8, 2009 was issued. Upon consideration of the reply and the material found during investigation, in suppression of the above SCN, a fresh SCN dated December 16, 2010 was issued by respondent SEBI to the appellant no.1 as well as to 12 other entities. 164. It is the case of the appellants that, on 29 March 2007, the Board of Directors of Appellant No.1 decided to raise resources, inter alia, by offloading approximately 5% of its holdings of equity shares of Reliance Petroleum Limited (RPL), a subsidiary of RIL. While Appellant No.1 undertook the transactions in the cash segment of RPL in November 2007, it enlisted the services of other 12 Noticees, as agents to operate on its behalf in the single stock futures segment of RPL. During November 1, 2007 and November 6, 2007 these 12 entities took substantial short-sell positions in the November Futures contract of RPL. Appellant No.1, RIL itself did not....
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....ti Investment and Holding Pvt. Ltd, other 11 entities were green horns. Their agency-wise, date-wise details and their connections, are all exhaustively given in the impugned order. Since it is an admitted position of Appellants that these 12 entities were in fact engaged by RIL for taking positions in the November futures contracts of RPL and the details of their trading etc. are not disputed, we do not propose to elaborate on this issue. However, it is important to note that, admittedly, these 12 front entities were engaged on a commission basis and the entire profit and loss emanating from their trading activities would flow to the accounts of RIL. It is also to be noted that the entire trading activities of these front entities were executed by an employee (Mr. Sandeep Agarwal) of a wholly owned subsidiary of RIL, who also placed orders in the cash market for selling the RPL shares. Information available on records also shows that RPL, a subsidiary of RIL, got listed in May 2006 when it came out with an Initial Public Offer (IPO) of equity shares at the rate of Rs. 60/- which reached the peak price of Rs. 294/- on November 1, 2007, the date on which RIL entered the RPL stock fu....
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....ing the position limits issued by SEBI and NSE and Section 18A of SCRA, it was alleged that the whole scheme was a fraudulent and manipulative practice in the securities market and attracts the provisions of Section 12A of the SEBI Act, 1992 read with Regulations 3(a),(b),(c) and (d) and 4(1) and 4(2)(d) and (e) of the SEBI (Prevention of Fraudulent and Unfair Trade Practices) Regulations. Accordingly, the Noticees were called upon to show cause as to why all or any of the actions, including disgorgement of the undue and illegal profits made, and such other measures as deemed fit, in terms of the SEBI Act, the SCRA 1956 and SEBI (PFUTP) Regulations, 2003 should not be initiated against them. 168. Based on an evaluation of the facts and circumstances brought out in the SCN and, the replies submitted, the impugned order has been passed with the following findings: (i) Noticee no.1 by employing 12 agents to take separate position limits of Open Interest on its behalf by executing separate agreements with each one of them and cornering 93.63% of the November futures of RPL, has acted in a fraudulent manner while dealing in RPL scrip. (ii) The Noticee No.1, by manip....
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....Crore by this fraudulent and manipulative strategy/pattern of trading. The actions of RIL and the other 12 entities constitute violation of the provisions of Section 12A of the SEBI Act read with Regulations 3, 4(1) and 4(2)(e) of PFUTP Regulations. The 12 entities have also violated provisions of 2001 SEBI Circular and 2001 NSE Circular relating to position limits in single stock futures segment. 170. Since charges/allegations relating to Benami transactions raised in the SCN were dropped by the WTM we do not propose to deal with the same in this Order. 171. We have heard Mr. Harish Salve, learned Senior Advocate along with Mr. Janak Dwarkadas, learned Senior Advocate, Mr. Raghav Shankar, Mr. Rohan Rajadhyaksha, Mr. Ashwath Rav, Mr. Kashish Batia, Mr. Vivek Shetty, Mr. Amey Nabar, Mr. Geetanjali Sharma, Ms. Arundhati Kelkar, Mr. Armaan Patkar, Ms. Cheryl Fernandes and Mr. Vedant Jalan, learned Advocates for appellants. We have also heard Mr. Darius Khambata, learned Senior Advocate with Mr. Gaurav Joshi, learned Senior Advocate, Mr. Aditya Mehta, Mr. Mihir Mody and Mr. Shehaab Roshan, learned Advocates for the respondent. 172. In addition, we have also heard two individua....
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....e scope (both the issues and the time span) of the investigation. It is an established position in law that an Intervener is entitled only to address the arguments in favour of or against the impugned order. Any intervention to expand / enlarge the scope of the appeal is not relevant to the matter in hand as well as the mandate assigned to this Tribunal. Similarly, issue such as oppression of minority shareholders and mismanagement are not within the purview of this Tribunal and this Tribunal has to go by the mandate assigned to it under Section 15T of the SEBI Act, 1992 as Section 15T(4) states that this Tribunal may pass orders confirming, modifying or setting aside the order appealed against. This is the crux of the decisions in Clariant (supra), which though relied on but not correctly interpreted by the Interveners. The decision in the case of Clariant (supra) is explained by the Supreme Court in the case of National Securities Depository Ltd. vs. SEBI (2017) SCC Online 256 wherein in para no.24 the Supreme Court clarified as under:- '24. It may be stated that both Rules made under Section 29 as well as Regulations made under Section 30 (of SEBI Act) have to be placed....
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....culation, it was added by the learned senior counsel, is not an offence at all since hedgers and speculators have to be part and parcel of the derivative market for transactions to takes place. Upon sale of substantial number of shares in the cash market by 19th November, 2007 the hedge became ‚naked‛, i.e. without the corresponding underlying exposure and that ‚any hedge position left open like the one RIL did is termed as a naked hedge transaction‛. A naked hedge transaction is a recognised concept and Reserve Bank of India also permits naked hedge derivative transaction in forex to continue until the maturity date in relation to the hedge transaction. To buttress the said submission the Master circular dated 5th July, 2016 issued by Reserve Bank of India was placed before us. The circular inter alia provides as under:- 'i) Forward Foreign Exchange Contracts Participants Market-makers - AD Category I banks Users - Persons resident in India Purpose a) To hedge exchange rate risk in respect of transactions for which sale and /or purchase of foreign exchange is permitted under the FEMA 1999, or in terms of the rule....
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....level position limits were even fixed. Further, there was a provision for 'acting in concert' and thereby if the position limit exceeds 15% of the open interest a disclosure had to be made to the stock exchanges. In subsequent circulars, though client level position limits were introduced, particularly, for single stock futures and options, there was no ban on 'acting in concert' or on aggregation of positions; therefore, there is no violation of position limit related laws by RIL when it engaged 12 front entities to take positions on its behalf in the futures segment. Even if it is held to be a position limit violation, without admitting the same, at worst it is a case of position limit violation under relevant stock exchange circulars and only a penalty under the said circulars/Exchange Rules can be imposed on the appellant. 181. According to him, there is no fraud, no manipulation, no attempt to deceive the market and the impugned order has failed miserably to prove even by a whisper how exceeding position limits in the face of substantial exposure of the underlying, is market manipulation and fraud as defined under Section 12A of SEBI Act, 1992 and under the stated provision....
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....n and documents as required by the respondent, the attitude of the respondent has been prejudicial. The relevant office note was part of Misc. Application no.427 of 2019 filed in the present proceedings which was disposed of by this Tribunal on 20th August, 2019. The said application was filed for staying the implementation of SCN dated November 21, 2017 issued by the AO of SEBI with a view to impose penalty. Reading of the Office note of respondent SEBI dated November 6, 2009 would show that a personal hearing in the case was scheduled before the WTM on November 7, 2009 at 2.30 p.m. The advocate of the respondent SEBI was briefed for presenting the case on behalf of SEBI. However, the Advocate had advised to obtain certain information from appellant no.1 'in order to strengthen the evidence against the entity'. Therefore, vide the office note it was decided that the respondent SEBI would seek adjournment of the hearing to be held on November 7, 2009. On the strength of this material, Mr. Salve submitted that the very act of the respondent of collecting information with a view ‚to strengthen the evidence against appellant no.1‛ would show that the respondent SEBI instea....
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....lar only a penalty under the exchange rules could have been imposed. The WTM's finding holding the Appellants to be violating Section 12A of SEBI Act and PFUTP Regulations is completely arbitrary as a position limit violation under the SCRA/exchange rules cannot be used to hoist a charge of PFUTP violations. This is all the more important, it was contended, when Section 12A of SEBI Act reads as below and states that the said section can be invoked only when provisions of the SEBI Act and Rules are violated, not for violation of other laws. 12A. 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 recognized 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; (emphasis added by the appellant) 188. It was vehemently contended that possible SCRA violation of position limits cannot be artificially converted into PFUTP violations under the SEBI Act, particularly when no fraud or inducement has been proved in the impugned order. 189. Learn....
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....ract Act; taking positions by acting in concert or by aggregation is not violative of client-wise position limits and is not a contravention of relevant exchange rules and circulars; no evidence of fraud, inducement or manipulation has been brought out in the impugned order and hence provisions of SEBI Act, 1992 and PFUTP Regulations could not have been invoked and an order under Sections 11 and 11B of SEBI Act could not have been issued against the appellants and no penalty/disgorgement could have been ordered. Without admitting, it was contended, that the actions of the Appellants may be at worst interpreted as a position limit violation under the relevant exchange circulars and a penalty under the same could have been the only punishment, if at all any, that could have imposed on the appellants. 193. On the other hand, the learned senior counsel Mr. Darius Khambata appearing for the respondent SEBI strongly contended that the scheme perpetrated by the appellants was an unparalleled manipulation of the securities market. The magnitude of the offence is clear from one single fact that effectively one party (RIL), through a clandestine scheme of engaging 12 front entities corner....
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.... as if such contracts had been entered into and acts done by the Principal in person. Accordingly, the Principal could not have cornered the market by taking up huge net sell position by engaging agents to do the same since under the provisions of the Contract Act, 'what is prohibited directly cannot be done indirectly by engaging others'. 196. Accordingly, the learned senior counsel for SEBI contended that when a Principal-Agent model was used by the appellants they could not have adopted the argument that there is no prohibition on acting in concert or aggregation in the SEBI / NSE circulars, though such an interpretation of the Circulars would be a complete misreading to totally undermine the principles behind imposing position limits in the derivatives market as a major risk management strategy. 197. As regards manipulation and violation of Section 12A of SEBI Act, 1992 read with Regulation 3, 4(1) and 4(2) (e) of the PFUTP Regulations the learned senior counsel submitted that once manipulation was established inducement would automatically follow. By the manipulative activities of the appellants integrity of the market in RPL shares in November 2007 was compromised and m....
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....considered that there was no fraud but only a violation of the position limit circular it was submitted that the reading of the impugned order in entirety would show that the learned WTM had also came to the conclusion that the appellants have indulged into fraudulent transaction since ‚fraud‛ has a very wide meaning under the PFUTP Regulations. 200. Shri Khambata further submitted that the action of RIL in dumping of 2.25 Cr shares (with most of the orders placed well below LTP) in the last ten minutes of trading on 29 November, 2007 was with the sole purpose of manipulating the settlement price of the RPL Futures contracts. Such manipulation amounted to a fraudulent act. He stated that on 29 November, 2007, RPL scrip opened at Rs 193.80 and rose to Rs 208.20 at 3:00 p.m. and thereafter increased further to Rs 224.35 at 3:20 p.m. The graph of RPL share price during the last half hour showed that the price was rising steadily. Such continuous price rise was not suiting RIL, as a rise in price of the RPL shares in the cash segment would mean reduction in RIL's realization on its open position in the RPL Futures segment. The learned senior counsel, thus, submitted that....
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....t an afterthought to cover up the motive of making speculative gains. Short selling 9.92 Cr shares in the Futures segment was not a legitimate hedge in as much as RIL's intention was to corner futures positions and take advantage of the price dip in the cash segment induced by RIIL itself. The appellants' contention that the transactions executed in the Futures segment were hedge transactions since it expected RPL prices to fall when shares were sold in the cash segment was nothing but an afterthought. The learned senior counsel placed reliance on a decision of the Gujarat High Court in Pankaj Oil Mills vs Comm. of Income Tax, AIR 1978 Guj. 226 which distinguished hedging from speculative transactions as ‚the genuine transactions entered into for purposes of insuring against adverse price fluctuations‛ and further held ‚in order to be genuine and valid hedging contracts of sales, the total of such transactions should not exceed the total stocks of the raw materials or the merchandise on hand which would include existing stocks as well as the stocks acquired under the firm contracts of purchases.‛ 204. The learned senior counsel also placed reliance on a d....
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....ropriate to extract the relevant provisions of Section 12A of the SEBI Act as well as Regulations 3 and 4 of the PFUTP Regulations for convenience, which reads as follows: - "SEBI Act Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control. 12A. No person shall directly or indirectly- (a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized 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 regulation....
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....ltiple entities for the benefit of that one entity is immaterial or violative of the circulars issued by SEBI / NSE on November 2/7 2001 in this regard because those circulars do not prohibit position taken in 'aggregation' or by 'acting in concert'. This submission is too simplistic, patently erroneous and gravely mischievous. In fact, if such a submission is adopted/accepted it would lead to a complete decimation of the derivatives market as position limit in the derivative market is arguably the most important regulatory tool available to manage/mitigate the considerable extent of risks associated with derivatives products. The impugned order itself explains the sanctity of position limits in preserving the integrity of derivatives market and to minimize risk as under: - "4. A.11 'Position limits' define the maximum position, either total or net long / short that may be held or controlled by one entity or one class of traders. The concept of ‚client level position limits‛ in equity derivatives markets stems from the prime objective of avoiding / limiting concentration of positions in a few hands and ensuring a wide dispersal of positions. Section 18A was int....
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....particular underlying stock (in terms of number of contracts)‛. By citing the said provision, it has been argued by the appellants that the thresholds prescribed are ‚with respect to a specific customer or client only‛. It has also been contented that SEBI has not provided for any concept of aggregation of holdings in this circular unlike in the Takeover Regulations (reference made to ‚persons acting in concert‛ etc.)‛ 4.A.14 In my view, the interpretation as advanced by Noticee No.1 holds good only if the words 'clients' or 'customers' would mean different clients or customers and not in a case where several clients or customers were acting on behalf of one common ultimate beneficiary. If the argument of Noticee No.1 is adopted, the stipulation of a client-wise limit in the relevant circular itself becomes irrelevant and redundant. Further, it would throw open the possibility of grave misuse by a person to multiply his position by enlisting agents to act on his behalf rather than to limit itself to the stipulated criteria laid down in law. Such a concentration of the position limits by one person deprives the other market playe....
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.... position limit, which is far less than the 62 % or 93% cornered by the appellants on 06 November and 29 November 2007 respectively. In any case when client-wise position limit was introduced and effected in 2001, the appellants are not entitled to even invoke the provisions relating to a circular of 1999 issued in respect of index products, which are quite different from single stock products, and that too for trading done in 2007, six years after the relevant circulars came into effect and when volumes in the derivatives segment had become very large. 210. By interpreting Section 18A of SCRA, the learned Senior Counsel for the appellants contended that since all their trades were in accordance with the conditions specified therein those trades were legal and hence the finding in the impugned order that the trades were illegal is patently wrong. A reading of the said Section, 18A reproduced below, would make such an argument hollow. Contracts in derivative. "18A. 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 excha....
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....ollar-INR futures. Position limit violation envisaged under the exchange circulars is simple and straight forward : when a particular entity, identifiable to the exchange surveillance mechanism by their code number / name, exceeding its position limit that the exchange could immediately monitor the same and take appropriate regulatory step to rectify the same such as directing its winding down to the permissible level or by imposing a penalty etc. In the context of the present appeal, the 12 entities in picture were distinct entities and hence for the exchange surveillance mechanism there was no way to capture that these entities were indeed agents of any particular entity. In fact, when one of the entities (Appellant no.12 -Dharti Investment and Holding Private Ltd.) exceeded the maximum permissible position limit of 101 lakh shares on November 6, 2007 when its net short position became 104.79 lakh shares, a penalty was imposed by the NSE on it. Therefore, the contention of the appellant that when an entity exceeds the permissible position limits only a penalty under the exchange rules is applicable has already been implemented in the case of one entity. This is not the case when ....
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....g in the securities market, it is also important to distinguish between different types / categories of participants such as promoters, speculators, hedgers, arbitragers and so on. There are also players like day traders, hedge funds, long terms investors etc. Here, hedging as a risk mitigating tool can only be used to a limited extent by promoter entities, as in the instant case the promoter's decision was to offload more than 5000 crore worth of shares in a few trading days. Further, they had an inventory of another 70% of the shares of RPL. The derivatives market position limits, even the market-wide position limit, do not have the depth to hedge such huge exposure. Not that all the listed securities are in the derivatives segment providing the exiting/diluting promoters or other investors in such shares any hedging option/tool. Therefore, the submission that a promoter entity trying to offload a large quantity of its equity holding of a subsidiary company in the cash segment can effectively hedge their exposure in one single contract (like the November future contracts) is a wild dream and efforts in achieving the same through devious, manipulative schemes would fall in a rare ....
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....ircular clearly provides as under: 'Operational Guidelines, Terms and Conditions General principles to be observed for forward foreign exchange contracts. a) The maturity of the hedge should not exceed the maturity of the underlying transaction. The currency of hedge and tenor, subject to the above restrictions, are left to the customer. Where the currency of hedge is different from the currency of the underlying exposure, the risk management policy of the corporate, approved by the Board of the Directors, should permit such type of hedging. b) Where the exact amount of the underlying transaction is not ascertainable, the contract may be booked on the basis of reasonable estimates. However, there should be periodical review of the estimates. c) Foreign currency loans/bonds will be eligible for hedge only after final approval is accorded by the Reserve Bank, where such approval is necessary or Loan Registration Number is allotted by the Reserve Bank.‛ Thus, the operational guidelines of RBI provide that the maturity of the hedge should not exceed the maturity of the underlying transactions. Further there should be correlation, ma....
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....ragraph no. 8 the Supreme Court has observed - '8. The second equally relevant matter is that when a statutory functionary makes an order based on certain grounds, its validity must be judged by the reasons so mentioned and cannot be supplemented by fresh reasons in the shape of affidavit or otherwise. Otherwise, an order bad in the beginning may, by the time it comes to court on account of a challenge, get validated by additional grounds later brought out‛. 218. In the case of Sterlite (supra) the appellants were charged and found guilty by respondent SEBI in two transactions being manipulative. This Tribunal however did not find those two transactions to be manipulative. Respondent SEBI argued that those two transactions were only illustrative and there were many more manipulative transactions. In this background this Tribunal referred the ratio of the case of Mohinder Singh Gill and at Paragraph no. 96 observed as under - '96. Shri Dada had submitted that the two transactions are only illustrative and there are other instances as well to show manipulation by the appellant. I am afraid this is a new finding, not found in the order. In this connection I ....
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....the mandate of the ratio of Clariant's case as explained in the case of National Securities Depository Ltd. vs. SEBI (2017) SCC Online 256 by the Supreme Court (cited and explained above in Paragraph No. 16 while dealing with the cases of interveners) that the power of this appellate tribunal are co-extensive with the powers of SEBI in quasi-judicial orders like the present impugned order. While exercising appellate powers this Tribunal is within its mandate to look into the impugned order in its entirety. When reasons are already supplied in the impugned order, merely a clerical mistake in not reproducing the provision i.e. 4(2)(d) of the SEBI PFUTP Regulations 2003 in the concluding paragraph would not amount to supplying any fresh reasons by this tribunal. The reading of the impugned order as a whole would show that the learned WTM had concluded that the appellants indulged in manipulative and fraudulent practices. As regards the 'mistake' of giving concession regarding one position limit we are of the view that once the learned WTM came to the conclusion that the act of the appellants in cornering the F&O segment and the attempt to depress the share price in cash segment during....
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....t 10 minutes on the expiry day of the November futures contract. Therefore, the finding that a frenetic effort was made by the appellant no 1 in pulling down the price in the cash segment by offloading massive number of shares as the second stage of manipulation cannot be faulted. Submission that appellant no1 was placing limit orders, not pulling down or impacting LTP, has no merit in the context that 12 out of 17 trades were placed below LTP and out of which 4 trades were placed at prices less by Rs. 7.25, 6.75, and 2.70 (twice). No rational investor, that too while selling crores of shares, would place sell order that much below the LTP in the absence of other intentions behind such action. 223. The vehemently argued stand of the learned Senior Counsel that appellant No 1, as a responsible promoter, was executing its trading with minimum market disruption falls flat the way the entire scheme was implemented: adoption of the principal- agent model for cornering position limits and the last 10 minutes trading in the cash segment. If the appellant was a responsible promoter, the appellant would have spread its sales, of the 5% equity of RPL they were planning to offload, across ....
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....red off their position and therefore, relative share of the appellants increased. We agree; but the question of why did the appellants kept a short sell position of 7.97 Crore shares intact to be expired on 29 November when their 'hedging' requirement was only that for 4.45 Crore shares from 16th November? Such an act cannot escape the inevitable conclusion as held in the impugned order, that the appellants were involved in a manipulative, devious scheme. On an observation made by the WTM in the impugned order that appellant No 1 did not have a hedging policy/strategy in response to the appellant's submission on hedging we are told that compulsory hedging policy was introduced only in 2016 and as such the WTM is even ignorant of facts. However, we note that the statement is not on a legal requirement, but a practical business sense for a big Company who tries to enter the market to sell huge stakes of a subsidiary and deciding to hedge ought to have a well-documented hedging strategy, irrespective of whether there is a mandating law or not. 226. In none of the arguments / submissions the appellant No 1 has clarified to us on why it was in a tearing hurry to do everything relatin....
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....I Act could not have been invoked for at worst a violation of position limits, which are part of exchange byelaws and circulars. In the aforesaid paragraphs we have already held that cornering about 62% / 93% of the market-wide position limit by one entity through a manipulative scheme or device is not the same thing as exceeding the position limit by a client in a transparent manner, visible to the exchange/clearing corporation/house. Therefore, the finding in the impugned order that it is a rare case of violation of section 12A of the SEBI Act and Regulation 3 and 4 of the PFUTP Regulations is perfectly in order. Further, it is an established fact that SEBI administers the SCRA, 1956, SEBI Act, 1992, Depositories Act, 1996 and the delegated provisions of the Companies Act, 1956/2013. Therefore, if the nature of the violations specified in any legislations spills over to the mandate under another legislation, SEBI is fully within its rights to invoke the provisions of both/all those legislations. In the instant matter, therefore, when it was held that the position limit violation had been achieved through a dubious, manipulative scheme or a device, such an act would squarely fall ....
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.... 11A, as may be appropriate in the interests of investors in securities and the securities market.] 45[Explanation.-For the removal of doubts, it is hereby declared that the power to issue directions under this section shall include and always be deemed to have been included the power to direct any person, who made profit or averted loss by indulging in any transaction or activity in contravention of the provisions of this Act or regulations made thereunder, to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention.] (emphasis added) 45 Inserted by the Securities Laws (Amendment) Act, 2014, w.e.f. 18-07-2013. 229. As per the afore-quoted provisions of the SEBI Act, disgorgement is an amount equivalent to the wrongful gain made or loss averted and therefore it is an equitable remedy; not a penal action. Moreover, equity is further served when the disgorged amount is credited to the Investor Protection Fund of SEBI, for the benefit of the market participants, particularly small investors; not to the Consolidated Fund of India as in the case of fine/penalty. Therefore, both the contentions that disgorgement is a penalty and S....