TaxTMI 
TaxTMI 
2023 (12) TMI 1477
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....nafter referred to as 'SEBI') imposing a penalty of Rs. 7 lakh for violation of Section 12A(c) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as 'SEBI Act') read with Regulations 3(d), 4(1) and 4(2)(e) 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 'PFUTP Regulations') in connection with selling and closing out on August 8, 2017 and August 10, 2017 existing positions in Nifty Put options of strike price of Rs. 11400/- and expiry date of December 28, 2017. 2. The facts leading to the filing of the present appeal is, that the appellant at the relevant moment of time was a wholly owned subsidiary of Reliance Industries Ltd. (hereinafter referred to as 'RIL') and was always funded by RIL. The appellant in the ordinary course of business regularly traded in options. In December 2016, the appellant took positions, both call and put options in long dated Nifty options with various strike prices of Rs. 1400/- Rs. 3500/- Rs. 4000/- Rs. 5000/- and Rs. 6000/-, all expiring on December 28, 2017. 3. The WTM passed an order date....
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....rt from aforesaid trades, no other trades were executed between January 1, 2017 to July 31, 2017 except one trade that was executed by the appellant on June 29, 2017. 8. An investigation was conducted by SEBI on the trades executed between the appellant and MSF for Decemebr 2017 expiring for the alleged "box trades" on trade dates July 31, 2017. August 8, 2017 and August 10, 2017. Even though, the investigation report clearly indicated that the trades executed by the appellant were not "box trades", nonetheless, a show cause notice dated December 2, 2021 was issued alleging that the appellant had violated Section 12A of the SEBI Act read with Regulations 3(d), 4(1) and 4(2)(e) of the PFUTP Regulations on the basis that the trades in 11400 PE on July 31, 2017, August 8, 2017 and August 10, 2017 were executed through only one trading member, namely, MSICPL with mutual understanding so that one leg of the options i.e. 11400PE was traded significantly away from its then prevalent intrinsic value i.e. at discount of 15%, 35% and 37% respectively on three days. 9. MSF settled the show cause notice under the Securities and Exchange Board of India (Settlement Proceedings) Regulations....
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....inding and, therefore, the appellant cannot be allowed to change its stand on this issue. The AO further found that the National Stock Exchange of India Ltd. (hereinafter referred to as 'NSE') circular dated October 28, 2022 which prescribes a band of + / - 40% to the reference price was not applicable as the said circular was prospective in nature and would not apply to the trades executed in 2017. The AO, consequently, concluded that the appellant failed to demonstrate that the trades were made at the best price available and held that the trades were manipulative in nature. The AO, consequently, imposed a penalty of Rs. 7 lakh. 12. We have heard Mr. Somasekhar Sundaresan, the learned counsel with Mr. Shuva Mandal, Mr. Rohan Batra, Ms. Sonali Malik, Mr. Dhruv Sethi, the learned counsel and Mr. Amey Nabar, Ms. Swati Jain, Authorised Representatives for the appellant and Mr. Pradeep Sancheti, the learned senior counsel with Mr. Suraj Chaudhary, Mr. Ravishekhar Pandey, Mr. Amarpal Singh Dua, Ms. Shefali Shankar, Ms. Rasika Ghate, the learned counsel for the respondent. 13. The learned counsel for the appellant contended that the show cause notice alleged that the trades in que....
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...., etc. The fair value determined by the appellant and NSE are different even though both have been determined using Black Scholes model due to different inputs of interest rate and implied volatility and whereas the appellant determined a 23% and 25% discount, NSE had determined it as 23% and 19% for the impugned trades. The learned counsel contended that comparing the traded price with the fair values which are subjective and, therefore, alleging them to be manipulative is wrong and is based on surmises and conjunctures in as much as the impugned order does not indicate as to how much of the deviation from the fair value would not be manipulative. It was contended that while the premium of 9% to the fair value on July 31, 2017 was not found to be manipulative, a discount of 23% and 19% as per NSE calculated fair value was found to be manipulative. It was urged that in the absence of any rational basis, the finding of the trades of the appellant are manipulative is arbitrary as it is not based either in law or on facts. 15. The learned counsel contended that the Bloomberg chats with Citigroup Global and transcript of all recordings between the appellant and the Bank of America, ....
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....r the respondent heavily relied upon a decision in SEBI vs. Rakhi Trading Pvt. Ltd. [(2018) 13 SCC 753] contending that the facts in the instant case, is similar to the facts and modus operandi in the case of Rakhi Trading Pvt. Ltd. (supra) and is squarely covered by the decision of the Hon'ble Supreme Court in Rakhi Trading Pvt. Ltd. (supra). The learned counsel contended that the trading on the stock exchange platform after mutual arrangement on the price and quantities between the two parties was necessarily fraudulent and manipulative since the price discovery and free and fair operation of the market forces is affected and prevents other parties from participation in the trades in question. The learned counsel contended that the name of the appellant was known to MSF, the counter party through the broker MSICPL and, therefore, the appellant knew the counter party and negotiated and agreed to a price and quantity and thereafter executed the trades on the stock exchange. The trades were, thus, pre-arranged trades executed on the stock exchange and that too at a huge discount to the fair value. As such the impugned trades were synchronized transactions and violative of Regulation....
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.... 2(d) of the SCRA "(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." Section 12A(c) of the SEBI Act "12A(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;" Regulation 3(d), 4(1) and 4(2)(e) of the PFUTP Regulations "3(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 thereunder." "4(1). Without prejudice to the provisions of regulation 3, no person shall indulge in a frau....
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....ue is Rs. 1500 i.e. Rs. 11400/- - Rs. 9900/-. 23. Fair value of an option is, that if a person wants to purchase a Call or Put option on July 1, 2017 he will not be ready to pay the Intrinsic value of Rs. 1500/- because there is a time to expiry of nearly six months i.e. from July 1, 2017 till Decemebr 28, 2017. The time value of the premium paid has to be factored in. Apart from this, there are other factors like risk free trade, implied volatility, Spot Price, expectation of the movement in the Index, etc. which will determine the value / premium that the buyer will be ready to pay for the options. This is determined by using the Black Scholes Model. The value so determined using this model is known as the fair value. 24. "Box Trades" are carried out with an intention to provide loan by one party to another. Party A and party B indulge in synchronized trading in options with higher and lower strike price such that on expiry of settlement the borrowing parties pays back the loan alongwith interest to the lending party. These are not genuine trades in options and gives a misleading appearance of the trades on the stock exchange. 25. The trades executed by the appellant on ....
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....e opinion that the appellant had a bonafide reason to close out all outstanding positions in view of the WTM order. Admittedly, in the instant case, we find that the appellant had complied with the order of the WTM and had completely stopped trading in the equity derivatives from March 24, 2017 onwards except for the trades in question. 28. The contention that the appellant should have waited till the expiry of the options on Decemebr 28, 2017 instead of closing the positions of selling these options by executing the impugned trades in July and August 2017 cannot be a ground to hold that the intention of the appellant was to manipulate the trades. 29. The finding that the appellant had only contacted one broker, namely, MSICPL to obtain quotes and, therefore, the trades are manipulative cannot be sustained in as much as the AO has mis- appreciated the admitted facts. We have perused the Bloomberg chats with Citigroup Global which brings out clearly that the price quoted were for the Nifty index options expiring on December 28, 2017. On a clear reading of Bloomberg chats between the appellant and Citigroup Global on July 31, 2017, it is clear that the quotes were sought for op....
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....arty was MSF for the trades on all the three dates nor can it lead to a conclusion that the appellant and MSF entered into a mutual arrangement to enter into trades at a discount. In fact, the appellant's stand was that they had no idea as to whether there was a one counter party or multiple counter parties and only came to know for the first time when the show cause notice was issued. 33. The fact that the MSF came to know that the counter party was the appellant through MSICPL does not mean that the broker also intimated the appellant that the counter party was MSF. Therefore, the presumption drawn by the AO that the appellant knew the counter party is based on no evidence. 34. Further, the finding that there was mutual arrangement between the appellant and MSF to execute the impugned trades at a discount is again based on presumptions. There is no direct evidence of the appellant being in contact with MSF nor there is any evidence to show that the price was negotiated between the appellant and MSF. In view of the above, it is impossible to hold that the appellant and MSF had entered into any mutual arrangement to execute the trades on all the three days at the discount to ....
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....d September 14, 1999 issued by SEBI clearly mandates that negotiated trades through a broker have to be executed only on the stock exchange platform which the parties did. Further, there were no reversal of trades within a few minutes. In Rakhi Trading Pvt. Ltd. (supra) there was no transfer of beneficial ownership whereas, in the instant case, there was genuine transfer of beneficial ownership. Thus, the decision in Rakhi Trading Pvt. Ltd. (supra) is distinguishable and is not applicable to the facts of the present case. 38. In Ketan Parikh vs. SEBI in Appeal No. 2 of 2004 decided on July 14, 2006, this Tribunal held that a synchronised transaction will be illegal if it is executed with a view to manipulate the market. Whether a transaction has been executed with the intention to manipulate the market will depend upon the intention of the parties which could be inferred from the attending circumstances. The attending circumstances, in the instant case, indicates that no inference can be drawn that the trades were executed with a manipulative intent since none of the factors stipulated in Ketan Parekh's decision (supra), namely, frequency of trades, twisting reversal, no change ....
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....ven manipulation of the market. In the absence of any criteria being framed, there was no occasion for the AO to hold the trades of July 31, 2017 as genuine and the trades of August 8, 2017 and August 10, 2017 to be manipulative only on the basis of certain percentage of discount. We find that NSE has issued a circular dated October 28, 2022 prescribing a band of + / - 40% to the reference price. This circular indicates that a trade executed with a discount up to 40% to the fair value cannot be faulted unless it is otherwise manipulative. This circular which is dated October 28, 2022 is only procedural and sheds a light on this issue, namely, a trade executed with a discount up to 40% to the fair value would be treated as valid and genuine. If such discounts up to 40% to the fair value could not be faulted from October 28, 2022 onwards there is no reason why the said principle cannot be made applicable to transaction which occurred prior to October 28, 2022. Thus, the circular of 2022 would apply to the trades in question. Thus, we hold that trades executed at a heavy discount as stated in the show cause notice by itself does not constitute manipulation. 41. Thus, the finding th....