SECURITIES AND EXCHANGE BOARD OF INDIA versus RAKHI TRADING PRIVATE LTD.

Citation: [2018] 1 S.C.R. 937 · Decided: 08-02-2018 · Supreme Court of India · Bench: KURIAN JOSEPH · Disposal: Disposed off

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Judgment (excerpt)

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SECURITIES AND EXCHANGE BOARD OF INDIA
v.
RAKHI TRADING PRIVATE LTD.
(Civil Appeal No. 1969 of 2011)
FEBRUARY 08, 2018
[KURIAN JOSEPH AND R. BANUMATHI, JJ.]
SEBI (Prohibition of Fraudulent and Unfair Trade Practices
relating to Securities Market) Regulations, 2003:  Regns 3(a), (b),
(c) and 4(1), (2)(a), (b) – Synchronized trading – Synchronization
and reversal of trades, some in few seconds and majority,  in any
case on the same day, without any significant change in the value
of underlying  – As a result one party booking gains and the other
party booking a loss – In the show cause notice, allegation was
that the parties-traders were buying and selling securities in the
derivatives segment in synchronized and reverse transactions at a
price which did not reflect the value of the underlying – Assessing
Officer held that there was intention of creating false or misleading
appearance in the market and also that a manipulative/deceptive
device was used for synchronization of trades and trades were
fictitious in nature,  amounting to violation of Regns 3(a), (b), (c)
and 4(1), (2)(a), (b) of the PFUTP Regulations  – Securities Appellate
Tribunal (SAT) set aside the order of Assessing Officer holding that
in the Futures and Options (F & O) segment, there is no concept of
“change of beneficial ownership” since what is traded in this
segment are contracts and not the underlying stock or index and it
is only through cash settlement that the trade is concluded and no
physical delivery of any asset is involved and in this view of the
matter, synchronized and reversed trades in Nifty options in F & O
segment can never manipulate the market which in the present
context means the value of Nifty index in cash segment – It further
held that since the trades were settled in cash through stock
exchange mechanism, they are genuine and did not create a false
and misleading appearance of trading in F & O segment – Appeal
by SEBI – Held:  Trading is always with aim to make profits – But if
one party consistently makes loss and that too in preplanned and
rapid reverse trades, it is not genuine and would amount to an unfair
trade practice – In the instant case, through reverse trades, there
                                      [2018] 1 S.C.R. 937
   937
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SUPREME COURT REPORTS
[2018] 1 S.C.R.
was no genuine change of rights in the contract – SAT erred in its
understanding of change in beneficial ownership in reverse trades
– Even in derivatives, the ownership of the right is restored to the
first party when the reverse trade occurs – The traders in question
did not intend to transfer beneficial ownership – Rather than
allowing the market forces to operate in their natural course, the
traders repeatedly carried out the impugned transactions which
deprived other market players from full participation – The repeated
reversals and predetermined arrangement to book profits and losses
respectively, made it clear that the parties were not trading in the
normal sense and ordinary course – Resultantly, there has clearly
been a restriction on the free and fair operation of market forces in
the instant case – The stock market is not a platform for any
fraudulent or unfair trade practice – The field is open to all the
investors – By synchronization and rapid reverse trade, as was
carried out by the traders in the instant case, the price discovery
system itself was affected – The traders, thus, having engaged in a
fraudulent and unfair trade practice while dealing in securities,
are liable to be proceeded against for violation of Regns 3(a), 4(1)
and 4(2)(a) of PFUTP Regulations. (Kurian Joseph, J.)
SEBI (Prohibition of Fraudulent and Unfair Trade Practices
relating to Securities Market) Regulations, 2003:  Regns. 3(a), (b),
(c) and 4(1), (2)(a), (b) – Fictitious transactions creating illegal
synchronization – Modus operandi – The question whether there
was fictitious transactions creating illegal synchronization has to
be gathered from the facts and circumstances and intention of the
parties – Acting in concert is something about which it is difficult to
obtain direct evidence – Proof of manipulation might depend upon
inferences drawn from factual details – Such inferences could be
gathered from pattern of trading data and the nature of the
transactions etc. – ‘By manipulation and synchronization’, it is meant
that two parties have pre-meditated; as such a drastic movement in
price within few seconds could have 

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