2018 Supreme(SC) 122

SUPREME COURT OF INDIA
KURIAN JOSEPH, R. BANUMATHI, JJ.
SECURITIES AND EXCHANGE BOARD OF INDIA – APPELLANT(S)
VERSUS
RAKHI TRADING PRIVATE LTD. – RESPONDENT(S)
CIVIL APPEAL NO. 1969 OF 2011 WITH CIVIL APPEAL NOS. 3174-3177 OF 2011 AND CIVIL APPEAL NO. 3180 OF 2011
Decided On : 08-02-2018

MAIN POINTS
A synchronised and reverse dealing in securities with predetermined arrangement to book loss or gain between pre-arranged parties constitutes all elements of fraud. For trades having an adverse impact on the fairness, integrity and transparency of the stock market traders held liable to be proceeded for violation of Regulations 3(a), 4(1) and 4(2)(a).
When every time one party makes profit and other party faces loss, the trades are not genuine.
In quasi-judicial proceeding before SEBI the standard of proof is preponderance of probabilities.

Headnote:Per KURIAN, J.

       (a) Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 – Regulation 4(1) – Trade practice is unfair if the conduct undermines the ethical standards and good faith dealings between the parties engaged in business transactions – Instantly, one party booking gains and the other party booking a loss – Nobody intentionally trades for loss – An intentional trading for loss per se, not a genuine dealing in securities – Parties not intending to transfer beneficial ownership – No genuine change of rights in the contract occurring – Other investors excluded from participation – traders placing the trade at unattractive prices when it was not synchronizing – Traders playing with the market – Trades held not genuine. (Para 34, 35, 36, 37)

       2017 SCC Online SC 1148; Appeal No. 2 of 2004 (SAT) – Relied upon

       (b) Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 – Regulation 2(1)(c) – A synchronised and reverse dealing in securities – With predetermined arrangement to book loss or gain between pre-arranged parties – Constitutes all elements of fraud – Having an adverse impact on the fairness, integrity and transparency of the stock market – Traders held liable to be proceeded for violation of Regulations 3(a), 4(1) and 4(2)(a). (Para 39, 41, 43)

       (2016) 6 SCC 368 – Relied upon

       Per R. BANUMATHI, J. (Concurring)

       (c) Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 – Regulation 4 – Buy and sell orders placed at a difference of few seconds/minutes – 'Sell' by respondent to Kasam Holding at a high price and "buy" by the respondent from Kasam Holding Pvt. Ltd. at a low price – Transactions almost simultaneous and the matching in time and quantity with significant price variation – Respondent consistently making profit but Kasam Holding Pvt. Ltd. consistently making loss – Every time one party making profit and other party facing loss – Trades not genuine. (Para 68, 69, 73)

       Manu/SB/0229/2006; (2016) 6 SCC 368; MANU/SB/0206/2003; MANU/SB/0136/2007 – Relied upon

       (d) Administration of justice – Standard of proof – In quasi-judicial proceeding before SEBI – Preponderance of probabilities. (Para 71)

       (2016) 6 SCC 368 – Relied upon

       (e) Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 – Regulations 3(a), 4(1) and 4(2)(a) – Non genuine reversal transactions – Violative of regulations 3(a), 4(1) and 4(2)(a). (Para 79)

       (f) SEBI Act, 1992 – Section 12A r/w Regulations 3 and 4, Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 – SEBI has to deal sternly with those who indulge in manipulative trading and deceptive devices to misuse the market and at the same time ensuring the development of the market. (Para 90)

       (2013) 12 SCC 152 – Relied upon

       (g) Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 – Regulation 4 – Contention that instant reversal transaction entered into for tax planning and it is not illegal per se – SEBI show cause notice not raising such issue – Question not gone into. (Para 92)

       MANU/SB/0046/2005 – Referred

       Facts of the case:

       SEBI proceeded against the traders for violation of Regulations 3(a), (b) and (c) and 4 (1), (2)(a) and (b) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003. In the case of brokers, the charge is that they also violated Regulations 7A (1), (2), (3) and (4) of the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992.

       The crux of the allegations in the show cause notices is that the parties were buying and selling securities in the derivatives segment at a price which did not reflect the value of the underlying in synchronised and reverse transactions.

       Finding of the Court:

       The transactions are non genuine and hence violative of regulation 3 and 4.

       Result:

       Appeal Nos.1969/2011, 3175/2011 and 3180/2011 allowed.

       Appeals filed against the brokers dismissed