Penalty imposed by SEBI on traders, for Non Genuine Transactions, upheld by Supreme Court and set aside SAT order

February 8, 2018

A Bench of Supreme Court Judges, Justice Kurian Joseph and Justice R. Bhanumathi passed Judgment with unanimous decision and separate suggestions, in an appeal filed by SEBI against the order of SAT, setting aside the penalty imposed on 3 Traders for involving in non genuine transactions and violating various provisions of SEBI Act, in SEBI v. Rakhi Trading Pvt Ltd, Civil Appeal No. 1969 of 2011, Civil Appeal No. 3174-3177 of 2011 and Civil Appeal No. 3180 of 2011.

There were three traders and three brokers involved in the transaction. The crux of the allegations 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.

One of the Traders, Rakhi Trading was issued a show cause notice on 05.10.2007 alleging execution of non genuine transactions in the Futures and Options segment. The trades in question pertain to NIFTY options. SEBI Adjudicating Officer analysed the trade logs and observed that the trades executed by Rakhi Trading matched with the counter-party Kasam Holding Private Limited in a few seconds. The counter-party to all the trades in the NIFTY contract was Kasam Holding Pvt. Ltd. and the reversals took place in a matter of minutes/hours. The A.O. also noted that on various occasions, when the time was not matched by the respective parties, the first order was placed at an unattractive price relative to market price. These transactions took place on 21.03.2007, 22.03.2007. 23.03.2007 and 30.03.2007 and resulted in a close out difference of Rs 115.79 lakhs without any significant change in the value of the underlying.

Thus, according to the A.O. a manipulative/deceptive devise was used for synchronization of trades and the trades were fraudulent/fictitious in nature. It was found that there is violation of Regulations 3(a), (b) and (c) and 4(1), (2)(a) and (b) of the PFUTP Regulations, 2003. Consequently, a penalty of Rs.1,08,00,000/- was imposed under Section 15HA of the SEBI Act, 1992.

The 2nd Trader, Tungarli was served with Show Cause Notice on 05.10.2007. The allegation in the SCN was that through these synchronized transactions, one party booked profits and the other party booked losses. The trades pertained to future scripts. The A.O.'s order notes that the trades were reversed in all the cases in a matter of few seconds showing significant difference between the buy and sell trade prices. The change in positions took place without any significant change/negligible change in the price of the underlying security. The trades took place on 12.03.2007, 15.03.2007, 23.03.2007, 26.03.2007 and 28.03.2007 and the total profit made by Tungarli was Rs 64.52 lakhs.

The Third Trader, TLB was served with Show Cause Notice on 05.10.2007. The trades pertained to future scrips. As per the A.O.'s order, TLB traded through stock broker SMC Global Securities Ltd and the same broker is the counter party broker as well, trading on behalf of different clients. All the transactions undertaken by TLB resulted in loss to TLB and the total loss was Rs.38.69 lakhs. The trades in question took place on 22.01.2007, 23.01.2007, 31.01.2007, 01.02.2007, 05.02.2007 and 06.02.2007. The A.O.'s order notes that in many cases, the trades were reversed in a matter of minutes showing significant difference in prices without any significant change in value of the underlying. The A.O.'s order notes that during investigation, it was also seen that when the time was not matched by the respective parties, the first order that was placed was at an unattractive price relative to the market price.

The Brokers involved in the Trading are:

Indiabulls
The case pertains to 23 reverse trades in 21 futures and 2 options on 22 different scrips and one Bank Nifty futures. The A.O. takes into account the fact, that in many cases, the reversals took place in a matter of seconds/minutes without change in the value of the underlying. The A.O. records that the Indiabulls representative stated that they could not have known about the intention of the clients, however, the representative admitted that the trades were non-genuine and should not have taken place.

Angel
In the Show Cause Notice dated 05.10.2007, the charge is that as a stock-broker, it executed 56 reversal trades. As per the A.O., these trades were reversed in a matter of a few minutes/ hours. However, the A.O. noted the positive steps taken by Angel in curbing such trades (post reversal trades) and submitted proof of its actions in this regard and therefore, a lesser penalty was imposed on Angel.

Prashant Jayantilal
The Show Cause Notice was dated 05.10.2007. The case pertains to 19 reversal trades wherein the original trades were closed out during the day at a price which was significantly above or below the price at which the first/original transaction was executed.

The Respondents were filed appeal with SAT and the SAT set aside the order passed by SEBI. Securities and Exchange Board of India challenged the order of SAT before the Supreme Court.

While disposing of the Civil Appeal under Section 15Z of SEBI Act, the Supreme Court said that "The traders thus having engaged in a fraudulent and unfair trade practice while dealing in securities, are hence liable to be proceeded against for violation of Regulations 3(a), 4(1) and 4(2)(a) of PFUTP Regulations. Appeal Nos.1969/2011, 3175/2011 and 3180/2011 are hence allowed. The orders of the Securities Appellate Tribunal are set aside and that of the SEBI are restored to the extent indicated above."

"As far as brokers are concerned, we are of the view that there is hardly any evidence on their involvement so as to proceed against them for violation of Regulation 7A of the Brokers Regulations and PFUTP Regulations. Merely because a broker facilitated a transaction, it cannot be said that there is violation of the Regulation. SEBI has not provided any material to suggest negligence or connivance on the part of the brokers."

Read the Judgment of Supreme Court of India in State of Madhya Pradesh & Anr v. Mahendra Gupta & Ors dated 8.2.2018