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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 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 been only through prior understanding between the parties concerned only to fulfill an unlawful objective through misuse of the stock exchange – That is, prior arrangement/prior understanding with each other wherein one will make profit and other will lose and thereby as soon as one party opens up its trade in the market, the other party will buy it – Though the trading is shown on the screen, but prior arrangement is very well possible behind the screen – This was done in the case in hand – Buy and sell orders were placed at a difference of few seconds/minutes, while ‘sell’ by respondent was at a high price and “buy” by the respondent was at a low price – The transactions wherein the ‘buy and sell’ orders entered almost simultaneously and the transactions matched in time and quantity with significant price variation and respondent consistently making profit but the other party consistently making loss – There was no possibility of such perfect matching of quantity, timing, prices etc. between the same parties unless there was prior meeting of minds or a specific understanding/arrangement between the parties – Applying the test laid down in Kishore R. Ajmera case to the instant case, by cumulative analysis of the reversal transactions, quantity, time and significant variation of prices, without major variation in the underlying price of the securities indicate that the respondent’s trades are not genuine and had only misleading appearance of trading in the securities market, without intending to transfer beneficial ownership. (Banumathi, J.) Securities and Exchange Board of India(Stock Brokers and Sub-brokers) Regulations, 1992: Regns. 7A, (2),(3), (4) – Synchronization and reversal of trades by brokers on behalf of their clients, 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 – SAT held that merely because appellant acted as a broker would not mean that it knew about the nature of transaction and that there was no evidence of lack of due diligence while executing the impugned transactions which could make the brokers guilty of violating the code of conduct prescribed for the stock brokers – Held: There was no evidence of involvement of brokers so as to proceed against them for violation of Regn 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 did not provide any material to suggest negligence or connivance on the part of the brokers – In the absence of any material provided by SEBI to prove the charges against the brokers, particularly regarding aiding and abetting fraudulent or unfair trade practices, the orders of SEBI against the brokers should be interfered with – Securities Contracts(Regulation) Act, 1956 – s.18A, 3(ac), 2(d). (Kurian Joseph, J.) Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992: Regns. 7A, (2), (3),(4) – Fictitious transactions creating illegal synchronization – Allegation of SEBI was that the traders and brokers at NSE were buying and selling almost equal quantities of contracts within the day and that such buy/sell orders were synchronized – Held: Considering the reversal transactions, quantity, price and time and sale, parties being persistent in number of such trade transactions with huge price variations, it will be too naive to hold that the transactions are through screen-based trading and hence anonymous – Such conclusion would be over-looking the prior meeting of minds involving synchronization of buy and sell order and not negotiated deals as per the board’s circular – The impugned transactions are manipulative/deceptive device to create a desired loss and/or profit – Such synchronized trading is violative of transparent norms of trading in securities – If the findings of SAT are to be sustained, it would have serious repercussions undermining the integrity of the market and the impugned order of SAT is liable to be set aside – On this additional reasonings also, conclusion allowing the appeal preferred by SEBI against the traders is upheld – The conclusion dismissing the appeal preferred by the SEBI against the brokers is also upheld – SEBI Act, 1992 – ss.12A, 15HA.(Banumathi, J.) Stock Exchange: Need for comprehensive legal framework governing the securities market – As the market grows, ingenuous means of manipulation are also employed – In such a scenario, it is essential that SEBI keeps up with changing times and develops principles for good governance in the stock market which ensure free and fair trading – The observations made in Kishore R. Ajmera and Kanaiyalal Patel regarding need for more comprehensive legal framework governing the securities market, reiterated – SEBI Act, 1992. (Kurian Joseph, J.) Stock Exchange: Circumstances under which synchronized trade become illegal – Held: A synchronized transaction will become illegal or violative of the Regulations if it is executed with a view to manipulate the market or if it results in circular trading or is dubious in nature and with a view to manipulate the price or volume of the scrip or with some ulterior purpose.(Banumathi, J.) Stock Exchange: Manipulation of market – If the factum of manipulation is established, it will necessarily follow that the investors in the market have been induced to buy or sell and that no further proof in this regard is required – The market is so widespread that it may not be humanly possible for the Board to track the persons who were actually induced to buy or sell securities as a result of manipulation and the Board cannot be imposed with a burden which is impossible to be discharged. (Banumathi, J.) Stock Exchange: Prevention of market abuse – The smooth operation of the securities market and its healthy growth and development depends upon large extent on the quality and integrity of the market – Unfair trade practices affect the integrity and efficiency of the securities market and the confidence of the investors – Prevention of market abuse and preservation of market integrity are the hallmark of securities law. (Banumathi, J.) Stock Exchange: Role of SEBI – Object of SEBI Act – Held: The object of the SEBI Act is to protect the interest of the investors in securities and to promote the development and to regulate the securities market so as to promote orderly, healthy growth of securities market and to promote investor’s protection – In order to protect the interests of the investors and the integrity of the markets, as a regulator, SEBI has to make the market place efficient and clean, wherein all the participants play their role diligently and professionally within the four corners of the system, without there being any scope for market abuse – Where certain unscrupulous elements are trying to manipulate the market to serve their own interest, it becomes imperative on the part of SEBI to intervene and to curb further mischief and to take necessary action to maintain public confidence in the integrity of the securities market. (Banumathi, J.) Evidence: In the quasi-judicial proceeding before SEBI, the standard of proof is preponderance of probability – Stock Exchange.(Banumathi, J.) Words and phrases: Synchronize, Synchronized Trading – Meaning of, discussed.(Banumathi, J.) |
