The Supreme Court has set aside an order of the Securities Appellate Tribunal (SAT) which held that only if there is market impact on account of sham transactions, could there be violation of the Prohibition of Fraudulent and Unfair Trade Practices Regulations.
A bench of Justice Kurian Joseph and Justice R Banumathi observed that the stock market is not a platform for any fraudulent or unfair trade practice, and it finds difficult to agree with the proposition set out in the SAT order that the synchronization and reversal of trades effected by the parties with a significant price difference, some in a few seconds and majority, in any case, on the same day had no impact on the market and it has not affected the NIFTY index in any manner or induced investors
SEBI had accused three traders and brokers of sham transactions of buying and selling securities in the derivatives segment at a price which did not reflect the value of the underlying in synchronized and reverse transactions. A manipulative/deceptive devise was used for synchronization of trades and the trades were fraudulent/fictitious in nature.
On their appeal to SAT, it held that the synchronization and reversal of trades effected by the parties with a significant price difference, some in a few seconds and majority, in any case, on the same day had no impact on the market and it has not affected the NIFTY index in any manner or induced investors. It also observed that such trades are illegal only when they manipulate the market in any manner and induce investors.
Justice Kurian Joseph observed: “In the instant case, one party booked gains and the other party booked a loss. Nobody intentionally trades for loss. An intentional trading for loss per se, is not a genuine dealing in securities. The platform of the stock exchange has been used for a non-genuine trade. Trading is always with the aim to make profits. But if one party consistently makes loss and that too in preplanned and rapid reverse trades, it is not genuine; it is an unfair trade practice.”
The bench also held that undesirable transactions would certainly include unfair practices in trade and the SEBI Act, 1992, was enacted to protect the interest of the investors in securities. Protection of interest of investors should necessarily include prevention of misuse of the market. Orchestrated trades are a misuse of the market mechanism. It is playing the market and it affects the market integrity, the judge said.
Setting aside the order of the SAT vis-à-vis traders, the court observed: “According to SAT, only if there is market impact on account of sham transactions, could there be violation of the PFUTP Regulations. We find it extremely difficult to agree with the proposition. As already noted above, SAT has missed the crucial factors affecting the market integrity, which may be direct or indirect. 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 has been carried out by the traders in the instant case, the price discovery system itself is affected. Except the parties who have pre-fixed the price nobody is in the position to participate in the trade. It also has an adverse impact on the fairness, integrity and transparency of the stock market.”
With regard to brokers, the bench observed that merely because a broker facilitated a transaction, it cannot be said that there is violation of the Regulation and that SEBI has not provided 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, we are of the opinion that the orders of SEBI against the brokers should be interfered with,” the bench said.
The bench also reiterated the need for a more 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 court said.
Justice R Banumathi, in her separate concurring judgment, observed: “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 naïve 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.”