Fairness, integrity, and transparency are hallmarks of the stock market in India. The present case involves two sets of party respondents – traders and brokers. Securities Exchange Board of India (“ SEBI”) proceeded against the traders for violation of Reg. 3(a), (b) and (c) and 4 (1), (2)(a) and (b) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (“PFUTP Regulations”), while the charge against the brokers is that they violated Regulations 7A (1), (2), (3) and (4) of SEBI (Stock Brokers and Sub-brokers) Regulations, 1992.

Traders – Rakhi Trading Pvt. Ltd. (“Rakhi Trading”), Tungarli Tradeplace Private Limited (“Tungarli”), TLB Securities Limited (“TLB”); and

Brokers – Indiabulls Securities Limited, Angel Capital and Debt Market Limited, and Prashant Jayantilal Patel.

The aggrieved parties preferred an appeal against the order of the Adjudicating Officer (AO), SEBI under Section 15T of the Securities Exchange Board of India Act, 1992 (“Act”) before Securities Appellate Tribunal (“Tribunal”). The Tribunal set aside the Order passed by the AO.

Tribunal’s order in this case succinctly dealt with the working of options in the securities market. In an options contract, the seller of the option sells a right to buy in the future at a predetermined price (“Call option”) or a right to sell in the future at a predetermined price (“Put option”), to the buyer of such option in lieu of a premium.

The charges against traders and the brokers relate to synchronized trading [a trade where the buyer and seller enter the quantity and price of the shares they wish to transact at substantially the same time].

The details of the case are below –

Case name Securities Exchange Board of India v. Rakhi Trading Pvt. Ltd.
Case number Appeal No. 1969 of 2011
Court Supreme Court of India 
Coram  Kurian Joseph, J. and R. Banumathi, J.
Decided on  February 8, 2018
Relevant Act/Sections SEBI Act, 1992 – Section 11, 12A, 15HA

SEBI (PFUTP) Regulations, 2003 –Regulation 3(a),(b) and (c) and Regulation 4(1), (2)(a) and (b)

Author of the case brief Ayush Gupta


Order of Adjudicating Officer, SEBI

Show Cause Notices (SCN) were issued to Rakhi Trading, Tungarli and TLB on 05.10.2007 for their alleged involvement in fraudulent and unfair trade practices. Rakhi Trading was alleged to have executed non-genuine transactions in the Futures and Options segment (“F&O segment”) pertaining to NIFTY Options. AO after analyzing trade logs found that trades executed by Rakhi Trading matched with orders placed by the counterparty (who was the counterparty to all the trades in NIFTY contract) – Kasam Holding Private Limited in a few seconds, and the reversals took place in a matter of minutes/hours. He also noted that where the time was not matched by respective parties, the first order was placed at an unattractive price relative to market price. The transactions resulted in a closeout difference of Rs. 115.79 lakhs without any significant change in the value of underlying.

SCNs were issued to Tungarli and TLB for their alleged involvement in synchronized transactions. The total profit made by Tungarli was Rs. 64.52 lakhs and a loss of 38.69 lakhs was booked by TLB. AO’s order noted that in many cases, the trades were reversed in a matter of minutes showing a significant difference in prices without any significant change in the value of the underlying, and where the time was not matched by respective parties, the first order was placed at an unattractive price relative to the market price.

Similarly, SCNs were also issued to aforesaid brokers for allegedly facilitating such non-genuine transactions and involving in malpractices relating to the securities market.

After affording an opportunity for filing reply and a personal hearing, AO passed a detailed order dated 26.03.2009 against Rakhi Trading for its alleged involvement in synchronized trading and market manipulation practices which upsets market equilibrium. A penalty of Rs. 1.08 Crores was imposed on Rakhi Trading under Section 15HA of the Act.

Appeal against AO’s Order

An appeal was preferred under Section 15T of the Act challenging the Order of AO before Tribunal. The Tribunal set aside the order of SEBI and ruled in favor of Rakhi Trading after making several observations (infra).

Observations made by Tribunal


The Tribunal was of the considered opinion that the movement of prices in F&O segment cannot have any impact on the price discovery system in the cash segment. It observed that the ‘transactions in the cash market are based on the current market price of the underlying derived by the principle of demand and supply and in the case of an index, the value depends on the performance of the stocks that constitute it, the pricing in the F & O segment is based on future expected events which may or may not happen. Anticipated future events may not have a discernible effect on the cash segment today where delivery of shares is given/taken immediately.


Tribunal didn’t concur with the findings of AO that the trade carried out by appellant (Rakhi Trading) in Nifty options were fictitious transactions for they were synchronized and reversed resulting in the creation of misleading appearance of trading in those options. Artificial/fictitious trades in the cash segment give a false appearance of active trading in a particular scrip by increasing volumes which tend to lure the lay investors to invest in that scrip. The impression given to the investors is that the scrip is highly liquid and much in demand and this interferes with the price discovery mechanism of the exchange and it is for this reason that such trades are held illegal in the cash segment. This, however, cannot be the case in the F & O segment. Since all the trades are executed through the stock exchange and settled in cash through its mechanism they cannot be said to be artificial trades creating a misleading appearance of trading in the options. Therefore, the charge of market manipulation is liable to be set aside.


According to Tribunal, 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. Tribunal held that such trades are illegal only when they manipulate the market in any manner and induce investors.

It was also observed that the trades being settled in cash through a stock exchange mechanism are genuine and therefore cannot create a false or misleading appearance of trading in the F&O segment. Further, any trade to be objectionable must result in influencing the market one way or the other.


It has also taken a view that there being no physical delivery of any asset, there is no change of beneficial ownership and what is traded in the F&O segment are only contracts and hence, such synchronized and reverse trades in NIFTY options in the F&O segment can never manipulate the market.


Tribunal held that the impugned transactions of trading and reversals were carried out for the purpose of tax planning which is not violative of any regulation.


  1. Whether ‘market impact’ is a sine qua non for deciding on the culpability of a person engaged in a sham transaction?
  2. Whether the change of beneficial ownership in a securities transaction necessary to constitute fraud under SEBI regulations?

ARGUMENTS FOR THE APPELLANT [Mr.Gourab Banerji, Senior Counsel]

The stock exchange is a platform created to facilitate efficient and fair trading. However, the transactions between the parties were non-genuine and orchestrated which are prohibited under the PFUTP Regulations.  The SCN makes it clear that the transactions were a misuse of market mechanism as they were not genuine trades. The non-genuineness of these transactions is evident from the fact that there was no commercial basis to it. Suddenly, within a matter of minutes, the impugned transactions were reversed when the value of the underlying had not undergone any significant change.

ARGUMENTS FOR THE RESPONDENT [Mr. Chidambaram, Ld. Senior Counsel]

Tribunal held that synchronized trades are not per se illegal in Ketan Parekh v. SEBI [Appeal No. 2 of 2004 before the Tribunal]. As far as the reversal of trade is concerned, the learned counsel has sought to distinguish Ketan Parekh (supra) as it pertained to dealings in the cash segment whereas the present case deals with the F&O segment. Therefore, the appeal before this Court is not maintainable.


  1. The apex court heard the arguments from both sides and overruled the decision taken by Tribunal in this matter. It observed that the transactions between the parties were not genuine, and orchestrated to manipulate the market. There was no commercial basis to the transactions entered into by the parties as, within a matter of minutes, a reversal of transactions were effected when the value of the underlying had not undergone any significant change.
  2. The Court relied on SEBI & Ors. v. Shri Kanaiyalal Baldevbhai Patel and Ors 2017 SCC Online SC 1148 where it held that a trade practice is unfair if the conduct undermines the ethical standards and good faith dealings between the parties engaged in business transactions. An act, to be construed as an act of UTP, has to be understood comprehensively to include any act beyond a fair conduct of business including the business in sale and purchase of securities.
  3. The Court also observed that Unfair Trade Practice is a practice which does not conform to the fair and transparent principles of trades in the stock market. 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 Preamble to 1956 Act does not permit “undesirable transactions in securities”. The Act intends to prevent undesirable transactions in securities by regulating the business of dealing therein.  Undesirable transactions would certainly include unfair practices in trade. Orchestrated trades are a misuse of the market mechanism. It is playing the market and it affects market integrity.
  4. The trade reversals, in this case, indicate that the parties did not intend to transfer beneficial ownership and through these orchestrated transactions, the intention of which was not regular trading, other investors have been excluded from participating in these trades. The fact that when the trade was not synchronizing, the traders placed it at unattractive prices is also a strong indication that the traders intended to play with the market. The Court disagreed with the understanding advanced by Tribunal that change of beneficial ownership does not arise in the derivative segment. In a derivative segment, there is a change of rights in a contract. In the instant case, through reverse trades, there was no genuine change of rights in the contract. In the light of ratio in  Ketan Parekh case, it is clear that the traders in question did not intend to transfer beneficial ownership and therefore these trades are non-genuine.
  5. Regulation 2(1)(c) of PFUTP Regulations defines ‘fraud’, which includes –
    • a suggestion as to a fact which is not true while he does not believe it to be true is fraud;
    • a deceptive behavior of one depriving another of informed consent or full participation is fraud; and
    • a false statement without any reasonable ground for believing it to be true is also fraud.
      In a synchronized and reverse dealing in securities, with predetermined arrangement to book loss or gain between pre-arranged parties, all these vices are attracted. Regulation 3(a) expressly prohibits buying, selling or otherwise dealing in securities in a fraudulent manner. Under Regulation 4(2) dealing in securities shall be deemed to be fraudulent if the trader indulges in an act which creates a false or misleading appearance of trading in the securities market. It is a deeming provision. Such trading also involves an act amounting to manipulation of the price of the security in the sense that the price has been artificially and apparently prefixed. The price does not at all reflect the value of the underlying asset. It is also a transaction in securities entered into without any intention of performing it and without any intention of effecting a change of ownership of such securities, ownership being understood in the limited sense of the rights in the contract.
  6. 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.
  7. The Court fortified its conclusion by its previous judgement in SEBI v. Kishore R. Ajmera (2016) 6 SCC 368 wherein it was observed that investors’ confidence in capital/securities market is a reflection of the effectiveness of the regulatory mechanism in force. The SEBI Act and the Regulations framed thereunder are intended to protect the interests of investors in the Securities Market. The primary purpose of the statutory enactments is to provide an environment conducive to increased participation and investment in the securities market which is vital to the growth and development of the economy. The provisions of the Act and the Regulations will, therefore, have to be understood and interpreted in the above light. it was also held that in the absence of direct proof of meeting of minds elsewhere in synchronized transactions, the test should be one of preponderance of probabilities as far as adjudication of civil liability arising out of the violation of the Act or the provision of the Regulations is concerned.
  8. 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. The orders of the Securities Appellate Tribunal are set aside and that of the SEBI are restored.
  9. As far as brokers are concerned, the court was 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 a violation of the Regulation. SEBI has not provided any material to suggest negligence or connivance on the part of the brokers.  


Considering the reversal transactions, quantity, price and time and sale, parties being persistent in a 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 a 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 the desired loss and/or profit. Such synchronized trading is violative of transparent norms of trading in securities.  If the findings of Tribunal are to be sustained, it would have serious repercussions undermining the integrity of the market and thus the impugned order of Tribunal is liable to be set aside.

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