Securities Appellate Tribunal
Jio Financial Services Ltd. vs Sebi on 13 December, 2023
BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Date of Hearing : 18.10.2023
Date of Decision : 13.12.2023
Misc. Application No. 1064 of 2023
And
Appeal No. 745 of 2023
Jio Financial Services Ltd.
(formerly known as Reliance Strategic
Investments Ltd.)
1st Floor, Building 4NA, Maker Maxity,
Bandra Kurla Complex, Bandra East,
Mumbai - 400 051. ..... Appellant
Versus
Securities and Exchange Board of India
SEBI Bhavan, Plot No. C-4A, G Block,
Bandra Kurla Complex, Bandra (East),
Mumbai - 400 051. ... Respondent
Mr. Somasekhar Sundaresan, Advocate with Mr. Shuva Mandal, Mr.
Rohan Batra, Ms. Sonali Malik, Mr. Dhruv Sethi, Advocates and Mr.
Amey Nabar, Ms. Swati Jain, Authorised Representatives i/b
Anagram Partners for the Appellant.
Mr. Pradeep Sancheti, Senior Advocate with Mr. Suraj Chaudhary,
Mr. Ravishekhar Pandey, Mr. Amarpal Singh Dua, Ms. Shefali
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Shankar, Ms. Rasika Ghate, Advocates i/b. MDP & Partners for the
Respondent.
CORAM : Justice Tarun Agarwala, Presiding Officer
Ms. Meera Swarup, Technical Member
Per : Justice Tarun Agarwala, Presiding Officer
1.The appellant has filed the present appeal challenging the order dated June 30, 2023 passed by the Adjudicating Officer (hereinafter referred to as 'AO') of Securities and Exchange Board of India (hereinafter referred to as 'SEBI') imposing a penalty of Rs. 7 lakh for violation of Section 12A(c) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as 'SEBI Act') read with Regulations 3(d), 4(1) and 4(2)(e) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (hereinafter referred to as 'PFUTP Regulations') in connection with selling and closing out on August 8, 2017 and August 10, 2017 existing positions in Nifty Put options of strike price of Rs. 11400/- and expiry date of December 28, 2017.
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2. The facts leading to the filing of the present appeal is, that the appellant at the relevant moment of time was a wholly owned subsidiary of Reliance Industries Ltd. (hereinafter referred to as 'RIL') and was always funded by RIL. The appellant in the ordinary course of business regularly traded in options. In December 2016, the appellant took positions, both call and put options in long dated Nifty options with various strike prices of Rs. 1400/-, Rs. 3500/-, Rs. 4000/-, Rs. 5000/- and Rs. 6000/-, all expiring on Decemebr 28, 2017.
3. The WTM passed an order dated March 24, 2017 debarring RIL from dealing in equity derivatives in the Futures and Options (hereinafter referred to as 'F&O') segment of the stock exchanges, directly or indirectly for a period of one year. The WTM however directed RIL to square off / close out open existing positions. The relevant extracts of the order of the WTM dated March 24, 2017 are extracted hereunder :-
"(i) The noticees named above shall be prohibited from dealing in equity derivatives in the F&O segment of stock exchanges, directly or indirectly, for a period of one year from the date of this order. The noticees may however square off or close out their existing open positions."4
4. As on March 24, 2017, the appellant had hedged outstanding call and put options at various strike prices including long dated open positions in 11400 PE expiring on Decemebr 28, 2017.
5. The order of the WTM dated March 24, 2017 squarely applied to the appellant also. Any trade other than for closing out / squaring off by the appellant would be an indirect trading by RIL through the appellant which was prohibited by the WTM's order. But for the WTM's order, the appellant had the following choices for any point of time :-
1. Wait until the expiry of the options;
2. Close out the open positions by sell or purchase;
3. Hedging the positions by taking opposite positions from time to time.
According to the appellant, hedging the positions was not possible since hedging would involve trading in options by RIL which was prohibited.
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6. Due to the risk involved in waiting till the expiry, the appellant decided to close out the open positions including 11400 PE and other long dated positions on the stock exchanges on three days i.e. on July 31, 2017, August 8, 2017 and August 10, 2017.
7. All the trades on July 31, 2017, August 8, 2017 and August 10, 2017 were executed by the appellant through its broker Morgan Stanley India Company Pvt. Ltd. (hereinafter referred to as 'MSICPL'). MSICPL obtained quotes from its clients Morgan Stanley (France) SA (hereinafter referred to as 'MSF') for all the options of the three days which quotes were accepted by the appellant and the trades were executed by MSICPL as a common broker of both the appellant and MSF. It may be noted here that all these long dated open positions were highly illiquid and, this fact is clear that apart from aforesaid trades, no other trades were executed between January 1, 2017 to July 31, 2017 except one trade that was executed by the appellant on June 29, 2017.
8. An investigation was conducted by SEBI on the trades executed between the appellant and MSF for Decemebr 2017 6 expiring for the alleged "box trades" on trade dates July 31, 2017. August 8, 2017 and August 10, 2017. Even though, the investigation report clearly indicated that the trades executed by the appellant were not "box trades", nonetheless, a show cause notice dated December 2, 2021 was issued alleging that the appellant had violated Section 12A of the SEBI Act read with Regulations 3(d), 4(1) and 4(2)(e) of the PFUTP Regulations on the basis that the trades in 11400 PE on July 31, 2017, August 8, 2017 and August 10, 2017 were executed through only one trading member, namely, MSICPL with mutual understanding so that one leg of the options i.e. 11400PE was traded significantly away from its then prevalent intrinsic value i.e. at discount of 15%, 35% and 37% respectively on three days.
9. MSF settled the show cause notice under the Securities and Exchange Board of India (Settlement Proceedings) Regulations, 2018 by paying the settlement amount of Rs. 27,35,000/-.
10. The allegation levelled against the appellant was denied contending that they had not violated any provisions of the SEBI Act nor the trades executed were box trades or synchronized trades. The AO after considering the material evidence on record held that the 7 appellant's trades on July 31, 2017 were not in violation of the SEBI laws but held that the trades executed on August 8, 2017 and August 10, 2017 were manipulative since there was a significant discount of 23% and 25% to the fair value of 11400 PE on those dates. As per NSE, the trade price on these two dates were 77% and 81% of the theoretical price (fair value) on these dates implying a discount of 23% and 19% respectively to the fair values as determined by NSE. Further, the appellant had contacted only one broker, namely, MSICPL, and the Bloomberg chats with Citigroup Global Markets India Pvt. Ltd. (hereinafter referred to as 'Citigroup Global') did not prove that the appellant had approached Citigroup Global for quotes for the said trades. The AO further held that MSF admitted of knowing the name of the counter party, namely, the appellant with respect to the trades executed on August 8, 2017 and, therefore, came to the conclusion that there was a mutual arrangement between the appellant and MSF to execute trades at a pre-determined price. Accordingly, the AO came to a conclusion that there was a collusion and synchronization of the trades between the appellant and MSF and there was a mutual arrangement between them which was violative of Regulations 3 and 4 of the PFUTP Regulations.
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11. The AO further came to the conclusion that the derivatives policy submitted by the appellant does not address the trading decision of the appellant as well as the present model to be adopted by the appellant with respect to the impugned trades. The AO considering that only one quote had been obtained by the appellant and in the absence of internal policy to demonstrate the trading decision, the AO came to the conclusion that the trades made at a considerable discount with only one counter party with whom the appellant had the mutual arrangement was violative of the SEBI laws. The AO also came to the conclusion that the order of the WTM was not applicable to the appellant in as much as the appellant initially had admitted that the order was not binding and, therefore, the appellant cannot be allowed to change its stand on this issue. The AO further found that the National Stock Exchange of India Ltd. (hereinafter referred to as 'NSE') circular dated October 28, 2022 which prescribes a band of + / - 40% to the reference price was not applicable as the said circular was prospective in nature and would not apply to the trades executed in 2017. The AO, consequently, concluded that the appellant failed to demonstrate that the trades were made at the best price available and held that the trades were 9 manipulative in nature. The AO, consequently, imposed a penalty of Rs. 7 lakh.
12. We have heard Mr. Somasekhar Sundaresan, the learned counsel with Mr. Shuva Mandal, Mr. Rohan Batra, Ms. Sonali Malik, Mr. Dhruv Sethi, the learned counsel and Mr. Amey Nabar, Ms. Swati Jain, Authorised Representatives for the appellant and Mr. Pradeep Sancheti, the learned senior counsel with Mr. Suraj Chaudhary, Mr. Ravishekhar Pandey, Mr. Amarpal Singh Dua, Ms. Shefali Shankar, Ms. Rasika Ghate, the learned counsel for the respondent.
13. The learned counsel for the appellant contended that the show cause notice alleged that the trades in question were "box trades" whereas the investigation report itself made it clear that the trades executed between the appellant and MSF did not qualify as "box trades". Learned counsel further contended that the trades had to be executed at a discount of 15%, 25% and 35% to the fair value due to the fact that 11400PE were highly illiquid and the outstanding positions were substantial coupled with the inability of the appellant to hedge these outstanding positions in view of the WTM order. The 10 learned counsel contended that taking the intrinsic value of an option was not the correct benchmark. The intrinsic value, in the instant case, was the simple difference between Strike Nifty and Spot Nifty on the date it is measured. Due to the time value of money and the volatility of the Nifty, the fair value of an option is always less than the intrinsic value and, therefore, the fair value has to be computed using the Black Scholes model which requires multiple inputs, viz, Strike Nifty, Spot Nifty, interest rate, time to expiry, implied volatility, etc. The learned counsel contended that impugned trades were found to be manipulative due to the trades being at a significant discount to the fair value which according to the appellant's calculation was 23% and 25% on August 8, 2017 and August 10, 2017 respectively. It was contended that the said finding by the AO is patently erroneous and the finding that the appellant has not been able to justify the sale of 11400 PE at such a significant discount and that it was not a prudent decision for the appellant to trade at a loss with only one broker, was based on mis-appreciation of the admitted facts. The learned counsel further contended that the finding regarding the mutual arrangement between the appellant and MSF to trade at a discount was again based on mis-appreciation of the 11 admitted facts. Further, the circular dated October 28, 2022 clearly indicates that discounted price up to 40% is allowable and cannot be treated as manipulative or a fraud under the PFUTP Regulations. The learned counsel contended that merely because the appellant had executed the trades at a discount to the fair value cannot be deemed to be manipulative.
14. According to the learned counsel, fair value is a theoretically calculated subjective value since it is based on subjective inputs such as interest rate, time to expiry, implied volatility, etc. The fair value determined by the appellant and NSE are different even though both have been determined using Black Scholes model due to different inputs of interest rate and implied volatility and whereas the appellant determined a 23% and 25% discount, NSE had determined it as 23% and 19% for the impugned trades. The learned counsel contended that comparing the traded price with the fair values which are subjective and, therefore, alleging them to be manipulative is wrong and is based on surmises and conjunctures in as much as the impugned order does not indicate as to how much of the deviation from the fair value would not be manipulative. It was contended that while the premium of 9% to the fair value on July 31, 2017 was not 12 found to be manipulative, a discount of 23% and 19% as per NSE calculated fair value was found to be manipulative. It was urged that in the absence of any rational basis, the finding of the trades of the appellant are manipulative is arbitrary as it is not based either in law or on facts.
15. The learned counsel contended that the Bloomberg chats with Citigroup Global and transcript of all recordings between the appellant and the Bank of America, Merill Lynch (hereinafter referred to as 'Bank of America') clearly brings out that the appellant had approached both Citigroup Global and Bank of America for quotes to sell 11400 PE. In any case, there is no requirement in law to seek quotes from multiple brokers before executing a trade. The learned counsel further contended that the finding of the AO that there was a mutual arrangement between the appellant and MSF to execute the trades at pre-determined price is without any basis. The appellant had approached the broker MSICPL and MSF is the client of MSICPL whereas there is no evidence to show that the appellant was in touch with MSF and, consequently, the finding that there was a mutual arrangement between the appellant and MSF is based on misreading of the evidence. It was urged that the mere fact that MSF 13 came to know that the appellant was a counter party through the broker does not mean that the appellant was also aware that the counter party was MSF.
16. It was urged that the finding of pre-determination and mutual arrangement between the appellant and MSF is based on surmises and conjunctures. It was also urged that the finding that there was no policy of the appellant to approve the trading decision for the trades in question at a considerable discount to only one counter party is devoid of any merit. The said trades were made under extreme situation on account of an order being passed by the WTM for which it was not expected for the company to have a policy to cover such a situation. Further, the mere fact that there was no policy does not mean that a trade becomes manipulative automatically. It was urged that whereas the AO admits that there was an economic rationale for MSF to provide quotes at a discount but failed to recognize the compelling circumstances under which the appellant had to close out the outstanding illiquid open positions at a discount. In such a scenario, it was urged that when the AO accepted that 11400 PE was illiquid, the finding that the act of the appellant of selling the trades at a discount was manipulative only because there was one counter 14 party is patently erroneous. It was contended that executing the trades on the stock exchange platform after concluding the deals with the broker at a negotiated price is neither manipulative nor an unfair trade practice.
17. On the other hand, the learned senior counsel for the respondent heavily relied upon a decision in SEBI vs. Rakhi Trading Pvt. Ltd. [(2018) 13 SCC 753] contending that the facts in the instant case, is similar to the facts and modus operandi in the case of Rakhi Trading Pvt. Ltd. (supra) and is squarely covered by the decision of the Hon'ble Supreme Court in Rakhi Trading Pvt. Ltd. (supra). The learned counsel contended that the trading on the stock exchange platform after mutual arrangement on the price and quantities between the two parties was necessarily fraudulent and manipulative since the price discovery and free and fair operation of the market forces is affected and prevents other parties from participation in the trades in question. The learned counsel contended that the name of the appellant was known to MSF, the counter party through the broker MSICPL and, therefore, the appellant knew the counter party and negotiated and agreed to a price and quantity and thereafter executed the trades on the stock exchange. The trades were, thus, 15 pre-arranged trades executed on the stock exchange and that too at a huge discount to the fair value. As such the impugned trades were synchronized transactions and violative of Regulations 3 and 4 of the PFUTP Regulations. The learned senior counsel contended that pre agreed trades executed with a known counter party is per se violative of the securities laws and amounts to synchronization of the trades which is not permissible. Further, the huge discount on which the impugned trades were executed potentially was aimed to mislead other investors since they were not aware of the private arrangement. Further, the order of the WTM is not applicable to the appellant nor the order of the WTM could be a reason for the appellant to undertake the trades in question and incur losses by undertaking the impugned trades at a huge discount. The learned counsel further contended that the NSE circular dated October 28, 2022 has no relevance to the impugned trades which are prior to the date of the circular. It was also urged that even if the impugned trades are within the prescribed band of + / - 40% discount under the circular, the said trades are still manipulative. The learned counsel submitted that it is not the discount that makes the trades manipulative, but the 16 fact that the trades were executed through a put arrangement at a huge discount which makes the trades fraudulent and manipulative.
18. Having heard the learned counsel for the parties and before deciding the issues which arises for consideration, as the facts pertain to transactions in derivatives segment, it would be necessary to deal with certain provisions of the securities laws in the context of derivatives as well as the meaning and content of certain technical terms. For facility, Section 18A of the Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as 'SCRA'), Section 2(d) of the SCRA, Section 12A(c) of the SEBI Act, Regulation 3(d), 4(1) and 4(2)(e) of the PFUTP Regulations are extracted hereunder :-
Section 18A of the SCRA "18A. Contracts in derivative. -- Notwithstanding anything contained in any other law for the time being in force, contracts in derivative shall be legal and valid if such contracts are--
(a) traded on a recognised stock exchange;
(b) settled on the clearing house of the recognised stock exchange. in accordance with the rules and bye-laws of such stock exchange;17
(c) between such parties and on such terms as the Central Government may, be notification in the Official Gazette, specify."
Section 2(d) of the SCRA "(d) "option in securities" means a contract for the purchase or sale of a right to buy or sell, or a right to buy and sell, securities in future, and includes a teji, a mandi, a teji mandi, a galli, a put, a call or a put and call in securities."
Section 12A(c) of the SEBI Act "12A(c). engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder;"
Regulation 3(d), 4(1) and 4(2)(e) of the PFUTP Regulations "3(d). engage in any act, practice, course of business which operates or would operate as fraud or 18 deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made thereunder."
"4(1). Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities market."
"4(2)(e). any act or omission amounting to manipulation of the price of a security including influencing or manipulating the reference price or bench mark price of any securities;"
19. The concept of "options" has been explained by the Hon'ble Supreme Court in Rakhi Trading Pvt. Ltd. (supra). "Options" are contracts between the buyer and the seller which gives the buyer a right, but not an obligation, to buy or sell the underlying assets at a stated price on a specified date. While the buyer of an option pays the premium and buys his rights to exercise his option the writer of an option is one who receives the option premium and, is, therefore, obliged to sell or buy the asset as per the option exercised by the buyer.
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20. Options are of two types "Call option" which gives the buyer the right but not an obligation to buy a given quantity of the underlying asset at a given price (Strike Price) on a given future date (Expiry Date). "Put option" gives the buyer the right, but not obligation to sell given quantity of underlying asset at the strike price on the expiry date. These options are called European style options. In India only European style options are permitted. A call options is denoted by the term CE and put options is denoted by the term PE.
21. "Spot price" is the actual price of the underlying assets on the date of consideration i.e. the date of purchase / sale of option or the Expiry Date as the case may be. Further, options are bought and sold only on the floor of the stock exchange till the Expiry Date. In case of a Call option, the option holder will exercise the option only if the Spot Price on the Expiry Date is higher than the Strike Price and, in case of the Put option, the option holder will exercise the option only if the Spot Price on the Expiry Date is lower than the Strike Price. If the option is allowed to lapse, the maximum loss to the option holder is the premium amount paid by him to purchase the option. 20
22. "Intrinsic value" of an option at any point of time is the difference between the Strike Price and the Spot Price on the date of measurement. For example, in the instant case, the expiry date was December 28, 2017; the Strike Price (Nifty index) 11400; if on a particular date, for example on July 1, 2017, the Spot Price is 9900 then the Intrinsic value is Rs. 1500 i.e. Rs. 11400/- - Rs. 9900/-.
23. Fair value of an option is, that if a person wants to purchase a Call or Put option on July 1, 2017 he will not be ready to pay the Intrinsic value of Rs. 1500/- because there is a time to expiry of nearly six months i.e. from July 1, 2017 till Decemebr 28, 2017. The time value of the premium paid has to be factored in. Apart from this, there are other factors like risk free trade, implied volatility, Spot Price, expectation of the movement in the Index, etc. which will determine the value / premium that the buyer will be ready to pay for the options. This is determined by using the Black Scholes Model. The value so determined using this model is known as the fair value.
24. "Box Trades" are carried out with an intention to provide loan by one party to another. Party A and party B indulge in synchronized trading in options with higher and lower strike price such that on 21 expiry of settlement the borrowing parties pays back the loan alongwith interest to the lending party. These are not genuine trades in options and gives a misleading appearance of the trades on the stock exchange.
25. The trades executed by the appellant on July 31, 2017, August 8, 2017 and August 10, 2017 in 11400 PE are as under :-
Date of Buy/ Strike Spot Traded Fair Value Deviation Intrinsic % the Sale Price value of price of of the (%) in the Value of Deviation Relevant NIFTY the Relevant trades price the Trades Relevant Trades from the Relevant from NSE Trades fair value Trades fair Value July 31, Sale 11400 10050 1149 1,121 2% 1,350 9% 2017 August Sale 11400 9985 920 1,197 -23% 1,413 -23% 08, 2017 August Sale 11400 9875 965 1,305 -25% 1,523 -19% 10, 2017
26. Apart from the aforesaid trades in 11400PE the appellant also executed other trades but those trades are not in question as they were all within the range of 1% or 2% of the fair value. There is no discussion nor any finding by the AO that the trades in question are 'box trades'. The investigation report also clearly states that the trades in question are not 'box trades'.
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27. Having perused the order of the WTM dated March 24, 2017 in the mater of RIL, we find that the WTM prohibited RIL from dealing in equity derivatives in the F&O segments of the stock exchanges directly or indirectly for a period of one year. The appellant is a wholly owned subsidiary of RIL and is completely funded by RIL which fact is not disputed by the respondent. In our opinion, the words "directly and indirectly" used in the order of the WTM clearly prohibits RIL from dealing in equity derivatives. The words "directly or indirectly" would include the appellant as it is a wholly owned subsidiary of RIL. The contention of the respondent that the order of the WTM will not apply to the appellant is wholly erroneous. If the appellant had taken positions in the F&O segment of the stock exchanges or had taken a hedging position, the same would have been indirect conflict with the order of the WTM and it would be construed that RIL was entering the market indirectly through the appellant. Thus, had the appellant continued dealing in the equity derivatives with all fundings coming from RIL, it would have amounted to RIL dealing in equity derivatives indirectly and hence would have breached the order of the WTM. In our view, the appellant dealing in the equity derivatives in the market would be 23 construed as dealings by RIL. In view of the aforesaid reasoning, we are of the opinion that the appellant had a bonafide reason to close out all outstanding positions in view of the WTM order. Admittedly, in the instant case, we find that the appellant had complied with the order of the WTM and had completely stopped trading in the equity derivatives from March 24, 2017 onwards except for the trades in question.
28. The contention that the appellant should have waited till the expiry of the options on Decemebr 28, 2017 instead of closing the positions of selling these options by executing the impugned trades in July and August 2017 cannot be a ground to hold that the intention of the appellant was to manipulate the trades.
29. The finding that the appellant had only contacted one broker, namely, MSICPL to obtain quotes and, therefore, the trades are manipulative cannot be sustained in as much as the AO has mis- appreciated the admitted facts. We have perused the Bloomberg chats with Citigroup Global which brings out clearly that the price quoted were for the Nifty index options expiring on December 28, 2017. On a clear reading of Bloomberg chats between the appellant 24 and Citigroup Global on July 31, 2017, it is clear that the quotes were sought for options in the 11400 for expiry on December 28, 2017. Further, the transcript of the calls between the appellant and the Bank of America on August 8, 2017 which were produced by the appellant during the course of the hearing also brings out that quotes were sought by the appellant in December 2017 expiring for options across strikes. We find that the appellant not only obtained quotes from MSICPL but also obtained quotes from Citigroup Global. Thus, the finding of the AO that the appellant had contacted only one broker, namely, MSICPL to obtain quotes is patently erroneous and, consequently, the finding on that score that by obtaining quotes from one broker only was therefore manipulative is against the evidence on record and such finding cannot be sustained.
30. We also find that there is no law or circular of the respondent which mandates that quotes from more than one broker is required to be obtained before executing the trades. This contention was fairly conceded by the learned senior counsel for the respondent, namely, that contacting or not contacting multiple brokers was not a determining factor for deciding whether the trades were manipulative or not. Thus, in our opinion, there is no legal requirement that a 25 person has to be necessarily contact more than one broker to obtain quotes.
31. The AO finds that the trade executed on July 31, 2017 is not manipulative but holds that the trades executed on August 8, 2017 and August 10, 2017 were manipulative due to the fact that they have been carried out at the significant discount from the fair value and that too with only one counter party and further, the trades were executed through a mutual arrangement arrived before hand. The AO, therefore, came to the conclusion that the impugned trades resulted in active concealment of fair price of the options and had the effect of potentially misleading the investors with regard to the likely future price of the subject options.
32. In this regard, the finding that there was a mutual arrangement between the appellant and MSF to execute the impugned trades at a discount is baseless and erroneous. There is no finding nor any evidence to show that the appellant and MSF were ever in contact. The mere fact that MSF knew the counter party was the appellant for the trades on August 8, 2017 cannot lead to a conclusion that the appellant also knew that the counter party was 26 MSF for the trades on all the three dates nor can it lead to a conclusion that the appellant and MSF entered into a mutual arrangement to enter into trades at a discount. In fact, the appellant's stand was that they had no idea as to whether there was a one counter party or multiple counter parties and only came to know for the first time when the show cause notice was issued.
33. The fact that the MSF came to know that the counter party was the appellant through MSICPL does not mean that the broker also intimated the appellant that the counter party was MSF. Therefore, the presumption drawn by the AO that the appellant knew the counter party is based on no evidence.
34. Further, the finding that there was mutual arrangement between the appellant and MSF to execute the impugned trades at a discount is again based on presumptions. There is no direct evidence of the appellant being in contact with MSF nor there is any evidence to show that the price was negotiated between the appellant and MSF. In view of the above, it is impossible to hold that the appellant and MSF had entered into any mutual arrangement to execute the trades on all the three days at the discount to fair value. 27
35. On the other hand, there is ample evidence to show that the appellant made enquiries of MSICPL for trades. MSICPL obtained quotes from one of its client MSF and provided the said quotes to the appellant which were accepted and, based on such acceptance, the trades were executed on the stock exchange platform.
36. Reliance by the respondent on the decision of the Hon'ble Supreme Court in Rakhi Trading Pvt. Ltd. (supra) is misplaced. The contention that the modus operandi, in the instant case, is the same as in the case of Rakhi Trading Pvt. Ltd. (supra) is incorrect. Rakhi Trading first executed original trades in Nifty options with a counter party, namely, Kasam Holding at a certain price. Rakhi Trading Pvt. Ltd. (supra) placed an order to sell 10000 options at Rs. 270/- per option and Kasam purchased an order to buy 10000 of the same options at the same price within a fraction of a second. The orders matched and the trades were executed on the stock exchange platform. Within minutes, the trades were reversed. Rakhi placed an order to buy 10000 options at Rs. 110/- Kasam punched an order to sell 10000 at Rs. 110/- per option within a few minutes. These orders matched and trades were executed. The difference of Rs. 28 160/- per option was a profit to Rakhi and loss to Kasam. This modus operandi of execution of trades and reversal with the same counter party which was repeated a number of times was found to be synchronized trades considering the matching of quantity, timing, prices, etc. between the same parties. It was found that there was prior meeting of minds and an understanding / arrangement between the parties. In this light, the Hon'ble Supreme Court held that trades were not genuine and had a misleading appearance of trading in the securities market without intention to transfer beneficial ownership. The Hon'ble Supreme Court held that the pre-determined arrangement to book profit and losses made it clear that the transactions were manipulative / deceptive devise to create a desired loss and / or profit and were violative of Regulations 3 and 4 of the PFUTP Regulations.
37. On the other hand, quotes were invited from a broker who, in turn, contacted his client and quotes were obtained and intimated to the appellant. Such quotes were accepted and thereafter the trades were executed on the stock exchange platform. The circular dated September 14, 1999 issued by SEBI clearly mandates that negotiated trades through a broker have to be executed only on the stock 29 exchange platform which the parties did. Further, there were no reversal of trades within a few minutes. In Rakhi Trading Pvt. Ltd. (supra) there was no transfer of beneficial ownership whereas, in the instant case, there was genuine transfer of beneficial ownership. Thus, the decision in Rakhi Trading Pvt. Ltd. (supra) is distinguishable and is not applicable to the facts of the present case.
38. In Ketan Parikh vs. SEBI in Appeal No. 2 of 2004 decided on July 14, 2006, this Tribunal held that a synchronised transaction will be illegal if it is executed with a view to manipulate the market. Whether a transaction has been executed with the intention to manipulate the market will depend upon the intention of the parties which could be inferred from the attending circumstances. The attending circumstances, in the instant case, indicates that no inference can be drawn that the trades were executed with a manipulative intent since none of the factors stipulated in Ketan Parekh's decision (supra), namely, frequency of trades, twisting reversal, no change of beneficial ownership, etc. is existing. Thus, the bald contention that the modus operandi in the case of Rakhi Trading Pvt. Ltd. (supra) matches with the modus operandi in the instant case is patently erroneous. Reliance placed by the respondent 30 on this judgment is misplaced. The Hon'ble Supreme Court considered the judgment of this Tribunal in Ketan Parikh's case (supra) and approved the following :-
"It has recently issued a circular requiring all bulk deals to be transacted through the exchange even if the price and quantity are settled outside the market. When such deals go through the exchange, they are bound to synchronise. It would, therefore, follow that a synchronised trade or a trade that matches of market is per se not illegal. Merely because a trade was crossed on the floor of the stock exchange with the buyer and seller entering the price at which they intended to buy and sell respectively, the transaction does not become illegal. A synchronised transaction even on the trading screen between genuine parties who intend to transfer beneficial interest in the trading stock and who undertake the transaction only for that purpose and not for rigging the market is not illegal and cannot violate the regulations."
The aforesaid principle squarely applies to the facts of the present case.
39. The contention of the respondent that negotiating outside the stock exchange and executing the trades on the floor of the stock exchange is per se manipulative since it prevents other investors from participating is again erroneous. Section 18A of the SCRA 31 permits trading in derivatives only on the stock exchange. There is no law which indicates that pre-negotiated deals cannot be executed on the stock exchange platform. The circular dated September 14, 1999 issued by SEBI makes it mandatory to the effect that negotiated trades through the broker have to be executed only on the platform of the stock exchange.
40. The trades of the appellant at a discount to fair value were found to be manipulative. The finding that trading at a considerable discount at 23% and 25% to fair value was per se manipulative cannot be accepted. In the first instance, we find that no criteria has been adopted to show that a certain percentage of the discount would be fair and over and above that percentage, it would be manipulative. This is without the intent of the proven manipulation of the market. In the absence of any criteria being framed, there was no occasion for the AO to hold the trades of July 31, 2017 as genuine and the trades of August 8, 2017 and August 10, 2017 to be manipulative only on the basis of certain percentage of discount. We find that NSE has issued a circular dated October 28, 2022 prescribing a band of + / - 40% to the reference price. This circular indicates that a trade executed with a discount up to 40% to the fair value cannot be 32 faulted unless it is otherwise manipulative. This circular which is dated October 28, 2022 is only procedural and sheds a light on this issue, namely, a trade executed with a discount up to 40% to the fair value would be treated as valid and genuine. If such discounts up to 40% to the fair value could not be faulted from October 28, 2022 onwards there is no reason why the said principle cannot be made applicable to transaction which occurred prior to October 28, 2022. Thus, the circular of 2022 would apply to the trades in question. Thus, we hold that trades executed at a heavy discount as stated in the show cause notice by itself does not constitute manipulation.
41. Thus, the finding that the trades which are executed away from the theoretical value as manipulative is erroneous and without any basis. A trade cannot be manipulative simply because it is away from the fair value. We also find that the AO has accepted the fair value determined by the appellant and not the fair value determined by NSE. The difference in the determination of fair value by the appellant and by NSE varies by 10%. This is because the subjective inputs were different. In our opinion, the fair value is only an indicator and not a measure to hold a trade as manipulative just because it is away from the fair value. Thus, the finding that the 33 trades are manipulative and violative of the SEBI Act and PFUTP Regulations due to trades being away from fair value cannot be sustained.
42. We find that the respondent has not considered the evidence properly. To hold a simple one way trade as manipulative when it is not a circular or reversal trade and in the absence of any shred of evidence of mutual arrangement with a motive to manipulate the market, the impugned order cannot be sustained and is quashed. The appeal is allowed. In the circumstances of the case, parties shall bear their own costs.
Justice Tarun Agarwala Presiding Officer Ms. Meera Swarup Technical Member 13.12.2023 PRAMILA Digitally signed by PRAMILA TANAJI TANAJI MISAL PTM MISAL Date: 2023.12.13 15:01:26 +05'30'