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Securities and Exchange Board of India v. Rakhi Trading Private Ltd.

Civil Appeal · 2018 INSC 119Decided 8 Feb 2018
Civil Appeal No. 1969 of 2011
Justice Kurian Joseph · Justice R. Banumathi

Background

SEBI's Adjudicating Officer found that certain traders (including Rakhi Trading) had repeatedly carried out "synchronized" and rapid "reversal" trades in the options segment of the stock exchange: essentially pre-arranged buy and sell orders between the same or related parties that created an artificial appearance of market activity. SEBI also proceeded against the stock brokers who executed these trades. The Securities Appellate Tribunal (SAT) set aside SEBI's penalties against both the traders and the brokers, prompting SEBI's appeals to the Supreme Court.

Decision Breakdown

The Supreme Court held that the pattern of trades, persistent reversal transactions with matching quantity, price, and timing, could not realistically be explained as ordinary anonymous screen-based trading, and amounted to a fraudulent/deceptive device in violation of the PFUTP Regulations, 2003, since it distorted genuine price discovery in the market. It therefore allowed SEBI's appeals against the traders, set aside the SAT's orders in their favour, and restored SEBI's findings against them. However, on the brokers, the Court found no real evidence of their knowing involvement or negligence, merely executing client-instructed trades was not enough to establish a regulatory violation, and dismissed SEBI's appeals against the brokers. Justice Banumathi wrote a separate concurring opinion reinforcing the same conclusions with additional reasoning on market integrity.

Lesson Learnt

Courts will infer manipulative intent from a consistent pattern of trades (matching price, quantity and timing) even without direct proof of an agreement between parties, but liability for market manipulation requires actual evidence of a participant's own wrongdoing: a broker cannot be penalised merely for carrying out a client's instructions.

Official source (sci.gov.in)View Judgment (PDF)

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