Allow Cookies!
By using our website, you agree to the use of cookies
On Wednesday, 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, there would be violation of prohibition of Fraudulent and unfair Trade practices regulations.
A bench consisting Justice Kurian Joseph and Justice R Banumathi, highlighted that the stock market is not a place for any fraudulent or unfair trade practice and it’s very difficult to find synchronization with the proposition set out in the SAT. The SAT order contained reversal of trades affecting the parties with significant price difference, some in a few seconds and majority, in any case, on the same day, having its no impact on market and NIFTY index in any manner.
Currently, SEBI has accused three traders and brokers of sham transaction for buying and selling securities in the derivative segment. These securities are sold and bought at a price which did not reflect the value of the underlying reverse transaction. There was a usage of manipulative or deceptive devise used for synchronization of trades. Hereby the trades were fraudulent or fictitious in nature.
As per the appeal in SAT, it was held that the synchronization and reversal of trades affected the parties with significant price difference, with its non-effect over market and NIFTY index. It was also observed such kinds of trades are illegal and void in nature which are only done to manipulate the market and induce investors.
Justice Kurian Joseph observed: “In the instant case, one party booked gains and the other party booked a loss and 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 pre-planned and rapid reverse trades, it is not genuine; it is an unfair trade practice.”
The bench has also observed that such kind of undesirable and illegal transaction will be covered certainly under unfair trade practices in trade and SEBI act, 1992. This act was enacted to protect the interest of investors in securities. Such kind of transaction plays with market and hence shakes the roots of integrity of the market.
While setting the order of SAT aside, 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”.
In such transactions, looking from the view point of a broker, SEBI has not provided any material to suggest negligence or connivance on the part of brokers. Broker is a person who facilitates such transactions .The bench adamantly asked SEBI for the need of more comprehensive framework governing the securities market. Such cases require, SEBI to keep with changing times in the market and develop good principles for governance in the market.
Justice R Banumathi, in her separate judgment stated that “considering all the essentials of reverse transaction, parties being persistent in number of such trade transactions with such huge price variations, it will too naive to hold that transactions anonymous or illegal. Such conclusions from the transaction will only lead to avoidance of essentials like meeting of mind with synchronization of buy and sale. The impugned transactions are manipulative device to create desired profit and loss. Such trading are in violation of norms of trading securities. On the basis of subsistence on the findings of SAT, it would create repercussions like shacking the integrity of the market”
86540
103860
630
114
59824