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
 2

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.”
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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

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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

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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.

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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
PRAMILA Digitally signed
13.12.2023 TANAJI
by PRAMILA
TANAJI MISAL
PTM MISAL
Date: 2023.12.13
15:01:26 +05'30'