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Sham Transactions Illegal Even If There Is Little Effect On Stock Market

In a significant judgment the Supreme Court overturned a decision of the Securities Appellate Tribunal and held that there would violation of the Prohibition of Fraudulent and Unfair Trade Practices Regulations when trades on the Stock Market are fraudulent even when the trades do not have any impact on the market.

In SECURITIES AND EXCHANGE BOARD OF INDIA vs RAKHI TRADING PRIVATE LTD., SEBI had accused three traders and brokers of sham transactions of buying and selling securities in the derivatives segment at a price which did not reflect the value of the underlying in synchronized and reverse transactions. A manipulative/deceptive devise was used for synchronization of trades and the trades were fraudulent/fictitious in nature.

On their appeal to SAT, it held that 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. It also observed that such trades are illegal only when they manipulate the market in any manner and induce investors.

The Supreme Court observed that 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 bench also held that undesirable transactions would certainly include unfair practices in trade and the SEBI Act, 1992, was enacted to protect the interest of the investors in securities. Protection of interest of investors should necessarily include prevention of misuse of the market. Orchestrated trades are a misuse of the market mechanism. It is playing the market and it affects the market integrity, the judge said.

Setting aside the order of the SAT vis-à-vis traders, 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."

Article referred: http://www.livelaw.in/sham-transactions-illegal-even-little-effect-stock-market-sc-read-judgment/

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