There were two groups of respondent parties – three traders and three brokers. Show causes notices were sent to the parties alleging that the parties had been buying and selling securities in the derivatives segment at a price which did not reflect the value of the underlying securities in synchronised and reverse transactions.

SEBI suspected manipulation in the trading of Futures & Options segment (F&O), and found that the company and some other firms had undertaken fictitious trades. The A.O. analysed trade logs and observed that trades executed by the said company matched with the counter-party in a few seconds and that these trades were reversed between the same parties within few minutes, showing significant difference in prices without any significant change in the value of the underlying securities. Further, in all these transactions, the said company made profits while the counter-party suffered continuous losses, thus raising doubts about the geniuneness of these transactions.

SEBI proceeded against the traders for violating provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (the PFUTP Regulations) and against the brokers for violating provisions of SEBI (Stock Brokers and Sub-brokers) Regulations, 1992.

According to the A.O., a manipulative/deceptive devise had been used for synchronization and reversal of trades and the trades were essentially fraudulent/fictitious in nature and resulted in creating a misleading appearance of active trading in those securities. Subsequently, SEBI imposed a penalty of Rs. 10.8 million in March 2009 for allegedly creating artificial volumes of F&O on the National Stock Exchange.

However, the Order was struck down by the Securities Appellate Tribunal (SAT) in 2011 on grounds that 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, had not affected the NIFTY index in any manner nor induced investors. SAT held that such trades are illegal only when they manipulate the market in any manner and induce investors.

The Supreme Court has now in Securities and Exchange Board of India v. Rakhi Trading Private Ltd. allowed the appeal preferred by SEBI against the traders, set aside the SAT order and held that the impugned transactions were indeed a manipulative and deceptive device.

It was held that the trade reversals in the instant case amply demonstrated that the parties did not intend to transfer beneficial ownership through these transactions. Rather, the repeated reversals adversely affected the price discovery system, deprived other market players from participating in the trades, were a misuse of market mechanism and therefore violative of transparent norms of trading in securities.

Considering the perfect matching of quantity, price and time and sale in the impugned transactions, parties being persistent in the number of such trade transactions with huge price variations (without any major variation in the price of the underlying securities) wherein one party repeatedly booked profits whilst the other repeatedly incurred losses, the Supreme Court noted that it would be too naïve to hold that such transactions were by mere coincidence.

The Court further observed that SEBI cannot be expected to track persons who were actually induced to buy or sell securities as a result of such manipulation - once the fact of manipulation is established, it necessarily follows that investors in the market have been induced to buy or sell and no further proof in this regard is required as SEBI cannot be imposed with a burden which is impossible to be discharged.