Securities And Exchange Board Of India v. Kanaiyalal Baldevbhai Patel .

Per Ramana, J.

Front-running comprises of at least three forms of conduct. They are: (1) trading by third parties who are tipped on an impending block trade (“tippee” trading); (2) transactions in which the owner or purchaser of the block trade himself engages in the offsetting futures or options transaction as a means of “hedging” against price fluctuations caused by the block transaction (self front-running); and (3) transactions where an intermediary with knowledge of an impending customer block order trades ahead of that order for the intermediary's own profit (trading ahead). In this batch of appeals the Court is concerned with the first and the last types of trade i.e. tippee trading and trading ahead. It is important to note that trading ahead has been explicitly recognised under Regulation 4(2)(q) of the 2003 FUTP.

(Para 21)

Nancy Folbre, The Front-Runners of Wall Street, 7-4-2014 (The New York Times); Circular CIR/EFD/1/2012, dated 25-5-2012; Consultative Paper issued by SEBI, pursuant to a Press Release No. 34/95 dated 16-3-1995, referred to

Although strict construction is well-established principle when interpreting a penal provision, but such interpretation should not result in incongruence when compared with the purpose of the Regulation. The SEBI Act and the Regulations framed thereunder are intended to protect the interests of investors in the Securities Market which has seen substantial growth in tune with the parallel developments in the economy. Investors’ confidence in the capital/securities market is a reflection of the effectiveness of the regulatory mechanism in force.

(Para 22)

SEBI v. Kishore R. Ajmera, (2016) 6 SCC 368, followed

Govind Impex (P) Ltd. v. CIT, (2011) 1 SCC 529 : (2011) 1 SCC (Civ) 296; Krishi Utpadan Mandi Samiti v. Pilibhit Pantnagar Beej Ltd., (2004) 1 SCC 391, clarified

The object and purpose of the 2003 FUTP is to curb “market manipulations”. Market manipulation is normally regarded as an “unwarranted” interference in the operation of ordinary market forces of supply and demand and thus undermines the “integrity” and efficiency of the market.

(Para 23)

N. Narayanan v. SEBI, (2013) 12 SCC 152, relied on

Palmer's Company Law, 25th Edn. (2010), Vol. 2, p. 11097; Gower & Davies — Principles of Modern Company Law, 9th Edn. (2012), p. 1160, approved

As a matter of principle, while interpreting the 2003 FUTP, the Court must weigh against an interpretation which will protect unjust claims over just, fraud over legality and expediency over principle. Once this rule is clearly established, individual cases should not pose any problem.

(Para 24)

It is equally well settled that in interpreting a statute, effort should be made to give effect to each and every word used by the legislature. The courts should presume that the legislature inserted every part for a purpose and the legislative intention is that every part of the statute should have effect. It must be kept in mind that whenever the Supreme Court is seized with a matter which requires judicial mind to be applied for interpreting a law, the effort must always be made to realise the true intention behind the law.

(Para 25)

The definition of “dealing in securities” acquires some importance as charge under Regulation 3 completely depends on the aspect whether the tippee was dealing in securities in the first instance or not. For a transaction to be termed as dealing in securities, following ingredients need to be satisfied:

(i) includes an act of buying, selling or subscribing pursuant to any issue of any security, or

(ii) agreeing to buy, sell or subscribe to any issue of any security, or;

(iii) otherwise transacting in any way in any security by any person as principal, agent or intermediary referred to in Section 12 of the SEBI Act.

(para 26)

The definition of “dealing in securities” is broad and inclusive in nature. Under the old regime the usage of term “to mean” has been changed to “includes”, which prima facie indicates that the definition is broad. Moreover, the inclusion of term “otherwise transacting” itself provides an internal evidence for being broadly worded so as to include situations such as the present one.

(Para 27)

Usually, the antifraud provisions of the security laws are not coextensive with common law doctrines of fraud as common law fraud doctrines are too restrictive to deal with the complexities involved in the security market, which is also portrayed by the changes brought in through the 2003 Regulations to the 1995 Regulations.

(Para 28)

The original definition of “fraud” under the 1995 FUTP Regulations, adopts the definition of “fraud” from the Contract Act, 1872 whereas the subsequent definition in the 2003 Regulations is a variation of the same and does not adopt the strict definition of “fraud” as present under the Contract Act. It includes many situations which may not be a “fraud” under the Contract Act or the 1995 Regulations, but nevertheless amounts to a “fraud” under the 2003 Regulations.

(Para 29)

The definition of “fraud” under Regulation 2(c) has two parts; first part may be termed as catch-all provision while the second part includes specific instances which are also included as part and parcel of term “fraud”. The ingredients of the first part of the definition are:

(i) includes an act, expression, omission or concealment whether in a deceitful manner or not;

(ii) by a person or by any other person with his connivance or his agent while dealing in securities;

(iii) so that the same induces another person or his agent to deal in securities;

(iv) whether or not there is any wrongful gain or avoidance of any loss.

The second part of the definition includes specific instances:

(v) a knowing misrepresentation of the truth or concealment of material fact in order that another person may act to his detriment;

(vi) a suggestion as to a fact which is not true by one who does not believe it to be true;

(vii) an active concealment of a fact by a person having knowledge or belief of the fact;

(viii) a promise made without any intention of performing it;

(ix) a representation made in a reckless and careless manner whether it be true or false;

(x) any such act or omission as any other law specifically declares to be fraudulent;

(xi) deceptive behaviour by a person depriving another of informed consent or full participation;

(xii) a false statement made without reasonable ground for believing it to be true;

(xiii) the act of an issuer of securities giving out misinformation that affects the market price of the security, resulting in investors being effectively misled even though they did not rely on the statement itself or anything derived from it other than the market price.

(para 30)

Whether an act or practice is unfair is to be determined by all the facts and circumstances surrounding the transaction. In the context of this regulation a trade practice may be unfair, if the conduct undermines the good faith dealings involved in the transaction. Moreover the concept of “unfairness” appears to be broader than and includes the concept of “deception” or “fraud”.

(Para 31)

Under the provisions of Regulation 4(2)(q), only intermediary trading on the information of substantial client order, if it involves fraud then the dealing in securities will be deemed to be fraudulent. However, the submission, that Regulation 4(2)(q) includes only front-running by the intermediaries, by implication means that any persons other than intermediaries are excluded from the rigours of law cannot be sustained in the eye of the law as the intention of the legislation was to provide for a catch-all provision and the deeming provision under Regulation 4(2)(q) was specifically provided as the intermediaries are in fiduciary relationship with the clients.

(Paras 35, 36 and 14.2)

The reliance on expressio unius est exclusio alterius may not be appropriate in this instant case as the intention of the Regulation is apparent in this case. Moreover, it has been well established that expressio unius est exclusio alterius is not a rule of law but a tool of interpretation which must be cautiously applied.

(Para 37)

Colquhoun v. Brooks, (1887) LR 19 QBD 400; Lowe v. Dorling & Son, (1906) 2 KB 772 (CA), explained and distinguished

In order to establish charges in this case, it is required by SEBI to establish that the harm was induced by the materialisation of a risk that was not disclosed because of the tippee's fraudulent practice. Further, the charges under the 2003 FUTP need to be established as per the applicable standards rather than on mere conjectures and surmises.

(Para 38)

The provisions of Regulations 3(a), (b), (c), (d) and 4(1) are couched in general terms to cover diverse situations and possibilities. Once a conclusion, that fraud has been committed while dealing in securities, is arrived at, all these provisions get attracted in a situation like the one under consideration.

(Para 39)

The concept of “fraud” includes the act of embezzlement, which is “the fraudulent appropriation to one's own use of the money or goods entrusted to one's care by another.”

(Para 40)

Carpenter v. United States, 1987 SCC OnLine US SC 171 : 98 L Ed 2d 275 : 484 US 19 (1987); Chiarella v. United States, 1980 SCC OnLine US SC 50 : 63 L Ed 2d 348 : 445 US 222 (1980), relied on

Securities and Exchange Commission v. National Securities Inc., 1969 SCC OnLine US SC 23 : 21 L Ed 2d 668 : 393 US 453 (1969), considered

McNally v. United States, 1987 SCC OnLine US SC 143 : 97 L Ed 2d 292 : 107 S Ct 2875 : 483 US 350 (1987); Hammerschmidt v. United States, 1924 SCC OnLine US SC 116 : 68 L Ed 968 : 44 S Ct 511 : 265 US 182 (1924); Grin v. Shine, 1902 SCC OnLine US SC 181 : 47 L Ed 130 : 23 S Ct 98 : 187 US 181 (1902); Snepp v. United States, 1980 SCC OnLine US SC 26 : 62 L Ed 2d 704 : 100 S Ct 763 : 444 US 507 (1980); Diamond v. Oreamuno, 24 NY 2d 494 : 301 NYS 2d 78 : 248 NE 2d 910 (1969); United States v. Winans, 612 F Supp 827 (SDNY 1985), cited

Possession of different information, which is a pervasive feature of markets, may not always be objectionable. Indeed, investors who invest resources in acquiring superior information are entitled to exploit this advantage, thereby making markets more efficient. The unequal possession of information is fraudulent only when the information has been acquired in bad faith and thereby inducing an inequitable result for others.

(Para 45)

Confidential information acquired or compiled by a corporation in the course and conduct of its business is a species of property to which the corporation has the exclusive right and benefit, and which a court of equity will protect through the injunctive process or other appropriate remedy. The information of possible trades that the company is going to undertake is the confidential information of the company concerned, which it has absolute liberty to deal with. Therefore, a person conveying confidential information to another person (tippee) breaches his duty prescribed by law and if the recipient of such information knows of the breach and trades, and there is an inducement to bring about an inequitable result, then the recipient tippee may be said to have committed the fraud.

(Para 46)

3 W. Fletcher, Cyclopedia of Law of Private Corporations § 857.1, p. 260 (Rev. Ed. 1986), approved

Accordingly, non-intermediary front-running may be brought under the prohibition prescribed under Regulations 3 and 4(1), for being fraudulent or unfair trade practice, provided that the ingredients under those heads are satisfied. From the above analysis, it is clear that in order to establish charges against tippee, under Regulations 3(a), (b), (c) and (d) and 4(1) of the 2003 FUTP, one needs to prove that a person who had provided the tip was under a duty to keep the non-public information under confidence, further such breach of duty was known to the tippee and he still trades thereby defrauding the person, whose orders were front-runned, by inducing him to deal at the price he did.

(Para 47)

Parties concerned to the transaction were involved in an apparent fraudulent practice violating market integrity. The parting of information with regard to an imminent bulk purchase and the subsequent transaction thereto are so intrinsically connected that no other conclusion but one of joint liability of both the initiator of the fraudulent practice and the other party who had knowingly aided in the same is possible. Consequently, Civil Appeals Nos. 2595, 2596 and 2666 of 2013 are allowed. At the same time, for the same reason, Civil Appeals Nos. 5829 and 11195-96 of 2014 are dismissed.

(Para 45)

SEBI v. Kishore R. Ajmera, (2016) 6 SCC 368, followed

Pooja Menghani v. SEBI, 2014 SCC OnLine SAT 69; Vibha Sharma v. SEBI, 2013 SCC OnLine SAT 66; Vibha Sharma v. SEBI, 2014 SCC OnLine SAT 124, affirmed

Dipak Patel v. SEBI, 2012 SCC OnLine SAT 217; Sujit Karkera v. SEBI, 2012 SCC OnLine SAT 234, reversed

SEBI v. Anandkumar Baldevbhai Patel, Civil Appeal No. 2594 of 2013, order dated 5-4-2017 (SC), referred to

Per Gogoi, J. (concurring)

If Regulation 2(1)(c) of the 2003 Regulations was to be dissected and analysed it is clear that any act, expression, omission or concealment committed, whether in a deceitful manner or not, by any person while dealing in securities to induce another person to deal in securities would amount to a fraudulent act. The emphasis in the definition in Regulation 2(1)(c) of the 2003 Regulations is not, therefore, of whether the act, expression, omission or concealment has been committed in a deceitful manner but whether such act, expression, omission or concealment has/had the effect of inducing another person to deal in securities.

(Para 53)

The definition of “fraud”, which is an inclusive definition and, therefore, has to be understood to be broad and expansive, contemplates even an action or omission, as may be committed, even without any deceit if such act or omission has the effect of inducing another person to deal in securities. Certainly, the definition expands beyond what can be normally understood to be a “fraudulent act” or a conduct amounting to “fraud”. The emphasis is on the act of inducement and the scrutiny must, therefore, be on the meaning that must be attributed to the word “induce”.

(Para 54)

The difference between inducement in criminal law and the wider meaning thereof as in the present case, is that to make inducement an offence the intention behind the representation or misrepresentation of facts must be dishonest whereas in the latter category of cases like the present the element of dishonesty need not be present or proved and established to be present. In the latter category of cases, a mere inference, rather than proof, that the person induced would not have acted in the manner that he did but for the inducement is sufficient. No element of dishonesty or bad faith in the making of the inducement would be required.

(Para 56)

Regulation 4 being without prejudice to the provisions of Regulation 3 of the 2003 Regulations would operate on its own without being circumscribed in any manner by what is contained in Regulation 3.

(Para 57)

By the conduct of DP, KB and AB were induced to deal in securities. A natural and logical inference that would follow is that the aforesaid two latter persons would not have entered into the transactions in question, had it not been for the information parted with by DP. The volume; the nature of the trading and the timing of the transactions in question can leave no manner of doubt that KB and AB had acted in connivance with DP to encash the benefit of the information parted with by DP to them and, therefore, they are parties to the “fraud” committed by DP having aided and abetted the same.

(Para 58)

SEBI v. Kishore R. Ajmera, (2016) 6 SCC 368, relied on

To attract the rigour of Regulations 3 and 4 of the 2003 Regulations, mens rea is not an indispensable requirement and the correct test is one of preponderance of probabilities. Merely because the operation of the aforesaid two provisions of the 2003 Regulations invite penal consequences on the defaulters, proof beyond reasonable doubt is not an indispensable requirement.

(Para 62)

SEBI v. Kishore R. Ajmera, (2016) 6 SCC 368, followed

VN-D/59172/S