[2017] 14 S.C.R. 268

SECURITIES AND EXCHANGE BOARD OF INDIA

SHRI KANAIYALAL BALDEVBHAI PATEL

(Civil Appeal No. 2595 of2013)

SEPTEMBER 20, 2017

[RANJAN GOGOi AND N. V. RAMANA, JJ.)

Shares and Securities - Securities and Exchange Board of India (Prohibition of Fraudulent And Unfair Trade Practices Relating To Securities Market) Regulations, 2003 - Regns. 3(a).

C (b). (c) and (d) and 4(1) '-- Fraudulent practice violating market integrity - Non-intermediary front-running in security market - Legality of - Allegations against the private individuals that they parted with the privileged/confidential information about the investments of their company' to other persons, who accordingly traded and earned substantial profits - Held: The information of D 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 - A person conveying confidential information to another person (tippee) breaches his duty prescribed by lmv and if the recipient of such information knows of the breach E and trades, and there is an inducement to bring about an inequitable result. then the recipient 'tippee may be said to have committed fraud

- Accordingly, non-intermediary front running may he brought . under the prohibition prescribed under regulations 3 and 4(1). for being fraudulent or unfair trade practice, provided ingredients under those heads are satisfied - Further, the parting of information F 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 other party who had knowingly aided in the same is possible - Words and Phrases - 'inducement' and 'fraud' - Meaning of.

G Disposing of the appeals, the Court

HELD:

Per N.V. Ramana, J.:

Whether 'front running by non-intermediary' is a prohibited H practice under regulations 3 (a), (b), (c) and (d) and 4(1) of 268

SECURITIES AND EXCHANGE BOARD OF INDIA v. SHRI 269 KANAlYALAL BALDEVBHAl PATEL

Securities and Exchange Board oflndia (Prohibition of Fraudulent A And Unfair Trade Practices Relating To Securities Market) Regulations, 2003 ? ·

1. As this case involves practice of 'front-running' in security market, a reference may be made to various definitions and meanings of front-running in Major Law Lexicon by P.

B Ramanatha Aiyar, The Black's Law dictionary, an Article by Nancy Folbre, Circular dated 25.05.2012 of SERI and Consultative Paper issued by SERI. In actuality, front-running is more complicated than these definitions suggest. It comprises of at least three forms of conduct. They are: (1) trading by third parties who are tipped C 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 a intermediary with knowledge of an impending customer block D order trades ahead of that order for the intermediary's own profit C'trading ahead"). In the instant case, the first and the last types of trade i.e., tippee trading and trading ahead are under consideration. [Para 19][284-F-G]

Major Law Lexicon by P. Ramanatha Aiyar (41h Ed. ' '2010) The Blacks Law dictionary 91h Ed., Nancy Folbre,

 The Front-Runners of Wall Street, 07.04.2014 (The New : York Times). Circular CIRIEFD/112012, dated ' ' ' 25.05.2012 of SERI, Consultative Paper issued by ' ' -· SEBI, pursuant to a Press release No. 34/95 dated

1; '

- March 16, 1995 - referred to.

2. There is no dispute as to the fact that fraud is jurisprudentially very difficult to define or cloth it with particular ingredients. A generalized meaning may be difficult to be attributed, as human ingenuity would invent ways to bypass such behaviour. [Para 26][287-E]

3. On a comparative analysis of the definition of "fraud" as existing in the 1995 regulation and the subsequent amendments

i~ .the 2003 regulations, it can be seen that the original definition .jof "fraud" under the FUTP regulation, 1995 adopts the definition

...J: -~-

A of "fraud" from the Indian Contract Act, 1872 whereas the subsequent definition in the 2003 regulation is a variation of the same and does not adopt the strict definition of "fraud" as present under the Indian Contract Act. It includes many situations which may not be a "fraud" under the Contract Act or the 1995

B regulation, but nevertheless amounts to a "fraud" under the 2003 regulation. [Para 27)(287-G-H; 288-A]

4. The provisions of regulations 3 (a), (b), (c), (d) and 4(1) of the 2003 Regulations arc couched in general terms to cover diverse situations and possibilities. Once a conclusion, that fraud C has been committed while dealing in securities, is arrived at, all these provisions get attracted in a situation like the one under consideration. [Para 37][291-C]

5. Regulations 3 and 4 (1) of the 2003 Regulations bars persons from dealing in securities in a fraudulent manner or indulging in unfair trade practice. Fairness in financial markets is D offon expressed in terms of level playing field. A playing field may be uneven because of varied reasons such as inequalities in information etc. Possession of different information, which is a pervasive feature of markets, may not always be objectionable.

Indeed, investors who invest resources in acquiring superior E 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

41][294-G-H]

6. The law of confidentiality has a bearing on this case instant. "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 G 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 H knows of the breach and trades, and there is an inducement to

SECURITIES AND EXCHANGE BOARD OF INDIA v. SHRI 271

KANAIYALAL BALDEVBHAI PATEL

bring about an inequitable result, then the recipient tippee may A be said to have committed the fraud. [Par~ 42)(294-H; 295-A-B)

 7. 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. It is clear that in B order to establish charges against tippee, under regulations 3 (a), (b), (c) and (d) and 4 (1) of 2003 the Regulations, 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 C defrauding the person, whose orders were front-runned, by inducing him to deal at the price he did. [Para 43][295-C-D]

8. Taking into consideration the facts and circumstance~ of this case and the law laid down herein above and SEBI v.

Kishore R. Ajmera can only lead to one conclusion that concerned parties to the transaction were involved in an apparent fraudulent D practice violating market integrity. The parting of information with regard to an imminent bulk purchase and the subsequent transaction thereto are so intrinsically conneded 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 E in the same is possible. [Para 44)(295-E]

Securities and Exchange Board of India v. Kishore R.

Ajmera (2016) 6 SCC 368 ! [2016] 1 SCR1118 - relied on.

Govind Impex Pvt. Ltd. v. Income Tax Department

(2011) 1 sec 529 : [2010] 14 SCR 523; Krishi

Utpadan Mandi Samiti v. Pilibhit Pantnagar Bee} Ltd.

(2004) 1 sec 391 : [20JJJJ 6 suppl. scR 344; N. Narayanan v. adjudicating Officer, SEBI (2013) 12 SCC 152 : [2013) 6 SCR 391 - referred to.

Securities and Exchange Board of India vs. National , Securities, Inc., et al. 393 U.S. 453 (1969); David Carpenter, Kenneth P. Fe/is and R. Foster Winans, v.

United States 484 U.S. 19; Vincent F. Chiarella v. United States 445 U.S. 222 (1980) - referred to.

Per Ranjan Gogoi, J: (Concurring)

1. If Regulation 2(c) of the 2003 Regulations was to be dissected and analyzed 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(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 5](297-C-D]

2. 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 D 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 E "induc1!". [Para 6](297-E-F]

3. A person can be said to have induced another person to act in a particular way or not to act in a particular way if on the basis of facts and statements made by the first person the second person commits an act or omits to perform any particular act.

F The test to determine whether the second person had been induced to act in the manner he did or not to act in the manner that he proposed, is whether but for the representation of the facts made by the first person, the latter would not have acted in the manner he did. This is also how the word inducement is understood in criminal law. The difference between inducement G 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 H established to be present. In the latter category of cases, a mere

SECURITIES AND EXCHANGE BOARD OF INDIA v. SHRI 273

KANAIYALAL BALDEVBHAI PATEL

inference, rather than proof, that the person induced would not A 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 8][298-A-D)

4. Adverting to the facts of the present case, if the information with regard to acquisition of shares by M/s 'PI' was B parted with by 'DP' to 'KB' Patel and 'AB' and the latter had transacted in huge volume of shares of the particular company/ scrip mentioned by 'DP' a little while before the bulk order was placed by M/s. 'PI' and.the said persons had sold the same a short-while later at an increased price, such increase being a C natural consequence of a huge investment made in the particular scrip by M/s 'PI', surely, it can be held that by the conduct of

'DP', 'KB' Patel 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 D

'DP'. The track record of earlier trading of the concerned two persons docs not indicate trading in such huge volumes in their normal course of business. Such an inference would be a permissible mode of arriving at a conclusion with regard to the liability, as held by this Court in Securities and Exchange Board. of India vs. Kislwre R. Ajmera. The volume; the nature of the E trading and the timing of the transactions in question can leave no manner of doubt that 'KB' Patel and 'AB' had acted in connivance with 'DP' to encash the benefit of the information parted with by 'DP' to them and, therefore, they arc parties to the 'fraud' committed by 'DP' having aided and abetted the same.

F [Para 10][298-F-H; 299-A-C)

5. To attract the rigor 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 G Regulations invite penal consequences on the defaulters, proof beyond reasonable doubt as held by this Court in Securities and Exchange Board of India Vs. Kishore R. Ajmera is not an indispensable requirement. The inferential conclusion from the proved and admitted facts, so long the same are reasonable and H

A can be legitimately a11rived at on a consideration of the totality of the materials, would be permissible and legally justified. Having regard to the facts of the present case~ i.e. the volume of shares sold and purchased; the proximity of time between the transactions of sale and purchase and the repeated nature of transactions on B different dates, would irresistibly lead to an inference that the conduct of the respondents in Appeal Nos.2595 of 2013, 2596 of 2013 and 2666 of 2013 and appellants in Appeal Nos.5829 of 2014 and 11195-11196 of 2014 were in breach of the code of business integrity in the securities market. The consequences for such breach including penal consequences under the provisions of C Section 15HA of the SEBI Act must visit the concerned defaulters.

[Pal'a 14)(300-A-D)

Securities and Exchange Board of India v. Kishore R.

Ajmera (2016) 6 SCC 368 : [2016) 1 SCR 1118 - relied on.

Case Law Reference

In the Judgment of N.V. Ramanai J.:

[2010) 14 SCR 523 referred to Para 20

12003) 6 Suppl. SCR 344 referred to Para20

[2016) 1 SCR 1118 relied on Para 20

[2013] 6 SCR 391 referred to Para 21

393 U.S. 453 (1969) referred to Para 38

484 U.S. 19 referred to Para 38

445 U.S. 222 (1980) referred to Para 39

In the Judgment of Ranjan Gogoii J.:

[2016) 1 SCR 1118 relied on Para 10

G CIVIL APPELLATE WRISDICTION: Civil Appeal No. 2595 of2013.

From the impugned Judgment and final Order dated 09.11.20 I 2 passed by the Securities Appellate Tribunal, Mumbai in Appeal No. 7 4 of 2012. .

SECURITIES AND EXCHANGE BOARD OF INDIA v. SHRI . 275

KANAIYALAL BALDEVBHAI PATEL

WITH

C.A. Nos. 2596 and 2666 of 2013, CA. Nos. 5829 and 11195- 11196 of2014

Arvind P. Datar, K.T.S. Tulsi, Sr. Advs., Pratap Venugopal, Ms.Surekha Raman, Anuj Sarma, Ms. Niharika, Aman Shukla, Ms.

Kanika Kalaiyarasan (for Mis K.J. John & Co.), Gaurav Bhargava, B Kuber Boddh, Gagan Gupta, Mayank:Mishra, DivyamAgarwal, Ritunjay Gupta, Dheeraj Nair, Ms.Hetu Arora Sethi, Yogcsh Jagia, Amit Sood, Yogesh, Rajesh Agrawal, Rameshwar Prasad. Goyal, Advs. for the appearing parties.

The Judgments of the Court were delivered by

N. V. RAMANA, J. 1. The important questionoflaw, arising in these batch of cases, being similar and the facts involved being largely comparable, all the appeals were heard together and are being decided by this common judgment.

2. This case revolves round the legality of'non-intermediary frontrunning' in security market under the SECURITIES AND EXCHANGE BOARD

OF INDIA (PROHIBITJON OF FRAUDULENT AND UNFAIR TRADE PRACTICES RELATING TO SECURITIES MARKET) REGULATIONS, 2003 [hereinafter 'FUTP 2003 'for brevity]. As SEBI Appellate Tribunal [hereinafter 'SAT' for brevity] has taken two different views in different cases appealed herein, E Securities and Exchange Board ofindia [herein after 'SEBI' for brevity] as well as private individuals, who are alleged to have been involved in front running, are in appeal before us.

3. A brief factual background would be necessary before we deal with the question of law that has arisen in this case instant. Broadly to understand the issue at hand, the facts in CIVIL APPEAL No. 2595 OF 2013 AND 2596 OF 2013 (related cases) may be stated in brief. SEBI investigated into the activities ofShri Kanaiylilal Baldevbhai Patel [herein after 'KB'for brevity] an individual trader. During the investigation, it

was found that KB was putting orders ahead of orders placed by Passport G India Investment (Mauritius) Ltd. [herein after 'PII' for brevity]. One Dipak Patel, was the portfolio manager of PII, who also happens to be a cousin of KB and one Shri Anandkumar Baldevbhai Patel [herein after 'AB' for brevity]. It was alleged that Dipak Patel provided information to KB and AB regarding forthcoming trading activity of the PII. It is to H

A be noted that trades were executed using the telephone number registered in the name of AB at the common residential address of KB and AB.

Taking advantage of the information received from Dipak Patel, KB had indulged in trading before the PII and consequently squared off the position when the order of PIT were placed in the market. It was estimated B that the KB earned a total profit of Rs. 1,56,32,364.01/-from the alleged trades. This Court in C1vn. APPEAL No. 2594 OF 2013, by order dated 05.04.2017, while remanding the matter back to the Appellate Tribunal with respect to AB, held that there is no finding or conclusion recorded with respect to AB in the following mannerc

Learned counsel for the appellant (SEBI) has vehemently urged that such findings are recorded in the Adjudication Order and the said order has merged with the order of the learned Appellate Tribunal. We-disagree with the aforesaid contention urged by the learned counsel for the appellant. In the appeal(s) filed by the aggrieved pcrson(s) against the ordcr(s) of the Adjudicating Officer, the learned Appellate Tribunal was expected to record its own independent findings and arrive at its own conclusions for holding the respondent liable for the penalty imposed. It seems that the learned Appellate Tribunal has proceeded on the basis that the case of the respondent is same and similar to the case of Kanaiyalal Baldev Patel and Dipak Patel which, evidently, is not.

4. In C1v1L APPEAL No.2666 OF 2013, Sujit Karkera and Group were trading through B.P. Equity Pvt. Ltd. SEBI alleges that they were trading ahead of the trades of CITIGROUP Global Markets Mauritius Pvt. Ltd.(CGMMPL) on the basis of information provided by Suresh Menon (trader of CGMMPL) who was in possession of the orders of F CGMMPL for 6 scrip days. SEBI in its investigation had found that there were several calls made between Suresh Menon and his family friend Sujit Karkera during this time period of 6 days. In these telephonic conversations, it was alleged that there was exchange of information related to scrip name, order quantity, order timing, and order price of the G orders placed by Suresh Menon for CGMMPL. Sujit Karkera utilized the information provided by Suresh Menon to trade thereby making huge profits.

5. In CIVIL APPEAL No.11195-96 OF 2014, Jitendra Kumar Sharma was an equity dealer employed by the Central Bank of India.

H His responsibilities entailed preparation of charts for the chief equity

SECURITIES AND EXCHANGE BOARD OF INDIA v. SHRI 277

KANAIYALAL BALDEVBHAI PATEL [N. V. RAMANA, J.]

dealer and placing of orders based on instructions of the chief equity A dealer. Vibha Shanna, who is the wife of Jitcndra Kumar Shanna, was a regular trader in the stock market and this fact was disclosed to Central Bank of India as a good practice of making disclosure to the employer.

It is the allegation of SEBI that Vibha Shanna engaged herself in front running Central Bank of India's large scale orders allegedly with the B knowledge obtained from her husband. Further the SEBI had alleged that Vibha Shanna's trades substantially matched with the trades of the bank during the relevant period thereby violating regulations 3(a), (b ), (c), (d) and4(1) ofFUTP 2003.

6. In Civ11, APPEAL No. 5829 OF 2014, facts of the case arc that appellant used to trade in scrips of four companies namely AmtekAuto C Ltd., Amtek India Ltd., Monnet Ispat Ltd. and Ahmednagar Forgings Ltd. through Religare Securities Ltd., ISF Securities Ltd., India Infoline Securities Ltd. and Narayan Securities Private Ltd. It is alleged against the appellant that, she had bought and sold equal quantities of shares in large volume in these four scrips by utilizing the infonnation provided by D .Decpak Khurana who was privy to certain confidential infonnation of Religare. SEBI conducted an investigation in the trading of appellant from June 1, 2008 to January 12, 2009. During the investigation, SEBI noticed irregularities in her dealings in the scrips of above mentioned four companies. A general trend of trading was noticed which further E revealed that the appellant was indulged in Front Running. It was found that the appellant's sell orders (quantity and price) substantially matched with the buy orders (quantity and price) of other traders and that her sell order limit price was always above the sell LTP but was same or very close to the buy limit price of other traders. Moreover the selling price, quoted by her, was close to the highest price reached on market on F those days.

7. With this factual background, a reference needs to be made to the scheme ofFUTP 2003. SEBI, by a notification under Section 30 of the SEBIAct, 1992, dated 17.07.2003, formulated FUTP 2003.

8. Indisputably, the object and purpose of this regulation (FUTP G

2003) is to safeguard the investing public and honest businessmen. The aim is to prevent exploitation of the public by fraudulent schemes and worthless securities through misrepresentation, to place adequate and true infonnation before the investor, to protect honest enterprises seeking capital by accurate disclosure, to prevent exploitation against the H

A competition afforded by dishonest securities offered to the public and to restore the confidence of the prospective investor in his ability to select sound securities.

9. FUTP 2003 has three chapters, namely 'preliminary', 'prohibition of fraudulent and unfair trade pmctices relating to securities B market' and 'investigation'. Regulation I contains the short title a'; lct

commencement. Regulation 2 consists of certain definitions. Clause (b) ofregulation 2 defines 'dealing in securities' which includes an act of buying, selling or subscribing pursuant to any issue of any security or agreeing to buy, sell or subscribe to any issue of any security or otherwise C transacting in any way in any security by any person as principal, agent or intermediary referred to in Section 12 of the SEBIAct. Clause (c) of regulation 2 defines fraud in the following mannerc) "fraud" includes any act, expression, omission or concealment committed whether in a deceitful manner or not by a person or by any other person with his connivance or by his agent while dealing in securities in order to induce another person or his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss, and shall also include-

(1) a knowing misrepresentation of the truth or concealment of material fact in order that ll!lOther person may act to his detriment;

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

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

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

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

( 6) any such act or omission as any other law specifically declares to be fraudulent,

(7) dceptive behaviour by a person depriving another ofinformed consent or full participation.

(8) a false statement made without-reasonable ground for believing it to be true.

,___..,.,

SECURITIES AND EXCHANCrE BOAJ{I) OF INDIA v. llltl

KANAlYALAL 13ALDEVIUIAI PATEL IN. v. HAMANA, .1.'1

(9) The act of an issuer of' securities giving oul misinlhrnUtlion A thot uffecls the mnrkel price of the security, resulting in invc:ttorn being effectively misled even though they did nol rely on the statement itmlf or nnylhing derived Jiom it other thnn the murkcl price.

And ''fraudulent" Hhall be construed accordingly;

Nothing contained in this clause 1-ihall apply to any general comments made in good failh in regard to .

(a) the economic policy orthe government

(b) the economic situation of the country

(c) trends in the sccmitics market or

(d) any other matter of a like nature

whether such comments arc made in public or in private

10. Regulation 3 prohiits certain dealings in securities, whereas D regulation 4 prohibits manipulative, fmudulcnt and unfair practices.

Regulation 5 deals with the power of the board to order investigation.

Regulation 6 elaborates on the power of the investigating authority.

11. It is important to note that SEBI has amended the regulation, a number of times, to keep up with the technology and times. A reference E may be made to the amendments carried out to the regulation -·

Table No.1comparison of relevant provisions

A ().).l\rlv 1udloct or emission a. !he \l) A ruggestlO!l u to• factwhid .. u not law ,.a.ny dtdatts to be frzudulmt; trut by one 1'-hode<s not belie\'• it to

(6~ And ''fnudulmi' •hall be bel!Uc; C0111b:11edaccordinpy

(3) All~ .. con"'31meut of a fact by ..

personhavingtnowledg• <>< btli<f of the fact; ! 4) Apromilomad. without any

. intflltion of perl'mning it;

(5) A reprmnt>tion made in .. recldes•

.2nd carcl.t3_, m.amtft whether rt be B

tne or false;

(6) Ally1Uchoctoromi!sicuuny

othO!law ipecifu:>lly de&r.1 tobt fnuduleut, .

(7) D<e<pti\-. bW>ior by a penon

dtpriving>nothor or infOIDJ.ci c®umodull particip>tioll. (S) A t'a!i< 1t>taumt made 1'i1hout c rwonzble grol!l1d for belie\ing it to beuue.

(9) Tho >ct ohn issuer of securiti"

giving Q11t misinfoon>tion tlur affects the. mzb!t price of the I.airily ; mu!ting in inV<JtoH J>eing effecth'ay misl<d mn though they did not rely oµ: the •-titl.if er >nything .i.tn'!d from it otha the.

D 1henurk<t nrioo.

o person soa.u buy, sell or otherwise Prohibition of c-ertain dtalings in No amcnCllD.cnts deal in stcuritics in a fraudolent ncuritits to Section 3( c) manner.

No person shalldircctly orindimdy- (a)bu:y, sell or otbcrnisc deal in securities in a fraudulcntmann<r;

i i (b)use oremploy, in connection\\ith i

~ issue, purchase or sale of any sr:urity ' " u : listed or proposed to belisted in a .E rccogniz:cd stock exchange-, any

l~ l't rilanipulativt ordCccpti\"c dc\ice or ¥

:3 I

contrivancin contraventionof tfic .. ... provisions of the Act_ortbC rults or the I E regulations made there under;

(c).cmploy any deiice, scheme or artifice u ... • to dcfraudincamccti<n with dealing in li = • or isruc of securities which arc.listed or i!I: i :a proposed to ho listed on areoognized • stock exchange; ~

~ e..

~ "'

(~)engage in any ill!, practic~ coorse of

~ I

'bu!iness which opcratos or would opcm

as"fraudor deecituponanyprrs<ilin 8 ronncctim with any dealing in orissuc of S! m:uritics which :irefu1td or.proposed 10

b<listed on amog!lizcdstod< exchange in contra, cntim ofthc provisiaisof the Act or tho rules and therogulati(llJ mad• there under.

sECURITIES AND EXCHANGE BOARD OF INDIA v. SHRI 281

_ -K.ANAIYALAL BALDEVBHAI PATEL [N. V. RAMANA, J.]

~ Nop!iiOsill- . . .

.~ ·.O>. \\thutl;.fejudic~.to.th~ J>tO}jl!om Eip~:lntion.~F:or ·:.: . t&J (a) Eff:'~~p~ ?l: ormm mto: ... ftgul:on J; uo on sh2lfmdule:~ the ptirpOJes'of ·w'o eitb~ dire¢y ormdirdy, ...

• ... . 0 inamudulmroran .unf~ trce; thilsub. ::i;· ... ttaimticm in s~"iuiri:.!: wjth !he :. ~~~.iin.truritles. ree:itatiolli for j intsrticn oi ci2n)·. rming 'cr

0 J~ (1). Deindn s~~s 3hall he dro .. . . .. th:itemo,'al:or: d:Ffessg~pri~~ ?H~~~3, \\ith ·=

0 to b! a frauduimt or 'an imfcir: traiie; do uti~ it is . . ~~ . th: intti9n of ~!lcty ranmg or pmti:e ifit lu\'olm fraUd and maj clarified th3t tli~ 1f deyrmin&th:cs ofJ~el .d · j!iue:.all'of any of tli~ followg. acts or omil3ioris

: therebyinducmgth~ 3~~ crpurclili~

- · Dimel ':- ..

lild in this sub~ • •• 0 0 ~. 0 - ,:. 0 . 0 0 0 (~~ ofstiei by mycn; ·=m: (a.)Jndulgmgm a aci whi; hcrt:.! ree:ublion 2ee not. ~! !bi lrululg, inay "-"!,_ u-hidii;

0 ' ~c~:Ill:lediljg eii2n'ce auuned: :c'o J C2lcuhi to cmt~ a 12lse. or ··~ .· oftrdml? 1D the serunties. that 2n xt or tS! mi3leading.peum~ oftr2.ding.on

• • :( 0 . . mcr1:~·~ . omi3sionis .. i-1.

~- oO mzk

; Z<.,

~->P.ias.nq~ prohibited if it i-6~ serunns • e~ '5 ·. -~ en (c) InduleeinDn\'ictwhithin ~~~!:; oliitended. to tfffct trw fer of falli\vithin the -?"''

0 -- " .. . bid .. c ,. efiWi~~.slilpuJ · purvien of :~~ :e~~~ iprt::-~ ci .s~e;,~. ~:"' . .~·~· f cnlr.IIlcdicm thawenot'l':emim~

•.tll : fde-Jtn.o~e9!Jiy~; a teli0n3 ~": ..

~143 tndetrcnctions' .

- :~ 0

; de\~~'tooinf!21 ~.--cken:er.: . nonViih3't2iiilin~ .. ~..~ ~~" . , ) . . . : .... ' (d) &.reriniO apurdleosale of my

: o•

eaweiluiioru.'in iiiepnce, of thai'~ is not .w o. ,. ~~

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12. Although aforesaid amendments are made to the regulation, yet such amendments sometimes fail to live up to human ingenuity and growth of technology. Usurpation of reprehensible profits by fraudsters,

Who are not entitled to them, must be made answerable by this Court as ' er established tenants of rule of law without leaving incentives for

1 raudulcnt practices, based on creativity of disingenuous, to survive the

1~al gambits. Before embarking upon the necessary discussions, I would

~ e to record my views on a somewhat unclear picture that emerge

om Undefined concepts contained in the Act and the Regulations framed

A there under, a comprehensive legislation can bring about more clarity and certainty on these aspects.

13. Submissions of Mr. K. T. S. Tulsi, learned senior advocate, appearing on behalf of the appellant in C1v1LAPPEAL No. 5829 OF 2014.

)- The finding with regard to the appellant being guilty of fraud under regulations 3 and 4 of FUTP 2003 is contrary to the definition of fraud as contained in Regulation 2( 1 )( c) of the said Regulations.

)- Sub-clauses (i), G), (1), (m), (p ), ( o) and ( q) of clause (2) of regulation 4 expressly make themselves applicable only to the case of intermediaries and not to individual buyers or sellers.

The rest of the sub-clauses being part of the scheme which seeks to regulate the conduct of intermediaries, will be deemed on their face, to pertain to activities undertaken by intermediaries. Thus, the whole of Regulation 4 seems to be inapplicable to the case()fthe applicant.

Submissions of Mr. Arvind P. Datar, learned senior advocate, appearing on behalf of SEBI-

)- That the ambit of FUTP regulations has been substantially increased from 1995 to 2003.

)- That inclusion of specific prohibition of front-running with respect to intermediaries under Regulation 4 (2)( q) should not whittle the scope ofregulation 4 of the FUTP 2003.

)- Moreover, 'Expressio Unius Est Exclusio Alterius' may not be a safe principle to oust the liability for non-intermediary front-running.

14. Other learned counsels appearing for parties have either adopted the submissions made by the above named advocates or provided alternative reasons for the conclusions reached by the abovementioned adv9cates.

15. The question which has arisen for our consideration is whether G 'front running by non-intermediary' is a prohibited practice under regulations 3 (a), (b), (c) and (d) and 4(1) ofFUTP 2003?

16. As this case involves practice of 'front-running' in security market, a reference may be made to various definitions and meanings of front-running-

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Major Law LexiconbyP.

FRONT

RUNNING.- Buying or selling A

Ramanatha Aiyar ( 4•h Ed.

(2010)

securities ahead of a large order so as to benefit from the subsequent price move.

This denotes persons dealing in the maiket, knowing that a large transaction will take place in the near future and the parties are likely to move in their favour.

i I

The Black's Law dictionary (9'h

Ed,)

Nancy Folbre1

The illegal private trading by a broker or market maker who has prior knowledge of a forthcoming laige movement in prices

Front running, n. Securities. A broker's or analyst's use of non-public infonnation to acquire securities or enter into options or futures contracts for his or her own benefit, knowing that when the information becomes public, the price of the securities will change in a predictable manner. This practice is illegal. Front-running can occur in many ways.

For example, a broker or analyst who works for a brokerage firm may buy shares in a company that the finn is about to recommend as a strong buy or in which the firm is planning to buy a large block of shares.

In the world of financial trading, a front-runner is someone who gains an unfair advantage with inside information

17. SEBI has defined front-running in one of its circular2 in the following manner- Front-running; for the purpose of this-circular, front running means usage of non public information to . directly or indirectly, buy or sell securities or enter into options or futures contracts, in advance of a substantial order, on an impending transaction, in the same or related securities or futures or options contracts, in anticipation that when the information becomes public; the price of such securities or contracts may change. 1 NancyFolbre, The Front-Runners of Wall Street, 07.04.2014 (The NewYorkTimes).

2 CircularCIR/EFD/1/2012, dated 25.05.2012.

18. Further a consultative paper3 issued by SEBI had grouped

front running to be an undesirable manipulative practice in the following manner-

'However, SEBI Act does not prescribe or specify as to which practice would be considered to be ftaudulent and unfair trade practices. While the fraudulent and unfair trade practices are commonly understood, it would be desirable if these practices are defined specifically . . .this will bring about clarity among the intermediaries, issuers, investors and other connected persons in the securities marl<:ets about the practices that are prohibited, fraudulent and unfair . .. . The draft defines fraudulent and unfair trade practices. These regulations seek to cover market manipulation on the stock exchanges also. Practices like wash sales, front-running, price rigging, artificial increasing or decreasing the prices of the securities are brought within the ambit of the regulations'

(emphasis added)

19. In actuality, front-running is more complicated than these definitions suggest. It comprises of at least three forms of conduct. They are: ( l) 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 a intermediary with knowledge of an impending customer block order G trades ahead of that order for the intermediary's own profit ("trading

ahead"). In this batch of appeals we are 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 recognized under regulation 4(2)(q) ofFUTP 2003.

' Consultative Paper issued by SEBI, pursuant to a Press release No. 34/95 dated H March 16, 1995.

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20. A word on interpretation would be appropriate before I take A up legal aspects of this case. Mr. K.T.S. Tulsi, learned senior counsel, states that penal laws have to be strictly construed. He places reliance on Govind lmpex Pvt. Ltd. v. Income Tax Department, Krishi lltpadan Mandi Samiti v. Pilibhit Pantnagar Beej Ltd. 5 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. In SEBJ v. Kishore R.

Ajmera, this Court observed thatthe SEBI Act and the Regulations framed there under 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.

All such measures are intended to preempt manipulative trading and check all kinds of impermissible conduct in order to boost the investors' confidence in the Capital market. The primaiy purpose of the statutory enactments is to provide an environment conductive to increased part1c1pation and investment in the securities market which is vital to the growth and development of the economy. The provisions of the SEBI Act and the Regulations will, therefore, have to be uuderstood and interpreted in the above light. 6 ..

 21. The object and purpose of FUTP 2003 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. 7 This Court in N. Narayanan v. adjudicating Officer, SEBP, has laid down that-

'(2011 l 1 sec 529. ' (2004) 1 sec 391. 6 SERI v. Kishore R. Ajmera, (2016) 6 SCC 368 7 Palmer's Company Law. 25th Edition (2010), Volume 2 at page 11097; Gower & Davies- Principles of Modern Company Law, 9th Edition (2012) at page 1160. '(2013) 12 sec 1 s2

Prevention of maiket abuse and priservation of matket integrity is the hallmark of Securities Law. Section 12A read with Regulations 3 and 4 of the Regulations 2003 essentially intended to pre>erve 'market integrity' and to prevent 'Market abuse'. The object of the SEBI Act is to protect the interest of inve>tors in securities and to promote the development and to regulate the securities market, so as to promote orderly, healthy growth of securities market and to promote investors protectio1t Securities matket is based on free and open access to infonnation, the integrity of the matket is predicated on the quality and the manner on which it is made available to market. 'Matket abuse' impairs economic growth and erodes investor's confidence. Market abuse refers to the use of manipulative and deceptive devices, giving out incorrect or misleading information, so as to encourage investors to jump into conclusions, on wrong premises, which is known to be wrong to the abusers. The statutory provisions mentioned earlier deal with the situations where a person, who deals in securities, takes advantage of the impact of an action, may be manipulative, on the anticipated impact on the market resulting in the "creation of artificiality'.

22. From the line of decisions cited herein above, it can be inferred that as a matter of principle, while interpreting this regulation, 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.

23. 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 G this Court is seized with a matter which requires judicial mind to be applied for interpreting a law, the effort must always be made to realize the true intention behind the law.

24. Before dealing with the legal issue we are seized with, it would be important to observe certain definition as occurring under the

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KANAIYALAL BALDEVBHAI PATEL [N. V. RAMANA, J.]

regula.tions. The definition of 'dealing in securities' acquires some A importance as charge under regulation 3 completely depends on the aspect whether the tippee was dealing in securities in the first instant or not.

For a transaction to be termed as dealing in securities, following ingredients need to be satisfied-

!. includes an act of buying, selling or subscribing pursuant to any B issue of any security, or

2. Agreeing to buy, sell or subscribe to any issue of any security, or;

3. Otherwise transacting in any way in any security by any person as principal, agent or intermediarireferred to in Section 12 of C the Act.

25. The definition of' dealing in securities' is broad and foclusive 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 D provides an internal evidence for being broadly worded so as to include sit; iations such as the present one.

26. There is no dispute as to the fact that fraud is jurisprudentially very difficult to define or cloth it with particular ingredients. A generalized meaning may be difficult to be attributed, as human ingenuity would E invent V'i'.~YS to bypass such behaviour; It is to be noted that fraud is extei; isively used in various regulatory framework which mandates me to take notice of the conceptual and definitional problem it brings along. 'Fraud is among the most serious, costly, stigmatizing, and punitive fonris ofliability imposed in modem corporations and financial markets. Usually, .the antifraud provisions of the security laws are not coextensive with common-law doctrines of fraud as common-law fraud doctrines are too t restrictive to deal with the complexities involved in the security market,

, which is also portrayed by the changes brought in through the 2003 regulation to the 1995 regulation.

27. On a comparative analysis of the definition of "fraud" as

- ., ' -· existing in the 1995 regulation and the subsequent amendments in the 2003 regulations, it can be seen that the original definition of "fraud" under the FUTP regulation, 1995 dopts the definition of "fraud" from the Indian Contract Act, 1872 whereas the subsequent definition in the

A 2003 regulation is a variation of the same and does not adopt the strict definition of"fraud" as present under the fudian Contract Act. It includes many situations which may not be a "fraud" under the Contract Act or the 1995 regulation, but nevertheless amounts to a "fraud" under the 2003 regulation.

28. The definition of 'fraud' under clause (c) of regulation 2 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-

1. includes an act, expression, omission or concealment whether c in a deceitful manner or not;

2. By a person or by any other person with his connivance or his agent while dealing in securities;

3. So that the same induces another person or his agent to deal in securities; .

4. Whether or not there is any wrongful gain ot avoidance of any loss.

The second part of the definition includes specific instances-

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

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

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

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

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

( 6) any such act or omission as any other law specifically declares to be fraudulent,

(7) deceptive behavior by a person depriving another of informed consent or full participation.

(8) a false statement made without reasonable ground for believing it to be true.

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KANAIYALAL BALDEVBHAI PATEL.[N. V. RA.MANA, J.]

(9) The act of an issuer of securities giving out misinformation A 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.

29. Although unfair trade practice has not been defined under the B regulation, various other legislations9 in India have defined the concept of unfair trade practice in different contexts. A clear cut generalized definition of the 'unfair trade practice' may riot be possible to be culled out fro:in the aforesaid definitions. Broadly trade practice is unfair ifthe conduct undermines the ethical standards and good faith dealings between parties engaged in business transactions. It is to be noted that unfair C trade practices are not subject to a single definition; rather it requires adjudication on case to case basis. 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, ifthe conduct undermines the good faith dealings involved in the D transaction. Moreover the concept of 'unfairness' appears to be broader than and includes the concept of 'deception' or 'fraud'.·

30. Although learned counsel for SEBI has admitted that there is no difference between fraud and unfair trade practice under regulation 4 ( 1 ), but we are of the opinion that such submission may not be E conclusive. As these cases do not require further investigation, the question . regarding the scope of prosecution for unfair trade practice is kept open.

, 31. Regulation 3 prohibits a person from committing fraud while dealing in securities. A reading of the aforesaid provision describes the width of the power vested with the SEBI to regulate the security inarket.

F In our view, the words employed in the aforesaid provisions are of wide !!, tnplitude and would therefore talce within its sweep the inducement to bring about inequitable result which has happened in this case instant.

32. Regulation 4 prohibits manipulative, fraudulent and unfair trade practices. It is to be noted that the regulation 4 (1) starts with the phrase

G 'without prejudice to the provisions of regulation 3'. This phrase acquires significance as it portrays that the prohibitions covered under

'Monopolies and Restrictive Trade Practices Act, 1969, Section 36A; The Consumer Protection Act, 1986, Section 2(1 )(r); The CompetitionAct,2002, Section 3; The Food Security and Standards Act, 2006, Section 24(2); Specific Relief Act, 1963, Section 20; Usurious Loans Act, 1918, Section 3.

A the regulation 3 do not bar the prosecution under regulation 4 (1).

Therefore regulation 4 (1) has to be read to have its own ambit which adds to what is contained under regulatio;:;. 3.

33. Regulation 4 (2)(q) ofFUTP 2003 states that-

(2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:-

q) an intermediary buying or selling seclll'ities in advance of a substantial client order or whereby a futlll'es or option position is taken about an impending transaction in the same or relatoo futlll'es or options contract.

Under the provisions of regulation 4(2)( q), only intermediary trading on the information of substantial client order, if it involves fraud then the D dealing in securities will be deemed to be fraudulent.

34. An argument has been introduced by the Mr. K.T.S. Tulsi, learned senior counsel, that sub-clause (q) ofregulation 4(2) includes only front-running by the intennediaries, by implication it means that any persons other than intermediaries are excluded from the rigors of law.

E In our opinion such submission cannot be sustained in the eyes oflaw as the intention of the legislation was to provide for a catchall provision and the deeming provision under sub-clause ( q) of regulation 4(2) was specifically provided as the intermediary are in fiduciary relationship with the clients. There is no dispute as to the fact that a fiduciary must F act in utmost good faith; he should not act for his own benefit or benefit of any third party without the informed consent of his client. The essential i1Teducible core of fiduciary duty is the duty ofloyalty10• Such heightened standard demanded a deeming provision under the FUTP 2003.

35. The reliance on 'expressio 11ni11s est exclusio alterius' may G not be appropriate in this case instant 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. 11 In light of the above

111 SEB! (Stock Brokers and Sub-brokers) Regulations, 1992, Schedule II.

11 Colquhoun v. Brooks, (1887) 19 Q.B.D. 400; Lowe v. Darling & Sons. (1906) 2 K.

B. 772

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KANAIYALAL BALDEVBHAI PATEL [N. V. RAMANA, J.]

discussion, this rule ofinterpretation does not help the case of the violators.

36. A crucial aspect which needs to be observed at this point is the element of causation which is embedded under regulation 2(1)(c) read with regulations 3 and 4. In order to establish the aforesaid charges in this case, it is required by the SEBI to establish that the harm was induced by the materialization fa risk that was not disclosed because B of the tippee'sfraudulent practice. Further the charges under the FUTP 2003 needs to be established as per the applicable standards rather than on mere conjectures and surmises.

37. It should be noted that the provisions ofregulations 3 (a), (b), ( c ), ( d) and 4(1) are couched in general terms to cover diverse situations C 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. We are not inclined to agree with the submission that SEBI should have identified as to which particular provision of FUTP 2003 regulations has been violated. A pigeon-hole approach may not be applicable in this case instant.

38. Before we conclude, it would be useful to have a look at American jurisprudence which has developed around Title 17, Code of Federal Regulations, Part 240, Rule IOb-5 (Prohibition of use of manipulative or deceptive devices or contrivances with respect to certain securities exempted from registration). It is to be noted E that much of Indian securities laws have similar provisions and a brief survey of jurisprudence might be useful for the discussion herein. The complexity of the subject we are dealing is reflected even in the American jurisprudence as the U.S Supreme Court seems to have accepted the

aforesaid provision to be the most litigated ones. 12 In David Carpenter, F Kenneth P. Fe/is and R. Foster Winan.~, v. United States13, the United States Supreme Court dealt with the matter of fraud under section 1 O(b).

In this case, the Petitioner, who was a co-author in a Journal's investment advice column, entered into a deal with a stock broker wherein he provided pre-publication information on the content of the column. Further the stockbroker bought and sold shares based on such information and G

12 Securities and Exchange Commission vs. National Securities, Inc., et al., 393 U.S.

453 (1969) 'Although section lO(b) and 10 b-5 may well be the most litigated provisions in the federal securities laws, this is the first time this Court has found it necessary to interpret them. We eneter the virgin territory cautiously ... '

"484 U.S. 19.

A shared the profits made therein with the Petitioner. The Court, while convicting the Petitioner, elaborated the meaning of fraud in following manner-

We cannot accept petitioners' further argument that Winans' conduct in revealing prepublication infonnation was no more than a violation of woikplace rules and did not amount to fraudulent activity that is proscribed by the mail fraud statute. Sections 1341 and 1343 reach any scheme to deprive another of money or property by means of false or fraudulent pretenses, representations, or promises. As we observed last Tenn in McNally. the wonls "to defraud'' in the mail fraud statute have the "common understanding" of " 'wronging one in his property rights by dishonest methods or schemes,' and 'usually signify the deprivation of something of value by trick, deceit, chicane or overreaching.' " 483 U.S., at 358,

107 S.Ct., at 2881 (quoting Hammerschmidt v. United States, 265 U.S. 182, 188, 44 S.Ct. 511, 512, 68 LEd 968 (1924)).

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.' " Grin v. Shine, 187 U.S. 181, 189, 23 S.Ct. 98, 102, 47 LEd 130 (1902).

Elaborating on the fiduciary relationship between the employee of a firm to safeguard the confidential information owned by the firm, the court ob.served as under-

The District Court found that Winans' undertaking at the Journal . was not to reveal prepublication information about his column, a promise that became a sham when in violation of his duty he passed along to his coconspirators confidential information belonging to the Journal, pursuant to an ongoing scheme to share profits from trading in anticipation of the "Heard" column's impact on the stock market. In Snepp v. United States. 444 U.S. 507, 515, n. 11, 100 S.Ct. 763, 768, n. 11, 62 L.Ed.2d 704 ( 1980) (J; er curiam). although a decision grounded in the provisions of a written trust agreement prohibiting the unapproved use of confidential Government information, we noted the similar prohibitions of the common law, that "even in the absence of a written contract, an employee has a fiduciary

• SECURITIES AND EXCHANGE BOARD OF INDIA v. SHRI

KANAIYALAL BALDEVBHAI PATEL [N. V. RAMANA, J.]

•, j --

obligation to protect confidential information obtained during the course of his employment." As the New York courts have recognized: "It is well established, as a general proposition, that a person who acquires special knowledge or information by virtue of a confidential or fiduciary relationship with another is not free to exploit that knowledge or information for his own personal benefit but must account to his principal for any profits derived therefrom." Diamond v. Oreamuno, 24 N.Y.2d 494, 497, 301 N.Y.S.2d 78, 80, 248 N.E.2d 910, 912 (1969); see also Restatement (Second) of Agency §§ 388, Comment c,

396( c) (1958).

We have little trouble in holding that the conspiracy here to trade on the Journal's confidential information is not outside the reach of the mail and wire fraud statutes, provided the other elements of the offenses are satisfied. The Journal's business information that it intended to be kept confidential was its property; the declaration to that effect in the employee manual merely removed any doubts on that score and made the finding of specific intent to defraud that much easier. Winans continued in the employ of the Journal, appropriating its confidential business information for his own use, all the while pretending to perform his duty of safeguarding it. In fact, he told his editors twice about leaks of confidential information not related to the stock-trading scheme, 612 F.Silpp., at 831, demonstrating both his knowledge that the Journal viewed information concerning the "Heard" column as confidential and his deceit as he played the role of a loyal employee.

39. In Vincent F. Chiarella v. United States14, the United States F Supreme Court was seized of the matter relating to securities fraud under section lOb of the Securities Exchange Act, 1934. The Petitioner therein was a printer of some corporate takeover bids. Despite attempts by the companies to conceal the names of the takeover targets, Chiarella was able to deduce, and he traded shares of the companies he knew G were involved. Consequently he was convicted by the lower forum as he traded in target companies without informing its shareholders of his knowledge of proposed takeover. The Supreme Court while reversing his conviction, observed as under-

" 445 U.S. 222 (1980).

"the Petitioner employee could not be convicted on theory of failure to disclose his knowledge fo stockliolders or target companies as he was under no duty to speak, in that he had no prior dealings with the stockholders and was not their agent or fiduciary and was not a person in whom sellers had placed their trust and confidence, but dealt with them only thiough impersonal market transactions."

On the issue of"General Duty between all participants (Tippee's), the Court stated that:

"Fonnulation of a general duty between all participants in market transactions for forego actions based on material, nonpublic information, so as to give rise to liability under section 1 O(b) of Securities Exchange Act for failure to disclose, would depart radically from established doctrine that a duty arises from a specific relationship betweeh two parties and should not be undertaken absent some explicit evidence of congressional intent. Securities ExchangeActofl934, § IO(b) as amended 15 U.S.C .. A. § 78j(b)."

40. Although excessive reliance on foreign jurisprudence may not be necessary as we have starkly deviated in many aspects from American jurisprudence, but we need to keep in mind the developments which E other countries have undertaken regarding this issue.

41. Now we come back to the regulations 3 and 4 (l) which bars persons from dealing in securities in a fraudulent manner or indulging in unfair trade practice. Fairness in financial markets is often expressed in tenns oflevel playing field. A playing field may be uneven because of F varied reasons such as inequalities in infonnation etc. Possession of different infonnation, 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 infonnation G is fraudulent only when the infonnation has been acquired in bad faith and thereby inducing an inequitable result for others.

42. The law of confidentiality has a bearing on this case instant. "Confidential information acquired or compiled by a corporation in the course and conduct of its business is a species of property to which the H corporation has the exclusive right and benefit, and which a court of

. -·

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equity will protect through the injunctive process or other appropriate A remedy. " 15 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 quty prescribed by law and ifthe recipient of such information knowi; 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.

43. 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 arc satisfied as discussed above. From the above analysis, C it is clear that in order to establish charges against tippee, under regulations 3 (a), (b), (c) and (d) and 4 (1) ofFUTP 2003, 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 tippec and he still trades thereby defrauding the person, whose D orders were front-runned, by inducing him to deal at the price he did.,

44. Taking into consideration the facts and circumstances of the case before us and the law laid down herein above and SEBI v. Kishore , R. Ajmera (Supra) can only lead to one conclusion that concerned parties to the transaction were involved in an apparent fraudulent practie 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 Appeal Nos. 2595, 2596 and 2666_ of 2013 arc allowed. At the same time, for the same reason, Civil Appeal Nos. 5829 of2014and11195-11196 of2014 are dismissed.

RAN JAN GOGOi, J. 1. I have had the privilege of going through

the vry erudite judgment of my learned brother Ramana, J. I can only agree with the trend of reasoning that iny learned brother has chosen to G adopt to arrive at his ultimate conclusions. However, I am of the view that the present case is capable of resolution within a very narrow spectrum of law and on an interpretaiion of the relevant provisions of

15 3 W. Fletcher, Cyclopedia of Law of Private Corporations§ 857.1, p. 260 (rev. ed.

19~ H

A the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Traqe Practices Relating to Securities Market) Regulations 2003 (hereinafter referred to as "2003 Regulations"). I, therefore, propose to record my own views in the matter.

2. The relevant provisions of the 2003 Regulations which would B require consideration of this Court has been set out in extenso by my learned brother and, therefore, I need not burden this order with a repetition of the same. All that I consider necessary to point out is that it is the provisions ofRegulation2(c),(3) and (4) of the 2003 Regulations which would require a consideration from the limited stand point of C whether the actions attributable to the respondents in Appeal Nos.2595

of2013, 2596of2013 and2666 of2013 and appellants inAppeal Nos.5829 of 2014 and 11195-11196 of 2014 come within the four corners of fraudulent or unfair trade practice as contemplated by the aforesaid provisions of the 2003 Regulations.

3. The gravamen of the allegations which can be culled out from D the facts in Civil Appeal No.2595 of 2013 is that one Dipak Patel

(respondent in Civil Appeal No.2596of2013), who was holding a position of trust and confidence in one Mis Passport India Investment (Mauritius) Limited (hereinafter referred to as "Mis Passport India"), was privy to privileged/confidential information that Mis Passport India would be E making substantial investments in particular scrips through the stock

(lxchangcs. Dipak Patel is alleged to have parted the said information to his cousins Kanaiyalal Baldevbhai Patel [respondent in Civil Appeal No.2595 of 2013] and Anandkumar Baldevbhai Patel [respondent in Civil Appeal No.2594 of2013 (disposed ofon 5th April, 2017)] who on various dates placed orders for purchase of scrips a few minutes before F the bulk orders in respect of the same scrips were placed on behalf of M/s Passport India by Dipak Patel. The bulk order/orders, because of the sheer volume, naturally had the effect of pushing up the prices of the particular scrips and no sooner the prices had increased, Kanaiyalal Baldevhai Patel and Anandkumar Baldevbhai Patel had traded the said G scrips thereby earning substantial profits. The large volume of the shares traded in the above manner; the several number of days on which such trading took place; and the close proximity of time between the sale and purchase of the shares i.e. before and after the bulk purchases, were alleged by the appellant - Securities and Exchange Board of India ("SEBI" for short) to be amounting to fraudulent or unfair trade practice H

SECURITIES AND EXCHANGE BOARD OF INDIA v. SHRI 297 KANAIYALAL BALDEVBHAI PATEL [RANJAN GOGOi, J.]

warranting imposition of penalty and visiting the offending individuals A with other penal consequences.

4. The adjudicating authority held the respondents liable. The Securities Appellate .Tribunal ("Appellate Tribunal" for short) before whom appeals were filed by the aggrieved persons (respondents herein) interfered with the orders passed by the adjudicating authority primarily B . on the ground that on a reading of Regulation 2( c ),(3) and Regulation( 4) of the 2003 Regulations it does not transpire that the acts attributable amount to fraudulent or unfair trade practice warranting the findings recorded by the Adjudicating authority and the imposition of penalty in question on that basis.

5. IfRegulation2(c) ofthe2003 was to be dissected and analyzed 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( c) of the 2003 Regulations is not, therefore; of whether the act, expression, omission D 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.

6. The definition of'fraud', which is an inclusive definition and, t!:lerefdre, has to be understood to be broad and expansive, contemplates E e\ien 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 F must, therefore, be on the meaning that must be attributed to the word "induce".

. 7: The dictionary meaning of the word "induced" may now be taken riote of.

. BLACK'S LAW DICTIONARY, EIGHTH EDITION, defines G 'inducement' as "the act or process of enticing or persuading another person to take a certain course of action." ·

Merriam-Webster Dictionary defines 'inducement' as "a motive or consideration that leads one to action or to additional or more .1;.

effective actions." H

8. A person can be said to have induced another person to act in a particular way or not to act in a particular way if on the basis of facts and statements made by the first person the second person commits an act or omits to perform any particular act. The test to determine whether the second person had been induced to act in the manner he did or not to B act in the manner that he proposed, is whether but for the representation of the facts made by the first person, the latter would not have acted in the manner he did. This is also how the word inducement is understood in criminal law. 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 C 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 D sufficient. No element of dishonesty or bad faith in the making of the inducement would be required .

. 9. While Regulation 3( a) of the 20!{3 Regulations prohibits a person to buy, sell or otherwise deal in securities in a fraudulent manner, Regulation 4 deelares that no person shall indulge in a fraudulent or an unfair trade practice in securities. Sub-regulation (2) of Regulation 4 E enumerates different situations in which dealing in securities can be deemed to be a fraudulent or an unfair trade practice. 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.

10. Adverting to the facts of the present case, if the information with regard to acquisition of shares by M/s Passport India was parted with by Dipak Patel to Kanaiyalal Baldevbhai Patel and Anandkumar Baldevbhai Patel and the latter had transacted in huge volume of shares of the particular company/scrip mentioned by Dipak Patel a little while G before the bulk order was placed by Mis. Passport India and the said persons had sold the same a short-while later at an increased price, such increase being a natural consequence of a huge investment made in the particular scrip by M/s Passport India. surely, it can be held that by the conduct of Dipak Patel, Kanaiyalal Baldevbhai Patel and Anandkumar Baldevbhai Patel were induced to deal in securities. A natural and logical H

SECURITIES AND EXCHANGE BOARD OF INDIA v. SHRI 299 KANAIYALAL BALDEVBHAI PATEL [RANJAN GOGOi, J.]

inference that would follow is that the aforesaid two latter persons would A not have entered into the transactions in question, had it not been forthe information parted with by Dipak Patel. The track record of earlier trading of the concerned two persons does not indicate trading in such huge volumes in their normal course of business. Such an inference would be a permissible mode of arriving at a conclusion with regard to B the liability, as held by this Court in Securities and Exchange Board of India Vs. Kishore R. Ajmera16 referred to by my learned brother Ramana, J. The volume; the nature of the trading and the timing of the transactions in question can leave no manner of doubt that Kanaiyalal Baldevbhai Patel and Anandkumar B11ldevbhai Patel had acted in connivance with Dipak Patel to encasli the benefit of the information C parted with by Dipak Patel to them and, therefore, they are parties to the 'fraud' committed by Dipak Patel having aided and abetted the same. . .

11. If the parting of information by Dipak Patel to Kanaiyalal Baldevbhai Patel andAnandkumar Baldevbhai Patel amounts to 'fraud' within the meaning of Regulation 2(c) of the 2003 Regulations; we do D not see as to how the transactions entered into by Kanaiyalal Baldevbhai Patel and Mis Passport India through Dipak Patel both in regard to purchase and sale of the shares would not be hit by the provisions of Regulation 3(a) and Regulation 4(1) of the 2003 Regulations in question.

12. Coupled with the above, is the fact, the said conduct can also be construed to be an act of unfair trade practice, which though not a defi!).ed expression, has to be understood comprehensively to include any act beyond a fair conduct of business including the business in sale " ., and purchase of securities. However the said question, as suggested by my learned Brother, Ramana, J. is being kept open for a decision in a more appropriate occasion as the resolution required presently can be made irrespective of a decision on the said question.

13. On the conclusions that has been reached, as indicated above, whether the deemed provisions contained in Regulation 4(2)( q) of the 2003 Regulations would be attracted to the facts of the present case and the scope, effect and contours of the explanation to Regulation 4 inserted G by Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) (Amendment) Regulations, 2013 would hardly require any specific notice of the Court.

14. To attract the rigor 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 B as held by this Court in Securities and Exchange Board of India Vs.

Kishore R. Ajmera(supra) is not an indispensable requirement. The inferential conclusion from the proved and admitted facts, so long the same are reasonable and can be legitimately arrived at on a consideration of the totality of the materials, would be permissible and legally justified.

Having regard to the facts of the present cases i.e. the volume of shares C sold and purchased; the proximity of time between the transactions of sale and purchase and the repeated nature of transactions on different dates, in my considered view, would irresistibly lead to an inference that the conduct of the respondents in Appeal Nos.2595 of 2013, 2596 of 2013 and2666 of2013 and appellants in Appeal Nos.5829 of2014 and D 11195-11196 of2014 were in breach of the code ofbusiness integrity in the securities market. The consequences for such breach including penal consequences under the provisions of Section 15HA of the SEBI Act must visit the concerned defaulters for which reason the orders passed by the Appellate Tribunal impugned in Civil Appeal Nos.2595 of2013, 2596 of2013 and 2666 of2013 are set aside and the findings recorded E and the penalty imposed by the Adjudicating Officer are restored.

15. Consequently and in view of the above Civil Appeal Nos. 5829 of2014 and 11195-11196 of2014 are dismissed and Civil Appeal Nos. 2595, 2596 and2666 of2013 are allowed.

Ankit Gyan Appeals disposed of.