Monday, May 25, 2015

Synchronised Trading: In Sync With the Law? – Part 2

[The following guest post is contributed by Kanwardeep Singh Kapany (5th B.S.L.LL.B) and Mitravinda Chunduru (4th B.S.L.LL.B.), both students of ILS Law College, Pune

This is a continuation of Part 1, which is available here]


What amounts to commission of Illegal Synchronisation had been a moot point for quite a while. However, with the passage of time and development of jurisprudence having taken place on the said subject, not only have factors that point towards the said contravention crystallised but so have the defenses. If successfully pleaded, these defenses will either act as a mitigating factor as they will be taken into consideration for imposition of reduced penalty or in certain situations, if the facts warrant, vitiate the proceedings in relation to Illegal Synchronisation in toto.[1]

Inordinate Delay In Filing Of Show Cause Notices

Expeditious disposal of proceedings wherein allegations of market manipulation are involved should be the foremost concern as this alone ensures that SEBI is carrying out its duty effectively to protect the interest of investors in securities and to promote the development of and regulating the securities market as mandated by SEBI Act.[2] Inordinate delay in conducting inquiries and in punishing the delinquent not only permits market manipulator to operate in the market, it also has demoralizing effect on the market players who are ultimately not found guilty but ‘Damocles sword’ of inquiry keeps hanging on them for years together from the date of starting investigation by SEBI to the date of completion of inquiry proceedings.[3] Time and again Competent Forums have expressed that SEBI must undertake necessary steps to ensure that inquiry proceedings against market manipulators are completed expeditiously and guilty persons are punished in a time bound manner[4] so as to prevent violation of principles of natural justice[5] which occurs when such proceedings are delayed without any fault on the part of Alleged Contravener.

No Access To Documentary Evidence And Or Witnesses

The materials upon which SEBI may rely in order to prove contravention of the Act & Regulations are inter alia details, records and statements such as order logs and trade logs. An Alleged Contravener necessarily would require access to the said materials for presenting an effective defense. Therefore, an opportunity to peruse and inspect the said materials has to be mandatorily provided to the Alleged Contravener.[6] However, if by not providing certain material, which formed basis of an order, the Alleged Contravener is not at all prejudiced, then such an omission will not be fatal to the continuation of proceedings. Also, on certain occasions if testimony of certain individuals has been relied upon[7] to come to a certain finding, in such cases, an opportunity to cross examine such individuals has to be mandatorily provided to the Alleged Contravener.[8]


Differential treatment presupposes discriminatory conduct. When contraveners are meted out different punishments, some with softer and the other with harsher, this is not at all sufficient to establish existence of discriminatory conduct on the part of the Competent Forum. For pleading discrimination what has to be clearly brought out is the factum that the Competent Forum has gone ahead and provided different punishments where the role played by all the Alleged Contraveners is homogeneous. Also, presence of discernible reasons, for reaching a conclusion is considered to be fair and non arbitrary[9] as reason is the heart beat of fair play. Therefore, absence of reasons in an order passed by a Competent Forum wherein similarly placed Alleged Contraveners are treated differently will squarely fall within the ambit of discriminatory conduct.

Merely Carrying Out Directions Of Client

This is a broker specific defense. The broker is expected to carry out the directions of the client such as executing trades for the client.[10] The trading system in place is designed to maintain complete anonymity. Until it cannot be shown that the broker was aware of the intention of the client being to undertake Illegal Synchronisation or that the client and the broker had colluded to do the same, or that the broker had individually undertaken to do the same, merely Legal Synchronisation will not at all be sufficient to hold the broker in contravention of either the SEBI Act or PFUTP Regulations or Broker Regulations.


Illegal Synchronisation is not just an actus reus based contravention, it necessarily requires the presence of mens rea as well. Across the board, Illegal Synchronisation is considered to be a serious offence, “Not all the King's horses and all the King's men' can ever salvage the situation.” The impact of such an adverse finding is wide, more so in the case of a large public company having large number of investors. Therefore, evidence merely raising probabilities and endeavouring to prove the fact on the basis of preponderance of probability is not sufficient to establish such a serious offence. Also, mere conjunctures and surmises are not adequate to hold a person guilty of such a serious offence. What will be required is the presence of reasonably strong evidence.[11]

Another pertinent aspect which is a continuation of the burden of proof aspect is whether merely establishing Illegal Synchronisation is enough or whether it has to be shown that investors were actually influenced by such contravention of the Act & Regulations. When an Alleged Contravener takes part in or enters into transactions relating to securities with the intention to artificially raise or depress the price, innocent investors in the market are thereby automatically induced to buy / sell their stocks. The buyer or the seller is invariably influenced by the price of the stocks and if that is being manipulated, the Alleged Contravener doing so necessarily influences the decision of the buyer / seller thereby inducing them to buy or sell depending upon how the market has been manipulated. Therefore, inducement to any person to buy or sell securities is the necessary consequence of manipulation and flows therefrom.[12] Therefore, SEBI is just burdened with establishing Illegal Synchronisation. Once that is established, it will necessarily follow that the investors in the market had been induced to buy or sell and that no further proof in this regard is required.

The market, as already observed, is so wide spread that it may not be humanly possible for SEBI to track the persons who were actually induced to buy or sell securities as a result of manipulation and law can never impose a burden which is impossible to be discharged.[13] While SEBI is drawn to the task of establishing that the Alleged Contravener has indulged in Illegal Synchronisation, by presenting evidence that meets the aforementioned standard, it need not wait for the final outcome of the said lis. SEBI is very well empowered, for the purpose of protecting the interest of investors[14] in securities market, to issue directions[15] as is appropriate in the interests of investors in securities and the securities market and SEBI has made judicious use of the said power on previous occasions.[16]


- Kanwardeep Singh Kapany & Mitravinda Chunduru

[1] In Re: Genus Commu-Trade Limited; In Re: The shares of Birmingham Thermotech Limited, MANU/SB/0105/2009.
[2] Shri Ashok K. Chaudhary v. SEBI, MANU/SB/0126/2008.
[3] Subhkam Securities Private Limited v. SEBI, MANU/SB/0156/2012.
[4] M/s. Prashant J. Patel v. SEBI, MANU/SB/0194/2012.
[5] Libord Finance Limited v. SEBI, [2008] 86 SCL 72 (SAT).
[6] Purshottam Budhwani v. SEBI, MANU/SB/0001/2015.
[7] Ketan Parekh v. SEBI, MANU/SB/0229/2006.
[8] Triveni Managaement Consultancy Services Limited v. SEBI, MANU/SB/0071/2013.
[9] The Constitution of India, 1949, art 14.
[10] Ajmera Associates Limited v. SEBI, MANU/SB/0044/2010.
[11] Sterlite Industries (India) Limited v. SEBI, MANU/SB/0040/2001.
[12] Sebi v. A Nitin Capital Services Limited, MANU/SB/0101/2007.
[13] Iridium v. Motorola Case, AIR 2011 SC 20.
[14] Securities and Exchange Board of India Act, 1992, section 11.
[15] Securities and Exchange Board of India Act, 1992, section 11B.
[16] In the matter of Blessing Agro Farm India Limited and its Directors WTM/SR/CIS-SRO/114/12/2014; Order against M/S Lee Capital Services Private Limited, WTM/RKA/MIRSD/53/2013.

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