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SAT reliance order
SAT reliance order
MUMBAI
Versus
Shankar, Ms. Rasika Ghate, Advocates i/b. MDP & Partners for the
Respondent.
1. The appellant has filed the present appeal challenging the order
Nifty Put options of strike price of Rs. 11400/- and expiry date of
2. The facts leading to the filing of the present appeal is, that the
‘RIL’) and was always funded by RIL. The appellant in the ordinary
the appellant took positions, both call and put options in long dated
Nifty options with various strike prices of Rs. 1400/-, Rs. 3500/-, Rs.
4000/-, Rs. 5000/- and Rs. 6000/-, all expiring on Decemebr 28,
2017.
directed RIL to square off / close out open existing positions. The
relevant extracts of the order of the WTM dated March 24, 2017 are
extracted hereunder :-
call and put options at various strike prices including long dated open
5. The order of the WTM dated March 24, 2017 squarely applied
to the appellant also. Any trade other than for closing out / squaring
appellant which was prohibited by the WTM’s order. But for the
WTM’s order, the appellant had the following choices for any point
of time :-
time to time.
and other long dated positions on the stock exchanges on three days
i.e. on July 31, 2017, August 8, 2017 and August 10, 2017.
7. All the trades on July 31, 2017, August 8, 2017 and August
10, 2017 were executed by the appellant through its broker Morgan
broker of both the appellant and MSF. It may be noted here that all
these long dated open positions were highly illiquid and, this fact is
clear that apart from aforesaid trades, no other trades were executed
between January 1, 2017 to July 31, 2017 except one trade that was
expiring for the alleged “box trades” on trade dates July 31, 2017.
August 8, 2017 and August 10, 2017. Even though, the investigation
report clearly indicated that the trades executed by the appellant were
2, 2021 was issued alleging that the appellant had violated Section
12A of the SEBI Act read with Regulations 3(d), 4(1) and 4(2)(e) of
July 31, 2017, August 8, 2017 and August 10, 2017 were executed
understanding so that one leg of the options i.e. 11400PE was traded
9. MSF settled the show cause notice under the Securities and
contending that they had not violated any provisions of the SEBI Act
nor the trades executed were box trades or synchronized trades. The
appellant’s trades on July 31, 2017 were not in violation of the SEBI
laws but held that the trades executed on August 8, 2017 and August
23% and 25% to the fair value of 11400 PE on those dates. As per
NSE, the trade price on these two dates were 77% and 81% of the
prove that the appellant had approached Citigroup Global for quotes
for the said trades. The AO further held that MSF admitted of
knowing the name of the counter party, namely, the appellant with
and synchronization of the trades between the appellant and MSF and
considering that only one quote had been obtained by the appellant
considerable discount with only one counter party with whom the
laws. The AO also came to the conclusion that the order of the
initially had admitted that the order was not binding and, therefore,
the appellant cannot be allowed to change its stand on this issue. The
were made at the best price available and held that the trades were
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Rs. 7 lakh.
counsel with Mr. Shuva Mandal, Mr. Rohan Batra, Ms. Sonali
Malik, Mr. Dhruv Sethi, the learned counsel and Mr. Amey Nabar,
Ms. Swati Jain, Authorised Representatives for the appellant and Mr.
Shefali Shankar, Ms. Rasika Ghate, the learned counsel for the
respondent.
13. The learned counsel for the appellant contended that the
show cause notice alleged that the trades in question were “box
trades” whereas the investigation report itself made it clear that the
trades executed between the appellant and MSF did not qualify as
“box trades”. Learned counsel further contended that the trades had
due to the fact that 11400PE were highly illiquid and the outstanding
was not the correct benchmark. The intrinsic value, in the instant
case, was the simple difference between Strike Nifty and Spot Nifty
on the date it is measured. Due to the time value of money and the
volatility of the Nifty, the fair value of an option is always less than
the intrinsic value and, therefore, the fair value has to be computed
using the Black Scholes model which requires multiple inputs, viz,
calculation was 23% and 25% on August 8, 2017 and August 10,
is patently erroneous and the finding that the appellant has not been
that it was not a prudent decision for the appellant to trade at a loss
admitted facts. Further, the circular dated October 28, 2022 clearly
The learned counsel contended that merely because the appellant had
to be manipulative.
as interest rate, time to expiry, implied volatility, etc. The fair value
determined by the appellant and NSE are different even though both
it as 23% and 19% for the impugned trades. The learned counsel
contended that comparing the traded price with the fair values which
from the fair value would not be manipulative. It was contended that
while the premium of 9% to the fair value on July 31, 2017 was not
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in the absence of any rational basis, the finding of the trades of the
or on facts.
15. The learned counsel contended that the Bloomberg chats with
appellant had approached the broker MSICPL and MSF is the client
was in touch with MSF and, consequently, the finding that there was
misreading of the evidence. It was urged that the mere fact that MSF
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came to know that the appellant was a counter party through the
broker does not mean that the appellant was also aware that the
and conjunctures. It was also urged that the finding that there was no
policy of the appellant to approve the trading decision for the trades
devoid of any merit. The said trades were made under extreme
it was not expected for the company to have a policy to cover such a
situation. Further, the mere fact that there was no policy does not
that whereas the AO admits that there was an economic rationale for
scenario, it was urged that when the AO accepted that 11400 PE was
illiquid, the finding that the act of the appellant of selling the trades
trades on the stock exchange platform after concluding the deals with
trade practice.
17. On the other hand, the learned senior counsel for the
Pvt. Ltd. [(2018) 13 SCC 753] contending that the facts in the instant
case, is similar to the facts and modus operandi in the case of Rakhi
the Hon’ble Supreme Court in Rakhi Trading Pvt. Ltd. (supra). The
since the price discovery and free and fair operation of the market
the appellant was known to MSF, the counter party through the
broker MSICPL and, therefore, the appellant knew the counter party
executed the trades on the stock exchange. The trades were, thus,
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huge discount to the fair value. As such the impugned trades were
other investors since they were not aware of the private arrangement.
Further, the order of the WTM is not applicable to the appellant nor
contended that the NSE circular dated October 28, 2022 has no
relevance to the impugned trades which are prior to the date of the
circular. It was also urged that even if the impugned trades are
the said trades are still manipulative. The learned counsel submitted
that it is not the discount that makes the trades manipulative, but the
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18. Having heard the learned counsel for the parties and before
deciding the issues which arises for consideration, as the facts pertain
2(d) of the SCRA, Section 12A(c) of the SEBI Act, Regulation 3(d),
hereunder :-
contracts between the buyer and the seller which gives the buyer a
the premium and buys his rights to exercise his option the writer of
an option is one who receives the option premium and, is, therefore,
obliged to sell or buy the asset as per the option exercised by the
buyer.
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20. Options are of two types “Call option” which gives the buyer
(Expiry Date). “Put option” gives the buyer the right, but not
on the expiry date. These options are called European style options.
denoted by the term CE and put options is denoted by the term PE.
21. “Spot price” is the actual price of the underlying assets on the
Expiry Date as the case may be. Further, options are bought and sold
only on the floor of the stock exchange till the Expiry Date. In case
of a Call option, the option holder will exercise the option only if the
Spot Price on the Expiry Date is higher than the Strike Price and, in
case of the Put option, the option holder will exercise the option only
if the Spot Price on the Expiry Date is lower than the Strike Price. If
the option is allowed to lapse, the maximum loss to the option holder
difference between the Strike Price and the Spot Price on the date of
measurement. For example, in the instant case, the expiry date was
particular date, for example on July 1, 2017, the Spot Price is 9900
then the Intrinsic value is Rs. 1500 i.e. Rs. 11400/- – Rs. 9900/-.
a Call or Put option on July 1, 2017 he will not be ready to pay the
nearly six months i.e. from July 1, 2017 till Decemebr 28, 2017. The
time value of the premium paid has to be factored in. Apart from
this, there are other factors like risk free trade, implied volatility,
Spot Price, expectation of the movement in the Index, etc. which will
determine the value / premium that the buyer will be ready to pay for
The value so determined using this model is known as the fair value.
24. “Box Trades” are carried out with an intention to provide loan
trading in options with higher and lower strike price such that on
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alongwith interest to the lending party. These are not genuine trades
stock exchange.
also executed other trades but those trades are not in question as they
discussion nor any finding by the AO that the trades in question are
‘box trades’. The investigation report also clearly states that the
27. Having perused the order of the WTM dated March 24, 2017
in the mater of RIL, we find that the WTM prohibited RIL from
opinion, the words “directly and indirectly” used in the order of the
that the order of the WTM will not apply to the appellant is wholly
would have been indirect conflict with the order of the WTM and it
the equity derivatives with all fundings coming from RIL, it would
hence would have breached the order of the WTM. In our view, the
are of the opinion that the appellant had a bonafide reason to close
in the instant case, we find that the appellant had complied with the
order of the WTM and had completely stopped trading in the equity
derivatives from March 24, 2017 onwards except for the trades in
question.
28. The contention that the appellant should have waited till the
July and August 2017 cannot be a ground to hold that the intention of
29. The finding that the appellant had only contacted one broker,
chats with Citigroup Global which brings out clearly that the price
quoted were for the Nifty index options expiring on December 28,
and Citigroup Global on July 31, 2017, it is clear that the quotes were
sought for options in the 11400 for expiry on December 28, 2017.
Further, the transcript of the calls between the appellant and the Bank
during the course of the hearing also brings out that quotes were
strikes. We find that the appellant not only obtained quotes from
MSICPL but also obtained quotes from Citigroup Global. Thus, the
finding of the AO that the appellant had contacted only one broker,
which mandates that quotes from more than one broker is required to
quotes.
31. The AO finds that the trade executed on July 31, 2017 is not
and August 10, 2017 were manipulative due to the fact that they have
been carried out at the significant discount from the fair value and
that too with only one counter party and further, the trades were
resulted in active concealment of fair price of the options and had the
finding nor any evidence to show that the appellant and MSF were
ever in contact. The mere fact that MSF knew the counter party was
conclusion that the appellant also knew that the counter party was
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MSF for the trades on all the three dates nor can it lead to a
stand was that they had no idea as to whether there was a one counter
party or multiple counter parties and only came to know for the first
33. The fact that the MSF came to know that the counter party
was the appellant through MSICPL does not mean that the broker
also intimated the appellant that the counter party was MSF.
of the appellant being in contact with MSF nor there is any evidence
to show that the price was negotiated between the appellant and
and MSF had entered into any mutual arrangement to execute the
35. On the other hand, there is ample evidence to show that the
quotes from one of its client MSF and provided the said quotes to the
The contention that the modus operandi, in the instant case, is the
Trading Pvt. Ltd. (supra) placed an order to sell 10000 options at Rs.
270/- per option and Kasam purchased an order to buy 10000 of the
orders matched and the trades were executed on the stock exchange
sell 10000 at Rs. 110/- per option within a few minutes. These
160/- per option was a profit to Rakhi and loss to Kasam. This
prices, etc. between the same parties. It was found that there was
the parties. In this light, the Hon’ble Supreme Court held that trades
PFUTP Regulations.
37. On the other hand, quotes were invited from a broker who,
in turn, contacted his client and quotes were obtained and intimated
to the appellant. Such quotes were accepted and thereafter the trades
manipulate the market will depend upon the intention of the parties
the bald contention that the modus operandi in the case of Rakhi
Trading Pvt. Ltd. (supra) matches with the modus operandi in the
present case.
stock exchange and executing the trades on the floor of the stock
In the absence of any criteria being framed, there was no occasion for
the AO to hold the trades of July 31, 2017 as genuine and the trades
dated October 28, 2022 is only procedural and sheds a light on this
40% to the fair value could not be faulted from October 28, 2022
41. Thus, the finding that the trades which are executed away
from the fair value. We also find that the AO has accepted the fair
value determined by the appellant and not the fair value determined
because it is away from the fair value. Thus, the finding that the
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trades are manipulative and violative of the SEBI Act and PFUTP
sustained.
42. We find that the respondent has not considered the evidence