SEBI v. Rakhi Trading: synchronised reversal trades and fraud without market impact

Trades that were never meant to be real

In the futures-and-options segment, traders can match orders with such precision that a buy and a corresponding sell are executed almost simultaneously, between the same two parties, and then reversed within seconds. When such trades are done at prices that bear no relation to the prevailing market — showing large differences between the buy and sell legs that no genuine market movement could explain — the transactions are not real dealing at all. They are a device: money is moved from one account to another under the cover of apparently market-executed trades, while the option's underlying never moves to justify the prices.

That was the pattern SEBI found in trading in NIFTY options involving Rakhi Trading Pvt. Ltd. and others. The regulator treated the synchronised reversal trades as a fraudulent and unfair trade practice. The matter travelled through the Securities Appellate Tribunal and reached the Supreme Court, which heard SEBI's appeal and the connected civil appeals together. A two-judge bench of Justices Kurian Joseph and R. Banumathi delivered judgment on 8 February 2018, addressing the central legal question on which the appeals turned: whether such trades can be a manipulative or unfair practice when there is no proof that the market was actually moved or that the parties intended to move it.

The anatomy of a synchronised reversal trade

The Court began with the character of the transactions themselves. Where the same party is on both sides of a trade through a counterparty, where the trade is executed and reversed within seconds, and where the prices show large unexplained differences between the buy and sell legs against a backdrop of no genuine underlying price movement, the inference is that the trades were not entered into for any genuine investment or hedging purpose. They were pre-planned, reciprocal and deliberately loss-making for one side and gain-making for the other — the hallmarks of non-genuine dealing rather than ordinary market activity. Such trades, the Court held, are non-genuine transactions caught by the prohibition in Regulations 3 and 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations 2003.

Market impact and intent are not ingredients

The respondents' principal defence was that, whatever the appearance of the trades, SEBI had not shown that the market was actually manipulated or that the parties intended to manipulate it — and that without market impact or manipulative intent there could be no contravention. The Court rejected the argument squarely. For conduct to fall within the relevant prohibition it is not necessary that the parties intended to manipulate the market, or that the market was in fact manipulated.

The reasoning is that the regulatory prohibition is aimed at the character of the transaction, not only at its market consequences. A trade entered into with no genuine intention to deal — a trade whose only purpose is to transfer value under the guise of market dealing — is non-genuine, and non-genuine dealing of this kind is an unfair trade practice in itself. To require proof of actual market impact would let the device succeed whenever it was executed cleverly enough to leave the visible price undisturbed, which is precisely how such schemes are designed to operate. The Court therefore held market impact and manipulative intent to be unnecessary for this category of contravention.

Market integrity and market abuse

The Court located the prohibition within its larger purpose. The provisions — section 12A of the SEBI Act read with the PFUTP Regulations — are aimed at preserving the integrity of the securities market and at preventing market abuse. The market depends on the confidence that the trades reported on the screen are genuine, that volumes and prices reflect real dealing, and that the order book is not being seeded with fictitious transactions. Synchronised reversal trades corrode exactly that confidence, whether or not any third party can be shown to have been moved by them on the day. Reading the prohibition to require market impact would defeat its protective object; the Court read it instead to reach the non-genuine transaction as such.

The reasoning also disposes of a subtler defence that recurs in option-segment matters. Respondents often argue that, because options are a zero-sum instrument and the reversal washed out within seconds, no investor was harmed and no genuine market price was distorted, so the conduct is at worst a private arrangement of no regulatory concern. The Court's answer is that the regulatory interest is not confined to demonstrable harm to an identified investor. The prohibition protects the market as an institution — the reliability of its reported volumes and prices, and the assurance that what appears as dealing is dealing. A transaction designed from the outset not to be a genuine deal injures that institutional interest by the very fact of its fictitiousness, independently of whether a particular counterparty in the wider market can be shown to have lost money because of it. The contravention is complete when the non-genuine character of the dealing is established.

The outcome, and a note on the bench

SEBI's appeal was partly allowed. The Court upheld the finding of a fraudulent and unfair trade practice against the traders who had entered into the synchronised reversal trades. On the position of the brokers, however, it found the evidence insufficient to fix them with liability — a calibration consistent with the broader securities jurisprudence, which distinguishes the originators of a manipulative scheme from intermediaries whose involvement is not shown to be complicit.

A word of caution is warranted on the reasoning. The matter was heard by a two-judge bench, and commentary on the judgment records a divergence in approach between the two judges on aspects of the analysis of the synchronised, wash-trade-style transactions. The operative result — the contravention upheld against the traders, and the holding that market impact and manipulative intent are not necessary ingredients — represents the Court's conclusion. But the case is better described as establishing those propositions through the bench's disposal than as a single seamless ratio, and a reader relying on a particular passage should keep the partial divergence in view.

The point is not merely academic. Where a two-judge bench reasons along somewhat different lines to a shared result, later courts and tribunals must be careful to identify what the bench actually decided together, as distinct from observations that reflect one judge's particular route to the conclusion. For Rakhi Trading the safe and widely accepted reading is that the bench held synchronised reversal trades of this character to be a fraudulent and unfair trade practice, and held that neither actual market impact nor a proven intention to manipulate is a necessary ingredient of that contravention. Those propositions have been treated as settled in the enforcement practice and the appellate jurisprudence that followed. A practitioner citing the case for some finer point about the precise mental element, or the exact threshold at which ordinary option trading becomes non-genuine, should go back to the report itself and weigh how far the two judges spoke with one voice on that narrower question.

Why the decision matters

Rakhi Trading is among the most cited authorities on what makes a securities transaction "non-genuine" and on the reach of the PFUTP Regulations into trading patterns that leave the visible market undisturbed. Its central contribution — that deliberate, pre-planned, loss-making reversal trades are an unfair practice in themselves, without proof of market impact or manipulative intent — closed off the most common defence to synchronised-trade enforcement. Together with the established standard of proof, under which manipulative conduct may be inferred to the preponderance of probabilities from the totality of circumstances, it equips SEBI to act against schemes that move value through fictitious dealing while leaving the price on the screen exactly where it was.

Related on Valkya

• SEBI v. Kishore R. Ajmera: preponderance of probabilities and inference from circumstance
• N. Narayanan v. SEBI: the liability of directors for market wrongdoing
• SEBI v. Rashmi Saluja (Religare): insider trading and disgorgement

Sources

1. Supreme Court Observer — case background and analysis: https://www.scobserver.in/
2. LiveLaw — SEBI v. Rakhi Trading and synchronised reversal trades: https://www.livelaw.in/
3. IndiaCorpLaw — market impact, intent and the PFUTP Regulations: https://indiacorplaw.in/
4. Bar & Bench — synchronised trades and FUTP liability: https://www.barandbench.com/
5. Securities and Exchange Board of India (sebi.gov.in): https://www.sebi.gov.in/