The SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 were enacted with a view to secure interests of investors and to prevent any kind of unfair and fraudulent trade practices which shall affect the integrity of the securities market. In SEBI vs. Kanaiyalal Baldevbhai Patel and Ors., Court observed that the object and purpose of this Regulation is to safeguard the investing public and honest businessmen. Its aim is to prevent exploitation of the public by fraudulent schemes and worthless securities through misrepresentation, to place adequate and true information before the investor, to protect honest enterprises seeking capital by accurate disclosure, to prevent exploitation against the 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
Some of the acts which are prohibited by these regulations are:-
- Creating a false appearance of trading of securities.
- Handling securities with a purpose of inflating or causing fluctuations in the market.
- Manipulating the price of securities.
- Use of false information to make a person handle securities.
- Publishing fake accounts with inflated figures in their financial report.
There is no statutory definition to the term “synchronized trading”. In absence of any statutory definition, courts have tried to define the term through case laws. According to the Oxford dictionary, the word “synchronized” means “Cause to occur or operate at the same time or rate”. In SEBI v. Pursarth Trading Company Private Ltd., Securities Appellate Tribunal observed that, “synchronized trade is a kind of transactions where the seller and buyer execute the trade for almost same quantity and price at the same time.” Simply put, synchronized trading is occurs when two or more people execute trade with a prior understanding with respect to:-
1. Time- Time of placing buy and sell orders is a crucial factor in determining whether the trading in question is synchronized or not.
2. Price- If the price of buy and sell orders is identical or close to one another, it raises a presumption that the trading in question is synchronized.
3. Quantity of the shares- If identical quantity of shares are bought and sold in subsequent transactions one after the other, it can be said that the transactions amount to synchronized trading. Quantity of shares also becomes important in determining the intention of parties. If huge volumes of shares are bought and sold, it can be inferred that there was an intention to manipulate the market, disturb the market equilibrium or create artificial volumes of trading.
Synchronized trading is not illegal per se. In cases where the parties decide to genuinely trade their shares, transfer beneficial interest and there is no intention to inflate or deflate the prices of shares, synchronized trading is very much legal. In Ketan Parekh v. SEBI, it was observed that, “genuine parties who intend to transfer beneficial interest in the trading stock and who undertake the transaction only for that purpose and not for rigging the market is not illegal and cannot violate the regulations”.
Types of Synchronized Trading
Synchronized trading is mainly of two types. These are:-
- Circular trading –Circular trading is a kind of trading where transactions take place between three or more individuals but the shares are ultimately held by the original owner. It is usually done to create false volumes of trade so as to portray a “rosy picture” of the company to the investors. For example, A, B, C, D and E are friends who hold shares in a company. A sells 100 shares B. B sells 100 shares to C and so on. At the end, E sells 100 shares back to A. In this way, there is no change in beneficial ownership takes place but an illusion in created in the market that the company is doing trade.
- Reversal Trades- Reversal trade takes place between two people wherein the seller ultimately buys same quantity of shares from the original purchaser. For example, A sells 100 shares of a company to B and then B sells those shares back to A. It can be done either through the same broker or a different broker.
Is synchronized trading illegal?
As stated earlier, synchronized trading is not per se illegal. Merely because parties entered into transactions with pre-determined quantity and price of shares does not make them illegal. As observed by the Securities Appellate Tribunal in SEBI v. Ketan Patekh, merely because a trade was crossed on the floor of the stock exchange with the buyer and seller entering the price at which they intended to buy and sell respectively, the transaction does not become illegal. A synchronised transaction even on the trading screen between genuine parties who intend to transfer beneficial interest in the trading stock and who undertake the transaction only for that purpose and not for rigging the market is not illegal and cannot violate the regulations. However, they become illegal if:-
- It results in circular trading- Where the seller ultimately gets back the same quantity of shares as being sold by him earlier.
- There is no change in the beneficial ownership- For instance, if there are two parties A and B. A sells 100 shares of X co. to B which are to be later sold back A. In this case, there is no transfer of beneficial ownership even because even after selling the shares, the intention of the parties is such that the shares will ultimately come back to A. In such cases, synchronized trading is illegal.
- It is executed to create false volumes of trade- For instance, shares of co. X are not being traded at all or are rarely traded. In such cases, investors may not be interested in buying shares of co. X. But the shareholders of the company decide to create false volumes of trade by entering into synchronized transactions. Though no actual trading takes place but an impression is created that shares of the company are frequently traded. In this way, an investor can be lured to invest in the company.
- It is executed with a view to inflate or deflate the prices of securities- For instance, the market value of shares of company X is Rs. 100 per share. A and B are the shareholders and A sells shares to B for Rs. 500 per share and B later sells them back at Rs. 500. This will create an impression in the market that the price of shares are going to be shot up very soon since people are willing to pay five times the actual price. By this, A and B successfully inflate the price of the securities.
- It is done with a view to manipulate the market or defeat market mechanism- If the trading is done with a view to manipulate the market in any way or to defeat the established market mechanism, it will be illegal. This includes entering in dubious trades, inflating or deflating the price of securities, trading done with a view of by-pass the regulatory mechanism or disturbing market equilibrium, etc.
  141 CLA 254 (SC)
 Regulation 3 and 4, SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market). 2003.
 https://en.oxforddictionaries.com/definition/synchronize Last accessed on 27-06-18.
- Quote paper
- Abhinav Mishra (Author), 2018, Synchronized Trading under SEBI (PFUTP) Regulations, 2003, Munich, GRIN Verlag, https://www.grin.com/document/436256