The Securities Appellate Tribunal (SAT) on Wednesday (December 13) overruled an INR 7 Lakh penalty imposed by the Securities and Exchange Board of India (SEBI) on Jio Financial Services (JFS). 

The case pertained to alleged manipulation in certain trades in long-dated Nifty options between the then Reliance Strategic Investments and Morgan Stanley France SA (MSF) back in 2017. 

It is pertinent to note that parent Reliance Industries hived off its financial services arm Reliance Strategic Investments into a separate entity called JFS. 

The penalty was quashed in response to an appeal filed by the newly floated arm against an order passed by the SEBI in June this year, which slapped a penalty of INR 7 Lakh on the company.

A bench comprising Justice Tarun Agarwala and Presiding Officer Meera Swarup quashed the fine saying that the markets regulator has not considered the evidence properly.

“… To hold a simple one way trade as manipulative when it is not a circular or reversal trade and in the absence of any shred of evidence of mutual arrangement with a motive to manipulate the market, the impugned order cannot be sustained and is quashed. The appeal is allowed. In the circumstances of the case, parties shall bear their own costs,” said SAT in an order. 

At the heart of the matter are the long-dated Nifty options with various strike prices placed by the company in December 2016, expiring on December 28, 2017. Subsequently, in March 2017, SEBI’s whole-time member (WTM) passed an order that debarred RIL from dealing in equity derivatives in the Futures and Options segment. 

The WTM, however, allowed the company to square off or close out open existing positions to comply with the order. Eventually, the then RSIL, supposedly fearing the risk involved in waiting till the expiry, closed out the open positions (including 11400 PE) and other long-dated positions on the stock exchanges.

“The AO (assessing officer) further held that MSF admitted to knowing the name of the counterparty, namely, the appellant, with respect to the trades executed on August 8, 2017…. Accordingly, the AO came to a conclusion that there was a collusion and synchronization of the trades between the appellant and MSF and there was a mutual arrangement between them which was violative of Regulations 3 and 4 of the PFUTP Regulations,” read the order. 

The trades, as per SEBI’s contention, were executed at a significant discount of 23% and 25% to the fair value determined by the NSE on August 8 and August 10.

In June 2023, SEBI ruled that JFS allegedly indulged in alleged violations of Prohibition of Fraudulent and Unfair Trade Practices regulations. The order had noted that JFS engaged in ‘manipulation of the price/premium of 11400 PE’ on the said two dates. The markets regulator also slapped a penalty of INR 7 Lakh on JFS in its judgement.

Meanwhile, the SAT ruled that there was no law that barred the execution of pre-negotiated deals on the stock exchange platform. On the discount aspect, the tribunal noted that no criteria was adopted to show that a ‘certain percentage of the discount would be fair and over and above that percentage, it would be manipulative.’

“… the finding that the trades which are executed away from the theoretical value as manipulative is erroneous and without any basis…. The difference in the determination of fair value by the appellant and by NSE varies by 10%. This is because the subjective inputs were different,” added SAT.