PFUTP Regulations| Fraud Cannot Be Inferred From Every Regulatory Breach; SEBI Cannot Exercise “Unfettered Powers” To Decide Fraud: Supreme Court

On Regulation 2(1)(c) of the PFUTP Regulations, the Bench described the provision as “an illustration of inelegant legislative drafting”, cautioning that an excessively literal interpretation could render the definition of fraud so broad that it risks covering virtually every market act or omission.

The Court drew an important distinction between a regulatory infraction under SEBI’s circular framework and a finding of fraud under the PFUTP Regulations, holding that the latter requires a distinct and higher threshold. It observed that concentration of trading positions or violation of disclosure norms may indicate regulatory non-compliance, but such conduct cannot automatically be treated as fraudulent unless accompanied by material establishing manipulation of the securities market or conduct designed to induce investors to trade to their detriment.

A Bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan observed, “We have taken this forward by discussing the definition of fraud under Regulation 2(1)(c) of the PFUTP Regulations and making the following courses of action necessary in certain situations. The definition of fraud under the PFUTP Regulations uses the word ‘act’ and not ‘entry’. Though the definition is wide, it does not mean every expression, omission or concealment under the sky. This is because the expression ‘inducement’ as used in the provision is sine qua non to bring a transaction within the ambit of a fraudulent activity. In our opinion, it cannot be the intention of the PFUTP Regulations to give unfettered powers to decide the question of fraud. We find it apposite to purposively interpret Regulation 2(1)(c). In our considered view, both intention and act cannot be made into irrelevant factors for deciding fraud”.

“Regulation 2(1)(c) in our opinion, is an illustration of inelegant legislative drafting. We say so because any imputation of wrong doing is founded either on unlawful mindset or unlawful action or both. Unfortunately, Regulation 2(1)(c) deprives us of both by making them irrelevant for the purposes of establishing fraudulent conduct. We have no choice but to ask ourselves the question– what exactly is the basis for someone to fall under the definition of fraud because at the moment, anything and everything in the stock market that may induce someone to deal in securities, could very well be termed as fraud by the respondent”, the Bench further noted.

Senior Advocates Harish Salve, Ritin Rai appeared for the appellants and Senior Advocates Arvind P. Dattar, Pratap Venugopal appeared for the respondent.

The Bench delivered the judgment while partly allowing appeals filed by Reliance Industries Limited and others against orders passed by the Securities Appellate Tribunal and the Securities and Exchange Board of India in relation to trading in shares and derivatives of Reliance Petroleum Limited in 2007.

“At this juncture, we find it apt to quote Sandeep Parekh’s ‘Fraud, Manipulation and Insider Trading in the Indian Securities Market’ that in light of the broad definition of fraud under Regulation 2(1)(c), it is mathematically possible to prove that even walking, jogging and cycling are securities frauds”, it remarked.

Applying this standard, the Court found that while the appellants had violated SEBI’s position-limit and disclosure framework through indirect agency arrangements, the regulator failed to establish a separate act of market manipulation or fraudulent inducement attracting liability under PFUTP.

“In our opinion, it cannot be the intention of the PFUTP Regulations to give unfettered powers to the respondent authority to decide the question of fraud. We find it apposite to purposively interpret Regulation 2(1)(c). In our considered view, both mens rea and actus reus cannot be made into irrelevant factors for deciding fraud…”, it said.

“…Therefore, we may outline the following scenarios for a more purposive approach to Regulation 2(1)(c): i) In situations where injury due to wrongful act is established, i.e, inducement to deal in securities has caused the other person to be adversely affected and allowed the party accused of fraud to gain unlawful profits or avert ordinary losses at the former’s expense, there would be no requirement on the respondent authority to prove deceitful intention. In other words, where injury is impossible to be proved, the requirement of wrongful intention becomes mandatory. ii) Secondly, similarly, in situations where deceitful or mala fide intention to defraud and manipulate the securities market is clear from the blatant misconduct or attending circumstances that cogently establish wrongful intention, then proving the injury would not be required”, the Bench categorically observed.

Pertinently, the Bench holding that both intention and the underlying act cannot be treated as irrelevant while determining fraud, adopted a purposive interpretation of the PFUTP framework and clarified that every regulatory infraction in the securities market cannot automatically be elevated into a finding of fraud.

“There is no gainsaying that the definition is so broad and vague that there is a high possibility of false positives i.e., an activity may be incorrectly classified as fraudulent when it is actually legitimate. The consequences of such errors include reputational damage for the person alleged to have committed fraud, increased operational costs for such a person and potential loss of customers and business partners. It would also be relevant to take note of Regulations 3 and 4 of the PFUTP Regulations respectively, wherein, prohibitions are prescribed. A reading of both the Regulations would reveal that the prohibited act should be directed towards manipulating the market and indulge in the act of fraud for many purposes including to make a gain or to avoid a loss. Though, it appears that there is a contradiction between the definition and Regulations 3 and 4, yet a closer scrutiny and harmonious reading would throw clarity. We find that, in enactments having drastic effect on the economy, there should be no room for doubts and misinterpretation”, the judgment further read.

The Court accordingly set aside the findings of fraud and the disgorgement directions to that extent, while maintaining the regulatory consequences arising from the circular violations.

Cause Title: Reliance Industries Limited & Ors. v. The Securities and Exchange Board of India (Neutral Citation: 2026 INSC 585)

Appearances:

Appellants: Harish Salve, Ritin Rai, Sr. Advs., K. R. Sasiprabhu, AOR, Amey Nabar, Aditya Swarup, Swati N Jain, Vishnu Sharma A S, Ritika Sinha, Yasharth Misra, Ribhav Pande, Namrata Saraogi, Madhav Agarwal, Advocates.

Respondent: M/S. K Ashar & Co., AOR, Arvind P. Dattar, Sr. Adv., Pratap Venugopal, Sr. Adv, Abhishek Singh, Advocates.

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