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No such thing as innocent fraud: Key implications of the Supreme Court decision in Reliance Industries Ltd. and Ors. v. SEBI

Summary: The Supreme Court recently ruled[1] on SEBI’s case of fraud against Reliance Industries Ltd. (“RIL”) and twelve of its agents for trades in respect of Reliance Petroleum Ltd. (“RPL”) in 2007. Its emphasis on establishing intent when determining the elements of fraud in Regulation 2 (1) (c) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (“PFUTP Regulations”), has implications for SEBI’s anti-fraud enforcement. This blog examines the fallout of the judgement.

Background

  • RPL, a 75% subsidiary of RIL, was listed in 2006, and its share price had been rising since. In 2007, RIL decided to sell 5% (22.5 crore shares) of its holding in RPL to raise funds. During November 1-6, 2007, RIL first created open short-sell positions in November 2007 RPL futures for 9.92 crore RPL shares, through its twelve agents. This was followed by sale of around 20 crore RPL shares by RIL in the cash segment, on four days between November 6 and 29, 2007, of which 1.95 crore shares were sold in the last ten minutes of trading on November 29, 2007. As per SEBI, this reduced the settlement price of the November 2007 RPL futures contracts, which was the volume weighted average price of the last half an hour trade in the cash segment on November 29, 2007. RIL, through its twelve agents, held open short positions for 7.97 crore RPL shares on November 29, 2007, and allegedly unlawfully gained around INR 513.12 crore from a reduced settlement price.
  • SEBI ordered disgorgement of INR 447.27 crore made from settlement of open interest illegally procured beyond the prescribed limits in SEBI Circular, dated November 2001, on “Scheme for introduction of Single Stock Futures and the Risk Containment Measures”, and related NSE Circular, dated November 7, 2001, holding violation of Section 18A of the Securities Contracts (Regulation) Act, 1956 (“SCRA”). The Court struck down SEBI’s finding of fraud and consequent disgorgement, and upheld the penalty levied for violation of the 2001 SEBI Circular.

The Supreme Court decision

  • The Supreme Court rejected SEBI’s findings,  that (i) the agency agreements were a fraudulent and deceptive device, used to corner open positions in the November 2007 futures segment of RPL to manipulate the futures market, (ii) the 9.92 crore open positions in the November 2007 futures segment of the RPL stock were not valid hedges, or that (iii) RIL dumped 1.95 crore in the last 10 minutes of trading in the cash segment on the November 2007 futures settlement date to depress the price and increase profits in the futures segment.
  • On each issue, the Court took into account the explanation provided by the appellants as reasonable, and concluded against preponderance of probability of fraud.
    • On alleged cornering due to around 40.10% of the open positions held by RIL agents, the Court found that while this was a dominant position, it was also necessary if RIL were to sell 5% of RPL shares. It also noted that 9.92 crore futures positions were less than half of the underlying 22.5 crore shares exposed to the risk of price movement in the cash segment. Importantly, since no investors were induced to deal in securities due to the open market positions of RIL agents and SEBI had not proved any manipulation due to such cornering, no fraud was found.
    • On the validity of the hedge, the Court accepted that the extra open positions (3.47 out of 7.97 crore) which continued to be held by RIL even when only 4.5 crore out of 22.5 crore shares were left to be sold in the cash segment, were an anticipatory hedge against possible drastic decreases in RPL share prices. The Court also noted that the absence of a hedging policy, or for a perfect hedge in proportion to the exposure, did not flow from any specific legal requirement, and did not render RIL’s or its agents’ trades fraudulent. Thus, RIL’s open positions were found to be justified.
    • The Supreme Court found itunlikely that RIL as promoter and 75% shareholder of RPL would depress its price and cause its own shareholding in RPL to be devalued. The trading pattern also showed that RIL never sold below INR 208 per share, and sold 1.95 crore shares only when prices unexpectedly rose to INR 224.70 at 3:21pm on November 29, 2007. Therefore, RIL “thought it fit to discount its sell price to ensure that its order gets fulfilled during the short phase of price hike caused by unknown factors”. Further, others had also sold 1.06 crore shares at these prices at that time. Had it been appellant no. 1’s intention to depress the price, it would have sold far more than 1.95 crore shares at prices below INR 210/- per share. Therefore, as per the Supreme Court, the evidence did not indicate fraudulent sale of shares by RIL to depress the settlement price for RPL in the futures segment, as alleged.[2]

Key implications of the Supreme Court decision

Does it matter that the person knew? The role of intent or scienter in proving “fraud”

  • The main significance of the ruling lies in identification of intent as the common factor across all elements of fraud in the PFUTP Regulations. While taking a purposive approach to interpreting Regulation 2(1)(c) of the PFUTP Regulations,[3] the Court has reinforced the essential element of inducement, which by its nature calls for an element of scienter or knowledge of consequences[4], and also granted minimum weightage[5] to “deceitful mens rea” and “injurious actus reus”. Even where the mandatory element of inducement is excused in line with precedent like Rakhi Trading[6] , it has been replaced by a requirement to establish manipulation, sufficiently and cogently, which in turn would provide “conclusive insight into the intention of the party seeking to defraud the market.”.[7] This implies that where inducement cannot be proved for some reason, injury[8] or deceitful intent[9], or both, still need to be proved.
  • The Court has also made it clear that “motives and suspicions can in no way be the only basis for holding that there was fraudulent intent”.[10] Therefore, just because someone stands to gain from an act, it would not mean there was inducement or intent to commit the act in violation of the PFUTP Regulations. “Knowingness” is more than motive.

High preponderance of probability

  • The Court has held that proof of inducement, or manipulation otherwise, requires a higher degree of preponderance of probability during evidence assessment.[11] The Court has further observed that the degree depends on “the mind of the reasonable man who is considering the particular subject matter”, and would be proportionate to the subject matter.[12] While stopping short of conflating  the requirement for proof of “reasonable doubt” for civil and criminal cases, the Court cited its decision in M/s Alupro Building Systems Pvt. Ltd. v. Commissioner of Central Excise Bangalore-II, Civil Appeal No. 8030 of 2010 (relying on Bater v. Bater, reported in [1951] P. 35), to imply that what is “reasonable” can vary depending on the subject matter and other factors, but is not necessarily more leniently measured in civil than in criminal cases.

Potential fraud is not the same as fraud[13]

  • While acknowledging that concentration of open market positions may have given RIL the ability to manipulate the market, the Court held that there was no actual fraud, in the context of the reasonable justification of hedging, and the absence of any inducement due to such concentration.[14]

Non-disclosures are not all tantamount to fraud

  • The Court refused to stretch the non-disclosure of position limits reached by RIL, or of the identity of persons acting in concert, to imply fraud, even though it upheld the monetary penalty levied on such non-disclosure. It was observed that there was no inducement of others to deal in RPL shares due to non-disclosure, and exceeding position limits was not in violation of the SCRA. Non-disclosures are not automatically fraudulent unless they induce investors in violation of the PFUTP Regulations or can otherwise be closely tied to fraud. This applies even where the non-disclosure is intentional, or held to circumvent provisions of Circulars, and subjected to penalty therefor.

Conclusion

  • For market participants, the Reliance ruling indicates that the “reasonable man” remains defensible.[15] Reasonability in the context of trading behaviour includes a broad array of actions, but is vitiated by inducement of trades, and creating artificial markets, which become unlawful. The decision also highlights the importance of detailed submissions to the regulator during investigations and thereafter – justifiable commercial decisions have a better chance of being termed as “reasonable” and not intended to create an artificial market.
  • SEBI may, on the other hand, more actively enforce preventive provisions addressing precursors to fraud. Therefore, non-disclosures and diligence lapses may now see prompt administrative warnings or deterrent penalty, where fraud cannot be established with high preponderance of probability but is likely.
  • Further, SEBI may apply subject-matter based flexibility in determining fraud, using the “preponderance of probability” compass. With the proposed Securities Market Code differentiating serious market abuse with criminal consequences from other violations, the Supreme Court’s emphasis on this subject-matter based evidentiary standard is expected to be tested at every stage of securities law enforcement.

[1] Reliance Industries Ltd. and Ors. v. SEBI, Civil Appeal No. 4015 of 2020, SC decision dated May 29, 2026.

[2] This is in line with SAT’s rulings which have consistently held that change in Last Traded Price per se is not fraudulent, and collusion with counterparties would be required to prove fraud on its account. SEBI’s cases against the relevant SAT rulings are pending before the Supreme Court in SEBI v. Bharat Natwarlal Patel (C.A. No. 000007 – / 2024 Registered on 02-01-2024), SEBI v. Nishith M. Shah HUF and Ors. (C.A. No. 002794 – 002795 / 2020).

[3] Para. 175 of the SC judgement.

[4] The first part of the definition of “fraud” in Regulation 2 (1)(c) of the PFUTP Regulations reads as follows:- ““fraud” includes any act, expression, omission or concealment committed whether in a deceitful manner or not by a person or by any other person with his connivance or by his agent while dealing insecurities in order to induce another person or his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss, and shall also include—”. [emphasis supplied]

[5] Para. 171 of the SC judgment.

[6] SEBI v. Rakhi Trading (P) Ltd., (2018) 13 SCC 753.

[7] Para. 177 of the SC judgement.

[8] Para. 195 of the SC judgement. “However, the factum of manipulation still needs to be established, which can be garnered only from the effects of the actions by the person alleged to have defrauded or manipulated the market price or induced the other party”.

[9] Para. 219 of the SC judgement. “This makes it all the more necessary for the respondent authority to prove deceitful intention from the beginning that would lead to a pre-planned act or omission.”. [emphasis supplied]

[10] Para. 207 of the SC judgement.

[11] Para. 180 of the SC judgement.

[12] Para. 179 of the SC judgement.

[13] Para. 193 of the SC judgement. “In a case such as the present matter where the 40.10% share of the appellant no. 1 in open interests was validly justified by the consideration of hedging, we may look at the concentration in positions as only giving the ability to manipulate. It bears no clarification that concentration by itself cannot be considered to be manipulation.”.

[14] Para. 194 of the SC judgement.

[15] In a similar case in AKG Securities & Consultancy Ltd. v. Securities & Exchange Board of India, 2025 SCC OnLine SAT 399 , SAT allowed a challenge to SEBI’s order which alleged price manipulation in the F&O segment due to price and volume manipulation in the last 40 minutes of trades in the cash segment, as collusion amongst counterparties for trades in the cash segment could not be established, and mere trading pattern of trades above Last Traded Price was insufficient to prove fraud.