Breach Of Position Limits Is A Regulatory Infraction, Not Automatic Market Fraud; Supreme Court Sets Aside Reliance RPL Disgorgement Order

"A breach of position limits cannot, by itself, constitute ‘fraud’ under the PFUTP Regulations. Excess acquisition at market price may at best be a regulatory violation, not fraud. Conflating the position-limit breach with fraud or manipulation is a clear misdirection in law." Supreme Court, in a landmark verdict dated May 29, 2026, held that a mere breach of disclosure requirements regarding position limits in the derivatives market constitutes a regulatory infraction and cannot be equated with market manipulation or fraud under the PFUTP Regulations.

A bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan set aside the majority judgment of the Securities Appellate Tribunal (SAT) which had ordered the disgorgement of over Rs. 447 crore from Reliance Industries Limited (RIL), observing that SEBI failed to cogently establish the element of price manipulation.

The dispute originated from RIL's 2007 decision to divest a 5% stake in its subsidiary, Reliance Petroleum Ltd (RPL). To hedge against potential price declines during the sale of 22.50 crore shares in the cash segment, RIL engaged 12 agents to take short positions in the November 2007 futures segment. SEBI alleged that RIL cornered nearly 93% of the open interest through these agents to depress settlement prices and earn illegal profits, leading to a WTM order for disgorgement and a subsequent 2:1 majority split decision by the SAT.

The primary question before the court was whether the use of agency agreements to bypass position limits constituted a "fraudulent and manipulative device" under the PFUTP Regulations. The court was also called upon to determine if RIL’s trades qualified as valid hedges and whether the sale of 1.95 crore shares in the final 10 minutes of trading on the settlement date amounted to intentional price manipulation.

Court Distinguishes Between Disclosure Lapses And Market Fraud

The Supreme Court emphasized that the 2001 SEBI Circular governing single-stock futures did not impose an absolute ban on exceeding position limits but rather established a disclosure-centric regime. The bench noted that while the 1999 Circular for index futures expressly mentioned "persons acting in concert," the 2001 Circular was silent on this aspect, creating a regulatory gap that RIL attempted to exploit through agency agreements.

"The 2001 SEBI Circular nowhere provides that the transgression of the position limits would have the effect of voiding the contract in derivatives. The only consequence provided for is a penalty. What is not expressly stated to be a consequence of a violation cannot be read into the Circular by implication."

Principles Of Indirect Violation Applied To Position Limits

The Court applied the established legal principle that "what cannot be done directly, cannot be done indirectly" to hold RIL liable for the disclosure breach. The bench observed that by establishing a principal-agent relationship with 12 entities to take positions significantly higher than the individual client limits, RIL violated an implicit duty to disclose trades that aggregate to a breach of the regulatory tool.

"The appellant no. 1 cannot shield its actions behind the argument that the 2001 SEBI Circular did not provide any position limits for ‘persons acting in concert’. The very stipulation of position limits in the Circular creates an implicit duty to disclose such trades that may be in breach of such limits."

Scope Of 'Fraud' Under PFUTP Regulations

While analyzing Regulation 2(1)(c) of the PFUTP Regulations, the Court noted that the definition of "fraud" is inelegantly drafted as it appears to dispense with both mens rea (deceitful intent) and actus reus (injury). However, the bench clarified that such a broad interpretation cannot be used to classify every legitimate market activity as fraudulent, especially when dealing with enactments that have drastic effects on the economy.

"Inducing another person to deal in securities remains a strict requirement for establishing fraud. It cannot be the intention of the PFUTP Regulations to give unfettered powers to the respondent authority to decide the question of fraud based on anything and everything in the stock market."

Inducement Essential Unless Manipulation Is Cogently Proved

Relying on the precedent in SEBI v. Rakhi Trading (P) Ltd., the Court held that while inducement may be presumed if the factum of manipulation is established, the burden of proof for establishing such manipulation is higher when no direct inducement is proved. In the present case, the Court found that the settlement of futures through a cash system meant that no third parties were induced to deal in securities after the positions were closed.

"Where the respondent authority is unable to show and prove inducement of third parties, it is necessary that the device or tactic which the respondent authority deems to be manipulative must be such that there could be no other explanation but that of fraud."

Validity Of Hedging In Derivatives Market

The Court rejected SEBI’s contention that RIL’s positions were "naked hedges" or speculative in nature. It held that hedging is a commercial tool for de-risking and does not require a "perfect" 1:1 ratio between the hedge and the underlying stock. The bench noted that RIL’s short positions covered less than half of its total exposure in the cash segment, supporting the argument that the trades were bona fide risk mitigation efforts.

"There is no legal requirement to ensure a 1:1 ratio of hedges to stock quantity. While a perfect hedge may be desirable from the point of view of monitoring, the economics of perfect hedging may not always be sound. Hedging includes anticipatory hedging as well."

Higher Burden Of Proof To Establish Price Manipulation

Regarding the allegation that RIL "dumped" 1.95 crore shares in the last 10 minutes to depress prices, the Court found that SEBI’s case was founded upon mere suspicion rather than material evidence. The bench observed that RIL’s sell orders were placed at Rs. 210, which was above its previous average selling price, and that the sudden price hike to Rs. 224 was driven by unknown market factors which RIL merely sought to capitalize on.

"Motives and suspicions can in no way be the only basis for holding that there was fraudulent intent. If the intention was to depress the prices, RIL would have placed sell orders at prices lower than Rs. 210/- per share. Selling huge blocks of shares during the last 10 minutes, though not ideal, is not illegal."

Promoter's Stake Makes Intentional Devaluation Unlikely

The Court highlighted the commercial implausibility of a promoter intentionally devaluing its own company. It noted that RIL continued to hold a 70% stake in RPL, and any artificial decrease in share price to gain in the futures segment would have resulted in a far greater loss in the valuation of its remaining multi-billion rupee shareholding.

"For a promoter, especially one with 70% holding, it is quite unlikely that it would even allow such decrease in valuation, let alone actively causing the artificial decrease in prices. The trade-off to gain profits in the futures segment seems highly unlikely to us."

The Supreme Court concluded that while RIL was liable for a penalty regarding the non-disclosure of its aggregate positions under the 2001 SEBI Circular, the charge of fraud and market manipulation under the PFUTP Regulations was unsustainable. The Court set aside the disgorgement order and directed the refund of Rs. 250 crore deposited by RIL, while upholding the basic penalty for the regulatory disclosure infraction.

Date of Decision: 29 May 2026