Synopsis
In a judgment, the apex court said the loss suffered by the investor alone could establish fraud, although the loss was not quantifiable.
India fight against fraud The regime has entered a new phase, with a market regulator Sebi reset the legal bar for what is considered fraud in securities law.
This change builds on the recent Supreme Court decision in the case of Reliance Industries v. Sebi. In this case, the court ruled that the demonstration of harm to the investor is in itself a sufficient reason to establish fraud.
Where no harm or loss can be quantified, wrongful intent must instead be inferred from the surrounding circumstances.
It is this element of intention that Sebi applied in its ex parte interim order last week against Rajesh Exports. Although no direct loss to investors was established, Sebi held that investors were induced to invest based on a misleading picture of the financial condition of the gold refiner.
“Going forward, Sebi’s fraud investigations will be guided by the Supreme Court’s interpretation,” said a person familiar with the matter.
Shruti Rajan, financial regulation partner at Trilegal, said the court had “crystallized two principles: that you can’t prove intent, you have to prove harm, and where you can prove intent, harm is irrelevant.” As Sebi implements the court’s observations in the Rajesh Exports case, Rajan said “it is a sign that the regulator is seeking to create more consistency in precedent-setting in its enforcement process”.
Sandeep Parekh, managing partner of Finsec Law Advisors, said the court had “reaffirmed that intent and act of harm are necessary ingredients of fraud, and that a violation of position limits is itself a failure to report and not deception.” Drawing an analogy, he said driving above the speed limit of 60 km/h on a highway does not constitute attempted murder, “especially if no one has been hit and even more so when there are not even pedestrians on the highway. Conversely, hitting someone deliberately, even at 30 km/h, can still be murder.”
In its Rajesh Exports order, Sebi observed that financial statements of a listed company are the primary documents investors rely on to make informed decisions and must be free from any inaccuracies or misrepresentations – a principle he found Rajesh Exports to have violated, with revenues amounting to `15.15 lakh crore, or 99.80 per cent of the total revenues between FY21 and FY25, found to be falsely declared.
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