Supreme Court Distinguishes Regulatory Violations from Securities Fraud under the PFUTP Regulations in Reliance Industries Case

The Supreme Court of India, in Reliance Industries Limited and Ors. v. SEBI, 2026 INSC 585 (Judgment, which can be viewed by clicking on this link), delivered on May 29, 2026 by a bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan, has rendered a significant judgment on the scope of securities fraud under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations). The Judgment sets aside the majority decision of the Securities Appellate Tribunal (SAT) and SEBI’s disgorgement order of INR 447.27 crore against Reliance Industries Limited (RIL). The Supreme Court’s principal findings are discussed below:

1. Factual Background

Reliance Petroleum Limited (RPL) was a 75% subsidiary of RIL in 2007. On March 29, 2007, RIL’s board authorised the raising of INR 87,000 crore, including through divestment of investments. Pursuant thereto, RIL decided to divest 5% (22.50 crore shares) of its shareholding in RPL.

For this purpose, RIL entered into agreements with 12 independent entities, pursuant to which such entities took short positions equivalent to 9.92 crore RPL shares in the November 2007 futures contracts. These entities acted on RIL’s instructions, transferred the entire profits to RIL and retained only a commission. In addition to the 9.92 crore futures positions by the aforesaid 12 entities, RIL sold 20.29 crore shares in the cash segment during November 2007, including 1.95 crore shares during the last approximately 10 minutes on the settlement date. The aggregate realisation from these transactions was INR 5,013 crore (INR 4,500 crore from the cash segment and INR 513 crore from the futures segment).

SEBI alleged, inter alia, that RIL had breached the position limits prescribed under the 2001 SEBI Circular, employed a fraudulent and manipulative scheme in violation of the PFUTP Regulations, artificially depressed the settlement price of RPL futures, and entered into benami transactions. The Whole Time Member (WTM) held that RIL had violated Section 12A of the SEBI Act, 1992 read with Regulations 3, 4(1) and 4(2)(e) of the PFUTP Regulations, and consequently directed disgorgement of INR 447.27 crore. The findings were subsequently upheld by SAT through a 2:1 majority decision.

2. Whether the Agency Agreements Constituted a Fraudulent Device

The Supreme Court held that the agreements created a principal-agent relationship and that RIL could not avoid its disclosure obligations merely by routing transactions through agents. However, the Court distinguished regulatory non-compliance from fraud under the PFUTP Regulations.

The Court observed that the 2001 SEBI Circular required disclosure where prescribed position limits were exceeded but did not impose an absolute prohibition on exceeding such limits. While non-disclosure could attract the penalty contemplated under the Circular, it could not, by itself, justify a finding of fraud under the PFUTP Regulations. The Court also rejected SEBI’s contention that transactions exceeding the prescribed position limits became void under Section 18A of the Securities Contracts (Regulation) Act, 1956 (SCRA), and held that the mere use of multiple agency agreements to exceed the position limits could not, without more, attract Regulations 3 and 4 of the PFUTP Regulations.

The Court also examined the definition of “fraud” under Regulation 2(1)(c) of the PFUTP Regulations, observing that while the first limb of the definition does not expressly require fraudulent intent, the second limb is founded upon the concept of “inducement”, which necessarily imports such intent. Relying upon SEBI v. Kanhaiyalal Baldevbhai Patel (2017) 15 SCC 1, the Court reaffirmed that inducement remains the sine qua non for establishing fraud. The Court further noted that, as held in SEBI v. Rakhi Trading (P) Ltd. (2018) 13 SCC 753, inducement need not be independently established where manipulation itself has been cogently proved.

3. Whether the Agreements Were Used to Corner Positions for Manipulation

The Court answered this issue in the negative. It held that SEBI’s methodology for calculating concentration was fundamentally flawed, since it considered only the November 2007 RPL futures contracts rather than the aggregate derivative positions contemplated under the 2001 SEBI Circular. Applying the correct methodology, the concentration worked out to 40.10%, as opposed to the 93.60% determined by SEBI.

While the revised calculation still exceeded the prescribed position limits, the Court held that concentration or cornering, by itself, does not amount to market manipulation. Rather, there must be cogent evidence establishing that the cornering was undertaken with the intention of manipulating the market. The ability to manipulate cannot, by itself, be equated with actual manipulation.

4. Whether the Sale of 1.95 Crore Shares During the Last 10 Minutes Constituted Price Manipulation

The Court rejected SEBI’s theory of price manipulation. It noted that the evidence demonstrated that RIL had never sold shares below INR 208 and, when the market price fell to INR 190, it refrained from selling altogether. Instead, the impugned sale occurred only after an unexpected increase in price during the final approximately 10 minutes of trading.

The Court further observed that, had RIL intended to artificially depress the settlement price, it could have sold a substantially larger quantity of shares or placed orders below INR 210. Further, since RIL continued to retain an approximately 70% shareholding in RPL, any deliberate depression of the settlement price would have adversely affected its own substantially larger residual holding. Accordingly, the Court held that motives and suspicions, without supporting evidence, cannot constitute the basis for a finding of fraud.

5. Decision and Significance

Ultimately, the Supreme Court set aside the SAT judgment insofar as it related to violations of Regulations 3 and 4 of the PFUTP Regulations and quashed the disgorgement order. Consequently, RIL became entitled to a refund of the INR 250 crore deposited in the Investor Protection Fund. However, the penalty imposed for violation of the 2001 SEBI Circular relating to disclosure of position limits was upheld.

Overall, the Judgment draws an important distinction between regulatory non-compliance and securities fraud under the PFUTP Regulations. It reaffirms that inducement remains central to establishing fraud and clarifies that regulatory violations, while capable of attracting statutory penalties, cannot automatically be elevated to fraudulent or manipulative conduct in the absence of cogent evidence establishing the requisite manipulative intent or effect.