SEBI learns fast, but has the Supreme Court been a good teacher? The Reliance judgment and how it shaped the Rajesh Exports order

By Natasha Aggarwal, Amol Kulkarni, and Bhavin Patel

Welcome to The Bridge! Regulatory orders shape markets, govern disputes, and test the rule of law, yet their quality rarely gets the scrutiny it deserves. The Bridge is TrustBridge’s window into the quasi-judicial work of India’s regulators: how they decide, and how they could decide better.

On 29 May this year, the Supreme Court issued its judgment in Reliance Industries Limited v. Securities and Exchange Board of India (the “Reliance judgment”).1 The judgment is significant for many reasons (for example, it distinguishes between valid hedging and fraud). In this post, we focus on its sharpening of the definition of “fraud” in Regulation 2(1)(c) of the Prohibition of Fraudulent and Unfair Trade Practices Regulations, 2003 (“PFUTP Regulations”). We choose this point of focus since this definition has long been criticised as being too open-ended and over-inclusive,2 which is a matter of concern as it sits at the core of the market regulator’s enforcement actions in market abuse matters.

The Reliance judgment’s impact is already visible: the Securities and Exchange Board of India’s (“SEBI’s”) ex-parte interim order dated 3 June in respect of Rajesh Exports Limited (“REL”) and Rajesh Mehta (the “Rajesh Exports order”) offers an early glimpse into how securities enforcement on market abuse may evolve.

First, we examine how the Supreme Court has reinterpreted the concept of fraud under Regulation 2(1)(c). Then, we analyse the Rajesh Exports order as an early example of how SEBI may operationalise the framework articulated in the Reliance judgment.

Under the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995 (the “1995 Regulations”), fraud was defined largely along the lines of Section 17 of the Indian Contract Act, 1872: that is, acts committed with intent to deceive another person or induce them to enter into a contract.

In 2003, SEBI significantly expanded the definition of fraud through Regulation 2(1)(c) of the PFUTP Regulations (which replaced the 1995 Regulations). The term now came to include “any act, expression, omission or concealment” committed while dealing in securities, “whether in a deceitful manner or not”, in order to induce another person to deal in securities. This definition has not been changed since 2003.

In the Reliance judgment, the Court identified three features of this definition:

• First, a deceitful or mala fide intention is not required,

• Second, inducing another person to deal in securities is required, and

• Third, proof of injury is not required.

Therefore, a bare reading of Regulation 2(1)(c) would suggest that inducement is the only mandatory element of the definition of fraud. Sandeep Parekh notes that this definition is “meaningless, as it requires neither deceit nor harm.”3

The Court quoted Mr Parekh’s statement, and agreed with its own observations in SEBI v. Kanhaiyalal Baldevbhai Patel,4 that fraud may be very difficult to define, but went on to state “such difficulty should not result in such a legislation that would cover every act, expression, omission or concealment under the sky.”5 It criticised Regulation 2(1)(c) as an “illustration of inelegant legislative drafting” and found it necessary to ask the question: “[W]hat 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.”6

The Court then wades into the weeds of purposively interpreting Regulation 2(1)(c), and articulates the following requirements to establish “fraud” under the PFUTP Regulations:

• An injury must be established:

  • The injury can be established by showing ‘inducement to deal in securities’,

  • The inducement must be such as “...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”,

  • If inducement of this sort is proved, then “there would be no requirement on the respondent authority to prove deceitful intention”,

  • Alternatively, injury can also be established by showing ‘manipulation’: inducement need not be shown “once the factum of manipulation” is established, although this requires a higher standard of ‘preponderance of probabilities’ than inducement;

• But where “injury is impossible to be proved, the requirement of wrongful intention becomes mandatory”:

  • Where “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.”

Finally, the Court carves out an exception to this approach for the limited set of circumstances covered by the case of SEBI v. Rakhi Trading (P) Ltd (“Rakhi Trading case”).7

We now examine whether the Rajesh Exports order, published a mere five days after the Reliance judgment, satisfies this newly-minted re-defined version of fraud.

The Rajesh Exports order alleges that REL, Rajesh Mehta, and certain related entities engaged in a scheme that materially misrepresented the company’s financial position and operations, and prima facie finds violations of several legal provisions, including the PFUTP Regulations.

The Rajesh Exports order responds to the Reliance judgment in Parts C (Dealing in securities and price volume impact) and D (Prima facie findings against Noticees). Part D specifically calls out the Reliance judgment, describes how it has clarified the interpretation of fraud, and goes on to argue that the order has satisfied the threshold prescribed in the Reliance judgment. Prior to the Reliance judgment, SEBI might have proceeded directly from allegations to a conclusion of fraud under the PFUTP Regulations.

We examine whether the Rajesh Exports order does indeed meet the requirements of the Reliance judgment. Note that this is an interim order, based on SEBI’s prima facie findings. As a result, the Rajesh Exports order need not conclusively establish that fraud has taken place. It just has to establish that there is enough evidence to justify interim measures.

While the Rajesh Exports order seems to fulfil the requirements of the Reliance judgment on the face of things, it can be argued that it does not show that the inducement “allowed the party accused of fraud” (i.e., REL and Rajesh Mehta), “to gain unlawful profits or avert ordinary losses at the former’s expense.” SEBI argues that the increase in the number of shareholders and the fall in the share price shows that investors were adversely affected; but it does not show how REL or Rajesh Mehta profited or avoided losses at the investors’ expense.

This may perhaps be expected, since this is an interim order based only on prima facie findings.

The significance of the Reliance judgment extends beyond the facts of a dispute that began nearly two decades ago. At one level, the judgment represents an important attempt to impose clarity in the previously ‘meaningless’ definition of fraud under the PFUTP Regulations: the Court has raised the analytical burden that must be satisfied before a finding of fraud can be established. SEBI must now prove either injury or intention in the manner the judgment sets out. In that sense, the Reliance judgment is a welcome development. However, we suggest the Court has missed two important aspects:

• It has left open the question of how SEBI must demonstrate that the ‘induced person’ was ‘adversely affected’ or how the accused person gained “unlawful profits or avert ordinary losses at the former’s expense”; SEBI has often argued that concepts such as ‘amount of loss or gain caused to investors’ are impossible to establish, and the possibility exists that it will use similar logic to argue that it cannot make such calculations in the case of PFUTP violations; and

• It has left the definition of ‘manipulation’ open; consequently, future litigation is likely to focus arguments over whether ‘manipulation’ has occurred, which could have been avoided had the Court defined this term clearly in the Reliance judgment. One way in which this could have been done would be to set down that ‘manipulation’ means ‘market manipulation’, that is, broadly speaking, some actions that demonstrably affect price discovery in the market. Not doing this leaves wiggle room for the regulator to get away with self-concocted definitions of manipulation.

- The authors are researchers at TrustBridge, and would like to thank Renuka Sane for her feedback.

CITATION

Natasha Aggarwal, Amol Kulkarni, and Bhavin Patel, 2026. “SEBI learns fast, but has the Supreme Court been a good teacher? The Reliance judgment and how it shaped the Rajesh Exports order”, The Bridge, TrustBridge Rule of Law Foundation

Thanks for reading The Bridge! Subscribe for free to receive new posts and support our work.

Website | LinkedIn | YouTube

Reliance Industries Limited v. Securities and Exchange Board of India (Civil Appeal No 4015 of 2020).

Sandeep Parekh, Fraud, Manipulation and Insider Trading in the Indian Securities Markets (5th edn, LexisNexis 2025).

Securities and Exchange Board of India v. Kanhaiyalal Baldevbhai Patel, (2017) 15 SCC 1.

Securities and Exchange Board of India v. Rakhi Trading (P) Ltd., (2018) 13 SCC 753.