2013 (11) TMI 1393 - AT - Companies Law

Contravention of Regulations 3(a), (b), (c) and (d) and Regulation 4(1) of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 - Trading done on account of Appellant no. 1 in such a way that net quantity at end of day was zero - Before placing orders for Central Bank of India, shares were purchased in account of Noticee no. 1 and sold to match the orders of CBI, thereby, earning undue profits at cost of CBI and its customers - Held that - 1995 Regulations prohibited front running by any person dealing in the securities market and a departure has been made in the Regulations of 2003 whereby front running has been prohibited only by intermediaries - In the absence of any specific provision in the Act, rules or regulations prohibiting front running by a person other than an intermediary, we are of the view that the appellants cannot be held guilty of the charges levelled against them. There is no denying the fact that when the appellants placed their order, these were screen based and at the prevalent market price. Admittedly Passport was the major counter party for trading in the market and was placing huge orders and hence possibility of order of traders placing orders for smaller quantities matching with orders of Passport cannot be ruled out. Therefore, it cannot be said that they have manipulated the market. The alleged fraud on the part of Appellant may be a fraud against its employer for which the employer has taken necessary action. In the absence of any specific provision in law, it cannot be said that a fraud has been played on the market or market has been manipulated by the appellants when all transactions were screen based at the prevalent market price. Act of front running is always considered injurious be it an intermediary or any other person for that reasons. We would like to give a liberal interpretation to the concept of front running and would hold that any person, who is connected with the capital market, and indulges in front running is guilty of a fraudulent market practice as such liable to be punished as per law by the respondent. Appellant nos. 1 and 2 have not been implicated in the case on basis of being mere husband and wife and on basis of their relation, but on basis that Appellant no. 1 was privy to inside privileged information, not in public domain, since she was wife of Appellant no. 2, who was dealer in securities on behalf of CBI; is borne out of facts and circumstances of the case; since investigation has brought about significant facts of the case where trading on basis of privileged information by Appellant no. 1 has been sufficiently proved beyond reasonable doubt, based on preponderance of probability against Appellants acting in concert with each other for committing fraud on investors and manipulation of securities market and not on basis of premise that matching of trade to 100% on 14 days out of 40 days of investigation period was mere coincidence - Hence, charges against Appellants have been sufficiently proved, on basis of above, and Appellants have violated Regulations 3(a), (b), (c), (d) and 4(1) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (PFUTP Regulations) and that penalty of Rs. 25 lac on Appellants to be paid jointly and severally is justified - Decided against appellants.

Issues Involved:
1. Alleged contravention of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003.
2. Investigation into trading activities and matching trades.
3. Allegations of insider trading and front running.
4. Examination of evidence and procedural fairness.
5. Applicability of penalties under SEBI regulations.

Detailed Analysis:

1. Alleged Contravention of SEBI Regulations:
The appellants were accused of violating Regulations 3(a), (b), (c), (d) and 4(1) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (PFUTP Regulations). SEBI's investigation revealed that the trading activities of the appellants involved fraudulent practices, including the use of privileged information not available to the public, leading to undue profits.

2. Investigation into Trading Activities:
SEBI conducted an investigation into the trading activities of the appellants following a report from the National Stock Exchange (NSE). The investigation covered the period from December 1, 2009, to March 31, 2010. It was observed that trades executed by Appellant no. 1 on 16 days resulted in a zero net quantity at the end of the day (day trading). On 14 of these 16 days, the sell trades matched 100% with the buy trades of Central Bank of India (CBI), leading to undue profits for Appellant no. 1.

3. Allegations of Insider Trading and Front Running:
The appellants were accused of insider trading and front running. Appellant no. 2, an equity dealer for CBI, was alleged to have communicated privileged information to Appellant no. 1, who then traded on this information. The trades of Appellant no. 1 matched perfectly with those of CBI on 14 days, indicating that she had access to non-public information. The Tribunal noted that such matching of trades could not be a mere coincidence and concluded that it was a clear case of fraud and market manipulation.

4. Examination of Evidence and Procedural Fairness:
The appellants denied the allegations and requested access to documents relied upon by SEBI. They were provided with the requested documents and given opportunities for personal hearings and inspections. Despite their claims of trading based on research and market information, the Tribunal found that the matching of trades on 14 days was statistically significant and could not be attributed to independent research.

5. Applicability of Penalties under SEBI Regulations:
The Tribunal upheld the findings of the adjudicating officer that the appellants had violated Regulations 3(a), (b), (c), (d) and 4(1) of PFUTP Regulations. The penalty of Rs. 25 lakh imposed on the appellants jointly and severally was deemed justified, considering the undue profit of Rs. 7,15,854 earned by Appellant no. 1. The Tribunal concluded that the appellants had committed fraud on other investors and manipulated the securities market.

Conclusion:
The appeal was dismissed, and the penalty of Rs. 25 lakh imposed on the appellants was upheld. The Tribunal found that the appellants had engaged in fraudulent and unfair trade practices, violating SEBI regulations, and had made undue profits through insider trading and market manipulation. The judgment emphasized the importance of maintaining market integrity and ensuring a level playing field for all investors.

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