2013 (12) TMI 459 - AT - Companies Law

Violation of Regulations 4(1), 4(2) (a), (b), (e), (g) and (n) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 - synchronized trade - All trades in shares of Adani Exports Ltd. effected by appellant during investigation were found to be synchronized and those trades were with only one group - Held that - synchronized trade is per se not illegal. Synchronized transaction would be illegal if it is executed with a view to manipulate the market, is dubious in nature and is executed with a view to avoid regulatory detection, does not involve change of beneficial ownership or is executed to create false volumes resulting in upsetting market equilibrium etc. - save and except recording that trades executed by appellant with one group were synchronized, no other particulars are set out in the impugned order. Neither names of persons forming group with whom appellant had traded nor their connection with appellant has been set out in the impugned order. Unless some connection between appellant and counterparties with whom appellant traded is established, it is difficult to hold that trades in question were carried out with a view to manipulate market by creating false volumes resulting in upsetting market equilibrium. Appellant had stated that while carrying out jobbing transactions some transactions carried out by appellant could have been matching, it cannot be inferred that trades effected by appellant were manipulated. In a screen based trading executed at stock exchanges, it is possible that some persons forming a group in connivance with each other may execute trades in a scrip with a view to create artificial volume in the scrip. However, if there is no direct or circumstantial evidence which is brought on record to suggest that appellant was connected to that group or connived with that group, it would not be proper to hold appellant to be guilty of violating PFUTP Regulations/Broker Regulations merely because trades between that group and appellant were found to be synchronized - Decided in favour of appellant.

Summary

Issues:
- Challenge to adjudication order imposing penalties for violating SEBI regulations
- Allegations of synchronized trades and market manipulation
- Consideration of circumstantial evidence and lack of connection between parties
- Applicability of previous tribunal decisions and legal principles
- Decision on setting aside the impugned order and allowing the appeal

Analysis:
The appeal was filed challenging an adjudication order imposing penalties for violating SEBI regulations related to fraudulent and unfair trade practices in the securities market and the Code of Conduct for stock-brokers. The appellant, a private limited company engaged in stock broking, was alleged to have executed synchronized trades in the scrip of a company, leading to fluctuations in price and volumes. The appellant denied the allegations and argued that trading in large volumes or synchronized trades do not necessarily indicate violations. The respondent contended that the trades were aimed at creating artificial volumes and demand in the scrip, indicating an understanding between the appellant and the counterparties.

The Tribunal considered the arguments presented by both parties. It was noted that synchronized trades alone do not establish illegality unless they are intended to manipulate the market or avoid regulatory detection. The impugned order imposed penalties solely based on synchronized trades without establishing a connection between the appellant and the counterparties. The lack of specific details regarding the counterparties and their relationship with the appellant raised doubts about the alleged violations.

The Tribunal emphasized the importance of circumstantial evidence and the intention behind the transactions in determining market manipulation. Previous tribunal decisions were cited to highlight the significance of establishing a connection between parties and proving the intent to manipulate the market. The appellant's contention that the trades were carried out in the ordinary course of business and without any connivance with the counterparties was considered.

Ultimately, the Tribunal found that there was insufficient evidence to conclude that the synchronized trades were conducted to create artificial volumes or manipulate the market. As a result, the impugned order imposing penalties was quashed and set aside. The appeal was allowed, with no order as to costs, based on the lack of evidence supporting the alleged violations and the absence of a connection between the appellant and the counterparties involved in the trades.