2020 (8) TMI 843 - AT - SEBI

Violation of the provisions of PFUTP Regulations - trading dynamics as sufficient to establish PFUTP violations - how deceptive the nature of trading adopted by the Appellants are? - HELD THAT - We are of the considered view that there are missing links in the investigation as brought out in the impugned order. While the trading pattern of both the Appellants; placing the buy orders for generally very small number of shares and the timing of the orders; all point towards possible violation of the provisions of PFUTP Regulations it is also possible that an investor through a thorough observation of the movement of the scrip could be placing orders in the system without any intention to manipulate the market. Since the dividing line is very thin and blurred distinguishing both these categories is a difficult, if not impossible, task. Though the learned counsel shed some light on this irrational behaviour some more analysis of the overall trading in the scrip during the investigation period would have been helpful since no connection have been established between the Appellants and the suspected/connected entities nor with the promoters or directors etc. of Mapro Industries. The scrip of Mapro was not a miracle scrip, as reflecteded in its limited trading data given in the impugned order, for the Appellants to place their orders in the early morning itself, mostly just after 9 a.m. at prices higher than LTP by 2 to 4% as if this scrip had to be bought at any cost. If any investor takes such a stand, and if he/she is so convinced of the performance of the scrip, he/she would buy at least a reasonable quantity rather than placing a buy order for miniscule quantities of 1, 2, 5 or 10 shares etc as done by the appellants. Nature and pattern of trading of the Appellants are violative of the stated provisions of PFTUP Regulations, 2003 but in the given facts and circumstances of the matter and in the absence of any effort in the impugned order towards connecting the dots in terms of relationship/connection/money transfer/even some interaction between the Appellants and other suspected entities or to the promoters of Mapro we are unable to uphold the penalty imposed on the two Appellants. A warning to the Appellants that repetition of trading of similar nature/pattern as the impugned ones will lead to penal consequences is sufficient to meet the ends of justice.

Summary

Issues Involved:
1. Violation of SEBI Regulations 3(a), (b), (c), (d), 4(1), 4(2)(a), and (e) of PFUTP Regulations, 2003.
2. Manipulation of the price of Mapro Industries Ltd.’s scrip.
3. Placing buy orders higher than the Last Traded Price (LTP).
4. Lack of evidence connecting appellants to other suspected entities.
5. Imposition of penalty by SEBI.

Issue-wise Detailed Analysis:

1. Violation of SEBI Regulations 3(a), (b), (c), (d), 4(1), 4(2)(a), and (e) of PFUTP Regulations, 2003:
The judgment discusses that the appellants were penalized for violating specific provisions of the PFUTP Regulations, 2003. These regulations prohibit fraudulent and manipulative practices in the securities market. The appellants were found to have engaged in trades that created a misleading appearance of trading in the securities market, which is explicitly prohibited under these regulations.

2. Manipulation of the price of Mapro Industries Ltd.’s scrip:
The judgment notes that a group of 16 entities, including the appellants, were responsible for manipulating the price of Mapro Industries Ltd.’s scrip from ?79.15 to ?493.40 during the investigation period. The appellants were part of a broader investigation that identified manipulative trading practices, such as placing buy orders at the beginning of trading hours and at prices significantly above the LTP, which disturbed the market equilibrium.

3. Placing buy orders higher than the Last Traded Price (LTP):
The detailed analysis of trades by Bharti Goyal and Laxmikant Vyas showed that their buy orders contributed significantly to the LTP. Bharti Goyal’s trades contributed to 8.13% of the market net LTP, while Laxmikant Vyas’s trades contributed to 11.98%. Both appellants placed buy orders at prices higher than the LTP, which were often the first orders of the day, indicating a deliberate attempt to manipulate the price.

4. Lack of evidence connecting appellants to other suspected entities:
Despite the suspicious trading patterns, the judgment acknowledges that there was no direct evidence linking the appellants to other suspected entities or to the promoters/directors of Mapro Industries. The appellants argued that they were small-time traders without any connection to the other entities involved. The tribunal noted the difficulty in distinguishing between genuine trading and manipulative practices due to the thin and blurred dividing line.

5. Imposition of penalty by SEBI:
SEBI imposed a penalty of ?5 lakhs each on the appellants for their involvement in manipulative trading practices. However, the tribunal found that while the trading patterns of the appellants were suspicious, the lack of concrete evidence connecting them to other entities or to any fraudulent scheme warranted a reconsideration of the penalty. The tribunal concluded that a warning to the appellants would suffice to meet the ends of justice, given the circumstances.

Conclusion:
The tribunal concluded that the trading patterns of the appellants violated the PFUTP Regulations, 2003. However, due to the absence of evidence linking them to other suspected entities or fraudulent schemes, the tribunal decided to issue a warning instead of upholding the penalty imposed by SEBI. The appeals were partly allowed, and the appellants were cautioned against repeating similar trading practices in the future.