2020 (9) TMI 1254 - AT - SEBI

Penalty for violation of Regulations 3 and 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (hereinafter referred to as PFUTP Regulations ) - trading activities in the illiquid Stock Options at BSE - non-genuine trades which was 81.38% of the total trades executed in the Stock Options Segment of BSE - HELD THAT - As buying and selling of equivalent quantities within the day may not be illegal but if the trades were done with ulterior purposes then the same are non-genuine. In the instant case, we find that one party is making a profit and the other party is making a loss. In addition, there is proximity in the time of sell orders at a higher price and the same quantity is being reversed to the same party in a lower price within a fraction of seconds or few minutes. We find that contracts got matched between the same parties. We fail to understand as to why the Appellants who made the transactions repeatedly incurred substantial losses within a few minutes. Given the fact that there was proximity of time between buy and sell orders one can reasonably point to some kind of manipulative exercise with prior meeting of minds especially when one can see it plainly that it was a clear case of synchronised trading namely that a synchronised trade is one where the buyer and seller enter quantity and time of shares they wish to transact at the same time. From the aforesaid cumulative analysis of the reversed transactions with the counter party, quantity, time and significant variation of the price clearly indicates that the trades were non-genuine and had only misleading appearance of trading in the securities market without intending to transfer the beneficial ownership. One finds it to be naive to presume that the perception of the two counter parties to a trade changed within few seconds/minutes and positions were interchanged and the contracts were changed where one party made profit and the other party ended up making losses every time without prior meeting of mind. It is not a mere coincidence that the Appellants could match the trades with the counter party with whom he had undertaken the first leg of respective trade. In our opinion, the trades were non-genuine trades and even though direct evidence is not available in the instant case but in the peculiar facts and circumstances of the present case there is an irresistible inference that can be drawn that there was meeting of minds between the Appellants and the counter parties, and collusion with a view to trade at a predetermined price. As urged by the learned counsel for the Appellants that the penalty awarded is excessive and harsh and, therefore, prayed that in the event the order is affirmed the Tribunal may consider reducing the penalty amount taking into consideration the financial status of the Appellants and the negligible transactions executed by the Appellants. We have perused the orders passed by the AO. We find that the AO has taken into consideration not only the factors contained in Sec. 15J of the SEBI Act but has also taken into consideration the number of total trades, the artificial volume generated, the loss incurred, etc while imposing the penalty. It may be stated here that the minimum penalty under Sec. 15HA is Rs.5Lacs and maximum penalty is Rs. 25 crores or three times the profit made. We find that the AO has excercised its discretion which is neither harsh nor arbitrary. We do not find any error in the quantum of penalty imposed by the AO. We do not find any merit in the appeals and the same are dismissed with no order as to costs.

Summary

Issues Involved:
1. Violation of Regulations 3 and 4 of the PFUTP Regulations.
2. Execution of reversal trades leading to artificial volumes.
3. Determination of whether the trades were non-genuine and manipulative.
4. Assessment of the penalty imposed by the Adjudicating Officer.

Issue-wise Detailed Analysis:

1. Violation of Regulations 3 and 4 of the PFUTP Regulations:
The core issue revolves around the violation of Regulations 3 and 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (PFUTP Regulations). The Appellants were found to have engaged in reversal trades that created a false and misleading appearance of trading, thereby generating artificial volumes in the Stock Options Segment of BSE. The investigation by SEBI revealed that a significant portion of the trades executed were non-genuine, leading to artificial volumes.

2. Execution of Reversal Trades Leading to Artificial Volumes:
The investigation report indicated that the Appellants engaged in reversal trades, which are characterized by the same entity reversing its buy or sell positions in a contract with the same counterparty on the same day. For instance, Global Earth Properties and Developers Pvt. Ltd. executed non-genuine trades in 29 unique contracts, resulting in artificial volumes of 1,91,26,750 units and a loss of Rs.3,14,82,500. Similar patterns were observed with other appellants like Pintail Reality Developers Pvt. Ltd., Blue Bull Equities Private Limited, and Ashok Investors Trust Ltd., leading to substantial artificial volumes and losses.

3. Determination of Whether the Trades Were Non-Genuine and Manipulative:
The Tribunal analyzed whether the trades executed by the Appellants were non-genuine and manipulative. It was found that the trades were reversed within a short span, ranging from a few seconds to a few minutes, with the same counterparty. This pattern indicated a meeting of minds and a predetermined arrangement, which is not typical of genuine trading. The Supreme Court's decision in Rakhi Trading was cited, which held that synchronized and reversed trades executed within a short time frame are fraudulent and manipulative, amounting to unfair trade practices.

4. Assessment of the Penalty Imposed by the Adjudicating Officer:
The Appellants contended that the penalty imposed was excessive and harsh. However, the Tribunal found that the Adjudicating Officer had considered the factors in Sec. 15J of the SEBI Act, including the total number of trades, artificial volumes generated, and the losses incurred. The penalties imposed were Rs.6 lakhs on Global, Rs.5 lakhs on Pintail, Rs.25 lakhs on Blue Bell, and Rs.8 lakhs on Ashok. The Tribunal concluded that the penalties were neither harsh nor arbitrary and were within the discretionary power of the Adjudicating Officer.

Conclusion:
The Tribunal dismissed the appeals, affirming that the Appellants had engaged in non-genuine trades that created artificial volumes and misleading appearances in the market. The penalties imposed were deemed appropriate and justified based on the nature and extent of the violations. The judgment emphasized the importance of maintaining the integrity and transparency of the securities market and the need to deter fraudulent and manipulative practices.