2020 (7) TMI 831 - Board - SEBI

Fraudulent and manipulative trading in the scrips - illegal gains made by the Noticees through the fraudulent and manipulative trades - SEBI was directed by SAT to bring out the date-wise reversal of trades done by the trading Noticees and pass a fresh order within a period of three months after granting an opportunity of hearing - HELD THAT - In securities market, reversal trades are understood to be trades where the parties after executing a trade enter into a reverse trade or opposite trade for similar quantities usually within a short time period. However, as held by the Hon ble Tribunal in the matter of Anita Dalal, in a given case reversal transaction could also happen over multiple days. What is important is the intention of the parties to manipulate the scrip as can be noted from the nature of their trades across multiple days. The Hon ble Supreme Court in the matter of SEBI v. Rakhi Trading 2018 (2) TMI 580 - SUPREME COURT had held that Once the reversal transactions are shown to be non-genuine or shown to be fictitious creating a false or misleading appearance in the market for ulterior purpose and that the stock market was misused by such manipulative device, this is in clear violation of the provisions of PFUTP Regulations, 2003. In the present case, since it is established that all the Noticees were acting as a group and were engaged in manipulative trading in the scrip, have no hesitation in holding that the back and forth transaction in scrip between the Noticees have to be considered as reversal trades even though such trades happened across days. Computation of the ill-gotten gains - Noticees have submitted that as per the data available from the BSE Price Volume Data in the scrip of Polytex, 75% of total trades had been marked delivery and 25% as intra-day during the investigation period. As can be noted from Table I, the cumulative buy value of the trades by the Noticees which have been taken for the purpose of calculating the ill-gotten gains was Rs. 2,28,90,79,601 and the sell value was Rs. 2,31,96,78,775. The STT and SEBI turnover fee paid at the applicable rates during the investigation period for such trades works out to Rs. 36,06,157.46. The ill-gotten gains made by the Noticees after excluding the eligible expenses would be Rs. 2,69,93,016.79. Directions - As in exercise of the powers conferred upon me under section 19 of the SEBI Act, 1992 read with sections 11 and 11B of the SEBI Act, and Regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Market) Regulations, 2003, confirm the computation of ill gotten gains made in SEBI order dated January 31, 2019 and hereby direct the Noticees to jointly and severally, disgorge an amount of Rs. 2,69,93,016.79, as ascertained along with interest calculated at the rate of 12% per annum from 17 December, 2012 onwards, till the date of payment. The above payments shall be made by the parties in the manner provided in the SEBI order dated January 31, 2019.

Summary

Issues Involved:
1. Reversal of Trades
2. Computation of Ill-Gotten Gains

Detailed Analysis:

Reversal of Trades
The Securities Appellate Tribunal (SAT) upheld SEBI's findings that the Noticees engaged in manipulative trades in the scrips of Polytex India Limited, KGN Enterprises Limited, and Gemstone Investments Limited. The Tribunal directed SEBI to provide date-wise details of reversal trades and calculation of profits. SEBI complied by providing date-wise trading details, except for one Noticee, Rawal Jinal Apurva, who incurred a loss and whose trades were not used for profit computation.

The Noticees argued that reversal trades should occur on the same day or within a few days. However, SEBI cited the SAT's observation that reversal trades could span multiple days if they show a pattern of manipulation. The Supreme Court in SEBI v. Kanaiyalal recognized the difficulty in defining manipulative practices due to evolving technology and human ingenuity. Thus, SEBI considered trades across days as reversal trades based on the intention to manipulate the scrip.

Computation of Ill-Gotten Gains
The Tribunal directed SEBI to detail the calculation of ill-gotten gains. SEBI provided a table showing the buy and sell quantities, values, and profits for each Noticee. The computation included actual transaction prices during the investigation period and prices for excess buy or sell quantities based on transactions immediately before or after the investigation period.

The Noticees contended that expenses incurred during transactions should be excluded from ill-gotten gains. SEBI agreed to exclude statutory levies like securities transaction tax (STT) and SEBI turnover fees but not other expenses, which were considered costs of committing fraud.

SEBI calculated the cumulative buy and sell values for the Noticees' trades, deducting eligible expenses to arrive at the ill-gotten gains of Rs. 2,69,93,016.79. The Noticees were directed to jointly and severally disgorge this amount with 12% annual interest from December 17, 2012, until payment.

Conclusion:
SEBI's order was upheld on merits, confirming the manipulative conduct of the Noticees. The detailed date-wise reversal trades and profit calculations were provided as directed by SAT. The ill-gotten gains were recalculated, excluding only statutory levies, and the Noticees were ordered to disgorge the adjusted amount with interest.