2020 (2) TMI 1002 - AT - SEBI

Fraudulent and Unfair Trade Practices Relating to Securities Market - Creating artifice/scheme - appellant restrained from dealing in the securities market, directly or indirectly, for a period of five years from the date of the ad-interim ex-parte order - HELD THAT - An unknown company suspended from trading for long; off-market buying of 1,050 shares of the said company which constitutes more than 2% of its share capital and which is in the name of an unknown person (Kushal Jain) on the recommendation of a person from the native place of the appellant with no prior connection etc. can be treated as only a fiction rather than normal business. Coupled with the finding that the appellant had other transactions off-market with Gromo as given in Table 2 page 13-14 of the impugned order is sufficient evidence to prove the connection between Gromo, the appellant and entities in the Kamalakshi Group, many of whom are inter connected in the matter as explained in the said table. Moreover, out of 1,050 shares of Gromo obtained off-market in an inexplicable way by the appellant more than half of it was sold in small tranches; most of the time placing sell order at far away prices than LTP. The said trading pattern and the other connections as explained above is sufficient enough to prove that the appellant was part of the group that created the artifice/scheme and therefore finding in the impugned order that the appellant has violated the stated provisions of the PFUTP Regulations cannot be faulted. Five year restraint imposed on the appellant has been in operation since February 20, 2015. However, the appellant never challenged the ex-parte interim order and filed this appeal belatedly with a delay of 101 days only on March 25, 2019 when there was hardly 1 year left to complete the restraint period. The orders relied on by the appellant are distinguishable in the facts of the present matter and in law since subsequent Judgements of the Hon'ble Supreme Court in the matter of Securities and Exchange Board of India v. Kishore R. Ajmera 2016 (2) TMI 723 - SUPREME COURT and SEBI v. Rakhi Trading (P.) Ltd. 2018 (2) TMI 580 - SUPREME COURT whereby it has been conclusively held that preponderance of probability is sufficient in confirming violations like market manipulation as direct evidence in such matters may not be forthcoming.

Summary

Issues:
1. Violation of Regulations under Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003.
2. Allegations of market manipulation and price inflation in trading of shares.
3. Connection between the appellant and entities involved in price manipulation.
4. Challenge to the restraint order and delay in filing the appeal.
5. Applicability of precedents in determining violations of market manipulation.

Issue 1: Violation of Regulations under Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003:

The appeal challenges an order by the Whole Time Member of SEBI, restraining the appellant from dealing in the securities market for five years due to violations of Regulations 3(a),(b),(c) and (d) and 4(1), 4(2)(a) and (e) of PFUTP Regulations, 2003. The violations were linked to market manipulation through preferential allotments and trading practices that artificially increased share prices of M/s Gromo Trade & Consultancy Ltd. The appellant argued lack of direct connection with Gromo or its promoters, emphasizing off-market transactions and reliance on recommendations for share purchases.

Issue 2: Allegations of market manipulation and price inflation in trading of shares:

The impugned order found evidence of market manipulation by a group of entities, including non-independent directors of Gromo, leading to a significant increase in share price without fundamental support. The trading pattern revealed small orders placed at distant prices from the Last Traded Price, indicating artificial inflation. The preferential allotments and subsequent trading activity were deemed as a scheme to create false trading appearance and provide an exit route for entities involved.

Issue 3: Connection between the appellant and entities involved in price manipulation:

The respondent contended that the appellant's transactions, including off-market purchases and sales, demonstrated a clear connection with Gromo and the Kamalakshi Group engaged in price manipulation. The appellant's explanations were refuted, highlighting undisclosed facts and suspicious trading behavior, such as selling shares at far-away prices from LTP. The Tribunal agreed that the appellant was part of the group orchestrating the scheme, as evidenced by trading patterns and connections outlined in the impugned order.

Issue 4: Challenge to the restraint order and delay in filing the appeal:

The appellant's delay in challenging the restraint order, filing the appeal 101 days before the restraint period's completion, was noted. Despite the restraint being in effect since February 2015, the appellant's failure to challenge the ex-parte interim order promptly raised questions regarding the timing and intent of the appeal.

Issue 5: Applicability of precedents in determining violations of market manipulation:

The appellant's reliance on previous judgments to argue against market manipulation charges was dismissed. The Tribunal cited Supreme Court judgments emphasizing the sufficiency of preponderance of probability in confirming violations like market manipulation, even in the absence of direct evidence. The precedents cited by the appellant were deemed distinguishable from the present matter, leading to the dismissal of the appeal.

In conclusion, the Tribunal upheld the restraint order, finding the appellant's connection to the price manipulation scheme established and the violations of PFUTP Regulations proven. The delay in filing the appeal and the inapplicability of cited precedents further weakened the appellant's case, resulting in the dismissal of the appeal without costs.