2022 (8) TMI 422 - SC - SEBI

Manipulation of share price - guilty of violating provisions of Section 12A (a), (b), (c) of the SEBI Act read with Regulations 3 (a), 3(b), 3(c), 3(d), 4(1), 4(2)(a), 4(2) (e) and 4(2)(g) of the PFUTP Regulations - imposition of a penalty - huge sale order at a price higher than the last traded price of the company and thereafter to make a self-trade of only one share for that higher price, thus, establishing a new higher LTP - HELD THAT - In the present case, the WTM, while imposing an order of debarment, has specifically applied her mind to the issue as regards the impact of such a manipulation. While dealing with this aspect, the WTM has observed that the manipulation of the price of scrips seriously impinges upon other counter parties in the securities market. In other words, the impact of a manipulation which is carried out by a participant in the securities market cannot be assessed only in terms of the gain which has been caused to the participants themselves, but in terms of the wider consequences of the action on the securities market. In N. Narayanan v. SEBI 2013 (4) TMI 652 - SUPREME COURT this Court observed that Section 12-A of the SEBI Act read with Regulations 3 and 4 of the PFUTP Regulations specifically aim to curb market manipulations which can have an adverse effect on investor confidence and the healthy growth of the securities market. The securities market deals with the wealth of investors. Any such manipulation is liable to cause serious detriment to investors wealth. In this backdrop, the order which has been passed by the WTM cannot be regarded as disproportionate so as to result in the interference of this Court in the exercise of its jurisdiction under Section 15Z of the SEBI Act. Moreover, the WTM has prohibited the appellant from participating in its proprietary account for a specified period, leaving it open to the appellant to continue operation in their broking account. Appeal dismissed.

Summary

Issues Involved:
1. Legality and proportionality of the penalty imposed by SEBI.
2. Determination of manipulative and unfair trade practices.
3. Impact of the trading ban on the appellant and its employees.
4. Justification for the manipulation findings by SEBI and SAT.

Issue-wise Detailed Analysis:

1. Legality and Proportionality of the Penalty Imposed by SEBI:

The Whole Time Member (WTM) of SEBI, on 28 February 2020, issued an order restraining the appellant from dealing in securities in its proprietary account for four years. Additionally, on 17 March 2020, the adjudicating officer imposed a mandatory penalty of Rs. 15 lakhs for violations under Sections 12A(a), (b), and (c) of the SEBI Act and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations 2003 (PFUTP Regulations). The appellant contested the penalty as disproportionate and harsh, emphasizing the minimal net gain and the impact on their 450 employees. However, the Supreme Court upheld the penalty, referencing the judgment in Adjudicating Officer, SEBI v Bhavesh Pabari, which states that penalties can only be interfered with if they are "distinctly disproportionate" or "wholly arbitrary and harsh."

2. Determination of Manipulative and Unfair Trade Practices:

The WTM found the appellant guilty of manipulative trades, specifically self-trades, which artificially increased the share price of Gujarat NRE Coke Limited (GNCL). The appellant executed 5,041 self-trades between 15 December 2011 and 24 February 2012, with a significant portion executed through the same terminal ID. The WTM concluded that these trades were intentional and manipulative, designed to create a false price ascension. The Securities Appellate Tribunal (SAT) affirmed these findings. The Supreme Court highlighted the importance of preventing market abuse and preserving market integrity, as noted in N. Narayanan v. SEBI.

3. Impact of the Trading Ban on the Appellant and Its Employees:

The appellant argued that the four-year trading ban was disproportionate, considering the minimal profit generated and the adverse impact on its 450 employees. The Supreme Court, however, emphasized that the manipulation's broader consequences on the securities market must be considered, not just the gain to the appellant. The WTM's order allowed the appellant to continue operations in their broking account, mitigating the impact on employees.

4. Justification for the Manipulation Findings by SEBI and SAT:

The WTM and SAT found that the appellant's trading pattern involved placing large sell orders followed by self-trades of single shares at higher prices, establishing a new higher Last Traded Price (LTP). This pattern was deemed manipulative, with the intention of creating a false price ascension. The Supreme Court upheld these findings, reiterating the importance of curbing market manipulations to maintain investor confidence and the healthy growth of the securities market.

Conclusion:

The Supreme Court dismissed the appeals, affirming the findings and penalties imposed by SEBI and SAT. The court emphasized the broader impact of market manipulations and the necessity of proportional penalties to maintain market integrity. Pending applications, if any, were disposed of.