2016 (1) TMI 1510 - Board - SEBI

Manipulative, fraudulent and unfair trade practices - Trading in certain scrips GIL pursuant to the detection of a huge rise in the traded volumes and/or price of the shares of these companies - certain entities had indulged in creating artificial volume by trading among themselves, in a synchronized manner and also carrying out off-market transfers among themselves for the purpose of meeting settlement obligations of another, thus contributing also to the price rise in these scrips - SEBI passed an interim order restraining 39 persons/entities from accessing the securities market and further prohibited them from buying, selling or dealing in securities in any manner whatsoever, till further directions. HELD THAT - Large scale trading amongst the PP group entities, which included the Noticees, all of which were synchronized and did not result in change in ownership created an artificial demand in the scrip of GIL and led to a price rise which was misleading and disadvantageous to the genuine investors in the securities market. We find that the Noticees in the present proceedings were related / connected to each other and connived amongst themselves for execution of synchronized and self trades, creation of artificial volume and price manipulation which not only distorted market equilibrium but were also found to be fraudulent in nature. The Noticees have therefore violated the provisions of regulations 3 (a),(b),(c),(d), 4(1), 4(2) (a),(b) (e) and (g) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003. Noticees have submitted that based on the same set of facts and transactions as in the instant case monetary penalties were imposed against the Noticees by the adjudicating officer vide his separate order(s) and the Noticees have challenged the said order(s) before SAT. However, we are satisfied that the contraventions as found in this case are grave and have the potential to disturb the market integrity and disturb the fair, equitable and efficient functioning of the securities market. In the instant case, the proceedings u/s 11 and 11B of the SEBI Act have been initiated against the Noticees in addition to the adjudication proceedings against them as the charges against the entities are grave and have larger implications on the safety and integrity of the securities market. For the serious contraventions as found in the instant case, monetary penalty alone would not be sufficient to safeguard the market integrity. Considering the repetitive nature of the default by the Noticees, I, in order to protect the interest of investors and the integrity of the securities market, in exercise of the powers conferred upon me under section 19 of the Securities and Exchange Board of India Act, 1992 read with sections 11 and 11B thereof and regulation 11 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 hereby restrain the 17 mentioned entities from accessing the securities market and further prohibit them from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner, whatsoever. The period of prohibition already undergone by the Noticees who were debarred/restrained pursuant to the interim order dated February 02, 2011, shall be taken into account for the purpose of computing the period of prohibition imposed in this order. Further, it is clarified that the restraint/prohibition imposed on the Noticees hereinabove shall run concurrently with the restraint/prohibition imposed by SEBI vide order dated May 13, 2015, June 29, 2015 and January 4, 2016 in the matters of dealings in the shares of Goldstone Technologies Limited, LGS Global Limited and Well Pack Papers and Containers Limited respectively.

Summary

Issues Involved:
1. Allegations of fraudulent and manipulative trading practices by certain entities.
2. Connection and relationship among entities involved in trading.
3. Execution of synchronized and self-trades.
4. Creation of artificial volume and price manipulation.
5. Violation of SEBI regulations.
6. Imposition of penalties and prohibitions on entities.

Detailed Analysis:

1. Allegations of Fraudulent and Manipulative Trading Practices:
The Securities and Exchange Board of India (SEBI) conducted an investigation into the trading activities of Gemstone Investments Ltd. (GIL) and found that certain entities were involved in creating artificial trading volumes and manipulating share prices. The investigation revealed that these entities engaged in synchronized trading and off-market transfers to meet settlement obligations, thereby contributing to price rises in the scrips.

2. Connection and Relationship Among Entities:
SEBI identified a group of connected entities, known as the "Pabari-Parikh" group (PP group), based on shared KYC details, trading activities, and fund transfers. The PP group consisted of 31 entities that traded significantly in the scrip of GIL. The connections among these entities were determined using parameters such as common addresses, telephone numbers, and fund movements.

3. Execution of Synchronized and Self-Trades:
The investigation found that the PP group entities executed synchronized trades, where buy and sell orders were placed within a minute of each other, often at the same price and quantity. This accounted for a significant portion of the market volume during the investigation period. Additionally, some entities engaged in self-trades, where the same entity acted as both buyer and seller, resulting in no change of beneficial ownership.

4. Creation of Artificial Volume and Price Manipulation:
The trading activities of the PP group entities significantly contributed to the daily market volume in the scrip of GIL, with their trades accounting for more than 50% of the total market volume on several trading days. The entities also engaged in off-market transfers of shares among themselves, further supporting the connection among them and contributing to artificial volume and price manipulation.

5. Violation of SEBI Regulations:
SEBI issued a Show Cause Notice (SCN) to the involved entities, alleging violations of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003. The Noticees were accused of engaging in fraudulent and unfair trade practices, including creating a false or misleading appearance of trading, manipulating security prices, and executing transactions without the intention of changing ownership.

6. Imposition of Penalties and Prohibitions on Entities:
SEBI imposed penalties and prohibitions on the involved entities, restraining them from accessing the securities market and prohibiting them from buying, selling, or dealing in securities for specified periods. The penalties were imposed to protect market integrity and deter similar fraudulent activities in the future. SEBI emphasized that monetary penalties alone would not suffice and that stricter measures were necessary to maintain market integrity.

In conclusion, SEBI's investigation revealed significant fraudulent activities by the PP group entities, leading to market manipulation and artificial trading volumes. The entities were found to have violated multiple SEBI regulations, resulting in severe penalties and prohibitions to safeguard the securities market and protect investors' interests.