2017 (6) TMI 1411 - Board - SEBI

Irregularity in the trading in the shares - Unfair Trade Practices relating to Securities Market - detection of a huge rise in the price of the shares - investigation inter alia revealed that entities/noticee no 1 to 4 had entered into transactions at higher prices than the last traded price (LTP) with low volumes in a fraudulent and manipulative manner in the scrip of BCSL - violation of the provisions of PFUTP Regulations and SEBI rules - HELD THAT - The noticee no. 1 executed the frequent buy orders at price higher than the LTP and once the 50% of buy order was matched with the sale order he was successful in sending the misleading message to the market and the remaining buy orders were deleted by him. The same pattern was adopted by Noticee No 2 and 3. As noted above the counterparty seller is the noticee no. 1 only in all 8 trades of noticee no. 2 and in 5 out of 11 trades of the noticee no. 3. Further they have repeatedly executed buy orders at the prices higher than LTP and deleted the remaining buy orders in the same manner once they are able to send the misleading message to the investors that the scrip is liquid and marketable enough. The noticee no. 4 also has traded frequently at prices higher than the LTP contributing more than 7% to the total net LTP. The noticees have contributed positively to the price rise of the scrip and the unusual move from Rs. 50/- to Rs. 559.95/- and defrauded the investors in the securities market. On analysis of the first trades of the day it is noted that out of 340 days the scrip of BCSL was traded only on 177 trading days wherein on all trading days the scrip opened at a price higher than LTP noticees had appeared always quoting price higher than LTP. The arguments of noticees that only because the price traded is higher than LTP there is no manipulation and even the transactions of Noticees are minimal i.e. sum quantity of 1650 by noticee no. 1 1047 by noticee no. 2 1056 by noticee no. 3 and 1450 by noticee no. 4 which can never influence the market nor can it be alleged as manipulation cannot be accepted in light of the fact that the scrip was illiquid and the total traded volume on a daily basis was observed to be only few shares on all days with singular trades. Thus it is clear that there was very little trading interest in the scrip. It is normal in the securities market to sell the scrip when a higher price is offered . But by purchasing shares at higher price than the LTP in all of their trades the noticees had generated the wrong impression about the liquidity of the scrip in the market. It must not be forgotten that every trade establishes the price of the scrip and the trading of noticees at higher than LTP resulted in the price of the scrip going up and were done with a view to set the price or benchmark the price at a desired level and thereby influencing the innocent / gullible investors. Therefore it can be concluded that the price of the scrip was manipulated by the noticees with low trading volume in the scrip. As per Order log and trade log that the noticees during the IP in all cases placed orders at a higher price than LTP that too in many cases sharp at 09 00 am. Such trades would lead to an artificial rise in the price of the scrip and the same would misguide the general public. The modus operandi adopted by the noticees is detrimental to the smooth functioning of the securities market and hence deserve to be viewed seriously. It is established that the price of the scrip increased because of placing of the orders by the said noticees in a manipulative manner. Therefore I conclude that the trades done by the noticees are in violation of Regulations 3(a) (b) (c) (d) 4(1) 4(2)(a) (e) of PFUTP Regulations. thus liable for monetary penalties as prescribed under Section 15HA of the Act. From the material available on record it is not possible to quantify any gain or unfair advantage accrued to the noticees or the extent of loss suffered by the investors as a result of the default of the noticees. However as find that the defaults were repetitive in nature. Further the noticees traded in the scrip in a manner meant to raise the price of the scrip and the net contribution of the noticees to the total Net LTP is much higher which has resulted in the price rise of the scrip. This kind of activity seriously affects the normal price discovery mechanism of the securities market. People who indulge in manipulative fraudulent and deceptive price rise should be suitably penalized for the said acts of omissions and commissions. Thus impose a monetary penalties on the noticees under Section 15-I of the Act and Rule 5 of Rules.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

• Whether the noticees violated Regulations 3(a), (b), (c), (d), 4(1), and 4(2)(a) & (e) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations).
• Whether the violations, if any, attract monetary penalties under Section 15HA of the SEBI Act, 1992.
• The quantum of monetary penalty that can be imposed on the noticees, considering the factors mentioned under Section 15J of the SEBI Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Violation of PFUTP Regulations

• Relevant Legal Framework and Precedents: The PFUTP Regulations prohibit fraudulent and unfair trade practices in the securities market. Regulations 3 and 4 specifically prohibit manipulative and deceptive practices, including creating a false or misleading appearance of trading and manipulating the price of securities.
• Court's Interpretation and Reasoning: The Court found that the noticees engaged in manipulative practices by placing buy orders at higher prices than the Last Traded Price (LTP), contributing to the artificial price rise of the scrip from Rs. 50 to Rs. 559.95. This conduct was deemed to violate the PFUTP Regulations.
• Key Evidence and Findings: The investigation revealed that the noticees placed buy orders at prices higher than the LTP and deleted remaining orders after partial execution, creating a misleading impression of liquidity and demand in the market. The noticees' trades contributed significantly to the price rise of the scrip.
• Application of Law to Facts: The Court applied the PFUTP Regulations to the noticees' conduct, concluding that their actions constituted fraudulent and unfair trade practices. The trades were designed to manipulate the market price of the scrip, misleading investors.
• Treatment of Competing Arguments: The noticees argued that their trades were minimal and could not influence the market. However, the Court rejected these arguments, noting the illiquid nature of the scrip and the significant impact of their trades on the market price.
• Conclusions: The Court concluded that the noticees violated the PFUTP Regulations by engaging in manipulative trading practices that artificially inflated the price of the scrip.

Issue 2: Penalty under Section 15HA of the SEBI Act

• Relevant Legal Framework and Precedents: Section 15HA of the SEBI Act prescribes penalties for engaging in fraudulent and unfair trade practices, with penalties up to Rs. 25 crore or three times the amount of profits made, whichever is higher.
• Court's Interpretation and Reasoning: The Court determined that penalties were warranted given the established violations of the PFUTP Regulations. The noticees' actions were deemed to have disrupted the normal price discovery mechanism of the securities market.
• Key Evidence and Findings: The Court considered the repetitive nature of the violations and the significant contribution of the noticees to the artificial price rise of the scrip.
• Application of Law to Facts: The Court applied Section 15HA to the noticees' conduct, finding that their manipulative practices warranted monetary penalties.
• Treatment of Competing Arguments: The noticees contended that their actions did not warrant penalties due to the minimal volume of trades. The Court dismissed these arguments, emphasizing the manipulative impact of their trades on the illiquid scrip.
• Conclusions: The Court concluded that the noticees were liable for monetary penalties under Section 15HA of the SEBI Act.

Issue 3: Quantum of Penalty

• Relevant Legal Framework and Precedents: Section 15J of the SEBI Act outlines factors for determining the quantum of penalty, including disproportionate gain, loss to investors, and the repetitive nature of the default.
• Court's Interpretation and Reasoning: The Court considered the repetitive nature of the defaults and the significant impact on the scrip's price. However, it noted the difficulty in quantifying gains or losses.
• Key Evidence and Findings: The Court found that the noticees' trades contributed significantly to the price rise, affecting the market's normal price discovery mechanism.
• Application of Law to Facts: The Court applied Section 15J factors, emphasizing the repetitive nature of the defaults and the manipulative impact on the market.
• Conclusions: The Court imposed penalties of Rs. 50,000 on each noticee, totaling Rs. 2,00,000, considering the nature and impact of their violations.

3. SIGNIFICANT HOLDINGS

• Core Principles Established: The judgment reinforces the prohibition of manipulative and deceptive practices in the securities market under the PFUTP Regulations. It underscores the importance of maintaining market integrity and the role of SEBI in penalizing violations.
• Final Determinations on Each Issue: The Court found that the noticees violated the PFUTP Regulations and were liable for penalties under Section 15HA of the SEBI Act. The penalties imposed were deemed commensurate with the nature and impact of the violations.