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TMI Blog2020 (2) TMI 1655X X X X Extracts X X X X X X X X Extracts X X X X ..... could not impact either the price or volume of the scrip. In this regard, we note that single share buy order placed by MBL got matched with the already available large sell order of MBL at a price higher than the last traded price thereby establishing the higher LTP. Further, such order placement pattern of MBL were observed in large number of MBL self-trades and the same were repetitive in nature. We note that due to such trading pattern, MBL had positive LTP contribution of Rs. 289.35 through 5,041 self-trades. Further, we also note the observation of Hon ble Securities Appellate Tribunal (SAT) in order dated February 25, 2020 in the matter of Mrs. Kalpana Dharmesh Chheda and others Vs. SEBI that [ 2020 (2) TMI 1420 - SECURITIES APPELLATE TRIBUNAL, MUMBAI] . when the appellants were holding a large number of shares, their selling miniscule quantity of one share each on more than four dozen occasions is nothing but a strategy of manipulation and unfairly benefiting by off-loading the entire shareholding after raising the price to considerable levels .. . Though the said observation of the Hon ble SAT was rendered in the context of manipulative trading pattern adopted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for Stock Brokers as specified under Schedule II read with Regulation 7 of Brokers Regulations, 1992 read with Regulation 9 of Brokers (Second Amendment) Regulations, 2013? - As already held that self-trades executed by MBL in its proprietary account are intentional self-trades through single shares self-trades with manipulative intention of creation of false price ascension. It is noted such conduct is an intentional conduct of MBL. Therefore, where MBL has intentionally committed a fraudulent activity of self-trades, the requirement that it should have exercised due skill, care and diligence while trading in the shares of GNCL in its proprietary account, does not arise. Thus, alleged violation of provisions of Clauses A (2) of the Code of Conduct for Stock Brokers as specified under Schedule II read with Regulation 7 of Brokers Regulations, 1992 read with Regulation 9 of Brokers (Second Amendment) Regulations, 2013 against MBL does not get attracted in view of the finding on the intentional self-trades by MBL. SEBI appropriate directions against MBL - As modus operandi adopted by MBL is that it had placed single share buy order immediately after placing sell order of large ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs and Sub-Brokers) (Second Amendment) Regulations, 2013 [hereinafter referred to as Brokers (Second Amendment) Regulations, 2013]. The period of investigation was from December 15, 2011 to October 09, 2014 (hereinafter referred to as Investigation Period / IP ). During the investigation period the scrip was traded on the Bombay Stock Exchange Limited (hereinafter referred to as BSE ) and National Stock Exchange of India Limited (hereafter referred to as NSE ). 2. The investigation revealed that during the investigation period, MBL Company Limited, broker (hereinafter referred to as MBL / Noticee ) had executed self-trades on NSE in its proprietary account and these self-trades in negligible quantity, contributed towards total market positive Last Traded Price (LTP). SHOW CAUSE NOTICE 3. A Show Cause Notice (hereinafter referred to as SCN ) dated July 10, 2019 was issued to the Noticee in the matter of GNCL alleging that MBL has violated Sections 12A (a), (b), (c) of SEBI Act read with Regulations 3 (a), (b), (c) and (d), 4 (1), 4 (2) (a), (e) and (g) of PFUTP Regulations, and Clauses A(2) of the Code of Conduct for Stock Brokers as specified under Schedule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into self-trades on several occasions. The details of self-trades are as follows: Entity Name Broker On Both Buy Sell Side Total Self Trade Volume Total Self Trade Count No of days on which self-trades done % Of Self Traded Qty. To Market Vol. No. of self-trades from same terminal Positive LTP contribution by self-trades MBL MBL 34,535 5,041 50 0.04 4,327 289.35 6. LTP Contribution at NSE: The details of top 10 LTP contributors at NSE as buyers during the period from December 15, 2011 to February 24, 2012 are as under: Buyer Name All trades LTP diff 0 LTP diff 0 LTP diff = 0 % of Positive LTP to Total Market Positive LTP LTP impact Rs. QTY traded No of trades LTP impact Rs. QTY traded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 501 6.10 36,029 101 -0.60 3,706 8 1,57,557 392 0.27 Quadeye Securities Pvt Ltd 4.60 4,58,765 2,309 7.75 48,306 152 -3.15 19,232 55 3,91,227 2,102 0.34 Mbl Co. Limited 3.45 87,46,016 63,924 585.50 4,30,108 10,422 -582.05 17,62,425 10,443 65,53,483 43,059 25.57 Total Top 10 Entities 67.55 1,23,34,021 93,208 790.80 8,15,917 14,185 -723.25 21,48,945 13,021 93,69,159 66,002 34.54 Rest Entities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2012012400040557 09:15:32.0000000 2000 09:15:36 1 22.10 0.25 Buy 2012012400054569 09:15:36.0000000 1 3 16/12/2011 Sell 2011121600122349 09:19:36.0000000 2000 09:19:36 1 16.65 0.15 Buy 2011121600122421 09:19:36.0000000 1 4 23/12/2011 Sell 2011122300046781 09:15:34.0000000 1000 09:15:35 1 16.50 0.15 Buy 2011122300047164 09:15:35.0000000 1 5 23/12/2011 Sell 2011122300049878 09:15:41.0000000 1000 09:15:47 1 16.45 0.15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ),(c) and (d), 4 (1), 4 (2) (a), (e) and (g) of PFUTP Regulations. Further, MBL by acting as broker and counterparty broker for self-trades in its own account on NSE, had failed to exercise due skill and care, and thereby alleged to have violated Clauses A (2), of the Code of Conduct for Stock Brokers as specified under Schedule II read with Regulation 7 of Brokers Regulations, 1992 read with Regulation 9 of Brokers (Second Amendment) Regulations, 2013. REPLY AND HEARING 10. MBL vide letter dated July 26, 2019 acknowledge the receipt of SCN dated July 10, 2019 and submitted its reply in the matter, which is inter alia as under: 10.1. That the alleged self-trades in MBL proprietary account were non-intentional, non-manipulative, inadvertent and accidental. 10.2. That execution of self-trades are negligible quantity and the impugned self-trades had no impact on the securities market so as to disturb the market equilibrium or create false/ misleading appearance of trading in GNCL market. 10.3. The Indian Regulators have themselves considered that self-trades per se are not illegal and cross trades do happen in the market in the nominal course of broking/intraday/j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jobbing/arbitrage through number of traders who are connected to the Exchange server through our multiple servers kept in various locations. 10.8. That likelihood of self-trades occurring is even more when the trading firm has number of branches and user IDs who trade. In MBL case, they have different locations and in the said locations they have no. of NSE BSE IDs. 10.9. That from difference in LTP of self-trades v/s high price in different dates mentioned by SEBI, it is observed that single share LTP is less than higher LTP and the same is higher than low LTP. 10.10. That in both the Exchanges, MBL average price (LTP) on daily basis was less than high price and more than low price which indicates that MBL were trading as they had been trading in other scrips and the single quantity in GNCL did not change the market equilibrium. Details in this regard is attached. 10.11. That the incident of single quantity trade is to enable MBL dealers and traders to know the LTP so as to take further necessary action. 10.12. That mere occurrence of impugned self-trades in particular scrip cannot be termed as fraudulent or manipulative. In the absence of the element of fraud/ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ificant i.e. self-trades of MBL is in negligible quantity and it did not have any impact on price/volume of GNCL scrip. Neither did MBL trades create false misleading appearance of trading in said scrip. 10.19. That manipulative intention is sine-qua non for establishing guilt in cases of alleged self-trades. 10.20. MBL have no nexus, connivance or collusion with GNCL or its Promoters, Directors, employees and any of its connected entities. 10.21. That there is no investor loss or complaint in respect of MBL dealing in the scrip of GNCL. 11. In the interest of natural justice, vide notice of hearing dated November 07, 2019, an opportunity of personal hearing was granted to MBL on December 04, 2019 at SEBI, Head Office, Mumbai. Mr. Ranjan Dutta, Compliance Officer of MBL appeared on December 04, 2019 and vide letter dated December 04, 2019 submitted that he was running with high pressure and was unable to make the argument, therefore requested to adjourned the hearing on December 06, 2019. Accordingly the hearing in the matter was adjourned and MBL was directed to appear for hearing on December 06, 2019. 12. Mr. Prakash Shah, Advocate and Mr. Ranjan Dutta, Complianc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hare trades. Further, if the submission of MBL is that 1 share order is the split order of large share order, then MBL is advised to explain and demonstrate the same from their order placement behavior 13. MBL vide letter dated January 02, 2020 submitted additional written submissions in the matter, which are inter alia in brief are as under: 13.1. That MBL value volume of impugned self-trades executed in GNCL shares were quite insignificant / miniscule in comparison to MBL value volume of trades in GNCL shares and also other shares during the relevant period. 13.2. That except earning intraday / arbitrage profit of Rs.2.61 lakhs for the trades executed in GNCL shares during the period from 15.12.2011 to 24.02.2012, MBL have not made any other gain or derived any benefit while executing trades in GNCL scrip. Except for intraday squaring off trades, MBL had no interest in the rise or fall in the price of GNCL shares. 13.3. That GNCL scrip had good fundamentals and volatility. Therefore no adverse inferences be drawn against MBL for carrying out trades in GNCL shares. 13.4. That MBL is dealing in the securities market on behalf of their clients and also carryi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to square off his position. 13.8. That as per analysis of trade log and order log of NSE provided by SEBI, the buy and sell orders placed by MBL have not always resulted into self-trades, and on majority of the occasions, the buy and sell quantity ordered has got matched with the orders placed by other entities and pending in the trading system. 13.9. That charge of fraudulent and unfair trade practices under Regulation 3 and 4 is a serious charge. In the instant case, there is no evidence at all that MBL trading was with a view to carry out fraudulent and unfair trade practices in the scrip of GNCL. 13.10. That MBL had carried out only arbitrage / jobbing transactions in proprietary account and MBL had earned a miniscule profit out of the said transaction, MBL volume in the scrip of GNCL was miniscule percentage of MBL total volume during the investigation period. MBL did not have any connection with either promoters and / or directors, there was no major concentration of brokers and clients at both BSE and NSE, no unfair gain or advantage has occurred to MBL and also no harm or loss has been caused to retail investors. 13.11. That GNCL scrip has been liquid throughout ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.12.2011 - Rs.17.00 GNCL close price 15.12.2011 - Rs.16.75 The above means that the market is in the downward. MBL had an open position +3,500 aprox. and now in order to sell the open position, MBL placed an order for -2,000 share at 09:19:36@ Rs. 16.65. Now in order to check the system, MBL hit a single quantity at 09:19:36. 13.17.3. Date: 23.12.2011 Before start of the trading in the morning on 23.12.2011, MBL checked GNCL open price and close price of previous day i.e. 22.12.2011 (NSE). GNCL open price 22.12.2011 - Rs.15.85 GNCL close price 22.12.2011 - Rs.16.25 The above means that the market is in the upward trend. MBL had purchased 3 single quantity, 2 single quantity at 09:15:35 and 1 single quantity at 09:15:36 from the market to check the system. MBL bought +1,000 quantity @Rs .16.35 at 09:15:31 and +1,000 quantity @Rs. 16.35 at 09:15:34 total +2,000. Thereafter, placed a sell order -1,000 quantity @Rs.16.50 at 09:15:35. Thereafter, balance quantity was sold later at Rs. 16.45 till 09:15:43. A fresh order of -1,000 quantity was placed @ Rs.16.45 at 09:15:45. In order to check the system, MBL placed a single quantity. 13.17.4. Date: 24.01.2012 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t at all whatsoever. Further average rate of MBL trades falls much in the range of high and low of the day. Therefore with regard to self-trades no adverse inference can be drawn against them. 13.21. MBL had placed reliance on the number orders passed by Ld. Whole Time Member, SEBI, Ld. Adjudicating Officer, SEBI and Hon'ble Securities Appellate Tribunal wherein, Noticees were exonerated from the alleged PFUTP violations. List of Orders has been mentioned in the written submission. Further, MBL also placed reliance on number Orders passed by Ld. Adjudicating Officer, SEBI wherein, Noticees were discharged from allegation of Self Trades List of Orders has been mentioned in the written submission. 13.22. That in the normal course of intraday activity; MBL have executed transaction in GNCL scrip as they have done trading in various other scrips over a period of time. The intraday trading activity is safe and less risky since impact of price variation is low because mostly overnight position is not held by MBL. In fact STT rates are also minimum for intraday activity. Therefore, large numbers of market participants carry out such activity. 13.23. That GNCL scrip is fundame ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontrol: Section 12A: No person shall directly or indirectly:- (a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder; (b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange; (c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder; PFUTP Regulations, 2003 Regulation 3: - Prohibition of certain dealings in securities 3. No person shall directly or indirectly- (a) buy, sell or otherwise deal in securities in a fraudulent manner; (b) use or employ, in connection with issue, purchase or sale of any sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; ISSUE No. 1- Whether MBL had entered into self-trades as alleged in the SCN? 16. I note that Self-trades are trades executed on the stock market in which both the buyer and the seller are the same entity. Self-trades do not represent a real change in beneficial ownership of the security. 17. In the SCN, it is alleged that, at NSE, during the period from December 15, 2011 to February 24, 2012, MBL Trading in its proprietary account had executed self-trades in the scrip of GNCL. The details of the alleged self-trades by MBL at NSE are as under: Entity Name Broker On Both Buy Sell Side Total Self Trade Volume Total Self Trade Count No of days on which self-trades done % Of Self Traded Qty. To Market Vol. No. of self-trades from same terminal Positive LTP contribution by self-trades (Rs) MBL MBL 34,535 5,041 50 0.04 4,327 289.35 18. From perusal of the above, it is observed that at NSE t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion caused by indulging in self-trades should be clearly brought out. It is relevant to note that SEBI has already laid down in its policy on self-trade dated May 16, 2017 (hereinafter referred to as Policy ) that intention is a sine qua non for establishing manipulation in case of self-trades, and that accidental/unintentional self-trades are not covered under the PFUTP Regulations. 23. In order to determine the intention of MBL regarding execution of self-trades, following is observed from the documents available on record: 23.1. At NSE, during the period from December 15, 2011 to February 24, 2012 (50 days), total trades executed by MBL as buyer were 63,924 for 87,46,016 shares of GNCL. On these 50 days, out of 63,924 MBL trades, MBL had entered into 5,041 self-trades for 34,535 shares of GNCL. 23.2. By these 5,041 self-trades, MBL had contributed Rs. 289.35/- towards positive LTP i.e. 12.64% of total market positive LTP. 23.3. Out of 5,041 self-trades, 4,327 self-trades for 11,828 shares were executed through the same terminal ID / user ID. 23.4. Few instances of such self-trades of MBL that contributed the LTP are as under: Sr. No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hare order was the split order of large share order, then MBL is also advised to explain and demonstrate the same from their order placement behavior. 23.6. Form the submission of MBL by way of one example, I note that MBL stated that on 16.12.2011 they had checked GNCL open and close price of previous day, which suggested to them that the scrip is in the downward trend. They had an open position of +3,500 shares and to sell the open position MBL placed the large an order for -2,000 shares at 09:19:36 @ Rs. 16.65 and to check the system, MBL had placed single quantity buy order at 09:19:36. During the course of hearing, MBL stated that they had place single share order quantity for price discovery. Further, from the submission of MBL, I note that MBL had failed to explain and demonstrate through their order placement behavior that after single share order placement (price discovery order), MBL had placed separate buy or sell order for large number / quantity of shares. Further, MBL also failed to demonstrate through their order placement behavior that single shares order was from large split order. 23.7. MBL contented that by placing 1 share buy order, MBL was trying to do th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into self-trade of 1 shares. This single share self-trades had increased the price of shares of GNCL, which benefit MBL. Thus, MBL had artificially manipulated the price of GNCL through single share self-trade. Hence, self-trades executed by MBL are intentional self-trades with an intention to manipulate price of the scrip of GNCL. 25. Considering the order placing pattern and other circumstances mentioned at paragraph 23 and 24 above, I am of the view that self-trades had impact on the price of the shares of GNCL, however, self-trades were so designed to appear that the volume creation is negligible but were in fact motivated by the manipulative intention of creation of false price ascension. Thus, preponderance of probability is that these trades are intentional self-trades. Therefore, I conclude that the impugned self-trades by MBL are intentional and manipulative self-trades. 26. MBL contented that in order to check the price of the scrip, MBL placed a single share buy order and these insignificant quantum of trading could not impact either the price or volume of the scrip. In this regard, I note that single share buy order placed by MBL got matched with the already avail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dopted by MBL is that it had continuously placed single share buy order immediately after placing sell order of large quantity at a price higher than the last traded price. These single share buy order got matched with its own sell order of large quantity resulted into self-trade of 1 shares. This single share self-trades had increased the price of shares of GNCL, which benefit MBL. This pattern of single share self-trades which were repetitive in nature by MBL is observed to be manipulative with the intention to inflate the scrip price. Thus, I am of the view that MBL has acted in a manner which led to a misleading appearance of trading in the scrip and manipulated the price of the scrip without any intention of change of ownership of the securities. 28. In view of the findings mentioned at paragraph 23, 24, 25 and 26 above and modus operandi adopted by MBL, I am of the view that alleged violations of provisions of Sections 12A(a), (b), (c) of 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 against MBL stand established. ISSUE No. 4 - If issue no.1, 2 3 is found in affirmative, then whether MBL by acting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s apart from other things aims to preserve and protect the market integrity in order to boost investor confidence in the securities market. By executing manipulative self-trades, as has been done by MBL in the instant matter, the price discovery system itself is affected. It also has an adverse impact on the fairness, integrity and transparency of the stock market. In view of the same and considering the violations committed by MBL, I find that it becomes necessary for SEBI to issue appropriate directions against MBL. 31. In summary, the modus operandi adopted by MBL is that it had placed single share buy order immediately after placing sell order of large quantity at a price higher than the last traded price thereby establishing the higher LTP. These single share order got matched with its own sell order of large quantity resulted into self-trade of 1 shares. MBL through the execution of self-trades of 1 shares, had artificially increased the price of the scrip for its own benefit. This pattern of single share self-trades by MBL were repetitive. Thus, considering at the pattern of trading done by MBL and the fact that MBL had derived benefit through that particular scheme or na ..... X X X X Extracts X X X X X X X X Extracts X X X X
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