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2020 (2) TMI 1655 - Board - SEBIOffence under SEBI - self trades - restrain orders - Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control - whether alleged self-trades in MBL proprietary account were non-intentional, non-manipulative, inadvertent and accidental? - violation of provisions of Regulation 3 (a),(b),(c),(d), Regulations 4(1), 4 (2) (a) (g) of PFUTP Regulations and Clause A(3), A( 4) A(5) of Broker Regulations - HELD 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, we conclude that the impugned self-trades by MBL are intentional and manipulative self-trades. 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, 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 single share transaction, the same equally holds good in the present factual matrix of the case as well, in respect of manipulative self-trades through single share transaction. Thus, in view of the observation of Hon ble SAT, that manipulation in the scrip can be done by single share order placement method also, which has precisely happened in the present matter, in such a scenario, volume created by such trades / self-trades in the scrip is irrelevant / immaterial. Thus, considering at the pattern of trading done by MBL and the fact that MBL had derived benefit through that particular scheme or nature of trading, the trading pattern adopted by MBL is of a manipulative and unfair nature and would fall within the ambit of the PFUTP Regulations. Hence, we merit in the submission of MBL that single share order placement could not impact either the price or volume of the scrip. Whether MBL have violated the 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 PFUTP Regulations? - The modus operandi adopted 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, 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. In view of the findings mentioned at paragraph 23, 24, 25 and 26 above and modus operandi adopted by MBL, it 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. Whether MBL by acting as broker and counterparty broker for self-trades in its own account on NSE, has failed to exercise due skill and care, thereby violated the 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? - 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 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 nature of trading, the trading pattern adopted by MBL is of a manipulative and unfair nature with the intention to inflate the scrip price which resulted into violation of PFUTP Regulations. It goes without saying once the higher price is established by these manipulative self-trades, the other trades by other counter parties, which happen subsequent to this manipulated self-trades, are executed at a price artificially hiked by self-trades. Order - As in exercise of the powers conferred upon under Sections 11, 11(4) and 11B read with Section 19 of the Securities and Exchange Board of India Act, 1992, hereby restrain MBL from buying, selling or otherwise dealing in securities, in its proprietary account, directly or indirectly, for a period of four (4) years from the date of this order. Needless to say, in view of prohibition on sale of securities, it is clarified that during the period of restraint, the existing holding, including units of mutual funds, of MBL shall remain frozen.
Issues Involved:
1. Whether MBL had entered into self-trades as alleged in the SCN? 2. If issue no. 1 is determined in affirmative, then whether such self-trades executed by MBL have been entered into intentionally/with manipulative intent? 3. If issue no. 2 is found in affirmative, then whether MBL has violated the 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 PFUTP Regulations? 4. If issue no. 1, 2 & 3 is found in affirmative, then whether MBL by acting as broker and counterparty broker for self-trades in its own account on NSE, has failed to exercise due skill and care, thereby violated the 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? 5. If issue no. 3 & 4 is in affirmative, what directions, if any should be issued against MBL? Issue-Wise Detailed Analysis: Issue 1: Whether MBL had entered into self-trades as alleged in the SCN? The investigation revealed that MBL had executed self-trades on NSE in its proprietary account. Specifically, on 50 days, MBL entered into 5,041 self-trades for 34,535 shares of GNCL, amounting to 0.04% of total market volume. MBL did not dispute these trades but contended they were non-intentional, non-manipulative, inadvertent, and accidental. The self-trades were found to have contributed Rs. 289.35 towards positive LTP (Last Traded Price). Therefore, it was concluded that MBL had indeed executed self-trades in the scrip of GNCL. Issue 2: If issue no. 1 is determined in affirmative, then whether such self-trades executed by MBL have been entered into intentionally/with manipulative intent? The judgment analyzed the intention behind the self-trades. It was noted that MBL had placed single share buy orders immediately after placing large sell orders at a higher price, resulting in self-trades that increased the LTP. MBL's claim that these trades were for price discovery was refuted, as the pattern and timing of the trades suggested intentional manipulation. The repetitive nature of these trades and the significant positive LTP contribution indicated manipulative intent. Thus, it was concluded that the self-trades were intentional and manipulative. Issue 3: If issue no. 2 is found in affirmative, then whether MBL has violated the 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 PFUTP Regulations? The judgment found that MBL's self-trades led to a misleading appearance of trading and manipulated the price of the scrip without any intention of change of ownership. The modus operandi adopted by MBL was manipulative, with the intention to inflate the scrip price. Therefore, it was concluded that MBL had violated the 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 PFUTP Regulations. Issue 4: If issue no. 1, 2 & 3 is found in affirmative, then whether MBL by acting as broker and counterparty broker for self-trades in its own account on NSE, has failed to exercise due skill and care, thereby violated the 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? Given the intentional nature of MBL's self-trades, it was concluded that the requirement to exercise due skill, care, and diligence did not arise. The intentional conduct of MBL in executing manipulative self-trades negated the need to assess their adherence to the Code of Conduct for Stock Brokers. Therefore, the alleged violation of Clauses A(2) of the Code of Conduct for Stock Brokers was not applicable. Issue 5: If issue no. 3 & 4 is in affirmative, what directions, if any should be issued against MBL? Considering the manipulative nature of MBL's self-trades and their adverse impact on market integrity, it was deemed necessary for SEBI to issue appropriate directions. Consequently, MBL was restrained from buying, selling, or otherwise dealing in securities in its proprietary account, directly or indirectly, for a period of four years. Additionally, MBL's existing holdings, including units of mutual funds, were to remain frozen during the period of restraint. Order: MBL is restrained from buying, selling, or otherwise dealing in securities, in its proprietary account, directly or indirectly, for four years. The order is effective immediately, and a copy is to be served to MBL, all recognized Stock Exchanges, Depositories, and Registrar and Transfer Agents for compliance.
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