2023 (4) TMI 1422 - Board - SEBI

Trading activity in illiquid Stock Options at Bombay Stock exchange ( BSE ) for Investigation Period/IP after observing large scale reversal of trades in Stock Options segment of the BSE - Whether the Noticee has violated the provisions of Regulations 3(a) (b) (c) (d) 4(1) 4(2)(a) of the PFUTP Regulations 2003? - HELD THAT - The trades executed by the Noticee were not genuine trades and being non-genuine created an appearance of artificial trading volumes in respective contracts. In view of the above I find that the allegation of violation of regulations 3(a) (b) (c) (d) 4(1) and 4(2)(a) of PFUTP Regulations 2003 by the Noticee stands established. Whether Noticee is liable for imposition of monetary penalty under Section 15HA of SEBI Act? - What would be the monetary penalty that can be imposed upon the Noticee taking into consideration the factors stipulated in Section 15J of the SEBI Act? - As established above the trades by the Noticee were non-genuine in nature and created a misleading appearance of trading. I note that the material available on record does not quantify any disproportionate gains or unfair advantage if any made by the Noticee and the losses if any suffered by the investors due to such violations on part of the said Noticee and does not demonstrate any repetitive default on the part of the said Noticee. However considering that the violation by the Noticee led to creation of artificial trading volumes which had the effect of distorting the market mechanism in the illiquid stock options segment of BSE find that the aforesaid violations were detrimental to the integrity of securities market and therefore the quantum of penalty must be commensurate with the serious nature of the aforesaid violations. The factors mentioned in section 15J of the SEBI Act 1992 and in exercise of power conferred upon me under Section 15-I of the SEBI Act 1992 read with rule 5 of the Adjudication Rules, hereby impose a penalty of Rs. 5, 00, 000/-(Rupees Five Lakhs only) on Noticee i.e. UNNO Industries Limited under Section 15HA of the SEBI Act for violations of Regulation 3(a) (b) (c) (d) 4(1) and 4(2)(a) of PFUTP Regulations 2003. The Noticee shall remit / pay the said amount of penalty within 45 days of receipt of this order through online payment facility available on the SEBI website.

Summary

The core legal questions considered in this adjudication pertain primarily to whether the Noticee violated specific provisions of the SEBI (Prohibition of Fraudulent and Unfair Trading Practices) Regulations, 2003 (PFUTP Regulations), specifically Regulations 3(a), (b), (c), (d), 4(1), and 4(2)(a), by engaging in reversal trades in illiquid stock options that generated artificial trading volumes; whether such violations attract monetary penalties under Section 15HA of the SEBI Act; and the determination of the quantum of such penalty in light of the factors under Section 15J of the SEBI Act.

The first issue addresses whether the Noticee's trading activity constituted a violation of the PFUTP Regulations. The investigation revealed that during the period from April 1, 2014 to September 30, 2015, a significant proportion of trades in the illiquid stock options segment of the Bombay Stock Exchange (BSE) involved reversal trades-transactions where buy and sell positions were squared off with substantial differences in prices, thereby creating artificial volumes. The Noticee was found to have engaged in such reversal trades, evidenced by detailed trade log records from BSE, showing multiple instances where buy and sell orders were executed within milliseconds to seconds of each other with the same counterparties at markedly different prices.

These trades involved contracts that were illiquid, as demonstrated by the minimal number of trades and low overall volumes in the relevant contracts during the investigation period. For example, in one contract, all trades during the period were exclusively between the Noticee and its counterparty, indicating a closed trading environment. The wide variation in option premiums between buy and sell orders, without any corresponding movement in the underlying securities' prices in the cash segment, further undermined the genuineness of these transactions.

The Court relied heavily on precedents, particularly the Supreme Court's judgment in SEBI vs Rakhi Trading Pvt Ltd, which emphasized that synchronized reversal trades with predetermined prices and exclusion of other market participants distort the price discovery mechanism and amount to manipulation. The Court also referred to the Supreme Court's decision in SEBI v Kishore R Ajmera, which clarified that direct proof of a meeting of minds between counterparties is not essential; rather, the inference can be drawn from the preponderance of probabilities based on trade patterns, timing, volume, and price variations. The principle that proof can be inferred logically from the totality of circumstances was underscored.

Applying these legal principles and the factual matrix, the Court found that the Noticee's trades were non-genuine, executed with prior meeting of minds with counterparties, and intended to create a misleading appearance of active trading by generating artificial volumes. The trades did not reflect true market demand or supply, nor did they transfer beneficial ownership of securities. The Court also relied on a Securities Appellate Tribunal (SAT) decision which held that such reversal trades with significant price variations and executed within very short time frames between the same parties are indicative of manipulative intent.

In addressing competing arguments, the Noticee did not file any reply to the Show Cause Notice (SCN) nor did it avail opportunities for personal hearings, despite being given multiple chances. The Court, therefore, invoked precedents from the SAT which hold that failure to respond or appear can be taken as admission of charges. Consequently, the Court proceeded ex parte and presumed the allegations admitted by the Noticee.

On the second issue, the Court held that the established violations attract monetary penalties under Section 15HA of the SEBI Act, which prescribes penalties for fraudulent and unfair trade practices ranging from a minimum of five lakh rupees to a maximum of twenty-five crore rupees or three times the amount of profits made from such practices, whichever is higher.

Regarding the quantum of penalty, the Court considered the factors enumerated under Section 15J of the SEBI Act: the amount of disproportionate gain or unfair advantage, the loss caused to investors, and the repetitive nature of the default. Although the material did not quantify any disproportionate gains or losses, nor demonstrate repetitive defaults by the Noticee, the Court emphasized the serious nature of the violation, given that artificial volumes distort market integrity and price discovery mechanisms, particularly in illiquid segments.

Therefore, balancing these factors, the Court imposed a penalty of Rs. 5,00,000 (Five Lakhs) on the Noticee under Section 15HA of the SEBI Act. The penalty amount reflects the minimum threshold prescribed but underscores the gravity of the misconduct.

In conclusion, the Court's significant holdings include the following:

"The execution of trades by the Noticee in the illiquid options segment with such precision in terms of order placement, time, price, quantity etc. and also the fact that the transactions were reversed with the same counterparty clearly indicates a prior meeting of minds with a view to execute the reversal trades at a pre-determined price."

"It is clear that these trade transactions obviously only aimed at carrying out manipulative objective."

"The trades executed by the Noticee were not genuine trades and being non-genuine, created an appearance of artificial trading volumes in respective contracts."

"Failure to file reply or avail personal hearing despite service of notices can be presumed as admission of charges."

"The quantum of penalty must be commensurate with the serious nature of the aforesaid violations which were detrimental to the integrity of securities market."

The Court's final determinations are that the Noticee violated Regulations 3(a), (b), (c), (d), 4(1), and 4(2)(a) of the PFUTP Regulations, 2003 by engaging in non-genuine reversal trades creating artificial volumes; that such violations attract monetary penalty under Section 15HA of the SEBI Act; and that a penalty of Rs. 5,00,000 is imposed considering the nature and impact of the violations.