TMI BlogSEBI- SAT order A case of confirmation of penalty for alleged violation of large number of provisions without specifying exact violation and provision under which penalty was imposed - gross illegality and carelessness in penalty proceeding by SEBI.X X X X Extracts X X X X X X X X Extracts X X X X ..... SEBI- SAT order A case of confirmation of penalty for alleged violation of large number of provisions without specifying exact violation and provision under which penalty was imposed - gross illegality and carelessness in penalty proceeding by SEBI. - By: - DEV KUMAR KOTHARI - Corporate Laws / IBC / SEBI - Dated:- 30-6-2022 - - Case under study: 2020 (9) TMI 1254 - SECURITIES APPELLATE TRIBUNAL, MUMBAI in case of GLOBAL EARTH PROPERTIES AND DEVELOPERS PVT. LTD and others - Conclusion in judgment- penalty imposed by Adjudicating officers for violation of Regulations 3 and 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 ( PFUTP Regulations ) confirmed by SAT. Transactions alleged to have involved violation were in respect of reversal of trades in the Stock Options segment of BSE Limited (hereinafter referred to as BSE ) leading to creation of artificial volumes during the period from 1st April, 2014 to 30th September, 2015 in the trading activities in the illiquid Stock Options at BSE. In the order we do not find date of investigation report. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it will be much after the last day that is 30.09.2015 of the period covered in investigation. For transaction done before 30.09.2015 penalty proceedings were initiated by issue of SCN not within reasonable time. Therefore, these should be considered as time barred. The question is what was SEBI doing over a long period of time when transactions which are now alleged to be in violation of provisions were taking place? SEBI kept EYES CLOSED AND MOUTH SHUT for long time, this itself means that there was no violations. Otherwise having surveillance measures in place, when transactions took place SEBI must have acted on real time basis. After long time SEBI suddenly found that there have been violation-creating volume of business can only lead to an AFTER THOUGHT BY SEBI. And for such inaction of SEBI, traders and investors must not suffer. SEBI was expected to act proactively on real time basis, if at all there was serious violation and fraud as now assumed. In absence of such action on real time basis or within a reasonable period from transactions it can be said that the transactions are not such which require levy of heavy penalties. After a long period, of tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions traders and investors were flooded with show cause notices and then penalty orders were passed forcing notice to prefer appeals. Penalty imposed has been confirmed by SAT ignoring the fact that SEBI has not found any violation on real time basis or within a reasonable time. Large number of cases are still pending as SCN has been issued and SEBI may still be in process of issuing further large number of SCN, if we can so infer from some of orders of Adjudicating Officers. Provisions of which violation is assumed and penalty has been levied: As per order of SAT penalty was imposed for violation of Regulations 3 and 4 of PFUTP Regulations . Let us have a look on these provisions because in this regard it is necessary to read said regulations just to check applicability in case of appellant. The nature of various appellants and nature of transactions of illiquid options clearly and out rightly suggest non-applicability of provisions in most of cases. Only some provisions can have application, if at all, there is a complainant who complain of any fraud, misrepresentation by any party due to which complainant has suffered loss. On reading of the judgme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt we find no mention of any such complainant in relation to any of appeals. For this purpose, said regulations are reproduced in following table in left column and in right column the author gives brief remarks about applicability or non-applicability of provision in relation to transactions. Statutory Provisions Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 CHAPTER II PROHIBITION OF FRAUDULENT AND UNFAIR TRADE PRACTICES RELATING TO THE SECURITIES MARKET From provision Observation/ not applicable NA 3. Prohibition of certain dealings in securities No person shall directly or indirectly- NA because If the dealing was prohibited, then how it could take place. In case of prohibited dealing, any bid or offer should not be allowed on terminal of stock exchange. When a bid or offer is permitted on terminal of S/E, it is permitted and not prohibited. (a) buy, sell or otherwise deal in securities in a fraudulent manner ; Fraudulent manner can be found only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if there is a complainant who has suffered loss due to such fraud. In the order, there is no mention of any complainant or fraud on any person. (b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made there under; NA Any of investor or trader who are appellant cannot have carried any manipulative or deceptive device or contrivance in relation to impugned transactions. Hence NA.Any transaction effect of which has been carried out cannot be a device or contrivance. (c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange; There is no case of defrauding any one. So it is NA (d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under. There is no case of fraud or deceit upon any person. There is no complaint of any one hence NA 4. Prohibition of manipulative, fraudulent and unfair trade practices If there was prohibition, it should not have been permitted on terminal of Stock Exchange. A bid or offer which is accepted on terminal of S/E is permitted. (1) Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities . NA because fraudulent or an unfair trade practice cannot be presumed unless there is a complaint in this regard from any person who has suffered loss due to any transaction. 4 [ Explanation . For the removal of doubts, it is clarified that any act of diversion, misutilisation or siphoning off of assets or earnings of a company whose securities are listed or any concealment of such act or any device, scheme or artific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to manipulate the books of accounts or financial statement of such a company that would directly or indirectly manipulate the price of securities of that company shall be and shall always be deemed to have been considered as manipulative, fraudulent and an unfair trade practice in the securities market.] NA in respect to any transaction carried out by appellants. (2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:- (a) indulging in an act which creates false or misleading appearance of trading in the securities market; NA because bid and offers placed on terminal of S/E and executed cannot be called false or misleading appearance. (b) dealing in a security not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress or cause fluctuations in the price of such security for wrongful gain or avoidance of loss; NA. If this is strictly applied then there should not be allowed any trade which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not backed by securities held in case of sale and funds available in case of purchases. Whereas intraday and intra settlement transactions are allowed without delivery. (c) advancing or agreeing to advance any money to any person thereby inducing any other person to offer to buy any security in any issue only with the intention of securing the minimum subscription to such issue; Not at all applicable cannot have any application in case of impugned transactions. (d) paying, offering or agreeing to pay or offer, directly or indirectly, to any person any money or money s worth for inducing such person for dealing in any security with the object of inflating, depressing, maintaining or causing fluctuation in the price of such security; Not at all applicable cannot have any application in case of impugned transactions. (e) any act or omission amounting to manipulation of the price of a security; NA because a transaction which has taken place and executed cannot involve such act or omission. (f) publishing or causing to publish or reporting or c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ausing to report by a person dealing in securities any information which is not true or which he does not believe to be true prior to or in the course of dealing in securities; Not at all applicable cannot have any application in case of impugned transactions. (g) entering into a transaction in securities without intention of performing it or without intention of change of ownership of such security; Not at all applicable cannot have any application in case of impugned transactions. (h) selling, dealing or pledging of stolen or counterfeit security whether in physical or dematerialized form; Not at all applicable cannot have any application in case of impugned transactions. (i) an intermediary promising a certain price in respect of buying or selling of a security to a client and waiting till a discrepancy arises in the price of such security and retaining the difference in prices as profit for himself; Not at all applicable cannot have any application in case of impugned transactions. (j) an intermediary providing his clients with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such information relating to a security as cannot be verified by the clients before their dealing in such security; Not at all applicable cannot have any application in case of impugned transactions. 5 [(k) disseminating information or advice through any media, whether physical or digital, which the disseminator knows to be false or misleading in a reckless or careless manner and which is designed to, or likely to influence the decision of investors dealing in securities;] Not at all applicable cannot have any application in case of impugned transactions. (l) an intermediary reporting trading transactions to his clients entered into on their behalf in an inflated manner in order to increase his commission and brokerage; Not at all applicable cannot have any application in case of impugned transactions. (m) an intermediary not disclosing to his client transactions entered into on his behalf including taking an option position; Not at all applicable cannot have any application in case of impugned transactions. (n) circular transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns in respect of a security entered into between intermediaries in order to increase commission to provide a false appearance of trading in such security or to inflate, depress or cause fluctuations in the price of such security; Not at all applicable cannot have any application in case of impugned transactions and nature of appellants. (o) encouraging the clients by an intermediary to deal in securities solely with the object of enhancing his brokerage or commission; Not at all applicable cannot have any application in case of impugned transactions. (p) an intermediary predating or otherwise falsifying records such as contract notes. Not at all applicable cannot have any application in case of impugned transactions. (q) an intermediary buying or selling securities in advance of a substantial client order or whereby a futures or option position is taken about an impending transaction in the same or related futures or options contract. Not at all applicable cannot have any application in case of impugned transactions. (r) Planting fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lse or misleading news which may induce sale or purchase of securities. Not at all applicable cannot have any application in case of impugned transactions. 1 [(s) mis-selling of units of a mutual fund scheme; Not at all applicable cannot have any application in case of impugned transactions. Explanation.- For the purpose of this clause, mis-selling means sale of units of a mutual fund scheme by any person, directly or indirectly, by─ Not at all applicable cannot have any application in case of impugned transactions. (i) making a false or misleading statement, or (ii) concealing or omitting material facts of the scheme, or (iii)concealing the associated risk factors of the scheme, or (iv) not taking reasonable care to ensure suitability of the scheme to the buyer.] 2 [(t) illegal mobilization of funds by sponsoring or causing to be sponsored or carrying on or causing to be carried on any collective investment scheme by any person.] -DO- [Explanation.- For the purposes of this sub-regulation, for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... removal of doubts, it is clarified that the acts or omissions listed in this sub-regulation are not exhaustive and that an act or omission is prohibited if it falls within the purview of regulation 3, notwithstanding that it is not included in this sub-regulation or is described as being committed only by a certain category of persons in this sub-regulation.] ************ Only latest amendment references from 2020 onwards are kept here because earlier amendments were applicable for the period applicable in the appeals decided by SAT. 4. Inserted vide Notification No. SEBI/LAD-NRO/GN/2020/36 dated 19-10-2020 5. Substituted vide Notification No. SEBI/LAD-NRO/GN/2022/71 dated 25-01-2022 before it was read as (k) an advertisement that is misleading or that contains information in a distorted manner and which may influence the decision of the investors; In view of above analysis of provisions under which penalty was imposed and has been confirmed by SAT, it is clear that penalty proceedings were initiated illegally and unjustifiably and penalty has been imposed and confirmed illegally and unjustifiably. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is surprising that action has been taken against small traders and investors and mighty S/E and broker members have been left almost untouched. When transaction was permitted by S/E how it can be prohibited ? Another question is why SEBI should not be held accountable and responsible for any misdeeds, as alleged by SEBI which were allowed to be carried if they were prohibited? What SEBI was doing? Is the role of SEBI to make Regulations and impose penalties and not to protect investors on real time basis or at least within reasonable time.? SEBI Turnover charges are levied and collected by brokers which are paid to SEBI. Therefore, SEBI is duty bound to protect interest of traders and investors. Readers are requested to send their feedback for strengthening case of small traders and investors who have been penalized heavily and no action has been taken against mighty Stock Exchange and Broker members of S/E. - - Scholarly articles for knowledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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