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TMI Blog2023 (4) TMI 1422X X X X Extracts X X X X X X X X Extracts X X X X ..... resaid reversal trades allegedly led to generation of artificial volumes. 3. UNNO Industries Limited ("the Noticee/Noticee") was one such client whose reversal trades involved squaring off transactions with significant difference in the sell value and buy value of the transactions. The aforesaid reversal trades allegedly resulted into generation of artificial volumes, leading to allegations that the Noticee had violated Regulation 3(a), (b), (c), (d) and Regulation 4(1), 4(2)(a) SEBI (Prohibition of Fraudulent and Unfair Trading Practices related to Securities Markets) Regulations, 2003 (hereinafter, referred to as "PFUTP Regulations, 2003"). APPOINTMENT OF ADJUDICATING OFFICER 4. SEBI initiated adjudication proceedings and appointed the undersigned as Adjudicating Officer (hereinafter referred to as "AO") under Section 15-I(1) of the Securities and Exchange Board of India Act (hereinafter referred to as "SEBI Act") read with rule 3 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter be referred to as the "Adjudication Rules") vide order dated June 21, 2021 to inquire into and adjudge under Section 15HA of the SEBI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated August 06, 2022 was served on the Noticee via digitally signed email dated August 08, 2022. The proof of service is on record. 8. The aforesaid SCN served to the Noticee indicated not only the nature and details of the violation alleged to have been committed by the Noticee but also intimated the Noticee regarding the SEBI Settlement Scheme, 2022 (hereinafter referred to as "SEBI Settlement Scheme") framed by SEBI in the matter of Illiquid Stock Options. The intimation regarding settlement scheme given to the Noticee SCN is reproduced herein below: "SEBI has framed the SEBI Settlement Scheme, 2022 pursuant to the Order dated May 13, 2022 passed by the Hon'ble Securities Appellate Tribunal (Annexure 5), wherein the following directions were issued to SEBI: "17. We are, thus, of the opinion that SEBI should reconsider and seriously give a thought in coming out with a fresh scheme under Clause 26 of the Settlement Regulations, 2018. Such scheme can be a onetime scheme for this class of person. The terms of settlement should be attractive so that it could attract the noticees / entities to come forward and settle the matter which will ameliorate the harassment of penalty pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iling the Scheme, the competent authority has extended the period of the Scheme till January 21, 2023". The SEBI Settlement Scheme, 2022 expired on January 21, 2023. However, it is observed from records that Noticee did not avail the SEBI Settlement Scheme. 10. It is noted from records that Noticee did not file any reply to the SCN. In the interest of natural justice, vide hearing notice dated March 15, 2023 served on Noticee through digitally signed email, the Noticee was granted an opportunity of personal hearing in the matter on March 27, 2023 through video conferencing on the Webex platform. However, Noticee failed to appear for the said hearing on the scheduled date. Thereafter, vide Hearing Notice dated April 12, 2023 served on Noticee through digitally signed email, the Noticee was granted another opportunity of personal hearing on April 20, 2023. However, the Noticee neither attended the hearing on April 20, 2023 nor it has submitted reply to the SCN till the date of this order. 11. In this regard, it is pertinent to note that the Hon'ble Securities Appellate Tribunal (SAT) in the matter of Classic Credit Ltd. vs. SEBI (Appeal No. 68 of 2003 decided on December 08, 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x parte, based on the material available on record and in absence of response of the Noticee, presume that the allegations/charges have been admitted by the Noticee. CONSIDERATION OF ISSUES AND FINDINGS 16. The issues arising for consideration in the instant proceedings are:- I. Whether the Noticee has violated the provisions of Regulations 3(a), (b), (c), (d), 4(1), 4(2)(a) of the PFUTP Regulations, 2003? II. If yes, whether Noticee is liable for imposition of monetary penalty under Section 15HA of SEBI Act? III. If yes, 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? ISSUE I Whether the Noticee has violated the provisions of regulations 3(a), (b), (c), (d), 4(1), 4(2)(a) of the PFUTP Regulations, 2003? 17. It has been alleged in the SCN that the Noticee had executed reversal trades which involved squaring off transactions with significant difference in the sell value and buy value in the illiquid Stock Options segment at Bombay Stock exchange. It has been alleged that the aforesaid reversal trades resulted into generation of artificial volumes in the illiquid stock o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... range of 1 millisecond to 10 milliseconds. The said orders resulted in 2 buy trades and 2 sell trade for 85,000 units each between the Noticee and Hans Metals Limited and Chandra Prakash Jalan in the said contract respectively. The average buy rate was Rs. 26/- for 85,000 units and sell rate was Rs. 6/-for 85,000 units. The aforesaid quantities traded by the Noticee made up 58.82% of the total market volume in the said contract during the IP. 22. Similarly, on March 24, 2015 in MARU15APR3650.00PE contract, buy and sell orders for 1,80,000 units were placed within a short time gap in the range of 1 millisecond to 8 milliseconds. The said orders resulted in 2 buy trades and 2 sell trade for 90,000 units each between the Noticee and Beena Pradhan and Shubhang Exports Limited in the said contract respectively. The average buy rate was Rs. 83/- for 90,000 units and sell rate was Rs. 43/- for 90,000 units. The aforesaid quantities traded by the Noticee made up 29.5% of the total market volume in the said contract during the IP 23. I note from the trade log that in MARU15APR3500.00PEW4 contract there were only 6 trades on two days for a total trading volume of 2,89,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f SEBI vs Rakhi Trading Pvt Ltd (Decided on February 08, 2018) in which crucial observations were made about trading activity in the illiquid stock options segment: ...Ordinarily, the trading would have taken place between anonymous parties and the price would have been determined by the market forces of demand and supply. In the instant case, the parties did not stop at synchronised trading. The facts go beyond that. The trade reversals in this case indicate that the parties did not intend to transfer beneficial ownership and through these orchestrated transactions, the intention of which was not regular trading, other investors have been excluded from participating in these trades. The fact that when the trade was not synchronizing, the traders placed it at unattractive prices is also a strong indication that the traders intended to play with the market. ...Rather than allowing the market forces to operate in their natural course, the traders repeatedly carried out the impugned transactions which deprived other market players from full participation. The repeated reversals and predetermined arrangement to book profits and losses respectively, made it clear that the parties we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outcome of meeting of minds elsewhere and it was a deliberate attempt to deal in such a manner. I note in matters dealing with violation of PFUTP Regulations, 2003, the reason as regards execution of non- genuine trades might not be immediately forthcoming. However, the correct test instead, is one of preponderance of probabilities. Here I would like to rely on the judgment of Hon'ble Supreme Court in SEBI v Kishore R Ajmera (AIR 2016 SC 1079) decided on February 23, 2016, wherein it was held that-"...According to us, knowledge of who the 2nd party / client or the broker is, is not relevant at all. While the screen based trading system keeps the identity of the parties anonymous it will be too naïve to rest the final conclusions on the said basis which overlooks a meeting of minds elsewhere. Direct proof of such meeting of minds elsewhere would rarely be forthcoming...in the absence of direct proof of meeting of minds elsewhere in synchronized transactions, the test should be one of preponderance of probabilities as far as adjudication of civil liability arising out of the violation of the Act or provision of the Regulations is concerned. The conclusion has to be gathered fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes that the trades were non-genuine and had only misleading appearance of trading in the securities market without intending to transfer the beneficial ownership. One finds it to be naive to presume that the perception of the two counter parties to a trade changed within few seconds/minutes and positions were interchanged and the contracts were changed where one party made profit and the other party ended up making losses every time without prior meeting of mind. It is not a mere coincidence that the Appellants could match the trades with the counter party with whom he had undertaken the first leg of respective trade. ....." 31. In view of the foregoing and placing reliance upon the aforesaid judgements, I am of the view 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. Issue II If yes, whether the failure, on the part of the Noticees would attract monetary penalty under Section 15HA of the SE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule 5 of the Adjudication Rules, I 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. 36. 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 www.sebi.gov.in on the following path, by clicking on the payment link- ENFORCEMENT ➔ Orders ➔ Orders of AO ➔ PAY NOW 37. The Noticee shall forward the confirmation of penalty so paid to the Enforcement Department -Division of Regulatory Action -V of SEBI. a) Name and PAN of the entity (Noticee) b) Name of the case / matter c) Purpose of Payment -Payment of penalty under AO proceedings d) Bank Name and Account Number e) Transaction Number In case of any difficulties in payment of penalties, Noticee may contact the support at [email protected] 38. In the event of failure to pay the said amount of penalty within 45 days of the receipt of this Order, SEBI may initiate consequential actions including but not limit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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