BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Order Reserved On: 22.11.2019
Date of Decision : 19.12.2019
Appeal No. 253 of 2018
M/s Blue Peacock Securities Pvt. Ltd.
Flat No. 14, Band Stand Apartments,
Band Stand,
Bandra (West),
Mumbai- 400 050
…Appellant
Versus
Securities and Exchange Board of India,
SEBI Bhavan, Plot No. C-4A, G-Block,
Bandra-Kurla Complex, Bandra (East),
Mumbai – 400 051
…Respondent
WITH
Misc. Application No. 580 of 2019
And
Appeal No. 258 of 2018
M/s Yes Investments
Flat No. 14, Band Stand Apartments,
Band Stand,
Bandra (West),
Mumbai- 400 050
…Appellant
Versus
Securities and Exchange Board of India,
SEBI Bhavan, Plot No. C-4A, G-Block,
Bandra-Kurla Complex, Bandra (East),
Mumbai – 400 051
…Respondent
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Mr. Vinay Chauhan, Advocate with Mr. K.C. Jacob, Advocate
i/b Corporate Law Chambers India for Appellants in Appeal
Nos. 253 and 258 of 2018.
Mr. Anubhav Ghosh, Advocate with Ms. Rashi Dalmia and
Ms. Akshata Timmapur, Advocates i/b The Law Point for the
Respondent.
CORAM: Justice Tarun Agarwala, Presiding Officer
Dr. C.K.G. Nair, Member
Justice M. T. Joshi, Judicial Member
Per: Dr. C.K.G. Nair
1.
Appellants in these appeals are aggrieved by a pair of
orders passed by the Adjudicating Officer (“AO” for
convenience) of Securities and Exchange Board of India
(“SEBI” for convenience), both dated December 14, 2017,
whereby penalty of ` 25 lakhs in Appeal No. 253 of 2018 and
` 20 lakhs in Appeal No. 258 of 2018 was imposed by the AO
of SEBI under Section 15HA of the SEBI Act for violation of
Regulations 3 (a), (b), (c), (d) and 4 (1) & (2) (a) of PFUTP
Regulations. Since the issues raised in these appeals are similar,
by consent of parties, both the appeals are heard and decided
together by this common decision.
2.
The basic question raised in these appeals is whether a
particular trading strategy adopted by a day trader can be treated
as market manipulation under the Securities and Exchange
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Board of India (Prohibition of Fraudulent and Unfair Trade
Practices relating to Securities Market) Regulations, 2003
(“PFUTP Regulations” for convenience). The impugned orders
say so in respect of the strategy adopted by the appellants; hence
the appeals.
3.
The basic facts relating to Appeal No. 253 of 2018 as
given in the impugned order are as follows:Pursuant to some alerts from NSE regarding the
dealings of Yes Investments (Proprietor: Mr. Bhatia)
and Blue Peacock in which Mr. Bhatia is one of the
directors, SEBI conducted an investigation, into the
trading and possible violation of the provisions of the
Securities and Exchange Board of India Act 1992
(hereinafter referred to as the ‘SEBI Act 1992’) and
various Rules and Regulations made there under.
The period of investigation was from July 01, 2009 to
December 31, 2010.
During the investigation, it was observed that the
Noticee, trading through Religare Securities Ltd., was
continuously placing and deleting orders and then
taking
reverse
position
in
the
cash
market.
Investigation further revealed from the trade and
order data of NSE in respect of 31 scrips that on 25
scrip days the noticee placed orders at a price
variation from last traded price while doing activity
on the opposite side. Investigation further revealed
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that the during the time slot wherein majority of the
selling was done by the noticee, it’s concentration
was significant to market net and gross in the
respective
scrips.
On
analyzing
the noticee’s
contribution to the market pending quantity it was
observed that when major selling transactions were
executed the noticee’s concentration to market
pending orders was significant on buy side. It was
further noted during the investigation that the buy
orders placed by the noticee (which were placed
significantly
below
the
market
prices
and
subsequently deleted) were with fully disclosed
quantities whereas the sell orders were placed at
partially disclosed quantities.
“Further, it was alleged in the SCN that the noticee:i)
created a false impression of artificial demand in the
scrips by placing buy orders with large quantities
below the market price,
ii)
by selling the shares in the market at the time when
its large buy orders at below the prevailing market
price were pending and subsequently cancelling these
buy orders prior to conducting majority of the buying
activity, acted in fraudulent manner,
iii)
was involved in BAIT and SWITCH activity i.e.
noticee entered buy/sell orders lower/higher than the
market price, fully disclosed the orders but actually
transacted on the opposite side in the market, across
various scrip and for several days, and
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iv)
manipulated the order book by giving false
impression in the market about the demand and
supply of various scrips during the investigation
period and thereby misled the investors.”
4.
Along with a related appeal (Appeal No. 420 of 2014) an
appeal filed in this matter (i.e. Appeal No. 421 of 2014) was
also remanded back to SEBI vide this Tribunal’s order dated
March 22, 2016.
Subsequently, after issuing another show
cause notice and following due process the impugned order has
been passed on December 14, 2017.
5.
Appellant in Appeal No. 253 of 2018 M/s Blue Peacock
Securities Pvt. Ltd. is a private limited company. Appellant in
Appeal No. 258 of 2018 M/s Yes Investments is a sole
proprietorship firm. Both these entities are managed by one
Mr. Vishal Bhatia. It is the stand of the appellants that they are
day traders; trade in large quantities particularly in blue chip
companies with large beta factor (meaning high intra-day
volatility); have not violated provisions of any securities laws;
traded only within the price band or quantity limits permitted
and, therefore, the strategy employed by the appellants is not
violative of any securities laws including the PFUTP
Regulations, 2003 which is alleged to have been violated.
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6.
The learned Counsel Shri Vinay Chauhan appearing on
behalf of the appellants, taking Appeal No. 253 of 2018 as the
lead matter contended as follows:-
a)
The appellant being a day trader have been trading
for a long period of time in large quantities of shares.
For instance in 2009-2010, the appellant had a
turnover of more than ` 25000 crores and in 20102011 about ` 17000 crores.
As such the appellant
has the financial wherewithal to trade in large
quantities.
b)
Further the scrip wise analysis given in the appeal
memorandum shows that these are all blue chip
companies, as part of NIFTY or SENSEX or other
indices and as such no individual investor/ trader can
manipulate the price of such scrips given the high
liquidity in these scrips. Moreover, despite placing
very high volume of trades appellants’ volume to
total market volume is generally in the range of 0.2%
to about 3% only.
c)
Further the volatility of prices in respect of these
scrips on the dates of the impugned trades were in
the range of 4% to 55% and even the pre-trade
volatility on a weekly average basis was also in the
range of 4% to 51%. Therefore, the allegation in the
impugned order that the appellant could manipulate
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the volume or price of such scrip is completely
unrealistic and untenable.
7.
The learned counsel further submits that while the Show
Cause Notice alleged that the appellant have traded in 1937
scrip days across 499 unique scrip days, the impugned order
cherry-picked a few days out of it in respect of a few scrips and
alleged that the appellant has violated the PFUTP Regulations.
Moreover, in order to arrive at this violation the impugned order
holds that the appellant has placed huge buy orders below Last
Traded Price (“LTP”) taking a 4% band in an arbitrary manner
because the applicable band for such blue chip scrips is 20% as
the normal rule while for those scrips which are in the futures
and options segment (“F&O”) there is no such price band.
Therefore, out of the 180 days of trading analysed by the AO,
25 days was arbitrarily taken out of which again 8 days was
picked up for charging.
Similarly, when the appellant was
trading throughout the day but certain time windows have been
also arbitrarily taken by the AO to prove that the appellant has
violated provisions of PFUTP Regulations.
It was further
contented that despite trading in large volumes the appellant had
incurred losses as well on some days clearly indicating that it is
a trading strategy being followed by the appellant rather than
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any market manipulation strategy. Even though the allegation is
that the appellant placed huge buy orders without the objective
of fructifying such orders and in order to show artificial depth to
the market, about 17% of such buy orders have in fact fructified.
It was also contended that for the same pattern of trading, on
which another adjudication order was passed by SEBI,
Mr. Vishal Bhatia, the manager of the appellant (and the sole
proprietor of the appellant in Appeal No. 258 of 2018) was
exonerated from any wrong doing and the strategy was not
found to be violative of any PFUTP Regulations.
8.
Learned Counsel Shri Anubhav Ghosh appearing for
respondent SEBI submits that the impugned order has rightly
held that the appellant had indulging what is called a “Bait and
Switch” approach and created artificial demand in various
scrips. He further contended that by placing huge volumes of
buy orders much below LTP, the appellant had manipulated the
order book which would fall squarely under Sub-Section 3(d) of
the PFUTP Regulations, because, the pattern of trading adopted
by the appellant is deceptive since he was not a serious buyer.
Rather, after placing huge buy orders in the early trading hours
the appellant would sell in the market at a higher price and later
on cancel the remaining buy orders. The inflated buy orders
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placed at much below the LTP were not insignificant quantities
even while factoring in the fact that the scrips were highly
liquid. The appellant repeated such a trade strategy to apply a
Bait and Switch approach.
Therefore, what is held in the
impugned order that the appellant has violated provisions of
PFUTP Regulations cannot be faulted. Since it is a repeated
pattern adopted by the appellant on multiple days and on
multiple scrips penalty has been imposed under Section 15HA
of the SEBI Act. Order relied on by the appellant’s counsel
whereby the manager of the appellant, Mr. Bhatia was
exonerated was a case of only one day’s trading and, therefore,
the AO gave benefit of doubt to the appellant. The impugned
order itself in paragraph 30 deals with this case.
9.
Coming back to the core question raised in this appeal as
to whether the appellants’ trading strategy as a day trader is
violative of the provisions of PFUTP Regulations; for facility
we quote the relevant Regulations below:“3. Prohibition of certain dealings in securities
No person shall directly or indirectly(a) buy, sell or otherwise deal in securities in a
fraudulent manner;
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(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;
(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;
(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
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.”
10. We note that the appellant’s strategy is to place large buy
orders generally in the early trading sessions. The appellant
also would place a number of sell orders but for much smaller
quantities after some time. The buy orders are generally placed
below around 4% variation from the LTP whereas the sell
orders would be placed more or less nearer to the LTP. In the
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process a large number of sell orders would get executed and
only a small/ insignificant part of the buy orders would get
executed.
Table at page 11 to 14 of the impugned order
summarize and analyze the trading done by the appellant in
terms of multiple scrips, number and volume of orders placed,
conversion of buy order and sell order etc. for a number of
trading days starting from December 24, 2009 to June 25, 2010.
11. We have also observed the actual trading screen available
to an investor in the presence of both parties. This trading
screen shows only the top five buy and sell orders while
showing the total quantity of buy and sell available in the
system.
Therefore, when huge quantities of buy orders are
placed in the system well below the LTP that entire data is not
available on the screen but the total quantity of buy orders
placed in the system is available. Therefore, what is held in the
impugned order that the appellant placing large buy orders away
from the LTP and placing sell orders on the other side is a
deceptive trading strategy adopted by the appellant to show that
there is huge pending demand in the system at some distance
from the top five orders. Though, the exact distance (in terms of
price) is not available, such an order book, therefore, would lure
the investors towards buying the scrip and, therefore, would
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help the appellant to sell whatever sell quantities he had placed
in the system. Hence the charge of order book manipulation
through a “Bait and Switch” policy.
12. On the other hand, the appellants contention is that he is
playing perfectly within the rules of the game; the buy orders
are placed within the circuit limits, if at all any limit is available
(for F&O scrips there is no such limit, and for other liquid scrips
it is 20%); there are no restrictions on the quantity that can be
placed and there are no other violations or manipulations which
are ascribed.
13. In this context, then the question is whether even if there is
no other violation such as LTP violations, quantity limit
violations, the strategy as described above and adopted by the
appellants can be termed as deceptive according to Regulation
3(d) of the PFUTP Regulations, 2003.
The answer to this
question would require an examination of the volumes. Here,
prima facie, we note that the volume of conversion of buy
orders is generally in the range of 10 to 22% whereas
conversion of sell orders is in the range of 56 to 100%. Though
the appellants’ volumes as a percentage to the total market
volume in no case exceeds 10% because of high liquidity in the
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identified scrips but the very fact that conversion of the buy
orders is less than 1/5th (on the average) of the buy orders
placed in the system does have the effect of displaying a larger
order book than the actual one. By implication, if a number of
traders adopt a similar strategy such a strategy would be
disastrous for the market as the market would be far from being
fair as it is expected to be. Therefore, it would be a tragedy of
the commons, a self-defeating strategy and there is a need for
regulations to appropriately capture such violations.
The
contention of the appellants that they have not violated the
circuit filters or the quantity limits etc. are irrelevant since there
are no allegations relating to the same nor any penalties
imposed on those grounds.
14. The submission that a lower band of 4%, and some
specific dates or time windows were arbitrarily taken though
factually correct do not come to the rescue of the appellants
since such a methodology was adopted only for the purpose of
analysis. It is the magnitude of the buy orders coupled with the
distance from the LTP that is to be seen together to judge
whether there is an element of deception in the strategy adopted
by the appellants. Looking from such a perspective we have no
doubt in categorizing the strategy adopted by the appellants as
14
deceptive as given under the PFUTP Regulations and therefore
in holding that the appellants have violated the said regulations.
15. Therefore, given the deceptive nature of the trading
strategy adopted by the appellant and considering the potential
impact of others adopting similar trading strategies on market
integrity and the need for preserving a fair market, which is the
very objective of regulation, we sustain the impugned orders.
16. Therefore both the appeals fail and are dismissed with no
costs. Appellants are directed to pay the amount of penalty of
` 45 lakhs (` 25 lakhs + ` 20 lakhs) within 30 days from the
date of this order. Misc. Application No. 580 of 2019 seeking
stay of the impugned order has become infructuous and is
disposed of as such.
Sd/Justice Tarun Agarwala
Presiding Officer
Sd/Dr. C.K.G. Nair
Member
Sd/Justice M. T. Joshi
Judicial Member
19.12.2019
Prepared & Compared By: PK