BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Date : 26.02.2019
Appeal No. 330 of 2017
Crosseas Capital Services Pvt. Ltd.
1303, 13th Floor, Lodha Supremus,
Dr. E. Moses Road, Worli Naka,
Worli, Mumbai – 400 018.
……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
Mr. Pesi Modi, Senior Advocate with Mr. Sumit Agrawal,
Ms. Kalpana Desai, Ms. Prachi Jain, Advocates i/b Regstreet Law
Advisors for the Appellant.
Mr. Mustafa Doctor, Senior Advocate with Ms. Vidhi Jhawar,
Advocate i/b The Law Point for the Respondent.
CORAM : Justice Tarun Agarwala, Presiding Officer
Dr. C. K. G. Nair, Member
Per : Justice Tarun Agarwala, Presiding Officer (Oral)
1.
The appellant is a private limited company and is a stockbroker
registered with Securities and Exchange Board of India (hereinafter
referred to as, “SEBI”) and is also a member of BSE Ltd. (hereinafter
referred to as, “BSE”) as well as National Stock Exchange of India
2
Ltd. (hereinafter referred to as, “NSE”). On March 11, 2011, i.e. on
the day of listing of the scrip of Sudar Industries Ltd. (hereinafter
referred to as, “SIL”) on the stock exchanges, the price of the scrip
opened at Rs. 74.00 on BSE and Rs. 80.05 on NSE. On that day, the
price of the scrips rose by almost 47% reaching Rs. 117.70 on BSE
and Rs. 117.35 on NSE. A total of 3,43,12,272 shares of SIL was
traded on BSE and 4,04,07,612 shares were traded on NSE. This
47% increase in the price of the scrips led to an investigation being
conducted by SEBI on the price movement of the scrip of SIL and
for possible violations of securities laws.
2.
Based on this investigation, a show cause notice dated May 12,
2015 was served to show as to why an inquiry should not be held and
penalty be not imposed for violation of Regulations 3 and 4 of
Securities and Exchange Board of India (Prohibition of Fraudulent
and Unfair Trade Practices relating to Securities Market)
Regulations, 2003 (hereinafter referred to as, “PFUTP Regulations”).
The appellant was given an opportunity of hearing, and after
considering the matter, a final order was passed by the Adjudicating
Officer (hereinafter referred to as, “AO”) imposing a penalty of
Rs. 1.10 crore under Sections 15HA and 15HB of the Securities and
Exchange Board of India Act, 1992, (hereinafter referred to as,
3
“SEBI Act”) for violation of PFUTP Regulations and Code of
Conduct for stockbrokers.
3.
The AO found that the appellant on March 11, 2011 while
carrying out algo trading in the scrip of SIL had conducted large selftrades with an intent to create misleading appearance of trading
without intention to change the ownership of such securities. The
AO held that such manipulative act and failure to comply with the
Code of Conduct had violated Regulation 3(a) and (d) and
Regulation 4(1) and 4(2)(a) and (g) of PFUTP Regulations as well as
Clause A(3), (4) and (5) of the Code of Conduct under Schedule II
read with Regulation 7 of the Securities and Exchange Board of India
(Stock Brokers and Sub Brokers) Regulations, 1992 (hereinafter
referred to as, “Stockbroker Regulations”).
4.
The AO found that the total market volume constituted by the
appellant in the SIL scrip by way of self-trades was around 4% in
both the stock exchanges. The AO took this total market volume of
4% into consideration to be substantial creating misleading
appearance of trading with the intention of misleading the market.
The AO gave this finding of 4% of the total market volume as
substantial on the basis of the decision of Securities Appellate
Tribunal in Smt. Krupa Sanjay Soni vs. SEBI, in Appeal No. 32 of
2013 decided on January 24, 2014 wherein it was held that 3% of the
4
total market volume of self-trades were considered as substantial
creating misleading appearance of trading. Thus, taking 3% as the
yardstick, the AO found that in the instant case, the total market
volume of self-trades being around 4% was substantial which had a
manipulative intent.
The AO further found that the frequency,
timing, number of self-trades or the substantial volume of the selftrades including the proprietary trading constituted manipulative
intention of the appellant which indicated positive movement in the
scrips and practically influencing the investors on the outcome of
first day trading in the scrips after it was listed. Such large volume
created an impression that the scrip was doing well in terms of
volume and / or price thereby influenced the investors to deal in the
scrip.
5.
The appellant being aggrieved by the imposition of penalty has
filed the present appeal on various grounds.
We have heard
Shri Pesi Modi, the learned senior counsel for the appellant and Shri
Mustafa Doctor, the learned senior counsel for the respondent.
Mr. Modi, the learned counsel basically placed his arguments on two
counts, namely, that the impugned order was based on erroneous
facts and that there was a violation of the principles of natural justice
as adequate opportunity was not given to inspect the documents.
5
6.
The learned counsel contended that the finding given by AO
that the appellant had self-traded around 4% of the total market
volume in the SIL scrips was factually incorrect. It was urged that
the total percentage of self-trades was only 1.95% of the total market.
7.
It was also urged by the learned counsel for the appellant that
the AO as well as the Whole Time Member (hereinafter referred to
as, ‘WTM’) pursuant to the policy in respect of self-trades and
pursuant to the decision of this Tribunal in Smt. Krupa Sanjay Soni’s
case had adopted a yardstick that self-trades of around 3% or more
would be treated as substantial creating misleading appearance of
trading. It was contended by the learned counsel for the appellant
that the AO as well as the WTM were passing several orders holding
that the volume of self-trading being less than 3% was a negligible
percentage and that it was difficult to arrive at a conclusion that these
self-trades were executed with an intention to create misleading
appearance of trading in the securities market and thus, difficult to
hold them liable for any failure of Code of Conduct of Stockbrokers
Regulations. Such orders were passed by the AO in the case of the
appellant itself being Adjudication Order No. RA/JP/172-181/2017
dated September 29, 2017 and another order in the case of the
appellant in RA/JP/166-171/2017 dated September 29, 2017 and
6
again in the case of the appellant passed by the WTM dated
December 28, 2018.
8.
The learned counsel for the respondent fairly conceded that the
percentage arrived at by the AO of self-trading of 4% was incorrect
and that the correct calculation comes to around 1.95%. It was,
however, submitted that such mathematical error would not in any
manner affect the merits of the case and the imposition of penalty in
as much as the AO has considered other aspects and found that the
execution of self-trades by the appellant was manipulative creating a
misleading appearance in the securities market and that such
manipulative intention was based on the modus operandi, namely,
frequency, timing, volume / percentage of self-trades as well as
proprietary trading. It was, thus, submitted that the AO after taking
into consideration the modus operandi and the entire circumstances
came to the conclusion that the appellant had violated Regulations 3
and 4 of the PFUTP Regulations and Clause A of the Code of
Conduct under Schedule II of the Stockbrokers Regulations. It was,
thus, urged that the impugned order does not suffer from any error of
law and, that the appeal was required to be dismissed.
9.
Having heard the learned counsel for the parties at some length,
we find that in order to understand the alleged violations, it is
essential to know as to what exactly is a self-trade. In case of self-
7
trades, both the buyer and the seller are the same entity and,
therefore, execution of self-trade does not result in change of
beneficial ownership.
Nonetheless, it may create a false or
misleading appearance of trading in the securities market and may
entice other investors to trade in that particular scrip or entities may
enter into such trades with the intention of manipulating the price or
volume of the scrip. As such, the execution of self-trades falls within
the purview of Regulation 4(2)(a) and (g) of PFUTP Regulations,
2003. However, orders placed through algo trading software using
different terminals through the same broker, may get matched
accidentally without any manipulative intention.
As such, mere
occurrence of self-trades may be accidental but still would attract the
provisions of Regulation 4(a) and (g) of the PFUTP Regulations,
2003 if any additional material, evidence or circumstances are
available to indicate manipulation of the price or volume of the scrip
or creation of false or misleading appearance of trading in securities
market resulting from such self-trades.
10.
In the case of Ketan Parekh vs. SEBI in Appeal No. 2 of
2004 decided on July 14, 2006, this Tribunal held as under :“Whether a transaction has been executed with the intention to
manipulate the market or defeat its mechanism will depend upon
the intention of the parties which could be inferred from the
attending circumstances because direct evidence in such cases
may not be available. The nature of the transaction executed, the
frequency with which such transactions are undertaken, the value
8
of the transactions, whether they involve circular trading and
whether there is real change of beneficial ownership, the
conditions then prevailing in the market are some of the factors
which go to show the intention of the parties. This list of factors,
in the very nature of things, cannot be exhaustive. Any one factor
may or may not be decisive and it is from the cumulative effect of
these that an inference will have to be drawn.”
11.
Various decisions have also been passed by the Tribunal on the
issue of self-trades wherein this Tribunal has taken a consistent view
that a few instances of self-trades in themselves would not amount to
an objectionable trade if there was no manipulative intent.
12.
In the light of the various decisions taken by this Tribunal,
SEBI reviewed its stand and came out with the circular dated May
16, 2017 dealing in self-trades. For facility, the said circular is
extracted hereunder :EFD/DRA-3/ON/332/2017
Securities and Exchange Board of India
Enforcement Department -1 (DRA-3)
“Sub.: Approved policy to deal with ongoing cases involving
allegation of self-trade.
1.
2.
IVD vide their ON dated January 25, 2017 had advised EFD
to take a view on the ongoing cases alleging self-trades.
Accordingly, EFD drafted a policy to deal with the issue of
self-trades in the ongoing matters. The said policy has been
approved by WTM(GM) on May 15, 2017.
While considering the policy view on the issue of self-trades,
the specific legal provisions applicable to self-trades i.e.
4(2)(a), (b) and (g) of PFUTP Regulations, 2003 were
examined and based on the examination done by EFD, it is
observed that intention is a sine quo non for establishing
manipulation
in
case
of
self-trades
and
accidental/unintentional self-trades are not covered under
the said regulations. Accordingly, mere occurrence of self-
9
trades should not be considered as per se illegal in the
absence of any other additional evidence to prove
manipulation or intent to defraud as is done in cases of
synchonised trades. Therefore, in all matters of Self Trade,
an assessment has to be made regarding whether the said
trade was intentional or unintentional on the basis of
supporting evidence and the manipulation caused by
indulging in self-trades should be clearly brought out.
3.
Accordingly, the approved policy to deal with ongoing cases
involving allegation of self-trade is as under :
a. The quasi-judicial authority may assess on the basis
of
SCN/ investigation report whether any
manipulation is arising out of self-trade or any
intention to enter into self-trade is evident from the
material on record. If the manipulation or intent can
be established the same may be proceeded with as
approved. However, if no intention or manipulation
is evident from the case and the only charge is mere
occurrence of self-trades, then the entity may be
exonerated by the quasi-judicial authority. Further,
while assessing the manipulative intent, the volume
transacted may also be considered in addition to the
other factors.
b. Further, the entities who have been charged for selftrades have an option to apply for settlement
proceedings and the cases where there is mere
occurrence of self-trades without any other evidence
to indicate manipulation may be settled at the
minimum amount prescribed as Schedule II, Chapter
I, pt. 2 of the Settlement Regulations. In order to
remove difficulties arising from various clauses of
Settlement Regulations such as Reg. 5(1)(c) exemption
is granted from the restriction placed under
Regulation 5(1)(c) so that cases arising in multiple
scrips due to self-trades by the same entity can be
settled. The settlement orders arising out of self-trade
matters would not considered in the number of orders
under Reg. 5(1)(c). The individual cases would
accordingly be taken through HPAC and panel of
members as per the Settlement Regulations.
4. The said policy may be circulated to all the departments for
necessary action.”
10
13.
The circular indicates that in order to find someone guilty of
self-trades under the PFUTP Regulations, 2003, it is essential to find
out the intention or manipulation.
The circular indicated that
accidental / unintentional self-trades were not covered under the
regulations and mere occurrence of self-trades would not be
considered per se illegal in the absence of any other additional
evidence to prove manipulation or intention to defraud. The circular,
thus, provided that in all matters of self-trades, an assessment has to
be made as to whether the said trade was intentional or unintentional
on the basis of supporting evidence. One such supporting evidence
as per the circular to indicate the manipulative intent is, the volume
transacted.
14.
In the light of the aforesaid circular, we find that the impugned
order basically revolves around the total market self-trades executed
by the appellant.
This self-trades being around 4% of the total
market weighed heavily in the mind of the AO while passing the
impugned order and imposing the penalty against the appellant. We
also find that the AO has considered the modus operandi as
supportive evidence to find out the manipulative intent of the
appellant but basically relied upon the high volume of self-trades in
arriving at a conclusion that there was a manipulative intention to
mislead the market and the investors. In our view, the other factors
11
relating to manipulative intent, namely, frequency, timing, number of
self-trades have not been dealt with in the correct perspective.
15.
In the instant case, the AO has given a finding that the appellant
has indulged in self-trades which is around 4% of the total market
trading which was substantial and created a misleading appearance of
trading. Based on this substantial volume of trading, further finding
has been given that the trading was manipulative. This substantial
trading of 4% is apparently incorrect and has wrongly been
calculated by the AO.
In this regard, we find that the volume of
self-trades made by the appellant in both the stock exchanges are as
under :Volume of Self
Trades
(A)
Total Market
Volume
(B)
S. No.
Details
1.
BSE
8,31,6771
2.
NSE
6,28,4612
4,04,07,6124
3.
Total (1+2)
14,60,138
7,47,19884
3,43,12,2723
The total percentage of self-trades to the total market would be the
total quantity of self-trades divided by the total market volume i.e.
14,60,138/7,47,19,884*100 = 1.95% of self-trades to the total market
volume.
12
16.
As per the actual calculation the total market self-trades comes
to 1.95%. This fact has been fairly conceded by the learned senior
counsel for the respondent. Whether 1.95% is substantial or not has
to be reconsidered by the AO in the light of the circular of 2017 in
order to find out whether the self-trades were accidental or
unintentional and, therefore, not covered by the PFUTP Regulations,
2003 or the self-trades were manipulative or intentional to defraud
the market on the basis of additional evidence which could be
physical or circumstantial to show the intention or manipulation.
17.
We are also of the opinion that the adoption of the yardstick of
around 3% of the total market self-trades as substantial creating
misleading appearance of trading, after taking into consideration the
judgment of SAT in Smt. Krupa Soni’s case is totally misplaced. We
find that the decision in Smt. Krupa Soni case does not indicate that a
total market self-trades of less than 3% would be considered as
negligible. Thus, in our view, the AO is required to reconsider and
arrive at a finding as to what percentage of the total market selftrades would be considered as negligible or minuscule to come under
the category of accidental or unintentional self-trades.
18.
Admittedly, the appellant was trading through algorithmic
software which was dully approved by BSE and NSE. In this regard,
the Bombay High Court in the case of National Stock Exchange of
13
India Ltd. vs. Moneywise Media Pvt. Ltd. [(2015) SCC Online
Bom. 4790; (2016) 1 Bom CR 112], has considered what is the algo
trading, holding :“Algo trades are the product of very high end mathematical
modelling. These are models devised specifically to anticipate the
most microscopic changes in markets and to respond to those
changes in a matter of seconds. This is done not through any
human intervention, an aspect that is totally eliminated, but in a
wholly automated fashion by computer-generated or triggered
transactions. In high value transactions the number of such
transactions that can be put through is very considerable indeed.
A most rudimentary example might be this: an ‘algo’ is designed to
detect the most minute changes in stock prices and to respond
accordingly. In anticipation of a rise in a particular stock’s value,
say, with no manual intervention but by a computer program
responding to the data input, a series of purchases are triggered
made at a lower value so that when the markets later reach the
higher level, a considerable profit is then, equally automatically,
generated and booked. The same can also operate in reverse to
minimise a potential loss. Of course, these are utterly basic
examples. I imagine the actual models are far more sophisticated
and complicated, for use in complex scenarios for highly evolved
financial and security transactions. The point is, however, that
these trades are automatic and computer-generated, and they
happen at very high speed and in high volumes.”
19.
Admittedly, the software is designed to anticipate microscopic
changes in the market and to respond to those changes in the matter
of seconds. Orders of sale and purchase are done automatically
through this software and not through any human intervention. The
algo softwares are designed to detect the most minute changes in
stock prices and to respond accordingly and, therefore, it is quite
possible that when certain orders are automatically generated without
any human intervention for purchase of shares on a minute change in
the stock prices, simultaneously in a fraction of seconds a similar
14
order of the same quantity could be booked for sale. Consequently,
such purchase and sale could happen automatically which may result
in self-trades.
Whether such self-trades generated automatically
could lead to violation of PFUTP Regulations is a point which is
required to be considered by the AO especially in the light of the
policy declared by SEBI in its circular of 2017, namely, the
intention/the manipulative intention. Further, whether such intention
or manipulative intention generated automatically through algo
trading can be fastened upon the appellant when there is no human
intervention is also required to be given some consideration. The
fact remains that if the appellant was executing an order through algo
trading, he should have placed some mechanism in the algo software
in order to ensure that such trades do not result in self-trades. All
these aspects are required to be considered which we find the same to
be lacking in the instant case.
20.
Since, admittedly, the volume of the transaction in self-trades
have been incorrectly calculated, the impugned order cannot be
sustained and the matter is required to be remitted again to the AO to
re-decide the matter. At this stage, it needs to be said that the
contention of the appellant that appropriate opportunity of hearing
was not given and the principles of natural justice were violated is
not correct.
We find from a perusal of the record that ample
15
opportunity was given which the appellant availed. However, since
the matter is remitted again to the AO to pass an order afresh, it
would be open to the appellant to move a fresh application for
inspection of the documents. If such an application is filed, the AO
will pass appropriate orders and deal with such application in
accordance with law.
21.
For the reasons stated aforesaid, the impugned order cannot be
sustained and is quashed. The appeal is allowed. The matter is
remitted to the AO of SEBI to decide the matter afresh in the light of
the observations made above after hearing the parties within four
months from the date of receipt of the certified copy of the order. In
the circumstances of the case, parties will bear their own costs.
Sd/Justice Tarun Agarwala
Presiding Officer
Sd/Dr. C. K. G. Nair
Member
26.02.2019
Prepared & Compared by
PTM