BEFORE THE SECURITIES APPELLATE TRIBUNAL
MUMBAI
Order Reserved on: 17.05.2019
Date of Decision
: 28.06.2019
Appeal No. 333 of 2017
Jaypee Capital Services Limited
FA-45, Shivaji Enclave,
Rajouri Garden,
New Delhi – 110 027.

…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
Appeal No. 345 of 2017
Mr. Gaurav Arora
F 8/21 Vasant Vihar,
New Delhi – 110 057.

…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. Somasekhar Sundaresan, Advocate with Sumit Agarwal,
Mr. Mahaveer Rajguru and Mr. Mittu Choudhary, Advocates i/b
Regstreet Law Advisors for the Appellant.
Mr. Gaurav Joshi, Senior Advocate with Mr. Anubhav Ghosh and
Ms. Rashi Dalmia, Advocates i/b The Law Point for the
Respondent.

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CORAM : Justice Tarun Agarwala, Presiding Officer
Dr. C.K.G. Nair, Member
Justice M.T. Joshi, Judicial Member
Per : Dr. C.K.G. Nair, Member
1.

Appellants in these appeals challenge the order of the
Adjudicating Officer (‘AO’ for short) of Securities and Exchange
Board of India (‘SEBI’ for short) dated September 28, 2017. By
the said order Jaypee Capital Services Limited (‘Jaypee’ for
short), appellant in Appeal No. 333 of 2017 and Mr. Gaurav
Arora, appellant in Appeal No. 345 of 2017 have been directed to
pay an amount of Rs. 2 crores as penalty jointly and severally
under Section 15HA of SEBI Act, 1992 and Jaypee has been
further directed to pay an amount of Rs. 10 lakhs as penalty under
Section 15HB of the SEBI Act, 1992. The said penalty of Rs. 2
crores has been imposed for violation of Regulations 3(a), (b), (c),
(d), and 4(1) and 4(2)(a) of the SEBI (Prohibition of Fraudulent
and Unfair Trade Practices relating to Securities Market)
Regulations, 2003 (‘PFUTP Regulations’ for short) and penalty of
Rs. 10 lakhs has been imposed for violation of Clause A(2), (3) &
(4) of the Code of Conduct under Schedule II [read with erstwhile
Regulation 7 (now regulation 9(f)] of the SEBI (Stock Brokers
and Sub-brokers) Regulations, 1992.

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2.

Jaypee, appellant in Appeal No. 333 of 2017 is a member of
the United Stock Exchange of India Limited (‘USE’ for short)
since June 2010. Appellant in Appeal No. 345 of 2017 was the
Managing Director of Jaypee till March 11, 2015. In addition, Mr.
Arora was also a Trading Member Director in the USE till
September 17, 2012. Since both these appeals have been filed to
challenge the same impugned order and by consent of the parties
both these appeals have been heard and decided together.
3.

During 23 – 25 January, 2012 SEBI conducted an inspection
of the books of accounts and other records of Jaypee for the period
between April, 2011 to October, 2011. During this inspection
SEBI noticed that Jaypee, with the help of its Managing Director,
Mr. Arora, had executed large number of self trades in the US
Dollar – Indian Rupee (USD – INR) currency derivative contract
during the inspection period and created misleading picture of
large volumes of trading in this contract at USE. Accordingly, a
show cause notice dated January 22, 2015 was issued to both the
appellants seeking to show cause as to why an enquiry should not
be held against them and penalty not imposed under Section
15HA and under Section 15HB of the SEBI Act, 1992. It is noted
from the records that a large number of extensions had been
sought by the appellants for filing replies and additional replies
4
etc. and for personal appearance which were granted by SEBI.
The appellants also sought a number of records including
voluminous trade logs, which was given by SEBI. Thereafter, the
order impugned in these appeals was passed on September 28,
2017. Further, the appellants have also filed settlement
applications twice which were rejected by SEBI.

4.

USE was a new Stock Exchange incorporated on October
15, 2008 and dealing in currency derivatives only. The USE was
co-founded by the Bombay Stock Exchange (BSE) and Federal
Bank with investments from 21 Indian public sector banks as well
as private banks and international banks. Both the appellants
herein were also shareholders of USE. USE merged with BSE in
2014. During the relevant time the appellant Jaypee had executed
voluminous trades on its proprietary account at USE, a major
share of which was self trades: such self trades were 59.77% of
the total volume in USE during the inspection period. Further, it
was observed that 73.32% of the self trades were executed within
a few seconds from 12 terminals of the appellant Jaypee. The
complete details of the trades, including its break up into self
trades and emanating from different terminal locations, are given
in the Annexure – II to the show cause notice.

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5.

The volume of trades and other facts are not disputed by the
appellants. Rather, in its reply dated April 19, 2015 it was, inter
alia, confirmed that during the period April – October, 2011 the
appellant was an active proprietary trader with substantial trades
executed in pro-account and it had only two clients at the relevant
time. It was also submitted by the appellants that in view of their
high activity levels it is not unusual that in terms of percentage the
volume of pro-trading is higher than the volume of client trading.
It is also an undisputed fact that the USE had only four active
trading members at the relevant time.
6.

Shri Somasekhar Sundaresan, learned counsel appearing on
behalf of the appellant submitted that the relevant time was the
early stage of the currency derivatives exchanges in India. It was a
demutualised Exchange from its trading launch date itself i.e.
September 20, 2010. Though the appellants in both the appeals
were also shareholders of USE, they were not among the top 10
shareholders. Further, the board of directors of USE consisted of
highly qualified and reputed individuals including former senior
civil servants etc.
7.

It was further submitted by the learned counsel for the
appellants that Jaypee at the relevant time was using algo trading
with no manual intervention. Further, it was contended that heavy
6
trades per se at the relevant time was not against rules, only self
trades and that too beyond the threshold level with the intention to
manipulate the market could be termed as violation. Appellant had
no intention to manipulate the market nor even to do self trades.
Because of algo based trading the volumes were large and hence
some of its trades got matched automatically but there was neither
any manipulation nor any intention to manipulate. In any case, it
was not possible to do any price manipulation since the reference
rate of the INR – USD contract was decided by the Reserve Bank
of India (RBI) which cannot be manipulated by anyone. In any
case, the appellant had incurred a heavy loss of Rs. 88,58,290/- on
account of the said trades. The decision of the board of directors
which is relied on by SEBI is relating to volumes upto December
31, 2010 and not for the investigation period. This is clear from
the minutes of the USE board decision on March 12, 2011. It is on
record that in the meeting of the board of directors of USE held on
March 12, 2011, wherein Mr. Arora was also present, it was
recorded as follows:“The portion “Mr. Gaurav Arora has endeavoured to
ensure that until 31st December, 2010, the Exchange
will have total traded volumes in the vicinity of Rs.
1500 Crore. Mr. Gaurav Arora has also committed to
the Board that, he will endeavour to ensure that at any
point of time effective from 1st January, 2011, the total
volumes traded on the Exchange will be 10% of the
overall market volumes (aggregate of volumes of all 3
7
stock exchanges) of Rs. 3000 Crore whichever is
higher.”, be replaced with “Mr. Gaurav Arora has
agreed to be in frequent touch with the other important
traders to endeavour that until December 31, 2010, the
Exchange will have traded volumes in the vicinity of Rs.
1500 Crore.”
8.

Similarly, the decision of the board of directors to restrict the
appellant’s trade volume was upto 30% which the appellant had
complied with subsequently.

However, this limit itself was
revised to 45% by the board of USE. Moreover, the open position
limit of 15% of the total position or USD 50 Million whichever is
higher was never breached by the appellant. Reliance on the
decision of the Hon’ble Supreme Court in the case of SEBI vs
Rakhi Trading (CA No. 1969/2011, order dated February 8,
2018) by SEBI is misplaced as Rakhi Trading deals with
synchronized and circular trading and not with respect to self
trades. Moreover, under Rakhi Trading the manipulative intent has
to be established which is not the case of the impugned trades
where no intention is established and that too in the context of
making a huge loss by the appellant.
9.

It was further contended that in any case self trades could
not have been detected and prevented during the relevant time as
the technology available in the trading system of USE was not
capable of doing the same. This facility came much later.

8
10. It was also contended by the learned counsel for the
appellant that SEBI gave only a warning to USE vide the WTM’s
order dated April 9, 2012 which dealt with the role of USE in the
same matter which, inter alia, covered self-trade volumes by a few
members which is the issue in the present appeal. In the WTM’s
order it was also held that there was no evidence of “wash trades”
as no motive could be established to the nature of such trades,
except affecting the volumes. In short, the impugned order does
not establish any intention or motive behind the alleged
manipulation and hence there was no manipulation and therefore
the charge of violation of PFUTP Regulations is without any
merit. The only issue is that of the appellant having high volumes
of trades which was neither self trades nor executed with any
manipulative intent and hence not liable to be punished under
PFUTP Regulations. In any case and without prejudice to the
aforesaid submissions, the penalty imposed is too high and
disproportionate, particularly in the context of no manipulative
intent as well as the fact that the appellant has incurred heavy loss.
11. The learned counsel for the appellant also placed reliance on
the orders passed by this Tribunal in matters of Todi Securities
Ltd. vs SEBI (Appeal No. 403 of 2015 decided on February 10,
2017) and Crosseas Capital Service Pvt. Ltd. vs SEBI (Appeal
9
No. 104 of 2015 decided on February 10, 2017), whereby a fresh
look on self trades was ordered, in the context of SEBI’s intention
to revisit the issue.
12. Shri Gaurav Joshi, learned senior counsel appearing for the
respondent SEBI emphasized the huge magnitude of the volume
of trade and the proportion of self trade therein executed by the
appellant. The table in the impugned order on page 20 at
paragraphs 29 and 30 clearly demonstrate these details.
Accordingly, the appellant had contributed 72.83% of USE’s total
turnover during the investigation period. Further 59.77% of USE’s
turnover was self trades by Jaypee. Similarly, in paragraph 77 of
the impugned order the absolute magnitude of trading is stated
that the appellant had executed more than 15 lakhs self trades
which was 59.77% of USE’s total volume.
13. It was further contended by the learned counsel for the
respondent SEBI that Mr. Arora, the Managing Director of Jaypee
was also a shareholder as well as a Director in USE. His son was a
Key Managerial Personnel (KMP) in USE appointed vide decision
indicated in the board meeting minutes dated March 12, 2011 of
USE a month before commencing the huge volume of trading by
the appellant Jaypee. It is on record that Mr. Arora had formally
agreed to bring in more volumes in the USE.

10
14. It was further submitted that algo trading is different from
what is done by the appellant herein. Algo trading is basically to
take advantage of arbitrage opportunities while in the present
matter it was computerized trading from multiple terminals only
to create artificial volume mainly by means of self trades. The
ratio of Rakhi Trading and SEBI vs Kishore R. Ajmera (2016) 6
SCC 368 squarely apply to the present matter as volume
manipulation is also a PFUTP violation and price manipulation is
not the only PFUTP violations. On the quantum of penalty
appellant’s reliance on the order of Todi Securities Ltd. is not
maintainable because they are not comparable situation since the
magnitude of trading and self trades of the appellant is much
higher than that of Todi Securities Ltd.
15. Learned counsel for the respondent SEBI also placed
reliance on a number of judgments in addition to Rakhi Trading
and Kishore R. Ajmera (supra), such as orders of this Tribunal in
Angel Broking Private Ltd. vs. SEBI (Appeal No. 46 of 2014
decided on October 1, 2014), H.J. Securities Pvt. Ltd. vs. SEBI
(Appeal No. 76 of 2012 decided on May 11, 2012), Ketan Parekh
vs. SEBI (Appeal No. 2 of 2004 decided on July 14, 2006), Smt.
Krupa Sanjay Soni vs. SEBI (Appeal No. 32 of 2013 decided on
January 24, 2014), Shankar Sharma vs. SEBI (Appeal No. 14 of
11
2009 decided on October 28, 2009) and Crosseas Capital
Services Pvt. Ltd. vs. SEBI (Appeal No. 330 of 2017 decided on
February 26, 2019).
16. For convenience the relevant provisions of the PFUTP
Regulations, 2003 and Schedule II of the Stock Brokers
Regulations, 1992 are reproduced as under:“PFUTP Regulations, 2003
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;
(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 thereunder;
(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 thereunder.
4. Prohibition of manipulative, fraudulent and unfair
trade practice
12
(1) Without prejudice to the provisions of
regulation 3, no person shall indulge in a
fraudulent or an unfair trade practice in securities.
(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;
Schedule II of Stock Brokers Regulations, 1992
(2) Exercise of due skill and care : A stock-broker shall
act with due skill, care and diligence in the conduct of
all his business.
(3) Manipulation : A stock-broker shall not indulge
in manipulative, fraudulent or deceptive transactions
or schemes or spread rumours with a view to
distorting market equilibrium or making personal
gains.
(4) Malpractices : A stock-broker shall not create
false market either singly or in concert with others
or indulge in any act detrimental to the investors
interest or which leads to interference with the fair
and smooth functioning of the market. A stockbroker
shall not involve himself in excessive speculative
business in the market beyond reasonable levels not
commensurate with his financial soundness.”
17. We find no merit in the submissions of the appellant.
Submissions that self trade per se is not a violation cannot be
accepted, particularly, in the given context where the quantity of
self trade is upto 60% of the total volume in an exchange, USE.
What is held in the judgments relied on by the appellant as well as
13
the circular issued by SEBI is relating to small volumes of self
trade happening unintentionally while placing large number of
orders. Such exception cannot be extended to huge volumes of
self trades basically covering almost 2/3 of the total volume of the
Stock Exchange itself. The contention of algo trading cannot be
accepted because the beneficial owner of the algo is expected to
be in control over the algo and trading strategy embodied in the
said algo has to be in tune with the extant rules and regulations.
Algos are not meteors or asteroids striking the market at random
but carefully designed trading strategies developed by traders /
trading members of an exchange. Here is a case of self trade of
upto 15 lakh units in a derivative contract of the Exchange in six
months which comes to almost 60% of the total volume of the
Exchange during the period. By no imagination this can be treated
as accidental matching of a few trades particularly when such high
volumes and high ratios are there on record for a number of
trading days covering the six months of inspection period. The
appellants cannot take shelter under ignorance of such high
volumes of self trades executed by its own algo trading even if the
algo trading argument is accepted. Moreover, we are also
intrigued by the intention of using algo trading method where only
4 active members were present in the exchange and where
volumes of trades other than that of the appellant was rather
14
limited. In such a context, introducing an algo mechanism or a
computerized strategy to trade itself is the result of a manipulative
intention of the appellant for creation of high volumes to which
the appellants were formally obligated. This coupled with the
huge percentage of self trades underscore the manipulation in the
present context, which is a clearly manipulation as defined under
Regulation 4(2)(a) and other cited provisions of PFUTP
Regulations, 2003.

18. The appellants’ submission that a huge loss of more than Rs.
85 lakh has been incurred has no meaning as this loss is miniscule
as it occurred in the market on a turnover of the appellant to the
tune of about Rs. 20 lakh crores (19,91,207 crore). The contention
that the Whole Time Member of SEBI did not find fault with
trading in USE and only a warning was given to USE has no merit
since that order was regarding the role of USE, the exchange in
the episode. Moreover, we note that the said order, inter alia,
records “USE is a four dealer / member exchange where these
dealers / members trade among each other with negligible client
participation. I note the admission of USE that the bulk of large
size trades have mostly been executed by two trading members
who operate with large number of trading terminals from multiple
locations. However, it was denied that the said trades were ‘wash
15
trades’ as no motives could be attributed to the nature of such
trade, except affecting the volumes.” Therefore, the WTM’s order
clearly held that volumes were affected by such trading, and the
denial on wash trading is that by the USE, not by the WTM
himself. In any case we do not intent to provide any benefit of this
order to the appellant, since it is not an order tested in appeal.

19. Volume manipulation
is
a
PFUTP violation
under
Regulation 4(2)(a) of PFUTP Regulation, 2003. This is further
underscored by a number of judgments, particularly, Ajmera and
Rakhi Trading (supra) which between them examined various
scenarios of market manipulation which are illustrative as
emanating from the appeals therein and not exhaustive, such as,
synchronized trading, circular trading etc. and which also rejects
the contention of some of the appellants in Rakhi Trading that
synchronized trading in F&O segment is not the same as that in
individual scrip as there is no beneficial ownership in the latter
since it is cash settled. Effectively, a self trade is a type of
synchronized trading with both the sides of buy and sell being
synchronized by the same entity. If volume generation has no
intrinsic basis and is only to lure other investors into the market it
is market manipulation. While it is possible that in an anonymous
market, in the context of large volume of trading some small
16
quantity of self trade can take place and which, in the absence of
other evidence, may not be treated as manipulative, huge
percentages of the market such as in the present matter where
more than 70% of the total volume in the market is created by the
appellant out of which a similar proportion is by self trades, by no
stretch of imagination this can be interpreted as normal matching
of self trade. When the proportion of trading by one entity and the
proportion of self trades by the same entity crosses some critical
limit of the same party’s trade and/or the total market volume such
trades are undoubtedly and ex-facie manipulative in nature. And it
happened not on one or two days, but over six months. The
present matter is, therefore, not only market manipulation as
defined under PFUTP Regulations, 2003 but market manipulation
of an unprecedented magnitude. In doing so, the broker (Jaypee)
undoubtedly violated Schedule II of Stock Broker Regulations,
1992 which specifically calls for due skill and care, no
manipulation and no malpractices in broking business.
20. In this context, it is also important to state the objective
behind a demutualised exchange; since the learned counsel for the
appellant also contended that USE was a demutualised exchange
since inception. A perfectly demutualised exchange envisages
complete separation of ownership (which is to be diversified),
17
management and trading. However, in an imperfect model of
demutualization a limited degree of trader participation is allowed
on the board of the exchange basically to provide a connection
between exchange policy making and the world of trading.
However, in such an imperfect model the implicit understanding is
that the trading member who is on the board of the exchange
would abstain from trading during the time when she / he is on
Board. However, in the instant matter such a restricted
relationship has been taken to such a level of effectively
monopolising the entire trading operation of the exchange by one
trading member who is on the board of the exchange. This is in
addition to his son being appointed as a key managerial person of
the exchange. This is far from a demutualised model which was
envisaged to protect market integrity, a deficiency noticed in a
mutualised exchange by separating board, management and
trading functions into distinct categories with firewalls between
them. Still the appellants were warned by the board of directors of
USE directing to reduce their exposure in terms of volumes.
However, even after this warning / direction it took considerable
time for the appellant to reduce its volume of trading. Therefore,
findings in this impugned order that the appellants violated
various provisions of PFUTP Regulations, 2003 and appellant
18
Jaypee violated Schedule II of Stock Broker Regulations, 1992
cannot be faulted.
21. The submission that the penalty imposed on another trading
member, Todi Securities, is much less and the penalty of Rs. 2
crore imposed on the appellant for violation of PFUTP
Regulations is harsh has no merit in view of the substantial
differences in volume of trading and self trades and other
distinguishing factors between the two parties. In fact, given the
facts and circumstances of this matter we are of the view that the
penalty of Rs. 2 crore is rather light.
22. For all the above reasons, we find no merit at all in these
appeals and they are dismissed forthwith. No orders on costs.

Sd/Justice Tarun Agarwala
Presiding Officer
Sd/Dr. C.K.G. Nair
Member
Sd/Justice M.T. Joshi
Judicial Member
28.06.2019
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