Circumstantial evidence can prove market manipulation in illiquid scrips, sustaining penalties where trade patterns show concerted trading.

Fraudulent or manipulative trading in illiquid scrips may be established by circumstantial evidence and the preponderance of probabilities under the SEBI framework, where the totality of trading patterns points to a concerted course of conduct creating a false appearance of market activity or affecting price. Repeated synchronized or circular orders, close buy-sell proximity, heavy volume, and persistent trading patterns are material indicators. On the proved facts, liability was not made out against one broker because the evidence showed only a vigilance lapse, but liability was sustained against the remaining respondents because the surrounding circumstances justified an inference of manipulation. The natural justice challenge failed because the trade-log extracts disclosed the relevant pattern and no prejudice from withheld material was shown.

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Issues: Whether liability of brokers and sub-brokers for fraudulent or manipulative trading in illiquid scrips can be established on circumstantial evidence and preponderance of probabilities, and whether the impugned penalties were vitiated by want of direct proof or breach of natural justice.

Analysis: The regulatory scheme under section 12-A of the Securities and Exchange Board of India Act, 1992 and the FUTP Regulations permits inference of fraudulent or manipulative conduct from the totality of surrounding circumstances. Direct evidence of a prior meeting of minds is seldom available in market manipulation cases, and the correct test is whether the proven facts reasonably point to a concerted course of trading that creates a false appearance of market activity or manipulates price. Factors such as the illiquid nature of the scrip, the huge volume of trading, repeated synchronized or circular orders, the close proximity of buy and sell orders, and the persistence of the pattern over time are material indicators. On that standard, the broker in the first group of appeals was not shown, on the proved primary facts, to have crossed the line from vigilance lapse to actionable misconduct. In the remaining appeals, the volume, pattern, and timing of trades justified the inference of manipulative conduct and breach of the code of conduct. The plea of natural justice failed because the relevant trade-log extracts disclosed the offending pattern and the withheld material did not cause prejudice sufficient to vitiate the findings.

Conclusion: Fraudulent or manipulative trading may be inferred from cumulative circumstances on a civil standard of proof, but the first set of facts did not justify liability against the broker, whereas the remaining respondents were rightly held liable and the penalties were sustained. The natural justice challenge also failed.

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