SEBI orders disgorgement of Rs. 2.7 crore plus interest for fraudulent reversal trades under PFUTP Regulations

SEBI confirmed fraudulent and manipulative trading by multiple parties acting as a group in scrip transactions. The Board held that back-and-forth transactions between the parties constituted reversal trades even when executed across multiple days, establishing manipulative intent. Following SAT directions, SEBI calculated ill-gotten gains at Rs. 2,69,93,016.79 after deducting eligible expenses from trade values. The Board ordered joint and several disgorgement of the calculated amount plus 12% annual interest from December 2012, confirming the computation methodology from its January 2019 order under PFUTP Regulations.

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Issues Involved:
1. Reversal of Trades
2. Computation of Ill-Gotten Gains

Detailed Analysis:

Reversal of Trades
The Securities Appellate Tribunal (SAT) upheld SEBI's findings that the Noticees engaged in manipulative trades in the scrips of Polytex India Limited, KGN Enterprises Limited, and Gemstone Investments Limited. The Tribunal directed SEBI to provide date-wise details of reversal trades and calculation of profits. SEBI complied by providing date-wise trading details, except for one Noticee, Rawal Jinal Apurva, who incurred a loss and whose trades were not used for profit computation.

The Noticees argued that reversal trades should occur on the same day or within a few days. However, SEBI cited the SAT's observation that reversal trades could span multiple days if they show a pattern of manipulation. The Supreme Court in SEBI v. Kanaiyalal recognized the difficulty in defining manipulative practices due to evolving technology and human ingenuity. Thus, SEBI considered trades across days as reversal trades based on the intention to manipulate the scrip.

Computation of Ill-Gotten Gains
The Tribunal directed SEBI to detail the calculation of ill-gotten gains. SEBI provided a table showing the buy and sell quantities, values, and profits for each Noticee. The computation included actual transaction prices during the investigation period and prices for excess buy or sell quantities based on transactions immediately before or after the investigation period.

The Noticees contended that expenses incurred during transactions should be excluded from ill-gotten gains. SEBI agreed to exclude statutory levies like securities transaction tax (STT) and SEBI turnover fees but not other expenses, which were considered costs of committing fraud.

SEBI calculated the cumulative buy and sell values for the Noticees' trades, deducting eligible expenses to arrive at the ill-gotten gains of Rs. 2,69,93,016.79. The Noticees were directed to jointly and severally disgorge this amount with 12% annual interest from December 17, 2012, until payment.

Conclusion:
SEBI's order was upheld on merits, confirming the manipulative conduct of the Noticees. The detailed date-wise reversal trades and profit calculations were provided as directed by SAT. The ill-gotten gains were recalculated, excluding only statutory levies, and the Noticees were ordered to disgorge the adjusted amount with interest.

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