2019 (3) TMI 885 - AT - SEBI

Stockbroker penalty quashed for PFUTP violation, matter remitted for reassessment.

Crosseas Capital Services Pvt. Ltd. Versus Securities and Exchange Board of India, Mumbai

The Tribunal quashed the penalty imposed on the stockbroker for violating PFUTP Regulations and remitted the matter back to the Adjudicating Officer for ... Misleading appearance of trading in securities market - guilty of self-trades under the PFUTP Regulations, 2003 - Price movement of the scrip of SIL and for possible violations of securities laws - price rise of scrips by almost 47% - misleading the market - investigation being conducted by SEBI - penalty 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 - appellant was trading through approved algorithmic software - HELD THAT:- 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. 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 [2015 (7) TMI 257 - SECURITIES APPELLATE TRIBUNAL MUMBAI] case is totally misplaced as it 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. Admittedly, the appellant was trading through algorithmic software which was dully approved by BSE and NSE. 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. 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. All these aspects are required to be considered which we find the same to be lacking in the instant case. 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. 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. Issues Involved:1. Alleged violation of Regulations 3 and 4 of the PFUTP Regulations.2. Imposition of penalty under Sections 15HA and 15HB of the SEBI Act.3. Allegation of self-trades constituting 4% of the total market volume.4. Appellant's contention of erroneous facts and violation of principles of natural justice.5. Determination of manipulative intent in self-trades.Detailed Analysis:1. Alleged Violation of PFUTP Regulations:The appellant, a registered stockbroker, was accused of violating Regulations 3 and 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations). The violation pertained to the execution of large self-trades on the listing day of Sudar Industries Ltd. (SIL), which allegedly created a misleading appearance of trading without changing the ownership of the securities.2. Imposition of Penalty:The Adjudicating Officer (AO) imposed a penalty of Rs. 1.10 crore under Sections 15HA and 15HB of the SEBI Act for the violation of PFUTP Regulations and the Code of Conduct for stockbrokers. The AO concluded that the appellant's self-trades were manipulative and intended to mislead the market.3. Allegation of Self-Trades Constituting 4% of Total Market Volume:The AO found that the appellant's self-trades constituted around 4% of the total market volume in SIL’s scrips, which was deemed substantial and indicative of manipulative intent. This finding was based on a precedent where 3% of total market volume in self-trades was considered substantial. However, upon review, it was conceded by the respondent's counsel that the actual percentage of self-trades was 1.95%.4. Appellant's Contention of Erroneous Facts and Violation of Principles of Natural Justice:The appellant argued that the AO's calculation of 4% self-trades was factually incorrect and that the actual figure was 1.95%. Additionally, the appellant claimed that there was a violation of the principles of natural justice as adequate opportunity was not provided to inspect the documents.5. Determination of Manipulative Intent in Self-Trades:The Tribunal emphasized the need to determine whether self-trades were intentional or accidental. The Tribunal referenced a SEBI circular from May 16, 2017, which stated that mere occurrence of self-trades should not be considered illegal without additional evidence of manipulative intent. The AO's reliance on the 4% figure was found to be misplaced, and the Tribunal noted that the AO needed to reconsider whether 1.95% was substantial and whether the self-trades were manipulative or accidental.Conclusion:The Tribunal quashed the impugned order and remitted the matter back to the AO for reconsideration. It directed the AO to reassess the case in light of the correct percentage of self-trades and to determine if there was any manipulative intent based on additional evidence. The Tribunal also clarified that the appellant had been given ample opportunity for a hearing, but allowed the appellant to apply for inspection of documents afresh. The AO was instructed to decide the matter within four months from the date of receipt of the certified copy of the order.