2020 (7) TMI 167 - AT - SEBI

Tribunal alters penalties for SEBI regulation breaches, citing lack of evidence and scrip liquidity.

Labhu Gohil Versus Securities and Exchange Board of India

The Tribunal modified the direction imposing penalties on 16 entities for violating SEBI regulations related to trading in a specific scrip. Despite prima ... Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market - Monetary penalties imposed on them under section 15HA of the SEBI Act, 1992 - HELD THAT:- SEBI was doing investigation during the interim and some delay though has happened on account of change in the AO. Though the impugned order deals with trading in the name of the minor, no action has been rightly contemplated against the minor. As regards the other noticees/appellants on appeal before us we note that though their relationship through common address, common mobile numbers etc. are matters of record and proved no motive has been attributed to their trading pattern. New LTP, NHP and a few first trades in the scrip have been created/done by these appellants which would prima facie points towards a manipulative effort. It is on record that the scrip was progressively doing well during the investigation period with substantial increase in both prices and volumes. No connection with the promoters of the Company or with the Company itself has been attributed to the appellants. There is no evidence or even any discussion on any fund transfer between the appellants or the appellants with any other entities in the absence of which motive for a collusive or manipulative effort becomes blunt. When a group of 16 entities themselves becomes parties to each other's trade in a circular fashion, though to a limited extent, the net amount of profits or losses also become negligible and only to the extent of their trades getting matched with entities outside the group. Looking at the trading pattern of the appellants; the LTP, NHP, first trades etc. it may be possible to arrive at a prima facie conclusion regarding violation of PFUTP Regulations. However, in the facts and circumstances of the matter, particularly the fact that the scrip involved was reasonably liquid and continued to become more liquid and hence increase in volume and prices and with no evidence of any fund transfer, motive for manipulation etc. we are of the considered view that no penalty can be imposed on the appellants. Without any other evidence, we are constrained to give some weight to the submissions of the appellant that they were trading in the scrip in a normal way because of the scrip itself being attractive through various public announcements supported by the fact of increase in volume of trading and rise in prices. Therefore, given these factors imposing a penalty becomes too harsh. At the same time since the trading behavior exhibited by these appellants is not normal and is amenable to invoking suspicion of a PFUTP violation, we would warn the appellants from indulging in similar trading practices in future. Issues:Challenging SEBI order imposing penalties for violating PFUTP Regulations.Analysis:1. The appeals were filed challenging the SEBI order dated November 30, 2017, penalizing 16 entities for violating SEBI regulations. Penalties ranged from Rs. 5 lakh to Rs. 10 lakh under section 15HA of the SEBI Act, 1992.2. The investigation focused on trading in the scrip of M/s. Aarya Global Shares and Securities Ltd. by 16 connected entities, contributing to positive Last Traded Price Variation (LTPV) and New High Price (NHP) in violation of PFUTP Regulations.3. The adjudication process involved two Adjudicating Officers, with a common show cause notice issued to the noticees. Personal hearings were granted, and the impugned order was passed on November 30, 2017, after considering replies and statements.4. The appellant raised objections regarding substantial delay in proceedings, citing a similar case precedent. Allegations of a malicious investigation were made, questioning the evidence against the appellants.5. The appellant argued that the impugned order did not consider stock split impact or continued price and volume increase, making it unsustainable. The individual contributions of appellants to LTP and NHP were deemed negligible.6. Distinctions were sought in the appellants' roles, contending they traded like regular investors, and their relationship or living arrangements should not imply guilt.7. SEBI contended that the appellants traded amongst themselves to create artificial LTPs, NHPs, and first trades, violating PFUTP Regulations. The appellants' replies were deemed inadequate, and their trading patterns were seen as manipulative.8. The Tribunal found no merit in the delay objections, noting ongoing investigations and changes in the Adjudicating Officer. Actions against a minor were not warranted, and while trading patterns suggested manipulation, no evidence of collusive motive or fund transfers was found.9. Despite prima facie violations, considering the liquidity of the scrip and absence of concrete evidence, the Tribunal concluded that penalties were unwarranted. The appellants were warned against similar trading practices in the future.10. The direction imposing penalties was modified, and the appeals were disposed of with a warning to the appellants, emphasizing the importance of adhering to securities regulations.