2021 (1) TMI 763 - AT - Companies Law

SEBI Upholds Market Manipulation Charges, Dismisses Appeals

BP Comtrade (P.) Ltd. Versus Securities and Exchange Board of India

The tribunal dismissed all appeals challenging SEBI's orders of debarment and penalty imposition on appellants for market manipulation through the ... Levy of Penalty - manipulation in price of the scrip of Blue Blends by employing/adopting a strategy of trading called 'Advancing the Bid' - HELD THAT:- The nature/pattern of trading adopted by the appellants is not in the nature of what a rational investor would do. A large number of sell orders were placed repeatedly on several trading dates at less than the LTP; it is illogical. Therefore, the contention of the appellants that it was following momentum trading has no meaning as by placing a large number of orders below the LTP the appellants themselves were creating a momentum. Of course we notice that a number of orders of the appellants were placed on or marginally above LTP, but that is the rational behaviour expected from a seller and no fault can be found for SEBI in not considering such trades as violative of the PFUTP Regulations. Further, it is also on record that in 124 out of 166 times sell orders were placed in single digits of 1, 2, 3 etc shares, which defies the submission of the appellants that they were placing orders below the LTP because only if sell orders are placed a bit below the LTP large quantities could be sold in a falling market. Therefore, clearly the strategy of trading [momentum trading] adopted by the appellants was creating its own momentum inimical to the interest of the securities market. Even if it affected only about 10 % of the market volume in the scrip of Blue Blends, as contended by the appellants, it is no consolation since influencing 10% of the market by 2 entities is a significant deviation from market equilibrium. Therefore, de hors the connectivity issue itself the appellants are in violation of the PFUTP regulations by the very nature of their trading strategy and trading pattern. Mitigating factors are inbuilt in the given punishments. 4 weeks restrain from the securities market as directed by the WTM and ₹ 5 lakhs joint and several penalty imposed by the AO are not harsh or disproportionate in the given facts and circumstances for us to interfere with the impugned orders. However, if the appellants so desire they may pay ₹ 2.5 lakh each - Appeal dismissed. Issues:Challenging SEBI orders of debarment and penalty imposition related to market manipulation through a trading strategy called 'Advancing the Bid'.Analysis:1. The appeals challenged SEBI's orders debarring the appellants for four weeks and imposing a joint penalty of Rs. 5 lakhs. The appeals were heard together as the issues were common.2. The case involved trading in the scrip of Blue Blends, with SEBI alleging manipulation by the appellants using the 'Advancing the Bid' strategy during the relevant period. The appellants were accused of unilaterally manipulating the price of the scrip without establishing collusion with the opposite party.3. The price of the scrip fluctuated significantly during the investigation period, with the appellants contributing to a decline in price. The appellants, represented by Shri Ravi Ramaiya, argued that they were legitimate traders, not related entities, and their trades were part of normal business operations.4. The appellants contended that SEBI cherry-picked trades to show negative impact, while they engaged in 'momentum trading' and did not intend to manipulate the market. They argued that the penalty was disproportionate, citing previous tribunal orders in support.5. SEBI's counsel, Shri Kumar Desai, argued that the 'Advancing the Bid' strategy was manipulative and violative of regulations. He highlighted the abnormal trading behavior of the appellants, selling below LTP on numerous occasions, which impacted the market negatively.6. SEBI sought to establish a connection between the appellants and related entities, emphasizing the violative nature of the trading pattern itself. The counsel argued that even without a direct connection, the appellants' strategy was against regulations.7. SEBI's counsel referenced various tribunal and Supreme Court decisions to support their argument against the appellants. The cases cited highlighted the regulatory stance on market manipulation and unfair trading practices.8. The analysis of trades by connected entities showed a consistent pattern of trading below LTP, resulting in a significant negative impact on the market. The table from the WTM Order illustrated the extent of the appellants' trading behavior and its consequences.9. The table demonstrated that the appellants' trades, particularly selling below LTP, led to a substantial net LTP difference, indicating manipulative behavior.10. The tribunal concluded that the appellants' trading pattern was irrational and manipulative, disregarding the claim of following 'momentum trading.' The repeated selling below LTP indicated a deliberate strategy to create momentum, contrary to market norms.11. The tribunal noted that the appellants' strategy, including selling in single-digit quantities below LTP, was detrimental to market equilibrium. The trading behavior was deemed violative of PFUTP regulations, irrespective of connectivity issues.12. The imposed penalties of debarment and joint penalty were considered appropriate and not disproportionate. The appellants were given the option to pay a reduced penalty if desired.13. All four appeals were dismissed, with the appellants directed to pay the penalty within 30 days. No costs were awarded to either party.14. Due to the Covid-19 pandemic, the order was digitally signed, and parties were instructed to act upon the digitally signed copy for compliance.