SEBI price manipulation order upheld after appellants artificially inflated suspended stock price through coordinated trading scheme

The Securities Appellate Tribunal, Mumbai dismissed appeals against SEBI's order regarding price manipulation in shares. Appellants received shares through off-market transfers at prices below Last Traded Price from one entity, then sold minimal quantities on exchange platform at higher prices despite pending large buy orders. This created misleading trading appearance in an illiquid stock that had been suspended for six years. The appellants contributed 70.96% of total trades during investigation period, causing price to rise from Rs. 17.50 to Rs. 427.85 without matching company fundamentals. Tribunal found transactions non-genuine and manipulative based on preponderance of probabilities, dismissing appeals without costs.

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Issues Involved:
1. Violation of Regulations 3 and 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (PFUTP Regulations, 2003).
2. Allegations of manipulation in the price of the scrip of Dhanleela Investments and Trading Company Ltd.
3. Connection and collusion between the appellants and the buyers.
4. Delay in the issuance of the show cause notice.
5. Applicability of previous judgments to the present case.

Issue-wise Detailed Analysis:

1. Violation of Regulations 3 and 4 of PFUTP Regulations, 2003:
The Adjudicating Officer (AO) found that the appellants were not genuine sellers and engaged in trading patterns that created a misleading appearance, amounting to manipulation in the price of the scrip, thus violating Regulations 3 and 4 of PFUTP Regulations, 2003. The AO noted that the appellants sold minuscule shares despite having a substantive holding, which was not a prudent investor's behavior, especially when the price quoted was above the Last Traded Price (LTP). The AO concluded that the appellants' actions were not genuine and were intended to increase the price of the scrip.

2. Allegations of Manipulation in the Price of the Scrip:
The investigation revealed that the trading in the scrip of Dhanleela Investments and Trading Company Ltd. was suspended since 2006 but was revoked in April 2012. The company issued bonus shares in February 2013, and the price of the scrip rose significantly from Rs. 17.50 to Rs. 427.85 within eight months. The appellants were found to have traded on 82 days totaling 298 trades, holding sizeable quantities of shares but selling limited shares despite large orders pending on the stock exchange platform. This trading pattern was alleged to be manipulative, increasing the price of the scrip.

3. Connection and Collusion Between the Appellants and the Buyers:
The appellants contended that they traded in minuscule quantities as sellers and had no connection or collusion with the buyers. They argued that the buy orders were already in existence when they placed their sell orders. The Tribunal found that there was no direct evidence of collusion between the appellants and the buyers. The principle of preponderance of probability could not be exercised in the absence of any connection between the seller and the buyer. The Tribunal noted that selling minuscule amounts of shares by itself is not illegal or manipulative unless collusion with others is found.

4. Delay in the Issuance of the Show Cause Notice:
The appellants argued that there was an inordinate delay in the issuance of the show cause notice. However, the Tribunal did not find this argument sufficient to overturn the AO's findings. The focus remained on whether the appellants' actions were manipulative and in violation of the regulations.

5. Applicability of Previous Judgments to the Present Case:
The appellants relied on the Tribunal's decisions in Nishith M. Shah HUF and Rajesh Jivan Patel, where the absence of a connection between the buyer and the seller was held fatal to SEBI's case. The Tribunal agreed that the controversy involved in the present case was squarely covered by the Nishith Shah case and Rajesh Jivan Patel. The Tribunal noted that the investigative reports did not find any connection between the buyer and the seller or between the appellants and the promoters/directors of the company. Therefore, the impugned order could not be sustained.

Separate Judgment by a Member:
One member of the Tribunal delivered a separate judgment, disagreeing with the majority opinion. The member emphasized the principle of preponderance of probabilities and the need to consider all relevant facts and circumstances. The member noted that the absence of a connection between the buyer and the seller or the non-prosecution of the buyer should not be the sole axis for deciding the appeal. The member concluded that the trading pattern of the appellants, including selling minuscule quantities despite higher buy orders pending, contributed to the manipulation of the price of the scrip. Therefore, the appeals should be dismissed.

Final Decision:
In view of the majority opinion, the impugned order was quashed, and all the appeals were allowed with no order as to costs. The Misc. Application no. 414 of 2020 was also disposed of. The Tribunal noted that the order would be digitally signed due to the COVID-19 pandemic, and parties were directed to act on the digitally signed copy.

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