Minor volume sellers absolved; key operators held liable for fraudulent scrip manipulation under PFUTP Regulations 3 and 4
SAT partly allowed the appeals arising from SEBI's orders alleging fraudulent and unfair trade practices in the manipulation of a scrip through preferential allotment and secondary market trades. It held that sellers contributing less than 1% of the total traded volume, who merely executed sell orders at prevailing or better market prices, could not be deemed manipulators; SEBI's consistent policy not to penalize such sellers was applied, and the orders of the WTM and AO against these appellants were quashed. However, SAT affirmed the findings against three key noticees who operated as principals, funded promoter share purchases, executed a fraudulent scheme, and violated Regulations 3 and 4 of the PFUTP Regulations.
1. ISSUES PRESENTED AND CONSIDERED
1.1 Whether the seller-appellants (other than Noticee nos. 8, 9 and 12) violated Regulation 3 and 4 of the PFUTP Regulations by manipulating the price of the scrip through their sell trades.
1.2 Whether, in the facts of the case, sellers can be held liable for price manipulation when (a) no connection is established between them and the buyers or inter se among sellers, (b) buy orders were placed above the last traded price (LTP) by buyers, and (c) SEBI exonerated the buyers after investigation.
1.3 Whether SEBI's consistent approach of not penalizing entities contributing less than 1% to the total traded volume in a scrip is attracted to the seller-appellants and affects the sustainability of the impugned orders.
1.4 Whether Noticee nos. 8, 9 and 12 (directors / HUF connected with RRSPL) devised and implemented a fraudulent scheme in violation of Regulation 3 and 4 of the PFUTP Regulations by acting as principals, purchasing promoter shareholding, using fake contract notes and misusing broker authorization.
1.5 Whether the principles of natural justice were violated in respect of Noticee nos. 8 and 9 by denial of cross-examination of buyers who allegedly purchased shares based on advertisements attributed to RRSPL.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1 & 2 - Alleged price manipulation by seller-appellants and absence of connection with buyers / other entities
Interpretation and reasoning
2.1 The Tribunal noted that the principal charge against most appellants was that, as sellers, they manipulated the price of the scrip. The record showed that:
(a) No connection was found between the appellants (sellers) and the buyers.
(b) No inter se connection was found among the sellers themselves, nor any finding of them acting as a group with common intention.
(c) The only common element was that appellants had purchased shares from the Roongtas; there was no further evidence of meeting of minds or common design with the Roongtas to manipulate the price.
(d) The WTM himself recorded that there was no one-to-one relationship or identifiable connection between buyers to treat them as a group.
2.2 The Tribunal held that mere purchase of shares from a common source (the Roongtas) is insufficient, in the absence of additional material, to establish collusion, meeting of minds or a manipulative scheme between the appellants and the Roongtas.
2.3 On the trading pattern, it was undisputed that buyers were placing buy orders above the LTP and that the appellants' sell orders were matched at the higher prices already reflected in the system. The Tribunal reasoned that in such a scenario:
(a) The higher price in the system emanated from buyers' actions, not from sellers' unilateral conduct.
(b) A seller cannot be held guilty of increasing the price when the buy order at a higher price already exists and the trade merely matches that price.
(c) It is commercially rational and a matter of "common sense" that a seller will seek to obtain the best available price shown in the system and cannot be treated as manipulative merely for selling at such price.
2.4 The WTM's conclusion that sellers were unilaterally increasing the price by placing sell orders in small quantities when large buy orders were available was held to be "patently erroneous" and based on "surmises and conjectures", as there was:
(a) No finding of a pattern of trades by the sellers evidencing manipulation.
(b) No evidence of collusion or coordinated trading strategy with buyers or amongst sellers.
2.5 The Tribunal further emphasized that initially an interim order had restrained the buyers, but after detailed investigation SEBI found no adverse findings against them regarding price manipulation, revoked the orders, and did not issue show cause notices to them. Once SEBI itself concluded that buyers had no role in manipulating the price, the Tribunal held that, in the facts of the present case, penalizing only the sellers could not be justified.
Conclusions
2.6 The seller-appellants (other than Noticee nos. 8, 9 and 12) were not shown to have any collusion, connection, or meeting of minds with the buyers or amongst themselves, beyond having a common source of acquisition (the Roongtas).
2.7 The increase in price was attributable to buyers' placement of buy orders above LTP; sellers only matched those orders and cannot be treated as manipulators or as having played any role in increasing the price of the scrip in the circumstances found.
2.8 In view of SEBI exonerating the buyers after investigation, penalizing the sellers alone for price manipulation was held unsustainable.
2.9 Accordingly, the findings of violation of Regulation 3 and 4 of the PFUTP Regulations against the seller-appellants (except Noticee nos. 8, 9 and 12) were set aside.
Issue 3 - Relevance of less than 1% contribution to total traded volume
Interpretation and reasoning
2.10 The appellants contended that their contribution to the price increase was negligible (less than 1% of the total volume) and referred to SEBI's consistent stance of not penalizing entities whose contribution is less than 1%.
2.11 The Tribunal recorded that it is SEBI's consistent view not to penalize sellers who have contributed less than 1% of the total volume in the scrip, and found this approach fully applicable on the facts.
2.12 It was noted that all sellers (other than the Roongtas' entities) had contributed less than 1% of the total traded volume.
Conclusions
2.13 On this additional, independent ground, the Tribunal held that the impugned orders against the seller-appellants (other than Noticee nos. 8, 9 and 12) could not be sustained.
Issue 4 - Liability of Noticee nos. 8, 9 and 12 (Roongtas / RRSPL) for fraudulent scheme under Regulation 3 and 4 of PFUTP Regulations
Legal framework (as discussed)
2.14 The show cause notice alleged that RRSPL, through its directors (Noticee nos. 8 and 9), devised a scheme to manipulate the price of the scrip by buying shares from promoter entities, issuing advertisements to solicit buyers, dealing in a suspended scrip, issuing fake contract notes, and misusing broker authorization, thereby violating Regulation 3 and 4 of the PFUTP Regulations.
Interpretation and reasoning
2.15 The Roongtas' defence was that:
(a) One Subhash Maheshwari sourced and concluded the entire transaction pursuant to a memorandum of understanding with a director of Mishka.
(b) RRSPL merely acted as a broker between buyers and sellers; shares were directly transferred from sellers to buyers.
(c) RRSPL did not issue any advertisement referring to Mishka.
2.16 The Tribunal held these contentions to be "patently erroneous". It agreed with the WTM that:
(a) The memorandum of understanding was "only a piece of paper" never acted upon and was procured merely to camouflage the scheme devised by the Roongtas.
(b) The evidence showed that Noticee nos. 8 and 9, as directors of RRSPL, purchased the entire shareholding from promoters and promoter entities at Rs. 5 per share, paying valuable consideration directly, thereby acting as principals, not brokers.
(c) Proof of such payments from RRSPL to the erstwhile promoters was clearly set out in the WTM's order and was not disputed by the noticees either before SEBI or before the Tribunal.
2.17 The Tribunal further found that:
(a) RRSPL became a single contact point for buyers of the scrip through the Roongtas.
(b) The shares were purchased off-market in a suspended stock (Mishka), yet contract notes were issued, which the WTM correctly found to be fake as there was no genuine need to issue contract notes for such off-market transactions.
(c) Funds moved directly from RRSPL's bank account to the erstwhile promoters, and there was non-levy of brokerage, which reinforced that RRSPL and the Roongtas were acting as principals and not as agents or brokers in the ordinary course.
2.18 It was recorded that erstwhile promoters received Rs. 21,20,500 directly from RRSPL and another Rs. 3,58,500 directly from buyers through RRSPL, and that the appellants gave no plausible explanation for these flows.
2.19 The Tribunal accepted the WTM's finding that:
(a) Noticee nos. 8 and 9, as directors of RRSPL, had planted a fraudulent scheme in the securities market whereby a penny / fake stock was identified, activated and subsequently transferred to several entities.
(b) All transactions starting from purchase of promoter shares and spreading them out in the market were manipulative and fraudulent, and were followed by price manipulation by the Roongtas.
(c) Noticee no. 12 (A.K. Roongta HUF), whose Karta is Noticee no. 8, traded in the shares through the HUF in violation of Regulation 3 and 4, as detailed in the impugned order.
Conclusions
2.20 The Tribunal held that Noticee nos. 8, 9 and 12 were principals in a fraudulent scheme involving acquisition of promoter shareholding, misuse of broker authorization, issuance of fake contract notes and manipulation of the scrip's price.
2.21 It affirmed the WTM's findings that Noticee nos. 8, 9 and 12 violated Regulation 3 and 4 of the PFUTP Regulations and upheld the impugned orders against them, dismissing their appeal.
Issue 5 - Alleged violation of principles of natural justice (cross-examination of buyers) vis-à-vis Noticee nos. 8 and 9
Interpretation and reasoning
2.22 The Roongtas claimed violation of natural justice on the ground that they were not permitted to cross-examine buyers who had allegedly stated that they purchased shares based on an advertisement issued by or attributed to RRSPL.
2.23 The Tribunal held that this contention was "patently erroneous and irrelevant to the issue involved" because:
(a) The core findings against the Roongtas were based on documentary evidence of their acting as principals-purchase of promoter shares for consideration, fund flows from RRSPL to promoters, use of RRSPL as a single-point contact, issuance of fake contract notes, and non-levy of brokerage.
(b) The liability under Regulation 3 and 4 was sufficiently established on these materials, and the opportunity of cross-examining the buyers was not necessary for adjudication of the main charges.
Conclusions
2.24 The Tribunal rejected the plea of violation of natural justice and held that denial of cross-examination of buyers did not vitiate the proceedings or the findings against Noticee nos. 8 and 9.
2.25 Consequently, the challenge to the impugned orders on this ground was also rejected, and the orders against Noticee nos. 8, 9 and 12 were affirmed.
TaxTMI 
AI Drafter ✕
TaxTMI 
