2025 (11) TMI 311 - AT - SEBI

Appeals allowed; May 5, 2021 order set aside - trading patterns alone insufficient to prove manipulation under SEBI PFUTP Reg. 3

AT allowed appeals and set aside the impugned order of May 5, 2021. Tribunal held that observed similarities in trading (price marginally above LTP and ... Guilty of manipulating the price in the scrip of Biocon - wrongful gains by establishing higher settlement price in its futures segment - violation of Section 12A (a) of SEBI Act and Regulation 3(b), 4(1), 4(2) (a) & (e) of the PFUTP Regulations - HELD THAT:- In the instant case, respondent’s case is built on observing certain similarities in the trading pattern of noticees, inter-alia, trading at a price higher than Last Traded Price (LTP) by Rs. 4.75/- per share (2% higher), in a limited time period relevant for impacting settlement price, and trading in same quantity. However, there is no material on record to show any connection, direct or indirect, amongst the Noticees based on evidences brought on record. Respondent has tried to establish ‘connection’ only between the Noticee No. 1 and Noticee No. 2 (appellant no. 2), based on subsequent loan transactions between the two parties in July 2019 and October, 2019. In our considered view, it would be absurd to take into account a subsequent transaction which takes place two years of the date of trade i.e. June 29, 2018 to establish that the two noticees may have acted in concert. There is no evidence regarding any communication amongst the noticees during the relevant time period has been brought on record. We also find merit in the explanation by the Ld. Advocate for the appellant no. 3, that transactions on the floor of stock exchanges take place on an anonymous IT platform, on which identity of the person making offer for sale or buy cannot be ascertained with the qualification that this may be possible, only where there is a connection between the buyer and the seller during the relevant time. In the absence of any formidable connection inter-se, appellants’ respective explanations for trading in cash segment of Biocon during the relevant period cannot be brushed aside and it cannot be held that they acted in a group for manipulating the price in the scrip for trading in F&O segment. We draw strength from the decision of the Hon’ble Apex Court in Balram Garg vs. Securities and Exchange Board of India [2022 (4) TMI 945 - SUPREME COURT] and of this Tribunal in Bharat Natwarlal Patel vs. SEBI [2023 (10) TMI 1556 - SECURITIES APPELLATE TRIBUNAL MUMBAI], and following the same hold that merely trading pattern cannot be the circumstantial evidence to support the charge of price manipulation. The impact on the price caused by the impugned transactions during the inspection period, was not extraordinary and was within the prevailing volatility level of the stock during the period. Appeals are allowed - Impugned order dated May 5, 2021 is set aside. ISSUES PRESENTED AND CONSIDERED 1. Whether trading by the appellants in the cash segment on the expiry day, together with contemporaneous futures positions, amounted to manipulation of the cash market and wrongful enhancement of the futures settlement price in contravention of the SEBI Act and PFUTP Regulations. 2. Whether similarity or synchrony in trading patterns (volume, price range and timing) between multiple market participants, without independent evidence of a contemporaneous connection or communication, is sufficient to infer collusion or concerted action for the purpose of establishing price manipulation. 3. Whether post-facto or subsequent financial transactions between participants (occurring after the trades under investigation) can be relied upon to establish a prior connection between them that would support an inference of collusion for the period under investigation. 4. Whether certain trading conduct described as 'stop-loss' or automated/algorithmic order placement, or mistaken broker punching, negates an inference of manipulative intent when considered with the overall transactional pattern and market liquidity. 5. Whether the computation of wrongful gains/disgorgement and consequential directions (disgorgement, monetary penalty and market debarment) were supported by the record and appropriate where the foundational finding of acting-in-concert (connection) is not established. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether the trading conduct amounted to manipulation affecting futures settlement price Legal framework: Transactions in the cash segment that influence Last Traded Price (LTP) on an F&O expiry may affect futures settlement; manipulation claims invoke provisions prohibiting fraudulent and unfair trade practices under the SEBI Act and PFUTP Regulations. Precedent treatment: Tribunal and higher court authority recognise that synchronized buyer-seller conduct intended to set artificial LTP on expiry can be fraudulent; however, such findings require proof of concerted action/connection beyond mere transactional similarity. Interpretation and reasoning: The Tribunal acknowledged that (a) activity in the last 30 minutes on expiry can affect settlement; (b) synchronized transactions that are coordinated with the purpose of artificially setting LTP are fraudulent. Nonetheless, the respondent's case rested largely on observed transactional similarities (timing, identical volumes, and above-LTP prices) contributing to a substantial share of trading volume during the relevant period. The Tribunal found those observations insufficient because there was no contemporaneous evidence of communication or other direct/indirect linkage among the participants to demonstrate coordinated intent to manipulate. Ratio vs. Obiter: Ratio - On facts where connection is not proven, similar/synchronous transactions alone do not constitute manipulation even if they influence LTP on expiry. Obiter - Emphasis that coordinated transactions, when shown by connection/communication, are fraudulent and will be treated as manipulation. Conclusion: The Court concluded that, absent evidence of connection, the trading conduct of the appellants could not be held to constitute manipulation for the purpose of increasing the futures settlement price. Issue 2 - Sufficiency of similarity in trading pattern to infer collusion Legal framework: Circumstantial evidence may support infractions but must, on the whole, establish concerted action; the element of collusion requires proof of a link between buyer and seller beyond coincidental matching in an anonymous screen-based market. Precedent treatment: Prior decisions recognise that pattern/similarity can be probative, but courts have also held that similarity alone is inadequate unless supported by evidence establishing a connection or coordinated scheme. Interpretation and reasoning: The Tribunal analysed the proportional contribution to volume (66.11%) and exact matching in quantities and close timing. It found these facts to be 'at best an arithmetic derivative' absent contemporaneous links. The Tribunal stressed the anonymous nature of electronic trading platforms and the common market reality that high-volume participants can coincidentally match with each other in liquid scrips; therefore, similarity in trading pattern does not, by itself, establish collusion or a preponderance of probability of acting as a group. Ratio vs. Obiter: Ratio - Similar trading patterns without demonstrable contemporaneous connection cannot sustain an inference of collusion for manipulation. Obiter - Where a connection is established, synchronized trading will support a finding of manipulation. Conclusion: Similarity and synchrony of trades were held insufficient to prove acting-in-concert; the impugned finding based solely on such similarity was unsustainable. Issue 3 - Reliance on subsequent financial transactions to establish prior connection Legal framework: Establishing concerted action for a given period requires evidence of connection or communication during that period; subsequent events may be relevant only if they demonstrate a preexisting relationship that existed at the time of the impugned conduct. Precedent treatment: Authorities require temporal relevance of relationships relied upon to infer prior concerted action; retro/post-dating of transactions cannot reasonably be used to create an inference of a prior connection absent supporting contemporaneous evidence. Interpretation and reasoning: The Tribunal rejected the respondent's attempt to rely on loan transactions occurring two years after the trading date as a basis to infer a connection at the time of the trades. The Tribunal characterised such reliance as absurd and held that subsequent financial dealings do not establish contemporaneous connection or coordination on the date of the alleged manipulation. Ratio vs. Obiter: Ratio - Post-dated transactions cannot be used to establish that parties were acting in concert at an earlier time absent other evidence tying them together during the relevant period. Conclusion: Subsequent loans/financial transactions were not a valid basis to infer a prior connection; they did not cure the absence of contemporaneous evidence of collusion. Issue 4 - Effect of order type (stop-loss), algorithmic/software recommendations, and broker error on intent Legal framework: Defences alleging mistaken order entry, automated trading recommendations, or legitimate order strategies (including stop-loss) must be assessed against the totality of transactions and whether they rebut an inference of coordinated intent. Precedent treatment: Legitimate trading strategies and operational errors can be exculpatory where plausible and supported by evidence; however, inconsistent behaviour (e.g., not rectifying obvious errors, or modification patterns) may undermine such explanations. Interpretation and reasoning: The Tribunal accepted that stop-loss orders and automated recommendations are legitimate explanations and that mis-punching by a broker may happen. It also noted specific factual responses: long traders explained rationale (intra-day trading, liquidity, limited risk appetite), and some appellants showed certificates or broker admissions about mistakes. The respondent's counter-arguments (e.g., failure to correct orders within 40 minutes) did not displace these reasonable explanations in the absence of a proven connection to other market participants. Ratio vs. Obiter: Ratio - Where legitimate trading rationale (stop-loss, software-driven orders, market liquidity) is plausible and not rebutted by evidence of connection or contemporaneous coordination, it negates an inference of manipulative intent. Obiter - Operational mistakes may be scrutinised for reasonableness (e.g., time to rectify) when other indicia of coordination exist. Conclusion: The appellants' explanations about stop-loss orders, algorithmic/software basis, and broker error were credible and, combined with absence of connection, precluded a finding of manipulative intent. Issue 5 - Validity of disgorgement, penalty and debarment where acting-in-concert is not established Legal framework: Disgorgement and penal directions flow from a proven contravention; the quantum and imposition must be founded on the illegality established by the regulator and be proportionate. Precedent treatment: Remedies are contingent upon a sustainable finding of wrongful gain arising from manipulative conduct; mis-computation of gains or imposition of penalties without foundational liability is impermissible. Interpretation and reasoning: The Tribunal observed that the impugned order changed the computation of futures gains from the SCN without affording opportunity to reply and that the disgorgement amounts were contingent upon the manipulation finding. Given reversal of the foundational liability (acting as a group), the remedial directions were unsupported. The Tribunal noted specific disputes on arithmetic and the claim that even excluding the six noticees would still produce a settlement close to the actual figure, but it did not reach a detailed arithmetic ruling because the primary legal basis for disgorgement failed. Ratio vs. Obiter: Ratio - Remedies predicated on manipulation cannot stand where manipulation (acting-in-concert) is not established; consequently disgorgement, penalties and debarment must be set aside in such circumstances. Conclusion: The Court set aside the remedial directions (disgorgement, penalty and debarment) because the underlying finding of acting-in-concert/manipulation was not sustained on the record.