2025 (11) TMI 1038 - AT - SEBI

Appellant found to conspire in reversal trades creating artificial volume and price rise, breaching SEBI (PFUTP) Regulations

Manju Devi Poddar Versus Securities and Exchange Board of India, Mumbai

SAT condoned a 63-day delay but upheld findings that the appellant conspired with the same counterparty to execute reversal trades in illiquid stock ... Trading activities of certain entities in illiquid stock options - creation of artificial volume in stock options segment of BSE - violation of Regulations 3(a), (b), (c), (d), Regulation 4(1) and Regulation 4(2)(a) of SEBI (PFUTP) Regulations - Imposition of monetary penalty - Condonation of delay - HELD THAT:- The delay of 63 days in filing this appeal is condoned. - The appellant executed trades with the same counter party with whom she had executed the first leg of transaction i.e., reversal trades of same quantity with the same counter party in the same contract, which is not a mere coincidence and clearly demonstrates consensus ad idem i.e., prior meeting of minds to execute reversal trades at pre-determined price. The appellant’s trades were conducted in illiquid stock options and created artificial trading volume of 11,000 units in a single contract within a short span of time at a higher price. The above undisputed transactions are sought to be justified firstly on the ground that they were not illegal prior to March 14, 2016, secondly, the trading was done by the broker, thirdly on delay. Admittedly, the counter party has availed SEBI’s settlement scheme and settled the matter. It cannot be a mere coincidence that transactions of the same scrip of the same quantity take place between the very same entities. It is important to note that gullible investors will be tempted to invest when there is an increase in the share price in a scrip and in this case the increase is a significant sum of about Rs. 128.2 per share. The innocent investors will lose their hard earned money being misguided by such unscrupulous transactions. In a matter of this nature, regulator is right in holding the appellant guilty of violation of PFUTP Regulations and imposing the penalty. Hence, this appeal must fail. Ground of delay in issuing notice urged by the appellant, is, in our opinion untenable because appellant’s transactions seriously affect the securities market. Appeal is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether execution of reversal trades (buy and sell of identical quantity with same counterparty within a short interval) in illiquid stock options constitutes manipulation and violation of SEBI (PFUTP) Regulations, 2003. 2. Whether delay of over seven years in issuance of show cause notice / initiation of proceedings renders the adjudication unsustainable. 3. Whether reversal trades executed prior to introduction of an exchange-level Reversal Trade Prevention Check (RTPC) (March 14, 2016) were lawful merely because no specific technological check existed then. 4. Whether absence of adverse action against intermediaries / trading members, or execution of trades by brokers, absolves the transacting client of liability for manipulative trades. 5. Whether opportunities of hearing and offer of settlement afforded by the regulator were adequate and whether failure to avail them affects the adjudication. ISSUE-WISE DETAILED ANALYSIS - 1. Reversal trades as manipulation under PFUTP Regulations Legal framework: Prohibition under Regulations 3(a)-(d), 4(1) and 4(2)(a) of SEBI (PFUTP) Regulations, 2003 against fraudulent, manipulative and deceptive practices including creation of artificial volumes. Precedent treatment: Tribunal's earlier decisions recognizing reversal trades and matched orders as indicators of prior meeting of minds and artificial trading volume (precedents relied upon by parties were considered but not treated as overruling.). Interpretation and reasoning: The Tribunal relied on undisputed trade data showing two legs: purchase of 5,500 units at Rs.56.2 and sale of identical 5,500 units to the same counterparty within a short span, creating aggregate artificial volume of 11,000 units in an illiquid contract and effecting a substantial price rise. The coincidence of same quantity, same counterparty and short interval was held to demonstrate consensus ad idem and pre-determined pricing rather than genuine anonymous market interaction. Ratio vs. Obiter: Ratio - such patterned reversal trades in illiquid contracts, showing identical quantities with the same counterparty within short intervals, constitute manipulative conduct attracting PFUTP prohibitions. Obiter - general observations on investor psychology and effect on market confidence. Conclusion: Reversal trades in the present facts amounted to manipulation and violated the cited PFUTP Regulations; penalty imposition by the regulator was justified. ISSUE-WISE DETAILED ANALYSIS - 2. Delay in issuance of show cause notice / initiation of proceedings Legal framework: Principles governing limitation or laches in regulatory prosecutions and relevance of delay to prejudice and fairness of proceedings. Precedent treatment: The appellant relied on authorities criticizing inordinate investigatory delay; the Tribunal considered these precedents but applied them factually. Interpretation and reasoning: Tribunal found delay of 63 days in filing the appeal condoned but rejected the appellant's contention of untenable seven-year delay in initiating proceedings because the appellant's transactions had serious adverse effect on the securities market. The Tribunal treated the market impact and the clear documentary evidence of manipulative trades as outweighing delay arguments absent specific demonstration of prejudice to the appellant's ability to defend. Ratio vs. Obiter: Ratio - mere delay in initiation does not automatically invalidate regulatory action where the subject transactions significantly affect market integrity and no specific prejudice is shown. Obiter - assessment of prejudice is fact-sensitive. Conclusion: Delay in issuing the show cause notice did not vitiate the proceedings on the facts before the Tribunal. ISSUE-WISE DETAILED ANALYSIS - 3. Legality of reversal trades before exchange-level RTPC (pre-RTPC conduct) Legal framework: Distinction between absence of exchange-enforced technological checks and substantive illegality under PFUTP Regulations; regulatory power to proscribe manipulative practices regardless of contemporaneous exchange mechanisms. Precedent treatment: The appellant argued that reversal trades were not recognized as illegal before RTPC implementation; Tribunal distinguished this technical point from substantive PFUTP prohibitions. Interpretation and reasoning: Tribunal held that absence of an RTPC does not immunize conduct that meets statutory standards of manipulation. The relevant inquiry is the nature of the conduct and its market effect, not whether a particular exchange-level prevention mechanism existed at the time. Ratio vs. Obiter: Ratio - legality of trades is governed by statutory PFUTP standards, not by the contemporaneous presence or absence of exchange detection systems; pre-RTPC reversal trades may still be unlawful if they satisfy manipulation elements. Obiter - technological detection tools are enforcement aids, not determinative of legal liability. Conclusion: Reversal trades executed prior to RTPC implementation were not per se lawful; liability attaches if the trades constituted manipulation as per PFUTP Regulations. ISSUE-WISE DETAILED ANALYSIS - 4. Liability where trades executed by broker / no action against intermediaries Legal framework: Client and intermediary responsibilities under securities law; principle that execution by intermediary does not automatically negate client's liability for manipulative intents or agreements. Precedent treatment: Appellant relied on absence of action against brokers; Tribunal examined this but did not treat it as exculpatory. Interpretation and reasoning: Tribunal observed that trades were executed on anonymous platform, but the pattern (same counterparty, identical quantity, short interval) demonstrated prior meeting of minds between the transacting entities irrespective of broker execution. The fact that intermediaries were not proceeded against does not negate the substantive evidence implicating the appellant. Settlement of the counterparty under a scheme further corroborated the non-innocuous nature of the transactions. Ratio vs. Obiter: Ratio - execution through a broker or absence of action against intermediaries does not absolve a client where evidence establishes collusion or manipulation. Obiter - supervisory or enforcement choices regarding intermediaries are separate and do not determine client culpability. Conclusion: Liability of the appellant was sustained despite trades being broker-executed and no separate action against intermediaries. ISSUE-WISE DETAILED ANALYSIS - 5. Adequacy of hearing opportunities and offer of settlement Legal framework: Principles of natural justice and procedural fairness in regulatory adjudication - right to receive notice, opportunity to be heard, and to consider settlement offers. Precedent treatment: Parties disputed adequacy of opportunities; Tribunal examined service, hearings offered, requests for adjournment, and the appellant's responses. Interpretation and reasoning: Tribunal found show cause notices and hearing notices were duly served (speed post and email), multiple hearing opportunities were granted, extensions requested by the appellant were accommodated, and appellant's authorised representative attended at least one hearing. Appellant declined the settlement scheme offer. Tribunal concluded procedural requirements were complied with and the appellant failed to avail the opportunities provided. Ratio vs. Obiter: Ratio - where procedural notices are properly served and reasonable hearing opportunities are granted and not availed, adjudication proceeds; failure to utilize offered settlement does not vitiate final order. Obiter - settlement schemes are discretionary offers by the regulator and non-availment is not a defense to substantive liability. Conclusion: Procedural fairness was satisfied; the appellant's non-participation did not invalidate the adjudicatory outcome. OVERALL CONCLUSION The Tribunal upheld the adjudicating authority's finding that the reversal trades constituted manipulative conduct in breach of PFUTP Regulations, rejected delay and procedural objections, and affirmed the penalty; the appeal was dismissed. The holdings establish that patterned reversal trades in illiquid contracts demonstrating prior meeting of minds and artificial volume are actionable under PFUTP irrespective of contemporaneous exchange detection mechanisms or broker execution, and delay in initiation is not fatal absent demonstrated prejudice.