M/S Blue Peacock Securities Pvt. Ltd. vs Sebi

Order Reserved On: 22.11.2019 Date of Decision : 19.12.2019

Appeal No. 253 of 2018

M/s Blue Peacock Securities Pvt. Ltd. Flat No. 14, Band Stand Apartments, Band Stand, Bandra (West), Mumbai- 400 050 ...Appellant

Versus

Securities and Exchange Board of India, SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051 ...Respondent

WITH Misc. Application No. 580 of 2019 And Appeal No. 258 of 2018

M/s Yes Investments Flat No. 14, Band Stand Apartments, Band Stand, Bandra (West), Mumbai- 400 050 ...Appellant

Versus

Securities and Exchange Board of India, SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400 051 ...Respondent 2

Mr. Vinay Chauhan, Advocate with Mr. K.C. Jacob, Advocate i/b Corporate Law Chambers India for Appellants in Appeal Nos. 253 and 258 of 2018.

Mr. Anubhav Ghosh, Advocate with Ms. Rashi Dalmia and Ms. Akshata Timmapur, Advocates i/b The Law Point for the Respondent.

CORAM: Justice Tarun Agarwala, Presiding Officer Dr. C.K.G. Nair, Member Justice M. T. Joshi, Judicial Member

Per: Dr. C.K.G. Nair

1.

Appellants in these appeals are aggrieved by a pair of

orders passed by the Adjudicating Officer ("AO" for

convenience) of Securities and Exchange Board of India

("SEBI" for convenience), both dated December 14, 2017,

whereby penalty of ` 25 lakhs in Appeal No. 253 of 2018 and

` 20 lakhs in Appeal No. 258 of 2018 was imposed by the AO

of SEBI under Section 15HA of the SEBI Act for violation of

Regulations 3 (a), (b), (c), (d) and 4 (1) & (2) (a) of PFUTP

Regulations. Since the issues raised in these appeals are similar,

by consent of parties, both the appeals are heard and decided

together by this common decision.

2. The basic question raised in these appeals is whether a

particular trading strategy adopted by a day trader can be treated

as market manipulation under the Securities and Exchange 3

Board of India (Prohibition of Fraudulent and Unfair Trade

Practices relating to Securities Market) Regulations, 2003

("PFUTP Regulations" for convenience). The impugned orders

say so in respect of the strategy adopted by the appellants; hence

the appeals.

3. The basic facts relating to Appeal No. 253 of 2018 as

given in the impugned order are as follows:-

Pursuant to some alerts from NSE regarding the dealings of Yes Investments (Proprietor: Mr. Bhatia) and Blue Peacock in which Mr. Bhatia is one of the directors, SEBI conducted an investigation, into the trading and possible violation of the provisions of the Securities and Exchange Board of India Act 1992 (hereinafter referred to as the 'SEBI Act 1992') and various Rules and Regulations made there under. The period of investigation was from July 01, 2009 to December 31, 2010.

During the investigation, it was observed that the Noticee, trading through Religare Securities Ltd., was continuously placing and deleting orders and then taking reverse position in the cash market. Investigation further revealed from the trade and order data of NSE in respect of 31 scrips that on 25 scrip days the noticee placed orders at a price variation from last traded price while doing activity on the opposite side. Investigation further revealed 4

that the during the time slot wherein majority of the selling was done by the noticee, it's concentration was significant to market net and gross in the respective scrips. On analyzing the noticee's contribution to the market pending quantity it was observed that when major selling transactions were executed the noticee's concentration to market pending orders was significant on buy side. It was further noted during the investigation that the buy orders placed by the noticee (which were placed significantly below the market prices and subsequently deleted) were with fully disclosed quantities whereas the sell orders were placed at partially disclosed quantities.

"Further, it was alleged in the SCN that the noticee:-

i) created a false impression of artificial demand in the scrips by placing buy orders with large quantities below the market price,

ii) by selling the shares in the market at the time when its large buy orders at below the prevailing market price were pending and subsequently cancelling these buy orders prior to conducting majority of the buying activity, acted in fraudulent manner,

iii) was involved in BAIT and SWITCH activity i.e. noticee entered buy/sell orders lower/higher than the market price, fully disclosed the orders but actually transacted on the opposite side in the market, across various scrip and for several days, and 5

iv) manipulated the order book by giving false impression in the market about the demand and supply of various scrips during the investigation period and thereby misled the investors."

4. Along with a related appeal (Appeal No. 420 of 2014) an

appeal filed in this matter (i.e. Appeal No. 421 of 2014) was

also remanded back to SEBI vide this Tribunal's order dated

March 22, 2016. Subsequently, after issuing another show

cause notice and following due process the impugned order has

been passed on December 14, 2017.

5. Appellant in Appeal No. 253 of 2018 M/s Blue Peacock

Securities Pvt. Ltd. is a private limited company. Appellant in

Appeal No. 258 of 2018 M/s Yes Investments is a sole

proprietorship firm. Both these entities are managed by one

Mr. Vishal Bhatia. It is the stand of the appellants that they are

day traders; trade in large quantities particularly in blue chip

companies with large beta factor (meaning high intra-day

volatility); have not violated provisions of any securities laws;

traded only within the price band or quantity limits permitted

and, therefore, the strategy employed by the appellants is not

violative of any securities laws including the PFUTP

Regulations, 2003 which is alleged to have been violated. 6

6. The learned Counsel Shri Vinay Chauhan appearing on

behalf of the appellants, taking Appeal No. 253 of 2018 as the

lead matter contended as follows:-

a) The appellant being a day trader have been trading for a long period of time in large quantities of shares.

For instance in 2009-2010, the appellant had a turnover of more than ` 25000 crores and in 2010- 2011 about ` 17000 crores. As such the appellant has the financial wherewithal to trade in large quantities.

b) Further the scrip wise analysis given in the appeal memorandum shows that these are all blue chip companies, as part of NIFTY or SENSEX or other indices and as such no individual investor/ trader can manipulate the price of such scrips given the high liquidity in these scrips. Moreover, despite placing very high volume of trades appellants' volume to total market volume is generally in the range of 0.2% to about 3% only.

c) Further the volatility of prices in respect of these scrips on the dates of the impugned trades were in the range of 4% to 55% and even the pre-trade volatility on a weekly average basis was also in the range of 4% to 51%. Therefore, the allegation in the impugned order that the appellant could manipulate 7

the volume or price of such scrip is completely unrealistic and untenable.

7. The learned counsel further submits that while the Show

Cause Notice alleged that the appellant have traded in 1937

scrip days across 499 unique scrip days, the impugned order

cherry-picked a few days out of it in respect of a few scrips and

alleged that the appellant has violated the PFUTP Regulations.

Moreover, in order to arrive at this violation the impugned order

holds that the appellant has placed huge buy orders below Last

Traded Price ("LTP") taking a 4% band in an arbitrary manner

because the applicable band for such blue chip scrips is 20% as

the normal rule while for those scrips which are in the futures

and options segment ("F&O") there is no such price band.

Therefore, out of the 180 days of trading analysed by the AO,

25 days was arbitrarily taken out of which again 8 days was

picked up for charging. Similarly, when the appellant was

trading throughout the day but certain time windows have been

also arbitrarily taken by the AO to prove that the appellant has

violated provisions of PFUTP Regulations. It was further

contented that despite trading in large volumes the appellant had

incurred losses as well on some days clearly indicating that it is

a trading strategy being followed by the appellant rather than 8

any market manipulation strategy. Even though the allegation is

that the appellant placed huge buy orders without the objective

of fructifying such orders and in order to show artificial depth to

the market, about 17% of such buy orders have in fact fructified.

It was also contended that for the same pattern of trading, on

which another adjudication order was passed by SEBI,

Mr. Vishal Bhatia, the manager of the appellant (and the sole

proprietor of the appellant in Appeal No. 258 of 2018) was

exonerated from any wrong doing and the strategy was not

found to be violative of any PFUTP Regulations.

8. Learned Counsel Shri Anubhav Ghosh appearing for

respondent SEBI submits that the impugned order has rightly

held that the appellant had indulging what is called a "Bait and

Switch" approach and created artificial demand in various

scrips. He further contended that by placing huge volumes of

buy orders much below LTP, the appellant had manipulated the

order book which would fall squarely under Sub-Section 3(d) of

the PFUTP Regulations, because, the pattern of trading adopted

by the appellant is deceptive since he was not a serious buyer.

Rather, after placing huge buy orders in the early trading hours

the appellant would sell in the market at a higher price and later

on cancel the remaining buy orders. The inflated buy orders 9

placed at much below the LTP were not insignificant quantities

even while factoring in the fact that the scrips were highly

liquid. The appellant repeated such a trade strategy to apply a

Bait and Switch approach. Therefore, what is held in the

impugned order that the appellant has violated provisions of

PFUTP Regulations cannot be faulted. Since it is a repeated

pattern adopted by the appellant on multiple days and on

multiple scrips penalty has been imposed under Section 15HA

of the SEBI Act. Order relied on by the appellant's counsel

whereby the manager of the appellant, Mr. Bhatia was

exonerated was a case of only one day's trading and, therefore,

the AO gave benefit of doubt to the appellant. The impugned

order itself in paragraph 30 deals with this case.

9. Coming back to the core question raised in this appeal as

to whether the appellants' trading strategy as a day trader is

violative of the provisions of PFUTP Regulations; for facility

we quote the relevant Regulations below:-

"3. Prohibition of certain dealings in securities No person shall directly or indirectly-

(a) buy, sell or otherwise deal in securities in a fraudulent manner;

10 (b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made there under;

(c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange;

(d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under."

10. We note that the appellant's strategy is to place large buy

orders generally in the early trading sessions. The appellant

also would place a number of sell orders but for much smaller

quantities after some time. The buy orders are generally placed

below around 4% variation from the LTP whereas the sell

orders would be placed more or less nearer to the LTP. In the 11

process a large number of sell orders would get executed and

only a small/ insignificant part of the buy orders would get

executed. Table at page 11 to 14 of the impugned order

summarize and analyze the trading done by the appellant in

terms of multiple scrips, number and volume of orders placed,

conversion of buy order and sell order etc. for a number of

trading days starting from December 24, 2009 to June 25, 2010.

11. We have also observed the actual trading screen available

to an investor in the presence of both parties. This trading

screen shows only the top five buy and sell orders while

showing the total quantity of buy and sell available in the

system. Therefore, when huge quantities of buy orders are

placed in the system well below the LTP that entire data is not

available on the screen but the total quantity of buy orders

placed in the system is available. Therefore, what is held in the

impugned order that the appellant placing large buy orders away

from the LTP and placing sell orders on the other side is a

deceptive trading strategy adopted by the appellant to show that

there is huge pending demand in the system at some distance

from the top five orders. Though, the exact distance (in terms of

price) is not available, such an order book, therefore, would lure

the investors towards buying the scrip and, therefore, would 12

help the appellant to sell whatever sell quantities he had placed

in the system. Hence the charge of order book manipulation

through a "Bait and Switch" policy.

12. On the other hand, the appellants contention is that he is

playing perfectly within the rules of the game; the buy orders

are placed within the circuit limits, if at all any limit is available

(for F&O scrips there is no such limit, and for other liquid scrips

it is 20%); there are no restrictions on the quantity that can be

placed and there are no other violations or manipulations which

are ascribed.

13. In this context, then the question is whether even if there is

no other violation such as LTP violations, quantity limit

violations, the strategy as described above and adopted by the

appellants can be termed as deceptive according to Regulation

3(d) of the PFUTP Regulations, 2003. The answer to this

question would require an examination of the volumes. Here,

prima facie, we note that the volume of conversion of buy

orders is generally in the range of 10 to 22% whereas

conversion of sell orders is in the range of 56 to 100%. Though

the appellants' volumes as a percentage to the total market

volume in no case exceeds 10% because of high liquidity in the 13

identified scrips but the very fact that conversion of the buy

orders is less than 1/5th (on the average) of the buy orders

placed in the system does have the effect of displaying a larger

order book than the actual one. By implication, if a number of

traders adopt a similar strategy such a strategy would be

disastrous for the market as the market would be far from being

fair as it is expected to be. Therefore, it would be a tragedy of

the commons, a self-defeating strategy and there is a need for

regulations to appropriately capture such violations. The

contention of the appellants that they have not violated the

circuit filters or the quantity limits etc. are irrelevant since there

are no allegations relating to the same nor any penalties

imposed on those grounds.

14. The submission that a lower band of 4%, and some

specific dates or time windows were arbitrarily taken though

factually correct do not come to the rescue of the appellants

since such a methodology was adopted only for the purpose of

analysis. It is the magnitude of the buy orders coupled with the

distance from the LTP that is to be seen together to judge

whether there is an element of deception in the strategy adopted

by the appellants. Looking from such a perspective we have no

doubt in categorizing the strategy adopted by the appellants as 14

deceptive as given under the PFUTP Regulations and therefore

in holding that the appellants have violated the said regulations.

15. Therefore, given the deceptive nature of the trading

strategy adopted by the appellant and considering the potential

impact of others adopting similar trading strategies on market

integrity and the need for preserving a fair market, which is the

very objective of regulation, we sustain the impugned orders.

16. Therefore both the appeals fail and are dismissed with no

costs. Appellants are directed to pay the amount of penalty of

` 45 lakhs (` 25 lakhs + ` 20 lakhs) within 30 days from the

date of this order. Misc. Application No. 580 of 2019 seeking

stay of the impugned order has become infructuous and is

disposed of as such.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C.K.G. Nair Member

Sd/-

Justice M. T. Joshi Judicial Member 19.12.2019 Prepared & Compared By: PK