M/S Spfl Securities Limited vs Sebi

Order Reserved On: 06.08.2019 Date of Decision : 11.10.2019

Appeal No. 362 of 2017

M/s SPFL Securities Limited 3/4267, Ansari Road, Darya Ganj, New Delhi ...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 Appeal No. 365 of 2017

M/s JV Stock Broking Private Limited 121, Padam Towers-II, 14/113, Civil Lines, Kanpur- 208 001 ...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

Mr. Ankur Kumar, Advocate i/b EZY Laws for Appellants.

Mr. Kumar Desai, Advocate with Mr. Abhiraj Arora and Mr. Vivek Shah, Advocates i/b ELP for the Respondent. 2

WITH Appeal No. 176 of 2018

M/s JV Stock Broking Private Limited 121, Padam Towers-II, 14/113, Civil Lines, Kanpur- 208 001 ...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

AND Appeal No. 177 of 2018

M/s SPFL Securities Limited 3/4267, Ansari Road, Darya Ganj, New Delhi ...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

Mr. Ankur Kumar, Advocate i/b EZY Laws for Appellants.

Mr. Kumar Desai, Advocate with Mr. Abhiraj Arora and Mr. Vivek Shah, Advocates i/b ELP for the Respondent.

CORAM: Justice Tarun Agarwala, Presiding Officer Dr. C.K.G. Nair, Member Justice M. T. Joshi, Judicial Member 3

Per: Dr. C.K.G. Nair

1.

The Adjudicating Officer ("AO" for convenience) of

Securities and Exchange Board of India ("SEBI" for

convenience) passed two orders against a trader and its broker

in respect of trading in two different scrips which are challenged

in these appeals. In Appeal Nos. 362 of 2017 and 365 of 2017

the order impugned is dated October 09, 2017 and in Appeal

Nos. 176 of 2018 and 177 of 2018 order impugned is dated

February 21, 2018. Since the issues raised in these two pairs of

appeals are the same, by consent of parties, these appeals are

heard together and decided by this common order.

Appeal Nos. 362 of 2017 & 365 of 2017

2. Appellant M/s JV Stock Broking Private Limited ("JV"

for convenience) is a trader and appellant SPFL Securities

Limited ("SPFL" for convenience) is the broker concerned.

SEBI conducted an investigation into trading in the scrip of Sky

Industries Limited ("SIL" for convenience) during the period

January 01, 2009 to May 10, 2010. Based on the finding that

JV executed a large number of transactions in the scrip of SIL

out of which many were synchronized trades an order was

passed on March 12, 2015 by the AO imposing a penalty of 4

` 25 lakh each on JV and its broker SPFL. On appeal, the said

order was set aside by this Tribunal on the ground that the said

order does not set out the extent to which artificial volume has

been created and as to what kind of mechanism ought to have

been installed by the stockbroker to prevent self-trades. Since

these findings were crucial to decide whether any violation has

been committed by the trader as well as the broker the matter

was remitted to the AO of SEBI for passing a fresh order on

merits and in accordance with law.

3. Pursuant to the above stated order of this Tribunal order

dated October 09, 2017 was passed by the AO, which is

impugned in these two appeals. By this fresh order of AO also

a penalty of ` 25 lakh each has been imposed upon both JV as

well as SPFL. The penalty has been imposed on JV under

Section 15HA of SEBI Act for violation of Regulation

3(a),(b),(c),(d), Regulation 4(1) and Regulation 4(2)(a) and (g)

of the SEBI (Prohibition of Fraudulent and Unfair Trade

Practices relating to Securities Market), Regulations 2003

("PFUTP Regulations" for convenience). The penalty of ` 25

lakh is imposed on SPFL under Section 15HB of the SEBI Act

for violation of Clause A(2) of the Code of Conduct for Stock 5

Brokers as specified under Schedule II read with Regulation 7

of the Stock Brokers Regulations.

4. The relevant provisions of PFUTP Regulations and the

Code of Conduct for Stock Brokers are as follows:

"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;

(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.

6 4. Prohibition of manipulative, fraudulent and unfair trade practices

(1)Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities.

(2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:-

(a) indulging in an act which creates false or misleading appearance of trading in the securities market;

(g) entering into a transaction in securities without intention of performing it or without intention of change of ownership of such security;

Stock-Brokers to abide by Code of Conduct.

7. The stock-broker holding a certificate shall at all times abide by the Code of Conduct as specified at Schedule II

SCHEDULE- II Code of Conduct for Stock Brokers

A. GENERAL (2) EXERCISE OF DUE SKILL AND CARE: A stock-

broker, shall act with due skill, care and diligence in the conduct of all his business."

7

5. Learned counsel Shri Ankur Kumar appearing for the

appellants submitted that self-trades per se are not illegal; only

when there is intent to manipulate they become violative of

securities laws. It was further contended that despite this

Tribunal remanding the matter to provide conclusive evidence

regarding the manipulative intent in the impugned trades no

proof has been provided in the fresh order. Further the

impugned order also does not deal with the steps that the broker

could have taken in avoiding such orders placed by clients.

Further, though the investigation period covers a long period

there are only a few instances where some self-trades happened

which constitutes only 0.031% of the total volume of trading in

the scrip during the investigation period. If the policy of SEBI

on self-trade that some unintentional synchronized trades/ self-

trade could normally happen is taken into account the impugned

trades squarely would fall within that small percentage. In any

case at the relevant time (2009-2010) the broker did not have

the wherewithal/ mechanism to identify such trades and the

brokers have to execute a large number of orders emanating

from multiple clients.

6. Leaned counsel for the appellants further submitted that in

the case of the client (JV) the appellant had no intention to 8

manipulate; as a trader he was doing his normal trading as usual

as he has been trading in a number of scrips and a few trades

which might have got synchronized was not indicative of any

manipulation and hence violation of PFUTP Regulations.

7. In any case it was contended, without prejudice to the

above arguments, that the penalty of ` 25 lakh each imposed on

the appellants is too harsh and disproportionate. It was further

contended that in a number of orders wherein the volume of

self-trade were less than 1% of total volume AOs of SEBI have

imposed no penalty. The learned counsel provided a list of such

orders passed by SEBI relating to self-trades where the quantum

of self-trade was negligible and therefore no penalty has been

imposed.

8. The learned counsel Shri Kumar Desai appearing for SEBI

submitted that SEBI's policy relating to self-trade is not a

complete exoneration of self-trades from any violations. What

it exonerates is only accidental/ unintentional self-trades.

Accordingly mere occurrence of a few self-trades should not be

considered as per se illegal in the absence of any additional

evidence to prove manipulation or intent to defraud as is done in

the case of synchronized trades. Moreover, the said policy also 9

enables settlement proceedings and in cases where there is mere

occurrence of self-trades without any other evidence to indicate

manipulation may be settled at the minimum amount prescribed

in Scheduled II of the Settlement Regulations. Looking in this

perspective, it was contended by the learned counsel that the

impugned trades in the matters before us are not mere chance

occurrences. Moreover, while these average percentages may

appear low but on some trading days like on June 25, 2009 it

was 70.87% and on October 26, 2009 it was 27.26%.

Moreover, the percentage of 0.0031 calculated by the appellants

is self-trades as a percentage of total volume at Bombay Stock

Exchange Limited (BSE) in the scrip of SIL not in terms of

appellants' self-trade as a percentage of appellants own trade,

which comes to 7.65%. Similarly, the prices of the scrip during

the investigation period have also changed substantially because

of creation of artificial volume.

9. Accordingly, the JV executed self-trades for 14235 shares

(7.65% of total traded quantity by JV through broker SPFL);

these trades were executed on 33 trading days during the

investigation period and involving 79 trades. Out of these 79

trades 16 trades, for a quantity of 6,935 shares, were found to be

synchronized as well. Further SPFL acted as both the broker 10

and counter party broker for the above trades. Both buy and sell

trades were executed from the same terminal in respect of 3,243

shares out of which 1,506 shares were synchronized. More

importantly, it is not only the number of trades executed that

matters but the number of orders placed and subsequently

deleted by JV. For instance, JV deleted about 56% of its buy

orders and 50% of its sell orders during the investigation period,

which is clearly showing the extent of inflated orders in the

scrip. The impugned order gives the complete details and

analysis of the self-trade/ deleted orders etc. Therefore, it is not

a case of simply a few orders getting synchronized, because of

placing multiple orders in the system like in algorithmic trading.

Similarly, the appellant was placing the orders significantly

away from the Last Traded Price ("LTP" for convenience)

thereby impacting the LTP, both in the buy side as well as sell

side. Many a times such orders are placed with a gap of only a

few seconds. Pages 26 to 52 of the impugned order details such

price manipulation and Pages 52 to 56 gives specific examples

of how the modus operandi of placing orders at a gap of a few

seconds at prices varying from LTP was used in manipulating

the prices and thereby creating both artificial volumes and price

manipulation.

11

10. As far as the broker SPFL is concerned on June 09, 2014

they, inter alia, submitted to SEBI that they had asked their

clients to develop a mechanism to ensure that no self-trades are

executed. On June 13, 2014 they further informed that one scrip

each has been assigned to a trader/ jobber / arbitrager to avoid

any self-trade. Therefore, it is clear that at the time of the

impugned trades no mechanism had been implemented by the

broker in avoiding such self-trades and synchronized trades

which are clearly a negligence from the side of the broker.

Therefore there is no defect in the finding that the broker did not

follow due diligence and skill in avoiding market manipulation

by their clients.

Appeal Nos. 176 of 2018 & 177 of 2018

11. These appeals also cover identical issues relating to the

same appellants JV as trader and SPFL its broker, in respect of

the scrip of Mindvision Capital Ltd. ("MCL" for convenience).

During the investigation period from June 17, 2009 to February

08, 2010 the AO, after concluding that JV had indulged in self-

trades and synchronized trades in the scrip of MCL and the

broker SPFL enabled the same due to negligence and lack of

due diligence imposed a penalty of ` 20 lakh on JV for violation 12

of the provisions of Regulations 3(a),(b),(c),(d) read with

Regulation 4(1), 4(2)(a), and 4(2) (g) of SEBI (PFUTP)

Regulations, 2003 under Section 15HA of SEBI Act and ` 5

lakh on SPFL under Section 15HB of SEBI Act for violation of

the provisions of Clause A(2) of Code of Conduct for Stock

Brokers specified in Schedule II read with Regulation 7 of SEBI

(Stock Brokers and Sub-brokers) Regulations, 1992.

12. Learned counsel for the appellants submitted that self-

trade was only 0.12% of the total volumes which happened by

chance; no intention to manipulate; mitigating factors under

Section 15J of the SEBI Act not considered etc. Learned

counsel for the respondent SEBI contended that the intention to

manipulate is very clear both from the nature of transactions,

extent of self-trades, synchronized trades, timing of trades,

impact on LTP by placing orders at far away prices and hence

both the appellants clearly violating the provisions of PFUTP

Regulations and Code of Conduct for Brokers respectively.

13. It was further contended by the learned counsel for the

appellants that out of 158 trading days the appellant JV traded

only on 33 days and self-trade to the total market volume was

only 4.59% and if all the trading days are taken into account 13

self-trade to market volume would work out to only 0.98%. As

regards the role of SPFL was concerned the learned counsel

reiterated the submission as in Appeal No. 362 of 2017.

14. From the impugned order it is noted that the buy and sell

orders for the aforesaid self-trades were structured in terms of

order quantity, price and time (in respect of 9 trades out of 19

trades). Out of the 7,323 shares executed through 19 self-trades

in 12 days, 4,815 shares executed in 9 self-trades on 5 days

were synchronized i.e., trades where the difference between buy

and sell order quantity as well as buy and sell order price is NIL

and time difference between the buy and sell orders is less than

one minute in most of the instances. It is also noted that 65.75%

self-trades were synchronized. Further submissions made by the

SPFL that these orders were placed from different terminals by

the dealers / jobbers does not have any merit because of the

proximity of time of entering orders at identical price and

quantity resulting into matching of the trades. This clearly

indicates synchronization while entering the orders, even as

these were executed on the screen of the exchange. A large

number of trades got matched regularly; around 66% of self-

trades are synchronized among the jobbers / dealers of SPFL

and therefore beyond reasonable doubt these trades were 14

executed with meeting of minds and with an intention to create

artificial volume in the scrip of MCL. It is a known fact that

persons who are unknown to each other cannot match trade

continuously by entering orders in such a pattern. It is also

difficult to accept that several orders placed on various days

also matched. Such transactions are clearly not genuine and

have been entered for creating misleading appearance of trading

in the scrip.

15. Similarly, the impugned order also highlights how the

LTP was affected by the manipulation indulged by the

appellant. The prices increased from ` 24.85 to ` 64.60 and the

appellant JV's contribution to the LTP was ` 6.80. It is also

evident from the impugned order that on 12 trading days the

appellant executed self-trade to the tune of 7323 shares which is

4.91% of the total trade. Given these facts, the finding in the

impugned order that the appellant JV has violated provisions of

the PFUTP Regulations cannot be faulted. Similarly, given the

frequency of self-trades and the fact that some of these were

executed from the same terminal of SPFL, the finding that SPFL

failed to do proper due diligence and therefore violated the code

applicable for brokers under the Broker Regulations also cannot

be disputed.

15

16. The learned counsel for the appellants has made a

submission that the penalties imposed by both the impugned

orders are too heavy and harsh and in several similar instances

SEBI did not impose any penalty. Reliance on the various

orders issued by SEBI where parties concerned have been let off

without any penalty imposed are distinguishable on the facts

and in all those cases the percentage of self-trades are very

negligible while in the case of the appellants they are not

negligible. Similarly, repetitive nature also makes considerable

difference. Therefore, in the facts of the present appeals we are

not inclined to give the benefit of no penalty to the appellants.

17. However, we note that while in Appeal Nos. 362 of 2017

& 365 of 2017 the impugned order has imposed a penalty of

` 25 lakh each on both the appellants vide subsequent impugned

order (in Appeal Nos. 176 of 2018 & 177 of 2018) the penalty

imposed is ` 20 lakh against the client JV and ` 5 lakh against

the broker SPFL. At the same time, there is a repetition of the

same offence. Though, these two impugned orders have been

passed in 2017 & 2018 respectively the period of violation/

investigation is similar; during 2009-2010 relating to two

different scrips. Therefore, the violation is of similar nature, the

period of violation is broadly the same and hence we find there 16

is an inter se disproportionality in the penalty imposed

particularly in respect of the broker. Moreover, it is also to be

noted that though the 2017 matter was remitted to SEBI on an

earlier appeal, the AO has retained the amount of penalty at ` 25

lakh each in the fresh order as well. Though, an exactly equal

amount of penalty may not be forthcoming even in identical

facts and circumstances by two adjudication orders there should

not be too much variance also for the sake of equity.

18. Therefore, in the given facts and circumstances of these

appeals while upholding the impugned orders on merit we are of

the view that an intervention is needed as far as the amount of

penalty is concerned. Accordingly, we reduce the amount of

penalty imposed in Appeal Nos. 362 of 2017 & 365 of 2017

from ` 25 lakh each to ` 15 lakh and ` 10 lakh vis-à-vis JV and

SPFL respectively and retain the amount of penalty of ` 20 lakh

on JV and ` 5 lakh on SPFL imposed in Appeal Nos. 176 of

2018 & 177 of 2018. Appellants JV and SPFL are directed to

pay the total penalty of ` 35 lakh and ` 15 lakh respectively

within 30 days from the date of this order.

17

19. Appeals are partly allowed on above terms with no orders

on costs.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C.K.G. Nair Member

Sd/-

Justice M. T. Joshi Judicial Member 11.10.2019 Prepared & Compared By: PK