Mr. Gaurav Arora vs Sebi

Jaypee Capital Services Limited FA-45, Shivaji Enclave, Rajouri Garden, New Delhi - 110 027. ...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. 345 of 2017

Mr. Gaurav Arora F 8/21 Vasant Vihar, New Delhi - 110 057. ...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. Somasekhar Sundaresan, Advocate with Sumit Agarwal, Mr. Mahaveer Rajguru and Mr. Mittu Choudhary, Advocates i/b Regstreet Law Advisors for the Appellant.

Mr. Gaurav Joshi, Senior Advocate with Mr. Anubhav Ghosh and Ms. Rashi Dalmia, Advocates i/b The Law Point for the Respondent. 2

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

Per : Dr. C.K.G. Nair, Member

1.

Appellants in these appeals challenge the order of the

Adjudicating Officer ('AO' for short) of Securities and Exchange

Board of India ('SEBI' for short) dated September 28, 2017. By

the said order Jaypee Capital Services Limited ('Jaypee' for

short), appellant in Appeal No. 333 of 2017 and Mr. Gaurav

Arora, appellant in Appeal No. 345 of 2017 have been directed to

pay an amount of Rs. 2 crores as penalty jointly and severally

under Section 15HA of SEBI Act, 1992 and Jaypee has been

further directed to pay an amount of Rs. 10 lakhs as penalty under

Section 15HB of the SEBI Act, 1992. The said penalty of Rs. 2

crores has been imposed for violation of Regulations 3(a), (b), (c),

(d), and 4(1) and 4(2)(a) of the SEBI (Prohibition of Fraudulent

and Unfair Trade Practices relating to Securities Market)

Regulations, 2003 ('PFUTP Regulations' for short) and penalty of

Rs. 10 lakhs has been imposed for violation of Clause A(2), (3) &

(4) of the Code of Conduct under Schedule II [read with erstwhile

Regulation 7 (now regulation 9(f)] of the SEBI (Stock Brokers

and Sub-brokers) Regulations, 1992.

3

2. Jaypee, appellant in Appeal No. 333 of 2017 is a member of

the United Stock Exchange of India Limited ('USE' for short)

since June 2010. Appellant in Appeal No. 345 of 2017 was the

Managing Director of Jaypee till March 11, 2015. In addition, Mr.

Arora was also a Trading Member Director in the USE till

September 17, 2012. Since both these appeals have been filed to

challenge the same impugned order and by consent of the parties

both these appeals have been heard and decided together.

3. During 23 - 25 January, 2012 SEBI conducted an inspection

of the books of accounts and other records of Jaypee for the period

between April, 2011 to October, 2011. During this inspection

SEBI noticed that Jaypee, with the help of its Managing Director,

Mr. Arora, had executed large number of self trades in the US

Dollar - Indian Rupee (USD - INR) currency derivative contract

during the inspection period and created misleading picture of

large volumes of trading in this contract at USE. Accordingly, a

show cause notice dated January 22, 2015 was issued to both the

appellants seeking to show cause as to why an enquiry should not

be held against them and penalty not imposed under Section

15HA and under Section 15HB of the SEBI Act, 1992. It is noted

from the records that a large number of extensions had been

sought by the appellants for filing replies and additional replies 4

etc. and for personal appearance which were granted by SEBI.

The appellants also sought a number of records including

voluminous trade logs, which was given by SEBI. Thereafter, the

order impugned in these appeals was passed on September 28,

2017. Further, the appellants have also filed settlement

applications twice which were rejected by SEBI.

4. USE was a new Stock Exchange incorporated on October

15, 2008 and dealing in currency derivatives only. The USE was

co-founded by the Bombay Stock Exchange (BSE) and Federal

Bank with investments from 21 Indian public sector banks as well

as private banks and international banks. Both the appellants

herein were also shareholders of USE. USE merged with BSE in

2014. During the relevant time the appellant Jaypee had executed

voluminous trades on its proprietary account at USE, a major

share of which was self trades: such self trades were 59.77% of

the total volume in USE during the inspection period. Further, it

was observed that 73.32% of the self trades were executed within

a few seconds from 12 terminals of the appellant Jaypee. The

complete details of the trades, including its break up into self

trades and emanating from different terminal locations, are given

in the Annexure - II to the show cause notice.

5

5. The volume of trades and other facts are not disputed by the

appellants. Rather, in its reply dated April 19, 2015 it was, inter

alia, confirmed that during the period April - October, 2011 the

appellant was an active proprietary trader with substantial trades

executed in pro-account and it had only two clients at the relevant

time. It was also submitted by the appellants that in view of their

high activity levels it is not unusual that in terms of percentage the

volume of pro-trading is higher than the volume of client trading.

It is also an undisputed fact that the USE had only four active

trading members at the relevant time.

6. Shri Somasekhar Sundaresan, learned counsel appearing on

behalf of the appellant submitted that the relevant time was the

early stage of the currency derivatives exchanges in India. It was a

demutualised Exchange from its trading launch date itself i.e.

September 20, 2010. Though the appellants in both the appeals

were also shareholders of USE, they were not among the top 10

shareholders. Further, the board of directors of USE consisted of

highly qualified and reputed individuals including former senior

civil servants etc.

7. It was further submitted by the learned counsel for the

appellants that Jaypee at the relevant time was using algo trading

with no manual intervention. Further, it was contended that heavy 6

trades per se at the relevant time was not against rules, only self

trades and that too beyond the threshold level with the intention to

manipulate the market could be termed as violation. Appellant had

no intention to manipulate the market nor even to do self trades.

Because of algo based trading the volumes were large and hence

some of its trades got matched automatically but there was neither

any manipulation nor any intention to manipulate. In any case, it

was not possible to do any price manipulation since the reference

rate of the INR - USD contract was decided by the Reserve Bank

of India (RBI) which cannot be manipulated by anyone. In any

case, the appellant had incurred a heavy loss of Rs. 88,58,290/- on

account of the said trades. The decision of the board of directors

which is relied on by SEBI is relating to volumes upto December

31, 2010 and not for the investigation period. This is clear from

the minutes of the USE board decision on March 12, 2011. It is on

record that in the meeting of the board of directors of USE held on

March 12, 2011, wherein Mr. Arora was also present, it was

recorded as follows:-

"The portion "Mr. Gaurav Arora has endeavoured to ensure that until 31st December, 2010, the Exchange will have total traded volumes in the vicinity of Rs. 1500 Crore. Mr. Gaurav Arora has also committed to the Board that, he will endeavour to ensure that at any point of time effective from 1st January, 2011, the total volumes traded on the Exchange will be 10% of the overall market volumes (aggregate of volumes of all 3 7

stock exchanges) of Rs. 3000 Crore whichever is higher.", be replaced with "Mr. Gaurav Arora has agreed to be in frequent touch with the other important traders to endeavour that until December 31, 2010, the Exchange will have traded volumes in the vicinity of Rs. 1500 Crore."

8. Similarly, the decision of the board of directors to restrict the

appellant's trade volume was upto 30% which the appellant had

complied with subsequently. However, this limit itself was

revised to 45% by the board of USE. Moreover, the open position

limit of 15% of the total position or USD 50 Million whichever is

higher was never breached by the appellant. Reliance on the

decision of the Hon'ble Supreme Court in the case of SEBI vs

Rakhi Trading (CA No. 1969/2011, order dated February 8,

2018) by SEBI is misplaced as Rakhi Trading deals with

synchronized and circular trading and not with respect to self

trades. Moreover, under Rakhi Trading the manipulative intent has

to be established which is not the case of the impugned trades

where no intention is established and that too in the context of

making a huge loss by the appellant.

9. It was further contended that in any case self trades could

not have been detected and prevented during the relevant time as

the technology available in the trading system of USE was not

capable of doing the same. This facility came much later. 8

10. It was also contended by the learned counsel for the

appellant that SEBI gave only a warning to USE vide the WTM's

order dated April 9, 2012 which dealt with the role of USE in the

same matter which, inter alia, covered self-trade volumes by a few

members which is the issue in the present appeal. In the WTM's

order it was also held that there was no evidence of "wash trades"

as no motive could be established to the nature of such trades,

except affecting the volumes. In short, the impugned order does

not establish any intention or motive behind the alleged

manipulation and hence there was no manipulation and therefore

the charge of violation of PFUTP Regulations is without any

merit. The only issue is that of the appellant having high volumes

of trades which was neither self trades nor executed with any

manipulative intent and hence not liable to be punished under

PFUTP Regulations. In any case and without prejudice to the

aforesaid submissions, the penalty imposed is too high and

disproportionate, particularly in the context of no manipulative

intent as well as the fact that the appellant has incurred heavy loss.

11. The learned counsel for the appellant also placed reliance on

the orders passed by this Tribunal in matters of Todi Securities

Ltd. vs SEBI (Appeal No. 403 of 2015 decided on February 10,

2017) and Crosseas Capital Service Pvt. Ltd. vs SEBI (Appeal 9

No. 104 of 2015 decided on February 10, 2017), whereby a fresh

look on self trades was ordered, in the context of SEBI's intention

to revisit the issue.

12. Shri Gaurav Joshi, learned senior counsel appearing for the

respondent SEBI emphasized the huge magnitude of the volume

of trade and the proportion of self trade therein executed by the

appellant. The table in the impugned order on page 20 at

paragraphs 29 and 30 clearly demonstrate these details.

Accordingly, the appellant had contributed 72.83% of USE's total

turnover during the investigation period. Further 59.77% of USE's

turnover was self trades by Jaypee. Similarly, in paragraph 77 of

the impugned order the absolute magnitude of trading is stated

that the appellant had executed more than 15 lakhs self trades

which was 59.77% of USE's total volume.

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

respondent SEBI that Mr. Arora, the Managing Director of Jaypee

was also a shareholder as well as a Director in USE. His son was a

Key Managerial Personnel (KMP) in USE appointed vide decision

indicated in the board meeting minutes dated March 12, 2011 of

USE a month before commencing the huge volume of trading by

the appellant Jaypee. It is on record that Mr. Arora had formally

agreed to bring in more volumes in the USE.

10

14. It was further submitted that algo trading is different from

what is done by the appellant herein. Algo trading is basically to

take advantage of arbitrage opportunities while in the present

matter it was computerized trading from multiple terminals only

to create artificial volume mainly by means of self trades. The

ratio of Rakhi Trading and SEBI vs Kishore R. Ajmera (2016) 6

SCC 368 squarely apply to the present matter as volume

manipulation is also a PFUTP violation and price manipulation is

not the only PFUTP violations. On the quantum of penalty

appellant's reliance on the order of Todi Securities Ltd. is not

maintainable because they are not comparable situation since the

magnitude of trading and self trades of the appellant is much

higher than that of Todi Securities Ltd.

15. Learned counsel for the respondent SEBI also placed

reliance on a number of judgments in addition to Rakhi Trading

and Kishore R. Ajmera (supra), such as orders of this Tribunal in

Angel Broking Private Ltd. vs. SEBI (Appeal No. 46 of 2014

decided on October 1, 2014), H.J. Securities Pvt. Ltd. vs. SEBI

(Appeal No. 76 of 2012 decided on May 11, 2012), Ketan Parekh

vs. SEBI (Appeal No. 2 of 2004 decided on July 14, 2006), Smt.

Krupa Sanjay Soni vs. SEBI (Appeal No. 32 of 2013 decided on

January 24, 2014), Shankar Sharma vs. SEBI (Appeal No. 14 of 11

2009 decided on October 28, 2009) and Crosseas Capital

Services Pvt. Ltd. vs. SEBI (Appeal No. 330 of 2017 decided on

February 26, 2019).

16. For convenience the relevant provisions of the PFUTP

Regulations, 2003 and Schedule II of the Stock Brokers

Regulations, 1992 are reproduced as under:-

"PFUTP Regulations, 2003

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 thereunder;

(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 thereunder.

4. Prohibition of manipulative, fraudulent and unfair trade practice 12

(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;

Schedule II of Stock Brokers Regulations, 1992

(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.

(3) Manipulation : A stock-broker shall not indulge in manipulative, fraudulent or deceptive transactions or schemes or spread rumours with a view to distorting market equilibrium or making personal gains.

(4) Malpractices : A stock-broker shall not create false market either singly or in concert with others or indulge in any act detrimental to the investors interest or which leads to interference with the fair and smooth functioning of the market. A stockbroker shall not involve himself in excessive speculative business in the market beyond reasonable levels not commensurate with his financial soundness."

17. We find no merit in the submissions of the appellant.

Submissions that self trade per se is not a violation cannot be

accepted, particularly, in the given context where the quantity of

self trade is upto 60% of the total volume in an exchange, USE.

What is held in the judgments relied on by the appellant as well as 13

the circular issued by SEBI is relating to small volumes of self

trade happening unintentionally while placing large number of

orders. Such exception cannot be extended to huge volumes of

self trades basically covering almost 2/3 of the total volume of the

Stock Exchange itself. The contention of algo trading cannot be

accepted because the beneficial owner of the algo is expected to

be in control over the algo and trading strategy embodied in the

said algo has to be in tune with the extant rules and regulations.

Algos are not meteors or asteroids striking the market at random

but carefully designed trading strategies developed by traders /

trading members of an exchange. Here is a case of self trade of

upto 15 lakh units in a derivative contract of the Exchange in six

months which comes to almost 60% of the total volume of the

Exchange during the period. By no imagination this can be treated

as accidental matching of a few trades particularly when such high

volumes and high ratios are there on record for a number of

trading days covering the six months of inspection period. The

appellants cannot take shelter under ignorance of such high

volumes of self trades executed by its own algo trading even if the

algo trading argument is accepted. Moreover, we are also

intrigued by the intention of using algo trading method where only

4 active members were present in the exchange and where

volumes of trades other than that of the appellant was rather 14

limited. In such a context, introducing an algo mechanism or a

computerized strategy to trade itself is the result of a manipulative

intention of the appellant for creation of high volumes to which

the appellants were formally obligated. This coupled with the

huge percentage of self trades underscore the manipulation in the

present context, which is a clearly manipulation as defined under

Regulation 4(2)(a) and other cited provisions of PFUTP

Regulations, 2003.

18. The appellants' submission that a huge loss of more than Rs.

85 lakh has been incurred has no meaning as this loss is miniscule

as it occurred in the market on a turnover of the appellant to the

tune of about Rs. 20 lakh crores (19,91,207 crore). The contention

that the Whole Time Member of SEBI did not find fault with

trading in USE and only a warning was given to USE has no merit

since that order was regarding the role of USE, the exchange in

the episode. Moreover, we note that the said order, inter alia,

records "USE is a four dealer / member exchange where these

dealers / members trade among each other with negligible client

participation. I note the admission of USE that the bulk of large

size trades have mostly been executed by two trading members

who operate with large number of trading terminals from multiple

locations. However, it was denied that the said trades were 'wash 15

trades' as no motives could be attributed to the nature of such

trade, except affecting the volumes." Therefore, the WTM's order

clearly held that volumes were affected by such trading, and the

denial on wash trading is that by the USE, not by the WTM

himself. In any case we do not intent to provide any benefit of this

order to the appellant, since it is not an order tested in appeal.

19. Volume manipulation is a PFUTP violation under

Regulation 4(2)(a) of PFUTP Regulation, 2003. This is further

underscored by a number of judgments, particularly, Ajmera and

Rakhi Trading (supra) which between them examined various

scenarios of market manipulation which are illustrative as

emanating from the appeals therein and not exhaustive, such as,

synchronized trading, circular trading etc. and which also rejects

the contention of some of the appellants in Rakhi Trading that

synchronized trading in F&O segment is not the same as that in

individual scrip as there is no beneficial ownership in the latter

since it is cash settled. Effectively, a self trade is a type of

synchronized trading with both the sides of buy and sell being

synchronized by the same entity. If volume generation has no

intrinsic basis and is only to lure other investors into the market it

is market manipulation. While it is possible that in an anonymous

market, in the context of large volume of trading some small 16

quantity of self trade can take place and which, in the absence of

other evidence, may not be treated as manipulative, huge

percentages of the market such as in the present matter where

more than 70% of the total volume in the market is created by the

appellant out of which a similar proportion is by self trades, by no

stretch of imagination this can be interpreted as normal matching

of self trade. When the proportion of trading by one entity and the

proportion of self trades by the same entity crosses some critical

limit of the same party's trade and/or the total market volume such

trades are undoubtedly and ex-facie manipulative in nature. And it

happened not on one or two days, but over six months. The

present matter is, therefore, not only market manipulation as

defined under PFUTP Regulations, 2003 but market manipulation

of an unprecedented magnitude. In doing so, the broker (Jaypee)

undoubtedly violated Schedule II of Stock Broker Regulations,

1992 which specifically calls for due skill and care, no

manipulation and no malpractices in broking business.

20. In this context, it is also important to state the objective

behind a demutualised exchange; since the learned counsel for the

appellant also contended that USE was a demutualised exchange

since inception. A perfectly demutualised exchange envisages

complete separation of ownership (which is to be diversified), 17

management and trading. However, in an imperfect model of

demutualization a limited degree of trader participation is allowed

on the board of the exchange basically to provide a connection

between exchange policy making and the world of trading.

However, in such an imperfect model the implicit understanding is

that the trading member who is on the board of the exchange

would abstain from trading during the time when she / he is on

Board. However, in the instant matter such a restricted

relationship has been taken to such a level of effectively

monopolising the entire trading operation of the exchange by one

trading member who is on the board of the exchange. This is in

addition to his son being appointed as a key managerial person of

the exchange. This is far from a demutualised model which was

envisaged to protect market integrity, a deficiency noticed in a

mutualised exchange by separating board, management and

trading functions into distinct categories with firewalls between

them. Still the appellants were warned by the board of directors of

USE directing to reduce their exposure in terms of volumes.

However, even after this warning / direction it took considerable

time for the appellant to reduce its volume of trading. Therefore,

findings in this impugned order that the appellants violated

various provisions of PFUTP Regulations, 2003 and appellant 18

Jaypee violated Schedule II of Stock Broker Regulations, 1992

cannot be faulted.

21. The submission that the penalty imposed on another trading

member, Todi Securities, is much less and the penalty of Rs. 2

crore imposed on the appellant for violation of PFUTP

Regulations is harsh has no merit in view of the substantial

differences in volume of trading and self trades and other

distinguishing factors between the two parties. In fact, given the

facts and circumstances of this matter we are of the view that the

penalty of Rs. 2 crore is rather light.

22. For all the above reasons, we find no merit at all in these

appeals and they are dismissed forthwith. No orders on costs.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C.K.G. Nair Member

Sd/-

Justice M.T. Joshi Judicial Member 28.06.2019 Prepared and compared by:msb