Order in respect of Crosseas Capital Services Private Limited in the matter of Bharatiya Global Infomedia Ltd.

WTM/SKM/EFD1-DRAIII/ 10 /2019-20 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM: S. K. MOHANTY, WHOLE TIME MEMBER ORDER Under section 15-I (3) read with Section 19 of the Securities and Exchange Board of India Act, 1992

Name of the Entity In the matter of PAN Crosseas Capital Services Bharatiya Global Infomedia AACCC5470H Private Limited Limited

Background 1. Securities and Exchange Board of India (hereinafter referred to as "SEBI") had conducted an Investigation into the affairs pertaining to the Initial Public Offer (herein after referred to as "IPO") of Bharatiya Global Infomedia Limited (hereinafter referred to as "the Company" or "BGIL”) and the trading in its scrip on the stock exchanges on the listing day, i.e., July 28, 2011. During the investigation, SEBI noticed inter alia that the Crosseas Capital Services Private Limited (herein after referred to as “Noticee”), a stock broker registered with SEBI and a trading member of both the National Stock Exchange of India Limited (hereinafter referred to as "NSE") and the Bombay Stock Exchange Limited (hereinafter referred to as "BSE"), had allegedly : (a) indulged in self-trades (where the Noticee was on both the sides of a trade, i.e., buyer as well as seller) in the scrip for a total quantity of 9,20,298 shares of BGIL on the BSE and NSE; and (b) out of the aforesaid total quantity of shares traded through self-trades, 16 self-trades were executed on BSE and 1375 self-trades were executed on NSE using the same terminal for a total quantity of 81,436 shares in the said scrip. 2. The nature of the above stated trades executed by the Noticee are alleged to be artificial in nature and therefore, the Noticee was alleged to have contravened the provisions of Section 12A(a), (b) and (c) of the Securities and Exchange Board of India Act, 1992 (herein after referred to as " SEBI Act ") read with regulations 3, 4(1) and 4(2)(a) of the SEBI (Prohibition of Fraudulent

Order in the matter of Bharatiya Global Infomedia Limited and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (herein after referred to as "PFUTP Regulations") and Clause A of the Code of Conduct prescribed for Stock Brokers under Schedule II of the SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 (herein after referred to as "Stock Broker Regulations”) read with regulation 7 thereof.

3. In view of such alleged violations, Adjudication Proceedings under Chapter VIA of the SEBI Act, was initiated against the Noticee. The Adjudicating Officer (hereinafter referred to as “AO”), having conducted the inquiry, found the Noticee not guilty of the violations as alleged and vide his order dated April 30, 2014 (herein after referred to as "the Adjudication Order"), disposed of the proceedings. While disposing the proceedings, the AO has, inter-alia observed that:  The Noticee is a registered intermediary carrying out the business of broking and is majorly involved into arbitrage/jobbing activities/ proprietary trading.  Matching of trades happened due to the algo trading software system used by the Noticee and the trades were executed without any human interventions.  If the self-trades are counted and examined at the terminals /trader ids level, the number of internal matching is much lower than what has been alleged in the SCN.  The volumes of BGIL scrip traded on the day of listing of BGIL was high and comparatively speaking, the percentage of matched self-trades executed by the Noticee which occurred automatically in the system if compared to the total traded volumes in the said scrip is a small fraction of the total traded volume in the scrip of BGIL.

Review of AO Order 4. Not being in agreement with the views expressed and decision taken by the AO in his adjudication order, SEBI, in exercise of powers conferred under Section 15- I (3) of SEBI Act, preferred to examine as to whether the order passed by the AO is erroneous and not in the interest of the securities market. Accordingly, a SCN dated July 11, 2014 (herein after referred to as “SCN”) was issued to the Noticee asking it to show cause as to why the observations of the AO and his decision regarding the impugned self-trades of the Noticee shall not be reversed and held erroneous and why appropriate penalty be not imposed on it for the alleged violation of section 12A(a), (b) and (c) of the SEBI Act read with regulations 3, 4(1) and 4(2)(a) of the PFUTP Regulations, read with the Code of Conduct prescribed under the Stock Broker Regulations.

5. In pursuance of the aforesaid SCN, hearing was granted to the Noticee and after having heard the Noticee, the Competent Authority, while finding the Noticee guilty of the charges levelled, vide order dated November 13, 2014, imposed a monetary penalty of Rs. 5.00 lakh on the Noticee. The said order had inter alia observed as: (a) self-trades are artificial trades as they are without change of ownership of such security; (b) the manner of determination of quantum of self-trades as proposed by the Noticee cannot be accepted; (c) percentage of self-trades as against the Noticee's total trades in BSE and NSE is 9.86% and 10.45% respectively; and (d) quantity of matching by way of self-trades is not so miniscule so as to qualify for leniency and therefore would be detrimental to market discipline.

Remand of the Case to SEBI

6. Being aggrieved by the aforesaid order imposing monetary penalty of Rs. 5.00 lakh, the Noticee, preferred an appeal before the Hon’ble Securities Appellate Tribunal (herein after referred to as “SAT”). The Hon’ble SAT, vide order dated February 10, 2017, has disposed of the appeal by remanding the matter to SEBI for re-consideration. The order of Hon’ble SAT, while remanding the matter to SEBI has noted the following: “Counsel for SEBI on instruction states that SEBI has decided to have a fresh look in these matters and, therefore, the impugned orders may be set aside and restored to the file of WTM of SEBI for passing fresh order on merits and in accordance with Law.”

Personal Hearing and Reply

7. In terms of the above mentioned order dated February 10, 2017 of Hon’ble SAT, the Noticee was provided with an opportunity of personal hearing. Noticee submitted its reply vide email dated February 04, 2019 praying for exoneration as no case is made out to proceed against it. The Noticee appeared for personal hearing on February 05, 2019. Further, vide letters dated April 30, 2019 and June 24, 2019 the Noticee has made additional submissions. In the submissions of the Noticee, it had prayed for exoneration from the charges levelled, inter-alia on the following grounds:-  That the Noticee being a jobber/arbitrager routinely does jobbing transactions of crores of rupees on a daily basis and the transactions are executed in several scrips on a given day.  That the self-trades have been executed without any human involvement as the trading takes place through the server/CTCL ids. The orders have been placed on the platform of BSE/NSE through approved algo trading mechanism and they got matched at the exchange level.  The internal matching has also happened on account of the latency factor in the system of algo trading in which system places orders at Ultra High Frequency and there is at time latency on account of lease line distance and drop of packets in the leased lines, due to which some of the trades may have rarely and accidentally matched internally as the buy/sell orders are placed automatically at Ultra High Frequency.

Alleged trades were automated trades executed through the algo trading software, as per the approved norms of the NSE and BSE.  There have been no penal actions or any infirmities found by NSE/BSE till date.  Trades have been executed without any human intervention hence, no malafide intent can be imputed to the self-trades. Therefore, the self-trades are not in violation of any provisions as alleged in the SCN.  The Noticee had deployed multiple CTCL servers (10) and each CTCL server was logged into by 5 to 7 traders represented by a combination of unique terminals/ location ids (53).  The Noticee’s representatives give instructions based on different algo trading strategies to various dealers, who traded through multiple terminals and therefore, there was a high probability that some of the orders originating from these algo strategies interacted and matched with each other in the exchange trading system without any malicious intention.  Person placing the orders on behalf of the Noticee worked in a closed environment and had no occasion to know the orders placed by the other traders, whether in the same branch or not.

Further, these self-trades cannot be treated as fictitious as the same have been executed on the platform of an exchange’s approved terminals and in the normal course of business.  The Noticee has also submitted to have made representation to stock exchanges stating that it is not possible for traders to prevent self-trades from occurring as trades are executed in an exchange’s order matching system. Once an order is accepted by trading system, it is not possible for trades to have control over who the counter-party would be at the time of matching of trade. Since, the trading engine of an exchange finds and matches orders based on price time priority, therefore, the traders should not be blamed for the systemic self-trades and requested stock exchange to take corrective measures.

 Occurrence of self-trades may attract provisions of PFUTP Regulations if any additional material, evidence or circumstances are available to indicate manipulation of the price or volume of the scrip or creation of false or misleading appearance of trading in securities market resulting from such self-trades.  Allegations of fraud and manipulation resulting from self-trades couldn’t be levelled unless they are supplemented by strong evidences/documents/ information establishing intention on the part of the Noticee to defraud or manipulate the market by means of self-trades, which in the present case has not been supplemented.  The present proceedings have been remanded by the Hon’ble SAT on account of the statement made on behalf of SEBI before the Hon’ble SAT that SEBI is working on a policy on self-trades which would enable SEBI to distinguish between intentional self-trades and un-intentional self-trades.  SEBI vide its letter no EFD/MISC/OW/7371/1/2018 dated March 08, 2018, addressed to Ms. Alka Taneja, Department of Economic Affairs, has clarified and reiterated that mere occurrence of self-trades is not per se illegal in absence of any other additional evidence. Thus, accidental or unintentional self-trades are not covered under the PFUTP Regulations and therefore not punishable.  Volume of such unintentional/accidental self-trades executed by the Noticee was only 1.04% of the total combined market volume of BGIL on both the exchanges, i.e., BSE and NSE, on the day the scrip of BGIL was listed for trading.  A number of orders passed by Whole Time Members as well as Adjudicating Officers have been cited and relied upon to draw parallel to the issue under consideration in the instant proceedings in support of the Noticee’s request for exoneration.  SEBI’s own committee (SMAC) has held that self-trades could be possible when multiple traders in a broking house are placing buy and sell orders in the same scrip for different clients or multiple algo orders of the same broker may get matched without any intent of self-trades.

Issues for consideration 8. I have perused the SCN, written submission, arguments put forth during the personal hearing and other materials on the record. On examination of the same, the following issues arise for consideration:

Issue No 1- Whether the self-trades executed by the Noticee have been entered into intentionally with manipulative intent or it was executed accidentally?

Issue No. 2- If issue no.1 is determined in affirmative, then whether the findings made in the Adjudication Order dated April 30, 2014 are erroneous and against the interest of securities market and require invocation of powers under Section 15- I (3)?

Issue No- 3 In case the answer to the above are in affirmative, quantum of monetary penalty to be visited upon the Noticee?

9. Before, I proceed to examine the issues framed as aforesaid, it would be relevant to have a look at the provisions of law pertaining to the contraventions as alleged in the SCN and the same are reproduced as under for ready reference:

Relevant provisions of SEBI Act, 1992: Section 12A of the SEBI Act. No person shall directly or indirectly – (a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognised stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made there under; (b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognized stock exchange; (c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognized stock exchange, in contravention of the provisions of this Act or the rules or the regulations made there under; Relevant provisions of PFUTP Regulations:

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. 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; Relevant provisions of Stock Broker Regulations:

Stock brokers shall abide by the following Code of Conduct.

7. The stock broker holding a certificate shall at all times abide by the Code of Conduct as specified in Schedule II. Clause A of the Code of Conduct for Stock Brokers A. General.

(1) Integrity: A stock-broker, shall maintain high standards of integrity, promptitude and fairness in the conduct of all his business. (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.(5) Compliance with statutory requirements: A stock-broker shall abide by all the provisions of the Act and the rules, regulations issued by the Government, the Board and the Stock Exchange from time to time as may be applicable to him. Now, I proceed to examine the issues and answer the questions framed at paragraph 8 above, hereunder:-

Issue No 1- Whether the self-trades executed by the Noticee have been entered into intentionally with manipulative intent or it was executed accidentally?

10. Self-trades are classified as those trades executed in the stock market, in which, both the buyer and the seller remains the same entity, meaning thereby, entity in such trades is the same on both sides, i.e., buy and sell side. Consequently, such self-trades do not result in change in beneficial ownership of the security. Summary of the trades including the alleged self-trades executed by the Noticee in BGIL is provided as below: Table-1 Name of Self-trade Total traded % of self-trade Total traded % of self-trade the quantity of quantity of quantity to the quantity of quantity to the exchange BGIL BGIL total traded BGIL shares total traded shares by shares by quantity of on the quantity of the Noticee the Noticee BGIL shares by exchanges BGIL shares on the Noticee (BSE & NSE) the exchanges (BSE & NSE) BSE 4,46,660 45,30,020 9.86 4,07,25,468 1.10 NSE 4,73,638 45,32,421 10.45 4,75,78,807 1.00 Total 9,20,298 90,62,441 10.1 8,83,04,275 1.04

11. It is not disputed that self-trades were executed by the Noticee in the scrip of BGIL for a total quantity of 9,20,298 shares. I further note that out of total self-traded quantity of 9,20,298 shares, Noticee had executed self-trades for 4,46,660 shares on the platform of BSE and self-trades for a quantity of 4,73,638 shares were executed on the platform of NSE. It is also noted that Noticee had executed 16 self-trades for a quantity of 692 shares on BSE and 1,375 self-trades for a total quantity of 80,744 shares on the exchange platform of NSE using the single terminal. Thus, the aforementioned self-trades were executed from the single terminal for a total quantity of 81,436 shares in the scrip of BGIL through 1391 trades. Although the Noticee has not disputed the execution of the self-trades cited above, it was contended that the aforesaid alleged self-trades were purely accidental/incidental in nature and executed in the ordinary course of its business of arbitrage/jobbing and not executed with any intent to manipulate trading in the scrip of BGIL. At this stage, I note that the allegation of executing self-trades has not been denied by the Noticee, and the Noticee has only attempted to attribute the reasons so as to justify the prayer for exoneration from the charges. The commission of self-trades and the allegation thereto is purely based on the factual data derived from the trading executed at the platform of stock exchanges. The data, as derived, has concretely established the execution of self-trades by the Noticee.

12. Having noted that the Noticee had actually executed self-trades in the scrip of BGIL, the issue that requires consideration is whether the alleged self-trades were accidental and executed without any oblique motive or the execution of the alleged self-trades were indeed intentional in nature. As noted earlier, in case of self-trades, both buyer and seller remains the same entity and, therefore, execution of self-trade does not result in change of beneficial ownership. Nonetheless, it may create a false or misleading appearance of trading in the securities market and may have potential to entice other investors to trade in that particular scrip. Entities may also enter into such trades with an intention of manipulating the price or volume of the scrip.

13. I find that the self-trades executed by the Noticee on BSE was for a total quantity of 4,46,660 shares, which was 9.86 % of the total shares traded by the Noticee on BSE in the scrip of BGIL, on the day of listing. Similarly, the Noticee executed self-trades for a total quantity of 4,73,638 shares in the scrip of BGIL on NSE on the listing day, which was 10.45% of the total volume of shares of BGIL traded by the Noticee on NSE on that day. It is further noted that on the day of listing, the quantity of total number of shares traded in the scrip of BGIL on BSE and NSE were 4,07,25,468 shares and 4,75,78,807 shares, respectively, which together amounted to 8,83,04,275 shares. Further, when total quantity of shares traded on the floor of both the exchanges is compared with the total number of shares traded through self-trades by the Noticee on BSE and NSE on the day of listing in the scrip of BGIL, it comes to only 1.10% and 1.00%, respectively, by the Noticee. Thus, statistically speaking, the volume of self-trades executed by the Noticee was approximately 1% of the total traded volume in the scrip of BGIL on the day of its listing.

14. In this context, the submissions of the Noticee need a careful consideration. The Noticee has made the following submissions:  It had deployed multiple different CTCL servers (10) and each CTCL server had separate CTCL id. Further, every CTCL server was logged in by 5 to 7 traders represented by a combination of unique terminal/ location ids.  The alleged number of self-trades need to be analysed based on the combination of CTCL ids and location of such CTCL ids, so as to arrive at the intent behind the execution of self-trades.  The trades were executed through algo trading system and the alleged self-trades were system generated without any intervention by human body or mind. The Noticee has further submitted that self-trades should be considered at a dealer/ id level and not at the broker level. In such a case, trades executed under self-trades category would be less than what was alleged under SCN.  Mere occurrence of self-trades could not be considered per se illegal in the absence of any other additional evidence to prove manipulation or intent to defraud as normally done in cases of synchronized trades.

15. In my view, in the absence of any direct evidence before me to attribute intentional self-trade or a motive to manipulate the price of the scrip of BGIL, attending circumstances become crucial to arrive at a finding as to whether the Noticee has committed the alleged breach or not. This view has been laid down by the Hon’ble Supreme Court of India in the matter SEBI v. Kishore Ajmera (2016) 6 SCC 368, wherein the Apex Court had observed that: “It is a fundamental principle of law that proof of an allegation levelled against a person may be in the form of direct substantive evidence or, as in many cases, such proof may have to be inferred by a logical process of reasoning from the totality of the attending facts and circumstances surrounding the allegations/charges made and levelled. While direct evidence is a more certain basis to come to a conclusion, yet, in the absence thereof the Courts cannot be helpless. It is the judicial duty to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded and to reach what would appear to the Court to be a reasonable conclusion therefrom. The test would always be that what inferential process that a reasonable/prudent man would adopt to arrive at a conclusion…” It is also noted that the aforesaid findings have been referred and reiterated by the Hon’ble Supreme Court in its decision passed in the matter of SEBI Vs. Rakhi Trading Private Limited, (2008) 13 SCC 753.

16. Keeping the aforesaid observation of the Hon’ble Apex Court in view, it requires examination as to whether the materials available on record and other immediate and proximate facts and circumstances surrounding the events on the basis of which the charges/allegations have been levelled on the Noticee, contain any other information, either implicit and explicit in addition to the information about self-trades so as to conclude that the Noticee had executed the aforesaid self-trades intentionally to manipulate the volume and/or the price of the scrip of BGIL on the day of its listing.

17. It has been submitted that the alleged self-trades were executed on the day of listing of BGIL, which witnessed significant trading volumes. Noticee being jobber by profession, did trading on the day of listing on both the stock exchanges to take advantage of the liquidity and arbitrage opportunities. It has also submitted that on the day of listing, i.e., July 28, 2011, trading volume in the scrip of BGIL was very high as compared to the trading volume in the scrip after the date of listing. On the date of listing, the volume of shares traded in the scrip of BGIL on the exchange of BSE and NSE were 4,07,25,468 and 4,75,78,807 respectively, i.e., aggregating more than 8.83 crore of shares were traded on that day. It was further submitted that on BSE, the scrip opened at ₹81.9, went up to ₹83, stayed between ₹60-70 for some time and then plunged to ₹29.90 at close, whereas on NSE, it opened at ₹84 (day’s high), stayed around the ₹60-₹70 for some time then plunged to ₹30.95 at close.

18. The Noticee has submitted that trades in the scrip of BGIL on July 28, 2011 were jobbing in nature and more particularly carried out using the exchange approved algo trading software and the price quoted at any given point of time matched at the prevailing market price of the scrip. It is also submitted that the Noticee did jobbing in several other scrips as well using the similar algo trading software on the day of listing of scrip of BGIL, i.e., July 28, 2011. As explained by the Noticee, orders placed through algo trading software using different terminals through the same broker, may get matched accidentally without any manipulative intention. The Noticee has also submitted that mere occurrence of self-trades, without any additional material evidence or circumstances indicating manipulation in the price or volume of the scrip or creation of a false or misleading appearance about the scrip resulting from such self-trades, would not make the Notice liable to be charged under the PFUTP Regulations.

19. It is further submitted by the Noticee that the internal matching of orders have happened on account of the latency factor in the system of algo trading in which system places orders of less than or equal to 1000 shares at ultra-high frequency speed and at times latency plays an important role on account of lease line distances and drop of packets in the leased lines, due to which, some of the orders placed by the dealers on behalf of the Noticee may result in matching internally. Noticee has also submitted that only some of the orders have been converted into self-trades on account of the above stated system generated trading mechanism by using algo trading software.

20. It is also submitted by the Noticee that some of the alleged self-trades were partial trades, i.e., result of split of a single order where a single order placed for higher quantity matched with the counter order of low quantity. Noticee further submits that no adverse findings regarding any synchronized trading, reversal trading, LTP contribution or creation of New High Price etc., have been brought out against it in the investigation report or in the SCN.

21. Noticee has relied on the findings recorded by the Adjudicating Officer in the matter of Bedmutha Industries Ltd. dated July 26, 2018, the relevant portion of which is extracted as under; “Admittedly, there are infrequent, random and incidental instances of self-trades from amongst the large number of trades of the Noticee in the scrip when it was highly liquid and volatile at the relevant time. Considering the facts and circumstance of this case, I find that the instances of self-trades alleged in this case were merely an occurrence on account of genuine trading strategies in the liquid and volatile scrip at the relevant time. The ‘self-trade’ in question were, thus, purely accidental/incidental in the ordinary course of business.”

22. Noticee has further referred to and relied on the order dated November 27, 2013 passed by Adjudicating Officer, in respect of Noticee in the scrip of Servalakshmi Papers Limited involving similar allegation. The relevant finding by Adjudicating Officer in this order is as under :

“I find merit in the submissions made by the Noticee with respect to the matching of trades due to the algo trading software system used by the Noticee and that if the self-trades are counted and examined at the terminal / trader id level then the number of internal matching is much lower than the one alleged in the SCN.”

23. Further, reliance has been placed on the order passed by the Whole Time Member in the matter of Orissa Minerals Development Company Limited (OMDCL), ( DOD- December 28, 2018) wherein it was held that “the SCN has been issued upon the Noticee inter alia on the basis of execution of said number of self-trades in the scrip of OMDCL and no further material is available to indicate that such self-trades were manipulative or resulted into creation of false or misleading appearance of trading in the securities market or executed for manipulating the price or volume of the scrips. ……. In this respect, I note that since no material to establish that the said self-trades were manipulative or created false or misleading appearance of trading in the securities market or executed for manipulating the price or volume of the scrip…….”.

24. The Noticee also submits that SEBI has already laid down in its policy on self-trade dated May 16, 2017 (hereinafter referred to as “Policy”) wherein it has been decided that intention would be sine qua non for establishing manipulation in case of self-trades, and accidental/unintentional self-trades would not be covered under the PFUTP Regulations.

25. I have considered the materials available on record and the above detailed submissions made and various arguments advanced on behalf of Noticee and record my observation in the succeeding paragraphs.

26. It is a matter of fact that the Noticee was carrying out jobbing transactions and in the course of jobbing transaction, the Noticee executed trades in the scrip of BGIL on the day of its listing. I note that the Noticee traded for a total quantity of 45,30,020 shares of BGIL on BSE, out of which, transaction in 4,46,660 shares were alleged to have been resulted from self-trades, which was 9.86% of the total shares of BGIL traded by Noticee on BSE on the day of listing. Similarly, Noticee had traded for 45,32,421 shares of BGIL on NSE, out of which transaction in 10.45% shares amounting to 4,73.638 shares were alleged to have been resulted from self-trades. However, I find that the quantity of alleged self-trades executed by the Noticee when compared with the total number of shares (8.83 crore) of BGIL, traded by the entire market on the platform of BSE and NSE on the day of listing, the volume of self-trades executed by the Noticee are found to be only 1.10% and 1.00% of the total quantity of shares of BGIL traded on BSE and NSE, respectively, on that day. As noted earlier the total quantity of shares traded on BSE and NSE on the day of listing was as large as 4,07,25,468 shares and 4,75,78,807 shares, respectively.

27. I further note from the record that out of the total shares traded by the Noticee on BSE and NSE, only 16 trades involving 692 shares and 1375 trades involving 80,744 shares were actually executed using the same terminal, which is not even 1% of the total shares traded by the Noticee on the day of listing in the scrip of BGIL. Further, the above number of self-trades executed from the same terminals pales into insignificance when compared with the total number of shares, (which is more than 8.83 crores) traded on the floor of the two exchanges on the day of listing.

28. I also note that the Noticee being in jobbing profession, executes large number of trades in a number of scrips on a daily basis by using algo trading software. As per records submitted by Noticee, I note that the Noticee had traded in total number of 326 scrips on BSE and in 330 scrips on NSE including that of BGIL on the day of listing of BGIL. There is no denying the fact that the Noticee had executed trades through algo trading software, wherein trades were executed without any human intervention in any manner. Trades through algo trading system is made using certain pre-approved programs designed on certain parameters and if employed in the trading system, the machine executes buy and sale orders automatically and in the process of execution of trades, no intervention of human mind is involved.

29. Admittedly, the Noticee was trading through algorithmic software which were duly approved by BSE and NSE. The question as to what constitutes algo trading has been considered by the Hon’ble Bombay High Court in the case of National Stock Exchange of India Ltd. vs. Moneywise Media Pvt. Ltd. [(2015) SCC Online Bom. 4790], and it has held that :- “Algo trades are the product of very high end mathematical modelling. These are models devised specifically to anticipate the most microscopic changes in markets and to respond to those changes in a matter of seconds. This is done not through any human intervention, an aspect that is totally eliminated, but in a wholly automated fashion by computer-generated or triggered transactions. In high value transactions the number of such transactions that can be put through is very considerable indeed. A most rudimentary example might be this: an ‘algo’ is designed to detect the most minute changes in stock prices and to respond accordingly. In anticipation of a rise in a particular stock’s value, say, with no manual intervention but by a computer program responding to the data input, a series of purchases are triggered made at a lower value so that when the markets later reach the higher level, a considerable profit is then, equally automatically, generated and booked. The same can also operate in reverse to minimise a potential loss.”

30. Further, in algo trading, the algo software is designed to anticipate microscopic changes in the market and also to respond to those changes in milliseconds. Orders of sale and purchase are placed automatically through such software and not through any human intervention. The algo software are designed to detect the most minute changes in the stock prices and to respond accordingly and, therefore, it is quite possible that when certain orders are automatically generated without any human intervention for purchase or sale of shares in response to minute changes in the stock prices, such purchase and sale orders could get self-matched automatically and may result in self-trades.

31. The Noticee has also emphasised on the fact that it had authorized its representatives to trade in different scrips. Multiple terminals had been allotted to several traders/dealers. The authorized representatives of the Noticee formulated their own strategies and instructed the dealers to trade in the selected scrips by making their own permutations and combinations. These authorized representatives place their orders with multiple dealers sitting on different terminals and in the process of placing large numbers of orders by multiple dealers in a given scrip, self-trades have got executed unintentionally. I find that the scrip of BGIL was highly liquid on the day of its listing. The Noticee has also submitted that it is normally seen that synchronized and intentional self-trades are conducted in illiquid scrips to display a false sense of liquidity to the market. Considering the high liquidity and volume in the scrip of BGIL on the day of listing, the quantity of trades executed by the Noticee and more particularly, the alleged self-trades placed from the same terminal would not be found sufficient enough, in the absence any other material suggesting for manipulation in the scrip. In high frequency transactions or trading, where trades are executed using algo strategy and when dealers are placing orders through same stock broker but using different terminals, it is possible that trades of the same broker may get matched incidentally without any intent of ‘self-trading’ or plan or device to create artificial volume or to manipulate the price.

32. Further, from the presentation of hourly summary of trades executed by the Noticee on the day of listing of BGIL (July 28, 2011), I observe that the Noticee was largely off-setting/squaring off its transactions at the end of each hour on BSE/NSE. Details of such transactions are reproduced here under: Table-2

Position as at BSE NSE Buy Qty Sell Qty Bal. qty Buy Qty Sell Qty Bal. qty 10:00:00 1063055 943531 119524 943537 1064509 -120972

11:00:00 1424123 1245915 178208 1246607 1424815 -178208 12:00:00 1485410 1364573 120837 1365265 1486102 -120837 13:00:00 1945847 1829909 115938 1830601 1946539 -115938 14:00:00 3484938 3328552 156386 3329139 3485622 -156483 15:00:00 4288961 4481443 -192482 4483456 4290935 192521 16:00:00 4531506 4531506 0 4533488 4521734 11,574

33. From the details of hourly trade data of the Noticee in the BGIL scrip as shown above, I note that the buy quantity in BSE almost matched with the sell quantity on NSE. For instance, as at 10:00 a.m., the Noticee had a buy position of 10,63,055 shares on BSE and sell position of 10,64,509 shares on NSE with a difference of only 1454 shares. Similarly, the Noticee had a sell position of 9,43,531 shares at BSE and buy position of 9,43,537 shares at NSE at 10.00 a.m. with a difference of only 6 shares. The said data supports the submissions given by the Noticee that the positions taken on NSE/BSE were largely for arbitrage purpose and intended to offset each other at different time period of the day.

34. I further note that SEBI has come out with a policy decision to deal with intentional and non-intentional self-trades. The Policy indicates that in order to find someone guilty of self-trades under the PFUTP Regulations, it is essential to find out that there is an intention of manipulation behind such self-trades. The policy indicates that accidental/unintentional self-trades should not be subjected to PFUTP Regulations, as mere occurrence of self-trades would not be considered per se illegal in the absence of any other additional evidence to support manipulation or intention to defraud. The aforesaid policy thus, suggests that in matters of self-trade, an assessment has to be made as to whether the said trade was intentional or unintentional on the basis of supporting evidences such as the manipulative intent, the volume transacted, illiquidity of the scrip etc. Provisions of PFUTP Regulations prescribes that dealing in securities shall be deemed to be a fraudulent transaction or an unfair trade practice if it involves an element of fraud and may also include entering into a transaction in securities without any intention of performing it or without an intention of effecting any change of ownership of such security. Since self-trades do not result in transfer of beneficial ownership, the same gets covered within the sweep of PFUTP Regulations. However, mere occurrence of self-trades cannot be suo-moto considered as illegal in the absence of any other corroborative evidence to prove manipulation of price or volume or intent to defraud, as normally seen in cases of synchronized trades. Therefore, in the matters of self-trades, first an assessment has to be made as to whether such trades were executed with any intention or executed in an unintentional manner, on the basis of the supporting evidence, if any and the market manipulation if any, caused by indulging in such self-trades should be ascertained from the available facts and circumstance in which, such trades were executed. It is also relevant to note that SEBI has already laid down in its policy on self-trade dated May 16, 2017 that intention is a sine qua non for establishing manipulation in case of self-trades, and that accidental/unintentional self-trades are not covered under the PFUTP Regulations.

35. To sum up, in the facts and circumstances of the case, I can appreciate that all the trades executed by the Noticee in BGIL shares on the day of listing of the scrip were on the basis of approved algo trading software and in an automated manner and there was no manual execution of such trades. I find that a minuscule proportion of such algo orders have resulted into self-trades on account of system generated trading mechanism. Hence, I find force in the submissions and explanation advanced by the Noticee that the execution of such self-trades was accidental, unintentional and consequential of algo based trading in the scrip of BGIL. The material available on record is not sufficient enough to hold that the said insignificant number of self-trades executed by the Noticee could have created artificial volume and/or manipulated the market or could have disturbed the market equilibrium in the said scrip which enjoyed a high liquidity and high volume.

36. I note that volume traded is also one of the important and relevant factor in order to ascertain the ‘manipulative intent’ in terms of the aforesaid Policy. As observed earlier, trades executed by the Noticee which have been alleged to be self-trades in the SCN were negligible in terms of quantity, i.e., 1% of the total volume of the trades in the scrip of BGIL executed on both of the exchanges on the day of its listing. Self-trade volume of about 1 % to the total market volume was too small to influence the volume of BGIL scrip, and in the absence of allegation of price manipulation or any other materials, it would be difficult to attribute any manipulative motive to the Noticee for attempting to create artificial volume by injecting 1% extra liquidity in a scrip, which is already highly liquid on that day.

37. I note that allegations have been made in the SCN only on the basis of execution of self-trades in the scrip of BGIL and no other material is made available to me to indicate that such self-trades were manipulative in nature and/or have resulted into creation of false or misleading appearance of trading in the scrip in the securities market or have been executed for manipulating the price/volume of the scrip. At this stage, I take guidance from the findings of Hon’ble Supreme Court in the matter of Kishore R. Ajmera (supra) and observe that the attending facts and circumstances of the present case are not sufficient enough to prove the violations, as alleged.

38. Moreover, considering the order placing pattern as found from the hourly trade data and other relevant facts pertaining to the trading activity of the Noticee as discussed above, it is difficult to accept that the impugned self-trades were executed intentionally. I also note that no adverse finding about any LTP contribution has been brought out in the SCN nor any fraudulent pattern /modus operandi on the part of the Noticee has been alleged in the SCN. Under the circumstances, I find it difficult to conclude that the impugned self-trades were executed intentionally. Instead, the preponderance of probability that emerges from the facts of the case indicates the possibility of these self-trades to be accidental in nature. In the absence of any other countervailing circumstances or evidence to indicate that the trades were motivated by intention, I find that the impugned trades are accidental self-trades. In the absence of anything to the contrary, in my view, the Noticee merits benefit of doubt in respect of the allegations levelled in the SCN.

39. I, further, note that another allegation made against the Noticee in the SCN, i.e., violation of the Code of Conduct under Stock Broker Regulations, is presumably based upon the alleged charge of execution of self-trades and failure of the Noticee in exercising due skill and care which allegedly resulted in violation of code of conduct prescribed for stock brokers. In this respect, I note that since the material available on the record is not sufficient enough to establish that the said self-trades were manipulative in nature or have created a false or misleading appearance of trading in the said scrip in the securities market or have been executed for manipulating the price or volume of the scrip, there would not be a reason to draw any adverse inference against the Noticee with regard to commission of violation of Code of Conduct prescribed under Stock Broker Regulations.

40. It has already been stated above that the instant proceedings have been remanded for re-consideration of self-trades executed by the Noticee in the backdrop of the policy on self-trade dated May 16, 2017. Thus, based on my aforesaid findings and observations recorded above qua issue no. 1, the consideration and adjudication for the issue no. 2 and consequently for issue no.3 are not warranted.

41. In view of the above facts and circumstances of the case and my observations in the preceding paragraphs and after taking into account the policy on self-trade dated May 16, 2017, I am inclined to conclude that the allegations of violation of the provisions of SEBI Act, PFUTP Regulations and the Code of Conduct under the Stock Broker Regulations by the Noticee are not established. Accordingly, I find no reason to interfere with the order dated April 30, 2014 passed by Adjudicating Officer in the matter and dispose of the proceedings without any modification in the order dated April 30, 2014 passed by AO.

-Sd- S.K. MOHANTY DATE: July 24, 2019 WHOLE TIME MEMBER PLACE: MUMBAI SECURITIES AND EXCHANGE BOARD OF INDIA