Global Earth Properties And Others vs Securities And Exchange Board Of India And Others

Tarun Agarwala, Presiding Officer

Even though different orders have been passed by different Adjudicating Officers, nonetheless, a common issue is involved and, consequently, all

the appeals are being decided together by a common order. All the Appellants have filed the appeals against the order of the Adjudicating Officer

imposing a penalty for violation of Regulations 3 and 4 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade

Practices Relating to Securities Market) Regulations, 2003 (hereinafter referred to as ‘PFUTP Regulations’).

The facts leading to the filing of the present appeals are that Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’)

observed large scale reversal of trades in the Stock Options segment of BSE Limited (hereinafter referred to as ‘BSE’) leading to creation of

artificial volumes. Accordingly, SEBI conducted an investigation for the period from 1st April, 2014 to 30th September, 2015 in the trading activities in

the illiquid Stock Options at BSE. The investigation report revealed that a total of 2,91,643 trades were found to be non-genuine trades which was

81.38% of the total trades executed in the Stock Options Segment of BSE. The investigation report further revealed that these non- genuine trades

resulted in the creation of artificial volumes to the tune of 826.21 crore units or 54.68% of the total market volume in the Stock Options Segment of

BSE.

In the case of Global Earth Properties and Developers Pvt. Ltd. (hereinafter referred to as ‘Global’) it was found that the said Appellant had

indulged in reversal trades which created false and misleading appearance of trading and generated artificial volumes in the Stock Options Segment. It

revealed that the Appellant had executed non-genuine trades in 29 unique contracts out of which 27 unique contracts were 100% non-genuine trades

which resulted in artificial volumes of 1,91,26,750 units resulting in a loss of Rs.3,14,82,500. The non-genuine trades executed by the Appellant had a

significant difference in the buy and sell rates considering the fact that the trades were reversed within a few minutes on the same day.

In the case of Pintail Reality Developers Pvt. Ltd., (hereinafter referred to as ‘Pintail’) the said Appellant had executed 36 non-genuine

trades in 5 unique contracts which resulted in artificial volumes of 39,74,000 units and incurred a loss of Rs.2,69,26,100.

Similarly, the Appellant Blue Bull Equities Private Limited (hereinafter referred to as ‘Blue Bell’) had executed 507 non-genuine trades in

233 unique contracts resulting in artificial volumes of 1,51,34,000 units and the Appellant Ashok Investors Trust Ltd. (hereinafter referred to as

‘Ashok’) executed 157 non-genuine trades from 27 unique contracts resulting in artificial volumes of 84,62,000 units.

Based on the aforesaid findings in the investigation report a show cause notice was served upon the Appellants indicating that the Appellants had

indulged in execution of reversal trades with the same entities on the same day and that such trades were found to be non-genuine trades in nature

which created false/misleading appearance of trading in terms of artificial volumes in Stock Options Segment and, therefore, these trades were

manipulative, deceptive and fraudulent thereby violating Regulations 3 and 4 of the PFUTP Regulations.

All the Appellants denied the allegations in the show cause notice and filed their responses. The Adjudicating Officer after affording an opportunity

of hearing passed different orders imposing a penalty of Rs.6 lakhs on Global, Rs.5 lakhs on Pintail, Rs.25 lakhs on Blue Bell and Rs.8 lakhs on

Ashok. The Adjudicating Officer in the impugned order found that the Appellants had indulged in the execution of reversal trades in Stock Options

Segments with the same entities on the same day thereby creating artificial volumes leading to false and misleading appearance of trading in illiquid

stock options at BSE. The Appellants have thereafter filed the present appeals.

We have heard Mr. Prakash Shah, Advocate assisted by Mr. Kushal Shah, Chartered Accountant for the Appellant and Mr. Gaurav Joshi, Senior

Advocate assisted by Mr. Abhiraj Arora and Ms. Rashi Dalmia, Advocates for the Respondent in Appeal No.212 of 2020, Mr. Saurabh Bacchawat,

Advocate assisted by Mr. Aditya Bhansali, Ms. Khyati Bhandari, Advocates with Ms. Nirali Mehta, Practicing Company Secretary for the Appellant

and Mr. Abhiraj Arora, Advocate assisted by Ms. Rashi Dalmia, Advocate for the Respondent in Appeal No.215 of 2020, Mr. Deepak Dhane,

Advocate for the Appellant and Mr. Gaurav Joshi, Senior Advocate assisted by Mr. Abhiraj Arora and Ms. Rashi Dalmia, Advocates for the

Respondent in Appeal No.229 of 2020 and Mr. Shrey Sancheti, Advocate assisted by Ms. Aparna Wagle, Advocate for the Appellant and Mr.

Abhiraj Arora, Advocate assisted by Ms. Rashi Dalmia, Advocate for the Respondent in Appeal No.379 of 2020.

The learned counsel for the Appellants contended that BSE had installed an E-boss surveillance system with effect from 1st February, 2013 which

gave alerts relating to suspicious transactions. It was urged that no alerts were generated with regard to the trades executed by the Appellants and,

therefore, it leads to an irresistible inference that the trades were genuine and were not violative of Regulations 3 and 4 of the PFTUP Regulations. It

was also urged that the Appellants had traded in other stocks which were highly liquid stocks and, therefore, it is wrong to contend that the Appellants

had violated the PFUTP Regulations for trading in illiquid stock options. It was also urged that the Appellants had no connection with the counter party

nor was there any prior meeting of minds and, therefore, the findings of the Adjudicating Officer was purely based on surmises and conjectures and

on a preponderance of probability. It was contended that there has to be a specific finding on the question of having connection with the counter party

in order to substantiate the charge of manipulation against the Appellants for violation of Regulations 3 and 4 of the PFUTP Regulations. It was

further urged that the trades done by the Appellants with the counter party cannot be termed as synchronised trades and, in any case, out of the total

non-genuine trades of 2,91,643 the Appellants had carried out only 94 trades in the case of Global, 36 trades in the case of Pintail, 507 trades in the

case of Blue Bell and 157 in the case of Ashok which was wholly negligible. It was contended that the transactions in the case of Global turns out to

be .03% and the alleged artificial volumes is only 0.23%. It was, thus, contended that even if it is found to be non-genuine trades the percentage was

very negligible and, therefore, the penalty amount was not justifiable. It was contended that the amount of penalty is excessive and does not

commensurate the alleged violations. Similar contention was raised by the other appellants.

On the other hand, the learned Senior Counsel for the Respondent contended that the transactions executed by the Appellants were totally non-

genuine trades and the modus operandi clearly indicates reversal of trades within a few seconds to a few minutes of entering into a transaction with

the same counter party but at different price resulting in losses to the Appellant. It was contended that the trades executed created artificial volumes

leading to false and misleading appearance of trading in the illiquid stock options at BSE. It was also contended that the only trades carried out by the

Appellants were not negligible and comparison to the total trades is patently erroneous. The learned Senior Counsel further contended that the

controversy in the present case is squarely covered by the decision of the Supreme Court in the case of Rakhi Trading (SEBI vs Rakhi Trading

(CA No. 1969/2011, order dated February 8, 2018).

Having heard the parties at some length we find that the reversal of trades are considered to be non-genuine trades if it involves an entity

reversing its buy or sell positions in a contract with substantial buy or sell position with the same counter party during the same day. To explain the

trades undertaken by the Appellants it would be appropriate to give an illustration. The counter party Bhushan Airways Services Pvt. Ltd. issued a

buy order of 2,97,000 units at 11:51:39:620808. The Appellant Global Earth executed the sell order at 11:51:39:529788. Immediately, thereafter the

Appellant Global Earth on the same date that is 26th February, 2015 placed a buy order for the same quantity of 2,97,000 units at 11:51:45.930344 and

the counter party Bhushan Airways Services Pvt. Ltd. placed a sell order at 11:51:45.820513. The Appellant at 11:51:39 placed sell order of 2,97,000

units at a price of Rs.0.80 paisa which got matched with the buy order of Bhushan Airway Services Pvt. Ltd. who had placed the same quantity at the

same time. Thereafter within 6 seconds from the first trade the Appellant placed a buy order of 2,97,000 units at a price of Rs.4.50 paisa which got

matched with the sell order of Bhushan Airway Services Pvt. Ltd. for the same units namely 2,97,000 units and thus incurred a loss. Similar is the

trades done by the other Appellants which trades have not been disputed by the learned counsel for the Appellants and, therefore, it is not necessary

to give illustration of the trades done by each and every Appellant.

Such execution of trades, in our opinion, are non-genuine trades and creates artificial volumes giving misleading appearance. The reversal of

trades executed by the Appellant cannot be called a normal trading transaction in as much as these trades were reversed within a short span ranging

from a few seconds to a few minutes with the same counter parties. By no stretch of imagination it can be held to be a mere coincidence that the

Appellants trades matched consistently with the same counter parties unless there was a meeting of minds with a view to trade at a predetermined

time. Such kind of transaction, in our opinion, is a manipulative device and is also synchronised trading.

The Supreme Court in Rakhi Trading (supra) has decided the issue, namely, synchronised and reversed trades in the Futures and Options Segment

of the market and have held that such kind of synchronised and reversed trading done on the same day within a few minutes is fraudulent,

manipulative and amounts to an unfair trade practice.

The Supreme Court in Rakhi Trading had found that the trades were fraudulent and manipulative in the following circumstances:

a. If the trades are synchronized and reversed with the same counterparty within a time span of seconds to minutes during the same day.

b. The prices at which the trades are undertaken is such that one party is making profit and other making loss.

c. The orders are placed at unattractive prices which does not reflect the value of the underlying asset.

d. An intentional trading for loss per se, is not a genuine dealing in securities. Trading is always with the aim to make profits. But if one party

consistently makes loss and that too in preplanned and rapid reverse trades, it is not genuine and the same is an unfair trade practice.

e. In case of trade in a scrip in cash segment, there is a physical delivery of the asset. In the derivative segment there is a change of rights in a

contract. In synchronized and reverse trades, there is no genuine change of rights in the contract.

To dwell further, the Supreme Court in Rakhi trading held:

“31………..In the instant case, one party booked gains and the other party booked a loss. Nobody intentionally trades for loss. An

intentional trading for loss per se, is not a genuine dealing in securities. The platform of the stock exchange has been used for a non-

genuine trade. Trading is always with the aim to make profits. But if one party consistently makes loss and that too in preplanned and rapid

reverse trades, it is not genuine; it is an unfair trade practice.â€​

and further held :-

“33 …………In the instant case, through reversa trades there was no genuine change of rights in the contract.â€​

and further held:

“34. Rather than allowing the market forces to operate in their natural course, the traders repeatedly carried out the impugned

transactions which deprived other market players from full participation. The repeated reversals and predetermined arrangement to book

profits and losses respectively, made it clear that the parties were not trading in the normal sense and ordinary course. Resultantly, there

has clearly been a restriction on the free and fair operation of market forces in the instant case.â€​

The Supreme Court further found that:

“37. …………..The stock market is not a platform for any fraudulent or unfair trade practice. The field is open to all the investors. By

synchronization and rapid reverse trade, as has been carried out by the traders in the instant case, the price discovery system itself is

affected. Except the parties who have pre-fixed the price nobody is in the position to participate in the trade. It also has an adverse impact

on the fairness, integrity and transparency of the stock market.â€​

The Supreme Court further found that:

“38. ………..In this case it was also held that in the absence of direct proof of meeting of minds elsewhere in synchronised

transactions, the test should be one of preponderance of probabilities as far as adjudication of civil liability arising out of the violation of

the Act or the provision of the Regulations is concerned.â€​

The Supreme Court has explained what is synchronised trades as under:

“55. As per the Oxford dictionary the word 'synchronize' means ""cause to occur at the same time; be simultaneous"". A synchronized trade

is one where the buyer and seller enter the quantity and price of the shares they wish to transact at substantially the same time. This could

be done through the same broker (termed a cross deal) or through two different brokers (Ketan Parekh v. SEBI)â€​

“56. Synchronized trade is one wherein 'buy and sell' orders are placed simultaneously for the same quantity and price they wish to

transact at substantially the same time. Synchronized trades are not illegal provided that they are executed on the screens of the exchange

in the price and order matching mechanism of the exchanges just like any other normal trade. “

and further held that:

 “58. A synchronized transaction will become illegal or violative of the Regulations if it is executed with a view to manipulate the market

or if it results in circular trading or is dubious in nature and with a view to manipulate the price or volume of the scrip or with some ulterior

purpose.â€​

In the light of the aforesaid, buying and selling of equivalent quantities within the day may not be illegal but if the trades were done with ulterior

purposes then the same are non-genuine. In the instant case, we find that one party is making a profit and the other party is making a loss. In addition,

there is proximity in the time of sell orders at a higher price and the same quantity is being reversed to the same party in a lower price within a fraction

of seconds or few minutes. We find that contracts got matched between the same parties. We fail to understand as to why the Appellants who made

the transactions repeatedly incurred substantial losses within a few minutes. Given the fact that there was proximity of time between buy and sell

orders one can reasonably point to some kind of manipulative exercise with prior meeting of minds especially when one can see it plainly that it was a

clear case of synchronised trading namely that a synchronised trade is one where the buyer and seller enter quantity and time of shares they wish to

transact at the same time.

From the aforesaid cumulative analysis of the reversed transactions with the counter party, quantity, time and significant variation of the price

clearly indicates that the trades were non-genuine and had only misleading appearance of trading in the securities market without intending to transfer

the beneficial ownership. One finds it to be naive to presume that the perception of the two counter parties to a trade changed within few

seconds/minutes and positions were interchanged and the contracts were changed where one party made profit and the other party ended up making

losses every time without prior meeting of mind. It is not a mere coincidence that the Appellants could match the trades with the counter party with

whom he had undertaken the first leg of respective trade. In our opinion, the trades were non-genuine trades and even though direct evidence is not

available in the instant case but in the peculiar facts and circumstances of the present case there is an irresistible inference that can be drawn that

there was meeting of minds between the Appellants and the counter parties, and collusion with a view to trade at a predetermined price.

It was urged by the learned counsel for the Appellants that the penalty awarded is excessive and harsh and, therefore, prayed that in the event the

order is affirmed the Tribunal may consider reducing the penalty amount taking into consideration the financial status of the Appellants and the

negligible transactions executed by the Appellants.

In this regard we have perused the orders passed by the AO. We find that the AO has taken into consideration not only the factors contained in

Sec. 15J of the SEBI Act but has also taken into consideration the number of total trades, the artificial volume generated, the loss incurred, etc while

imposing the penalty. It may be stated here that the minimum penalty under Sec. 15HA is Rs.5Lacs and maximum penalty is Rs. 25 crores or three

times the profit made. We find that the AO has excercised its discretion which is neither harsh nor arbitrary. We do not find any error in the quantum

of penalty imposed by the AO.

In the light of the aforesaid, we do not find any merit in the appeals and the same are dismissed with no order as to costs.

The present matter was heard through video conference due to Covid-19 pandemic. At this stage it is not possible to sign a copy of this order nor

a certified copy of this order could be issued by the registry. In these circumstances, this order will be digitally signed by the Presiding Officer on

behalf of the bench and all concerned parties are directed to act on the digitally signed copy of this order. Parties will act on production of a digitally

signed copy sent by fax and/or email.