Case Law Details
SEBI conducted an investigation into the trading activities of certain entities in Illiquid Stock Options at BSE for the period April 1, 2014 to September 30, 2015.
It was observed that during the investigation period, total 2,91,643 trades comprising substantial 81.38% of all the trades executed in Stock Options Segment of BSE were found to be non-genuine trades. The aforesaid non-genuine trades resulted into creation of artificial volume to the tune of 826.21 Crore units or 54.68% of the total market volume in Stock Options segment of BSE during the investigation period.
It was observed that the said non- genuine trades were not restricted to any specific contract or between any specific set of entities. It was observed that Mr. Pradeep Kumar Kyan (hereinafter referred to as “Noticee”) was one of the various entities who were indulged in execution of non-genuine trades in Stock Options Segment of BSE during the investigation period. The following points narrate the dealings of the Noticee during the investigation period and the allegations against it for execution of non-genuine trades.
As regards to all the dealings of Noticee in the Stock Options segment of BSE during the Investigation Period, it was observed that the Noticee had traded in 34 unique contracts, from which it has allegedly executed non genuine trades in 34 contracts wherein it executed total 93 non-genuine trades, which resulted in artificial volume of total 121,34,836 units.
It is established that reversal trades are not normal transactions and it clearly demonstrates beyond reasonable doubt that the Noticee had intentionally executed these trades and manipulated the volume by artificial trading pattern in 34 contracts. Out of the 34 contracts, in respect of 1 contract, all the trades were non genuine trades, which contributed to 100% artificial volume.
I am of the view that the misuse of stock options as shown above not only displays an unreal picture of market activity to other investors but also defeats the basic premise of screen based electronic trading system and price discovery mechanism by repeated execution of pre decided reversal trades at irrational / arbitrary prices. Moreover, the impact of such trading on the traded volume and the price of stock options contracts is huge. Such activity deliberately or otherwise damages market integrity apart from presenting wrong picture of liquidity to gullible investors which could affect their trading/investment decisions. Options as financial instruments, ordinarily, provide hedging avenues to investors. The trading pattern of the Noticee in the instant matter was abnormal and was designed to create artificial volumes in the illiquid stock options, fail to justify any of the normal strategies of hedging/ speculation/ arbitrage. In my view, the abuse of such financial instruments, which are made available to the investors for the purpose of protection of their investment portfolios from the risks of adverse price movement, cannot be tolerated and needs to be dealt with strictly.
I find that the Noticee by indulging in execution of reversal trades in Stock Options with same entities on the same days, had created artificial volume, leading to false and misleading appearance of trading in the illiquid stock options at BSE and therefore violated the provisions of Regulations 3(a), 3(b), 3(c), 3(d), 4(1), and 4(2)(a) of PFUTP Regulations. Accordingly, the Noticee is liable for appropriate monetary penalty under Section 15HA of SEBI Act, 1992 the provisions of which are furnished hereunder.
Section 15HA of SEBI Act – Penalty for fraudulent and unfair trade practices
“If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty which shall not be less than five lakh rupees but which may extend to twenty five crore rupees or three times the amount of profits made out of such practices, whichever is higher”.
I note from the facts of the case that the first leg of trades of Noticee were reversed within a few seconds/minutes of such trades, with the same counter party, at such option prices which no rational investor would undertake, as explained in above paras. Consequent to such manipulative trades, both the parties of the trades could structure and generate profits/ loss in their accounts wherein profit/ loss made by one entity was exactly equal to the loss/ profit made by the counterparty.
Considering the above, I am of the view that it will be appropriate to take into account the payoff of transactions between the two parties together, rather than viewing it independently. Therefore, in respect of the non-genuine trades carried out by the Noticee which resulted in creation of artificial volume in Illiquid Stock Options, it is not possible to quantify the amount of disproportionate gain or unfair advantage made by the Noticee. Further, there is also no material on record to assess the amount of loss caused to investors as a result of the Noticee’s default. The persistent trading pattern of the Noticee, which was fraudulent and deceptive, affects the normal price discovery mechanism in the securities market. People who indulge in manipulative, fraudulent and deceptive transaction, or abet the carrying out of such transaction which are fraudulent and deceptive should be suitably penalized for such acts of omissions and commissions.
After taking into consideration the nature and gravity of the violations established in the preceding paragraphs and in exercise of the powers conferred upon me under Section 15-I of the SEBI Act, 1992 read with Rule 5 of the Inquiry Rules, 1995, I hereby impose a penalty of Rs. 5,00,000/- (Rupees Five Lakh Only) on the Noticee i.e., Mr. Pradeep Kumar Kayan, under Section 15HA of the SEBI Act, for indulging in execution of reversal trades in Stock Options with same entities on the same day, thereby creating artificial volume, leading to false and misleading appearance of trading in the illiquid stock options at BSE. I am of the view that the said penalty is commensurate with the lapse/omission on the part of the Noticee.
FULKL TEXT OF THE SEBI ORDER IS AS FOLLOWS:-
Securities and Exchange Broad of India
Adjudication Order No. Order/BD/VS/2020-21/9442
UNDER SECTION 15-I OF SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH RULE 5 OF SEBI (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES) RULES, 1995
In respect of:
Pradeep Kumar Kayan [PAN AFOPK1284R]
6, Lyons Range, 28 Fortuna Chamber,
Calcutta, 700001
In the matter of Dealings in Illiquid Stock Options at BSE
BACKGROUND
1. Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) observed large scale reversal of trades in Stock Options segment of Bombay Stock Exchange (hereinafter, referred to as ‘BSE’) leading to creation of artificial volume. Accordingly, SEBI conducted an investigation into the trading activities of certain entities in Illiquid Stock Options at BSE (hereinafter, referred to as “investigation”) for the period April 1, 2014 to September 30, 2015 (hereinafter referred to as “Investigation Period“).
2. It was observed that during the investigation period, total 2,91,643 trades comprising substantial 81.38% of all the trades executed in Stock Options Segment of BSE were found to be non-genuine trades. The aforesaid non-genuine trades resulted into creation of artificial volume to the tune of 826.21 Crore units or 54.68% of the total market volume in Stock Options segment of BSE during the investigation period.
3. It was observed that the said non- genuine trades were not restricted to any specific contract or between any specific set of entities. It was observed that Mr. Pradeep Kumar Kyan (hereinafter referred to as “Noticee”) was one of the various entities who were indulged in execution of non-genuine trades in Stock Options Segment of BSE during the investigation period. The following points narrate the dealings of the Noticee during the investigation period and the allegations against it for execution of non-genuine trades.
4. As regards to all the dealings of Noticee in the Stock Options segment of BSE during the Investigation Period, it was observed that the Noticee had traded in 34 unique contracts, from which it has allegedly executed non genuine trades in 34 contracts wherein it executed total 93 non-genuine trades, which resulted in artificial volume of total 121,34,836 units.
5. Summary of dealings of the Noticee in 34 Stock Options contracts in which the Noticee allegedly executed non genuine trades during the investigation period is as follows:
S. N |
Contract Name |
Avg. Buy Rate (Rs.) |
Total Buy Volume (no. of units) |
Avg. Sell Rate (Rs.) |
Total Sell Volume (no. of units) |
Number of non genuine trades exec-uted by Entity in the Cont-ract |
Total num-ber of trades exec-uted by the Entity in the Cont-ract |
Total numb er of trades exec-uted in the cont-ract |
% of Non Genuine trades of Noticee in the contract to Noticee’s Total trades in the Contract |
% of Non Genuine trades of Entity in the contract to Total trades in the Cont-ract |
% of Artif-icial Volume gene-rated by Noticee in the contract to Noticee’s Total Volume in the Cont-ract |
% of Artif-icial Volume gene-rated by Noticee in the contract to Total Volume in the Cont-ract |
1 |
ADPW14AUG 50.00PE |
0.35 |
104000 |
1.60 |
104000 |
2 |
2 |
14 |
100% |
14% |
100% |
8% |
2 |
ADPW14SEP 50.00CEW2 |
0.30 |
80000 |
2.00 |
80000 |
3 |
3 |
6 |
100% |
50% |
100% |
21% |
3 |
ADPW15MAR 40.00PEW3 |
0.05 |
120000 |
0.70 |
120000 |
2 |
2 |
7 |
100% |
29% |
100% |
55% |
4 |
ANBK15AUG 75.00CEW3 |
2.20 |
12000 |
4.40 |
12000 |
2 |
2 |
2 |
100% |
100% |
100% |
100% |
5 |
ANBK15JUL 80.00CEW3 |
0.05 |
296000 |
1.75 |
296000 |
3 |
3 |
14 |
100% |
21% |
100% |
30% |
6 |
APLT14SEP 210.00CE |
0.10 |
24000 |
8.30 |
24000 |
2 |
2 |
9 |
100% |
22% |
100% |
23% |
7 |
DISH15MAY 85.00CEW1 |
0.05 |
120000 |
2.18 |
120000 |
3 |
3 |
5 |
100% |
60% |
100% |
33% |
8 |
GMRI15JAN 12.00PE |
0.10 |
27000 |
0.90 |
27000 |
2 |
2 |
22 |
100% |
9% |
100% |
1% |
9 |
GMRI15MAR 11.00PEW3 |
0.05 |
605418 |
0.75 |
605418 |
2 |
2 |
6 |
100% |
33% |
100% |
33% |
10 |
HXTL14AUG 150.00PEW3 |
1.08 |
70000 |
3.95 |
70000 |
3 |
3 |
6 |
100% |
50% |
100% |
50% |
11 |
HXTL14DEC 210.00CE |
0.10 |
120000 |
2.15 |
120000 |
2 |
2 |
5 |
100% |
40% |
100% |
44% |
12 |
IDBI15MAY 65.00PE |
0.05 |
164000 |
2.24 |
164000 |
3 |
3 |
18 |
100% |
17% |
100% |
17% |
13 |
IOBL14AUG 70.00PEW2 |
0.10 |
360000 |
1.50 |
360000 |
5 |
5 |
14 |
100% |
36% |
100% |
34% |
14 |
IOBL14NOV 50.00PE |
0.10 |
132000 |
2.39 |
132000 |
3 |
3 |
21 |
100% |
14% |
100% |
24% |
15 |
IOBL14NOV 50.00PEW3 |
0.10 |
116000 |
2.75 |
116000 |
3 |
3 |
9 |
100% |
33% |
100% |
50% |
16 |
IOBL14OCT 50.00PEW4 |
0.10 |
96000 |
2.20 |
96000 |
3 |
3 |
17 |
100% |
18% |
100% |
21% |
17 |
IOBL15JAN 55.00PEW3 |
0.15 |
260000 |
2.10 |
260000 |
2 |
2 |
20 |
100% |
10% |
100% |
13% |
18 |
IOCL15AUG 380.00CEW3 |
8.90 |
20000 |
18.90 |
20000 |
2 |
2 |
4 |
100% |
50% |
100% |
87% |
19 |
IRBI14SEP 250.00PEW1 |
0.51 |
36000 |
6.55 |
36000 |
3 |
3 |
9 |
100% |
33% |
100% |
18% |
20 |
JAIA14DEC 20.00PE |
0.05 |
96000 |
0.60 |
96000 |
2 |
2 |
9 |
100% |
22% |
100% |
5% |
21 |
JAIA14OCT 30.00PE |
0.10 |
184000 |
1.75 |
184000 |
3 |
3 |
14 |
100% |
21% |
100% |
5% |
22 |
JISL15MAR 85.00CEW1 |
0.10 |
400000 |
2.10 |
400000 |
2 |
2 |
44 |
100% |
5% |
100% |
11% |
23 |
JPPW14NOV 16.00CEW2 |
0.05 |
315000 |
1.02 |
315000 |
4 |
4 |
17 |
100% |
24% |
100% |
7% |
24 |
JPPW15MAR 16.00CEW3 |
0.05 |
600000 |
0.89 |
600000 |
3 |
3 |
20 |
100% |
15% |
100% |
20% |
25 |
JSWE14DEC 95.00CE |
0.10 |
32000 |
1.65 |
32000 |
2 |
2 |
4 |
100% |
50% |
100% |
24% |
26 |
JSWE14SEP 80.00PEW3 |
0.20 |
128000 |
2.20 |
128000 |
2 |
2 |
4 |
100% |
50% |
100% |
42% |
27 |
PFCL14JUL 270.00CE |
1.20 |
46000 |
12.10 |
46000 |
2 |
2 |
4 |
100% |
50% |
100% |
35% |
28 |
PTCI15JUN 70.00CEW3 |
0.05 |
148000 |
2.10 |
148000 |
2 |
2 |
35 |
100% |
6% |
100% |
13% |
29 |
RCOM14AUG 120.00CE |
1.61 |
124000 |
5.33 |
124000 |
7 |
7 |
18 |
100% |
39% |
100% |
30% |
30 |
RPOW15FEB 50.00PEW2 |
0.10 |
352000 |
2.10 |
352000 |
3 |
3 |
5 |
100% |
60% |
100% |
60% |
31 |
SAIL15JAN 70.00PE |
0.10 |
404000 |
1.05 |
404000 |
3 |
3 |
34 |
100% |
9% |
100% |
28% |
32 |
SAIL15MAY 60.00PEW2 |
0.20 |
188000 |
2.27 |
188000 |
3 |
3 |
8 |
100% |
38% |
100% |
51% |
33 |
SYND14AUG 125.00PE |
0.15 |
84000 |
2.20 |
84000 |
2 |
2 |
7 |
100% |
29% |
100% |
15% |
34 |
UNIT14SEP 24.00CEW2 |
0.13 |
204000 |
1.35 |
204000 |
3 |
3 |
11 |
100% |
27% |
100% |
21% |
6. From the above table, the following is observed as regards to dealings of the Noticee:
a) The Noticee had executed non genuine trades in 34 contracts, wherein in respect of 1 contract, all the trades were non genuine trades.
b) Number of non-genuine trades of Noticee had significantly contributed to the total no. of trades from the market in the above contracts, as a substantial 5% to 100% of the trades that happened in the aforementioned contracts were due to non-genuine trades executed by the Noticee.
c) A substantial 1% to 100% of volume generated by the Noticee in each of the above contracts was artificial volume and further, artificial volume generated by him also contributed to significant contribution of the total volume from the market in said contracts.
d) Non genuine trades executed by Noticee in above contracts had significant differential in buy rates and sell rates considering that the trades were reversed on same day.
7. In view of the foregoing, it was alleged that the Noticee, indulged in execution of reversal of trades in Stock Options with same entities on the same day. Such trades are non-genuine in nature and have created false or misleading appearance of trading in terms of artificial volumes in stock options and therefore alleged to be manipulative, deceptive in nature. Thus, it was alleged that the Noticee had violated the provisions of Regulation 3(a), (b), (c), (d), 4(1) and 4(2)(a) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (hereinafter referred to as “PFUTP Regulations, 2003”).
APPOINTMENT OF ADJUDICATING OFFICER
8. Pursuant to investigation, SEBI, after being satisfied that there are sufficient grounds to inquire into the affairs and adjudicate upon the alleged violations as mentioned above inter-alia in respect of the Noticee, had appointed the undersigned as the Adjudicating Officer vide Order dated April 03, 2018, under section 19 read with section 15I(1) of the SEBI Act, 1992 and Rule 3 of SEBI (Procedure for Holding Inquiry and Imposing Penalties) Rules, 1995 (hereinafter, referred to as “Inquiry Rules, 1995”) to conduct adjudication proceedings in the manner specified under rule 4 of Inquiry Rules, 1995 read with section 15I(1) and (2) of SEBI Act, and if satisfied that penalty is liable, impose such penalty deemed fit in terms of Rule 5 of Inquiry Rules, 1995 and Section 15HA of SEBI Act, 1992.
SHOW CAUSE NOTICE, REPLY AND HEARING
9. A Show Cause Notice (hereinafter referred to as “SCN”) bearing ref. no. SEBI/HO/EAD-7/BJD/NJMR/23974/2018 dated August 28, 2018 was issued to the Noticee under Rule 4 of Inquiry Rules, 1995 to show cause as to why an inquiry be not held against him in terms of Rule 4 of the Inquiry Rules, 1995 and penalty be not imposed under Section 15HA of SEBI Act, 1992 for the violations alleged to have been committed by it. A time period of 14 days was granted to the Noticee to present its reply to the SCN. I note that the SCN was sent to the Noticee at his addresses on record i.e. 6, Lyons Range, 28 Fortuna Chamber, Calcutta – 700001 and 21 B Regent Park, Kolkata, West Bengal, India, 700040. However, the said SCN issued to Noticee returned undelivered. Thereafter, a copy of SCN along with the Annexures was sent to the email IDs [email protected] and [email protected] of the Noticee through digitally signed email dated December 04, 2018. The Noticee, vide email dated December 05, 2018, requested for more time to file reply to the SCN. The request of the Noticee was acceded to and vide email dated December 07, 2018, he was granted time till December 28, 2018, to file reply to the SCN. The Noticee vide letter dated December 14, 2018, requested for inspection of documents in the matter. Vide digitally signed email dated December 21, 2018, the Noticee was informed that his request for the inspection of documents was not accepted and he was advised to file his reply to the SCN latest by December 28, 2018. Thereafter, the Noticee submitted a copy of its Application for settlement dated December 24, 2018, filed with SEBI. Further, Settlement Division of Enforcement Department of SEBI, vide note dated January 03, 2019, informed that it has received an application for settlement in the matter and requested to keep the proceedings on hold till the disposal of aforesaid application.
10. Thereafter, the Noticee, vide letter dated September 29, 2020, informed that it has withdrawn the Application for Settlement, filed with SEBI, in the matter and requested for an opportunity of personal hearing. The Noticee vide letter dated September 29, 2020, submitted its reply to the SCN, wherein it inter alia made following submissions.
“……..
2. At the outset, we deny all such allegations and observations against us in the Show Cause Notice in so far as the same are contrary to the present submission or specifically admitted therein. Nothing contained in the Show Cause Notice shall be deemed to admitted by us for the lack of traverse.
Background of allegations in the Show Cause Notice
3. It is alleged in the Show Cause Notice that while dealing in the stock option segment of BSE, we had indulged in execution of reversal trades which allegedly created artificial volumes during the investigation period ranging from April 1, 2014 to September 30, 2015.
4. It is alleged that we had executed 93 non-genuine trades in 34 unique contracts during the investigation period. These trades allegedly reversed on the same day with the same counterparty with a significant differential in buy and sell rates.
5. It is therefore alleged that we have violated provision of Regulation 3(a), (b), (c), (d), 4(1) and 4(2)(a) of the SEBI (Prohibition of Fraudulent and Unfair Trading Practices related to Securities Market) Regulation, 2003 (“PFUTP Regulations”).
Preliminary Objections
6. I respectfully submit that SEBI has not provided any evidence or proof to show that my trades were fraudulent. None of the ingredients of the said PFTUP Regulations are attracted in the present case essentially because:
i. The trades were executed on the floor of the exchange with due compliance with all the rules and regulations of the exchanges;
ii. At no point of time was there any warning or any observation about the scrips / stocks which were executed by me;
iii. The observations regarding the stocks being illiquid is incorrect;
iv. Even assuming the stocks were illiquid, then any small quantity or volumes would look significant as there are no active traders in the stock;
v. The trades in question were in the normal course of business and there is nothing amiss in the trades executed by us;
vi. For the transaction to be termed fraudulent, as per the definition of “fraud”, there has to be an “inducement” and SEBI has not even alleged inducement;
vii. None of the trades are deceptive in nature or have any impact on the investors or their investment decision which is a sine qua non of “fraud”.
viii. There is no nexus, directly or indirectly with the counter party brokers or the clients;
ix. The Show Cause Notice does not specify and consider facts matrix of our dealings in stock options segment of BSE. It does not state the reasons, rational, cause of action, locus and invoking of jurisdiction after over three (3) years from the dates of settled transactions. The Show Cause Notice is therefore arbitrary.
x. The Show Cause Notice fails to appreciate that when SEBI itself has not discharged its obligations of quick investigation, seeking explanation of the parties at that time, declaring trades in stock options as illegal at the relevant time, subjecting to me to adjudication proceeding belatedly in unfair, unreasonable and absurd.
Investigation report not provided by SEBI
7. I humbly submit that, upon reading of the Show cause Notice, it appears tat there are various documents and data that are referred to and relied upon by SEBI in the captioned proceedings as there is a disconnect in the charging provision. In fact, serious allegations is made against us that we have committed ‘fraud’ in securities market without even providing the investigation report or even cogent evidence in this regard.
8. Without prejudice to the aforesaid, I hereby submit our explanations and clarifications with the limited data/information retrieved by us and made available to us in the subsequent paragraphs. I crave leave to file further submissions after I am provided with investigation report and all the relevant records during the course of captioned proceedings.
Submissions on dealing in “illiquid” option segment of BSE
9. With respect to observation that we have dealt in stock options contracts which are illiquid in nature, we submit that if we observe the underlying scrips in which I traded it can be established that these scrips are highly liquid in nature i.e. frequently traded in market. We traded in contracts of scrips such as GMR, Dish TV, IDBI Bank, IRBI, JSW, SAIL etc. In fact, we submit with humility that underlying stock of aforesaid contracts consists of companies which make up index of Bombay Stock Exchange. Thus, to allege that we deliberately traded in only those options which were illiquid in nature is unfair.
10. Apparently, SEBI has held that we transacted in ‘illiquid options’ on the basis that my trades were in far off strike prices and therefore, very few entities were trading in such strike rates. However, in that case, it may also be concluded that said trades could have had no effect on other investors or market at large and that such illiquidity would be the reason for volatility and alleged reversal transactions since variations in options price would be dramatic if the chosen strike price is thinly traded.
11. I submit that BSE and SEBI have themselves allowed and permitted trading in options for far months ’ with a strike price which are at large variance to current market price. The fact that such parameters are laid down is clearly indicative of fact that options will always be ‘in the money’ and ‘out of money’ and since regulators have themselves permitted trading in same, no adverse inference be drawn against us in this regard.
12. It is pertinent to mention that stock exchanges regularly come out with list of illiquid scrips in cash segment. However, no such list is issued by exchanges or regulator for dealing in stock options contracts. Thus, to fasten the responsibility or allege a single individual investor that he traded in illiquid option is unwarranted and unfair.
13. I submit with humility that derivative market is ‘zero-sum game’ and thus in each and every case one party will inevitably make profit and co unterparty will make loss. In capital market neither BSE nor SEBI can guarantee profit or loss to any individual/entity. In derivative trading, traders often make profit or loss over a period of time since the market does not always behave as per their prediction/expectation. Thus, profit and loss is concomitant to trading in derivative segment. The mere fact that we traded in option segment cannot be a ground to rope us into present proceedings.
Our trades did not depress the price/ volume of underlying shares in cash segment
14. I submit that the total number of alleged non-genuine trades were 93 which is a meagre part of overall 2,91,643 trades in market (constituting a miniscule 0.032% of market volume of alleged non-genuine trades). The volume of my trade vis-a-vis the total market volume was meagre:
| SI. No. | Name of Contract | Percentage Of Impugned Contracts To Total Market volume At Bse |
| 1. | ADPW14AUG50.00PE | 8% |
| 2. | ADPW14SEP50.00CEW2 | 21% |
| 3 | ADPW15MAR40.00PEW3 | 55% |
| 4. | ANBK15AUG75.00CEW3 | 100% |
| 5. | ANBKl5JUL80.00CEW3 | 30% |
| 6. | APLT14SEP2lO.OOCE | 23% |
| 7. | DISH15MAY85.00CEW1 | 33% |
| 8. | GMRI15JAN12.00PE | 1% |
| 9. | GMRI15MAR1l.OOPEW3 | 33% |
| 10. | HXTL14AUGI50.00PEW3 | 50% |
| 11. | HXTL14DEC210.00CE | 44% |
| 12. | IDBI15MAY65.00PE | 17% |
| 13. | IOBL14AUG70.00PEW2 | 34% |
| 14. | IOBL14NOV50.00PE | 24% |
| 15. | JOBL14NOV50.00PEW3 | 50% |
| 16. | IOBL14OCT50.00PEW4 | 21% |
| 17. | IOBL15JAN55.00PEW3 | 13% |
| 18. | IOCL15AUG380.00CEW3 | 87% |
| 19. | IRBI14SEP250.00PEW1 | 18% |
| 20. | JAIA14DEC20.00PE | 5% |
| 21 | JAIA14OCT30.00PE | 5% |
| 22 | JISL15MAR85.00CEW1 | 11% |
| 23. | JPPW14NOV16.00CEW2 | 7% |
| 24. | JPPW15MARI6.00CEW3 | 20% |
| 25. | JSWE14DEC95.00CE | 24% |
| 26. | JSWE14SEP80.00PEW3 | 42% |
| 27. | PFCL14JUL270.00CE | 35% |
| 28. | PTCI15JUN70.00CEW3 | 13% |
| 29. | RCOM14AUG120.00CE | 30% |
| 30. | RPOWI5FEB50.00PEW2 | 60% |
| 31. | SAIL15JAN70.00PE | 28% |
| 32. | SAIL15MAY60.00PEW2 | 51% |
| 33. | SYND14AUG125.00PE | 15% |
| 34. | UNIT14SEP24.00CEW2 | 21% |
15. In can be observed in aforesaid Table that:
- Except in one contract, in all the contract the percentage of volume is lesser than the market volume. This means that the contracts were not illiquid and other market participants were dealing in the said contracts as well.
- In some contracts percentage of my volume is as low (for instance: in GMR it is 1% and in JAIA it is 5%). Thus, in my humble opinion, it erroneous to allege that my trades created artificial volume on BSE.
16. I submit that there was no major movement in price of underlying scrip which itself proves that my trades had no impact on market. Further, I traded on few days out of one and half year of the investigation period. Thereby, I submit with humility that my transactions neither distorted the equilibrium in market nor caused any loss or prejudice to investors at large.
17. With demurer, I submit that any kind of alleged fictitious/ manipulative trade in cash segment may create distorted impression in minds of investors that price of scrip is rising/falling who may invest/divest from said scrip. However, in case of option segment there is no such effect since each contract expires at end of contract period and for every party who makes profit there is counter party who makes a loss. There is no question of transfer of beneficial ownership in option segment since at end of settlement cycle only net loss/profit is adjusted. Therefore, in my humble opinion, allegation of creation of ‘artificial’ or ‘reversal’ trade is of no consequence in option segment of exchange.
No relationship with counterparty or its broking entities
18. I did not act in concert or in collusion with anyone and nor was I part of any group or connected with anyone for the purpose of influencing price or for any manipulative activity as alleged or otherwise. It is an admitted position that there is no connection whatsoever between us and counter parties.
19. On analysis of the transactions provided to us with the Show Cause Notice, I understand that there were counterparties to my trades.
| SI. No. | Name of the Counter party to impugned trades | PAN number of the counter party to impugned trades |
| 1. | Adonis Niryat Private Limited | AACCA5704G |
| 2. | Anurag FinvestPvt Ltd | AACCA1611N |
| 3. | Arihant International Limited | AAECA55550 |
| 4. | Atlantic Invest Advisory Private Limited | AAHCA4878J |
| 5. | Auj Investments And Consultants P Ltd | AAECA4888P |
| 6. | Bakliwal Fincom Private Limited | AABCB9895Q |
| 7. | Bharat Kuamr Mahensaria | AEZPM3860P |
| 8. | Blackcherry Commosale Pvt Ltd | AAECB7488G |
| 9. | Dharti Investments And Holdings Limited | AACCD2509C |
| 10. | Ginni J:inancepvt. Ltd. | AABCG7898J |
| 11. | Gunneet Singh | AAQPS9561E |
| 12. | Inter Globe Finance Ltd | AAACI5520N |
| 13. | Jai Prakash Agarwal | ADEPA2174L |
| 14. | Krishna Agarwal | ADBPA6833H |
| 15. | Laxmi Rolling And Strips Private Limited | AAACL8886A |
| 16. | MakhanLal Ashok Kumar Private Limited | AABCM7550P |
| 17. | Pace Biotech Pvt Ltd | AABCK1341G |
| 18. | Paraminder Singh Kalra – Huf | AAAHPI 677A |
| 19. | Rashi Commercial Company | AAAFR1026K |
| 20. | Sagar VincomPvt Ltd | AALCS5250N |
| 21. | Sanjay Choudhary | AADPC5574E |
| 22. | Shambhu VinimayPvt Ltd | AAOCS2054F |
| 23. | Sharda Paper Products Pvt.Ltd | AACCS5294B |
| 24. | Sitaram Investment Limited | AACCS4036P |
| 25. | Southern Pacific Energy Private Limited | AARCS6498J |
| 26. | Swaran Financial Private Limited | AAECS4024R |
| 27. | Tarang Stock Broking Services Pvt Ltd | AAACT9338F |
| 28. | Topmost Commercial Private Limited | AADCT8675L |
20. We state and assert that we have no ‘connection’ or ‘relation’ with any of counterparties to my trade as mentioned in Table hereinabove. My trading in stock option segment was independent of any other entities dealing in the same and based on our limited understanding of capital market.
21. All our transactions have been carried out on the floor of stock exchange. Undisputedly, in case of screen-based trading, the automated system itself matches orders on a price-time priority basis and hence it is not possible for anybody to have access over identity of counter party. Since counter party identity is not displayed; one can never have any choice with whom it wants to deal or not to deal.
22. Be the case as it may, I state and assert that at no point of time were we aware of counterparty with which my transactions got matched since all my transactions were executed through the normal screen-based trading system of stock exchange where matching is done by automated on-line trading module.
23. Further, I had dealt in stock option segment through a SEBI registered intermediary. From the data provided by SEBI, it can be observed that the counterparties were dealing with different broking entities:
| Sl. No. | Name of the Counterparty to impugned trades | Trading member of the counterparty to impugned trades |
| 1. | Adonis Niryat Private Limited | Aryav Securities Pvt. Ltd. |
| 2. | Anurag FinvestPvt Ltd | Guiness Securities Ltd. |
| 3. | Arihant International Limited | Guiness Securities Ltd. |
| 4. | Atlantic Invest Advisory Private Limited | Geometry Vanijya Pvt. Ltd. |
| 5. | Auj Investments And Consultants P Ltd | Harish Kumar Singhania |
| 6. | Bakliwal Fincom Private Limited | Aryav Securities Pvt. Ltd. |
| 7. | Bharat Kurunr Mahensaria | Bahubali Forex Pvt Ltd |
| 8. | Blackcherry CommosalePvt Ltd | Kayan Securities Pvt. Ltd. |
| 9. | Dharti Investments And Holdings Limited | Bahubali Forex Pvt Ltd |
| 10. | Ginni Financepvt. Ltd. | Harish Kumar Singhania |
| 11. | Gurmeet Singh | Best Bull Stock Trading Pvt. Ltd. |
| 12. | Inter Globe Finance Ltd | Harish Kumar Singhania |
| 13. | Jai Prakash Agarwal | Harish Kumar Singhania |
| 14. | Krishna Agarwal | Harish Kumar Singhania |
| 15. | Laxmi Rolling And Strips Private Limited | Best Bull Stock Trading Pvt. Ltd. |
| 16. | MakhanLal Ashok Kumar Prlvate Limited | Guiness Securities Ltd. |
| 17. | Pace Biotech Pvt Ltd | Aryav Securities Pvt. Ltd. |
| 18. | Paraminder Singh Katra – Huf | Aryav Securities Pvt. Ltd. |
| 19. | Rashi Commercial Company | Guiness Securities Ltd. |
| 20. | Sagar VincomPvt Ltd | Aryav Securities Pvt. Ltd. |
| 21. | Sanjay Choudhary | R.K.Stock Holding Pvt.Ltd. |
| 22. | Shambhu VinimayPvt Ltd | Kayan Securities Pvt. Ltd. |
| 23. | Sharda Paper Products Pvt. Ltd | Guiness Securities Ltd. |
| 24. | Sitaram Investment Limited | Aryav Securities Pvt. Ltd. |
| 25. | Southern Pacific Energy Private Limited | Harish Kumar Singhania |
| 26. | Swaran Financial Private Limited | Aryav Securities Pvt. Ltd. |
| 27. | Tarang Stock Broking Services Pvt Ltd Pvt Ltd | The Calcutta Stock Exchange Ltd. |
| 28. | Topmost Commercial Private Limited | Bahubali Forex Pvt Ltd |
24. I state, declare and assert that I had no prior meeting of minds with aforesaid broking entities as well as their clients, nor any contemporaneous knowledge about any alleged wrong doing. I am not guilty of conduct which is contumacious or dishonest or acted in conscious disregard oflaw.
25. I submit that no relationship, connection or nexus of ours is shown with counter brokers and I or their end clients in respect of (purported) objectionable trades. There is complete disconnect, disjoint and divide between me/my broker and counter brokers I their clients. In the absence of any linkage of ours, treating my trading or rather one part or component (or ingredient or concomitant) of a trade as objectionable is far-fetched, a far cry and retrograde.
26. I would like to draw your kind attention to the matter of Jagruti Securities (2008 SCC online SAT 184) and S.P.J Stockbroker Pvt Ltd (2013 SCC Online SAT 67) wherein it was held that such alleged trades cannot be treated as illegal per se unless there is some cogent connection between the counterparties or there is “mischievous meeting of minds amongst certain parties”. I submit that such element is completely absent in the present case.
27. Additionally, I would like to draw your kind attention to Order dated May 18, 2012 passed by the Hon’ble Securities Appellate Tribunal in matter of Sanjay Agrawal vs. SEBI wherein it was held that in order to establish an allegation of reversal trade between parties a cogent evidence or connection between the parties needs to be established. In my humble submission, in the present case, no such connection is established in Show Cause Notice since none exist.
28. I would like to further submit that all my trades in option segment were within prudential norms of exchange and as per procedures and guidelines as prescribed by regulator (BSE). At the relevant time, none of our trades were questioned by the brokers who are SEBI registered intermediaries and frontline gate-keepers of stock exchange. Had I been alerted by the broker or stock exchange we would have taken prompt and immediate corrective measures. if any, at that point in time only.
29. Further, no cautionary warning, advisory, communication or alarm was raised by BSE at any point of time. There was nothing in the public domain that there is anything amiss in the matter. In fact, with a fool proof and state of art surveillance system BSE could have annulled the trades at that point in time only in case it considered that the trades were fraudulent. However, this was not the case, which means that the trades executed by me were genuine and fair.
30. It is pertinent to mention that it is only recently that BSE, vide Notice No. 2016030833 dated March 08, 2016, announced that it has introduced measure for prevention of reversal trades in Equity Derivative Segment w.e.f. from March 14, 2016. Thus, in case of potential reversal trade, second leg (latest leg) of a reversal trade shall automatically be cancelled by exchange in an on-line real time basis on trading system. I submit that merely because on-line preventive measure and check & balance did not exist with the regulator at the relevant point of time to avoid inadvertent reversal trades no adverse inference be drawn against me in this regard.
No role attributed to us in Show Cause Notice
31. I submit that there is no reason for any allegation that I have violated the provisions of the SEBJ (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 2003 Regulations or the SEBI Act. I humbly submit that besides recording common generic allegations against me, not a single instance or observation on my specific role in alleged reversal is delineated in the Show Cause Notice. Such an approach, in my humble submission is bad in law. In this regard, I would like to draw your kind attention to case of Commissioner of Central Excise, Bangalore vs. M/s Brindavan Beverages (P) Ltd. and Ors [Civil Appeal 3417 of 2002] decided on June 15, 2007; wherein Hon’ble Supreme Court observed as under:
“…9. We find that in the show cause notice there was nothing specific as to the role of the respondents, if any. The arrangements as alleged have not been shown to be within the knowledge or at the behest or with the connivance of the respondents. Independent arrangements were entered into by the respondents with the franchise holder. On a perusal of the show cause notice the stand of the respondents clearly gets established
10. There is no allegation of the respondents being parties to any arrangement. In any event, no material in that regard was placed on record. The show cause notice is the foundation on which the department has to build up its case. If the allegations in the show cause notice are not specific and are on the contrary vague. lack details and/or unintelligible that is sufficient to hold that the notice was not given proper opportunity to meet the allegations indicated in the show cause notice. In the instant case, what the appellant has tried to highlight is the alleged connection between the various concerns. That is not sufficient to proceed against the respondents unless it is shown that they were parties to the arrangements. if any… “
Summary
32. In summary, with regard to our dealings in stock options on BSE, we would like to clarify as under:
(i) I acted as bonafide trader and have transacted in stock option segment in normal course of our business activity and my trading in the same was very much within our own financial and risk bearing capacity.
(ii) I submit that in any business activity in stock market, one can either make profit or loss. We humbly submit that at the relevant time we had no idea of any profit or loss in said transactions and we traded in option segment taking into account our ‘risk and reward’ parameters.
(iii) I am not connected to counterparty of our transactions in option segment and neither do we have any relation with promoters/ directors/ key management person of underlying scrips in cash segment.
(iv) I believe there has been no grievance by any investor, broker, stock exchange or any other agency concerned with respect to our dealing in the option segment of BSE Ltd.
(v) I have an impeccable record of dealing in stock market and no action has ever been taken against me in past in respect of dealing in securities market.
(vi) SEBI has discontinued proceedings against the brokers and intermediaries against whom similar allegations of dealing in illiquid stock options while executing trades on behalf of clients have been leveled. We humbly submit that the same recourse ought to be adopted on an individual entity like me.
(vii) Speaking for myself, I state that I had followed and complied with all the procedures and requirements of capital market while dealing through SEBI registered intermediary. All the pre-trade, trade and post trade activities were carried out on the trading, clearing and settlement system of stock exchange which itself has sophisticated on-line surveillance software and systems in place.
33. Based on my aforesaid submissions, it is apparent that we were not involved in any ‘modus operandi’ or manipulations while dealing in option segment of BSE. There is enough material on record to suggest that no further enquiry is required in the matter. It is, therefore, humbly requested that the Show Cause Notice qua the Company be dropped without imposing any monetary penalty.”
34. l humbly request the learned Adjudicating Officer that a lenient view be taken in the matter and I be discharged from captioned proceedings.
11. Further, Authorized Representative of the Noticee (hereinafter referred to as ‘AR’) vide email dated October 05, 2020, requested to conduct personal hearing through video conferencing, in view of the ongoing Covid-19 Pandemic, in the matter. The request of the Noticee was acceded to and he was granted an opportunity of personal hearing before the undersigned on October 09, 2020, vide email dated October 05, 2020. The hearing was later postponed to October 12, 2020, vide email dated October 09, 2020 and on the same day the AR confirmed attendance for hearing by email. The hearing was conducted on scheduled date and time through videoconferencing. The AR of the Noticee attended the online hearing on the scheduled date & time and reiterated the contents of his reply dated September 29, 2020.
CONSIDERATION OF ISSUES AND FINDINGS
12. After perusal of the material available on record, I have the following issues for consideration viz.,
I. Whether the Noticee has violated the provisions of Regulations 3(a), 3(b), 3(c), 3(d), 4(1) and 4(2)(a) of PFUTP Regulations?
II. Whether the Noticee is liable for monetary penalty under Section 15HA of the SEBI Act, 1992?
III. If so, what quantum of monetary penalty should be imposed on the Noticee?
FINDINGS
13. On perusal of the material available on record and giving regard to the facts and circumstances of the case, I record my findings hereunder.
ISSUE I: Whether the Noticee has violated the provisions of Regulations 3 (a), 3(b), 3(c), 3 (d), 4 (1) and 4 (2) (a) of PFUTP Regulations, 2003?
14. Before moving forward, it is pertinent to refer to the relevant provisions of PFUTP Regulations, 2003 which reads as under:
Regulation 3 of SEBI (PFUTP) Regulations: – Prohibition of certain dealings in securities
3. 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.
Regulation 4 of SEBI (PFUTP) Regulations: – 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;
15. It has been alleged that the Noticee had indulged in execution of reversal of trades in Stock Options with same entities on the same day. Such trades are non-genuine in nature and have created false or misleading appearance of trading in terms of artificial volume in stock options and therefore alleged to be manipulative, deceptive in nature.
16. I note that reversal trades have been considered as those trades in which an entity reverses it’s buy or sell positions in a contract with subsequent sell or buy positions with the same counterparty during the same day. The said reversal trades are non-genuine trades as they are not executed in normal course of trading, lacks basic trading rationale and lead to false or misleading appearance of trading in terms of generation of artificial volume, hence were deceptive and manipulative. Artificial volume is considered to be the volume (no. of units) reversed in both legs of said reversal trades while keeping out the volume, if any, which is not reversed.
17. I note that the Noticee had executed 93 non-genuine trades in 34 unique contracts on 31 trading days in the year 2014 & 2015. The details of non-genuine trades executed by the Noticee are furnished hereunder:
S. No |
Contract Name |
Avg.BuyRate(Rs.) |
Total Buy Volume (no. of units) |
Avg.SellRate(Rs.) |
Total Sell Volume (no. of units) |
Numb er of non genuine trades executed by Entity in the Contra ct |
Total numb er of trades executed by the Entity in the Contract |
Total number of trade executed in the contract |
% of Non Genuine trades of Noticee in the contract to Noticee’s Total trades inthe Contract |
% of Non Genuine trades of Entity in the contract to Total trades in the Contract |
% of Artificial Volume generate d by Noticee in the contract to Noticee’s Total Volume in the Contract |
% of Artificial Volume generated by Noticee in the contract to Total Volume in the Contract |
1 |
ADPW14AUG 50.00PE |
0.35 |
104000 |
1.60 |
104000 |
2 |
2 |
14 |
100% |
14% |
100% |
8% |
2 |
ADPW14SEP 50.00CEW2 |
0.30 |
80000 |
2.00 |
80000 |
3 |
3 |
6 |
100% |
50% |
100% |
21% |
3 |
ADPW15MAR 40.00PEW3 |
0.05 |
120000 |
0.70 |
120000 |
2 |
2 |
7 |
100% |
29% |
100% |
55% |
4 |
ANBK15AUG 75.00CEW3 |
2.20 |
12000 |
4.40 |
12000 |
2 |
2 |
2 |
100% |
100% |
100% |
100% |
5 |
ANBK15JUL 80.00CEW3 |
0.05 |
296000 |
1.75 |
296000 |
3 |
3 |
14 |
100% |
21% |
100% |
30% |
6 |
APLT14SEP 210.00CE |
0.10 |
24000 |
8.30 |
24000 |
2 |
2 |
9 |
100% |
22% |
100% |
23% |
7 |
DISH15MAY 85.00CEW1 |
0.05 |
120000 |
2.18 |
120000 |
3 |
3 |
5 |
100% |
60% |
100% |
33% |
8 |
GMRI15JAN 12.00PE |
0.10 |
27000 |
0.90 |
27000 |
2 |
2 |
22 |
100% |
9% |
100% |
1% |
9 |
GMRI15MAR 11.00PEW3 |
0.05 |
605418 |
0.75 |
605418 |
2 |
2 |
6 |
100% |
33% |
100% |
33% |
10 |
HXTL14AUG 150.00PEW3 |
1.08 |
70000 |
3.95 |
70000 |
3 |
3 |
6 |
100% |
50% |
100% |
50% |
11 |
HXTL14DEC 210.00CE |
0.10 |
120000 |
2.15 |
120000 |
2 |
2 |
5 |
100% |
40% |
100% |
44% |
12 |
IDBI15MAY 65.00PE |
0.05 |
164000 |
2.24 |
164000 |
3 |
3 |
18 |
100% |
17% |
100% |
17% |
13 |
IOBL14AUG 70.00PEW2 |
0.10 |
360000 |
1.50 |
360000 |
5 |
5 |
14 |
100% |
36% |
100% |
34% |
14 |
IOBL14NOV 50.00PE |
0.10 |
132000 |
2.39 |
132000 |
3 |
3 |
21 |
100% |
14% |
100% |
24% |
15 |
IOBL14NOV 50.00PEW3 |
0.10 |
116000 |
2.75 |
116000 |
3 |
3 |
9 |
100% |
33% |
100% |
50% |
16 |
IOBL14OCT 50.00PEW4 |
0.10 |
96000 |
2.20 |
96000 |
3 |
3 |
17 |
100% |
18% |
100% |
21% |
17 |
IOBL15JAN 55.00PEW3 |
0.15 |
260000 |
2.10 |
260000 |
2 |
2 |
20 |
100% |
10% |
100% |
13% |
18 |
IOCL15AUG 380.00CEW3 |
8.90 |
20000 |
18.90 |
20000 |
2 |
2 |
4 |
100% |
50% |
100% |
87% |
19 |
IRBI14SEP 250.00PEW1 |
0.51 |
36000 |
6.55 |
36000 |
3 |
3 |
9 |
100% |
33% |
100% |
18% |
20 |
JAIA14DEC 20.00PE |
0.05 |
96000 |
0.60 |
96000 |
2 |
2 |
9 |
100% |
22% |
100% |
5% |
21 |
JAIA14OCT 30.00PE |
0.10 |
184000 |
1.75 |
184000 |
3 |
3 |
14 |
100% |
21% |
100% |
5% |
22 |
JISL15MAR 85.00CEW1 |
0.10 |
400000 |
2.10 |
400000 |
2 |
2 |
44 |
100% |
5% |
100% |
11% |
23 |
JPPW14NOV 16.00CEW2 |
0.05 |
315000 |
1.02 |
315000 |
4 |
4 |
17 |
100% |
24% |
100% |
7% |
24 |
JPPW15MAR 16.00CEW3 |
0.05 |
600000 |
0.89 |
600000 |
3 |
3 |
20 |
100% |
15% |
100% |
20% |
25 |
JSWE14DEC 95.00CE |
0.10 |
32000 |
1.65 |
32000 |
2 |
2 |
4 |
100% |
50% |
100% |
24% |
26 |
JSWE14SEP 80.00PEW3 |
0.20 |
128000 |
2.20 |
128000 |
2 |
2 |
4 |
100% |
50% |
100% |
42% |
27 |
PFCL14JUL 270.00CE |
1.20 |
46000 |
12.10 |
46000 |
2 |
2 |
4 |
100% |
50% |
100% |
35% |
28 |
PTCI15JUN 70.00CEW3 |
0.05 |
148000 |
2.10 |
148000 |
2 |
2 |
35 |
100% |
6% |
100% |
13% |
29 |
RCOM14AUG 120.00CE |
1.61 |
124000 |
5.33 |
124000 |
7 |
7 |
18 |
100% |
39% |
100% |
30% |
30 |
RPOW15FEB 50.00PEW2 |
0.10 |
352000 |
2.10 |
352000 |
3 |
3 |
5 |
100% |
60% |
100% |
60% |
31 |
SAIL15JAN 70.00PE |
0.10 |
404000 |
1.05 |
404000 |
3 |
3 |
34 |
100% |
9% |
100% |
28% |
32 |
SAIL15MAY 60.00PEW2 |
0.20 |
188000 |
2.27 |
188000 |
3 |
3 |
8 |
100% |
38% |
100% |
51% |
33 |
SYND14AUG 125.00PE |
0.15 |
84000 |
2.20 |
84000 |
2 |
2 |
7 |
100% |
29% |
100% |
15% |
34 |
UNIT14SEP 24.00CEW2 |
0.13 |
204000 |
1.35 |
204000 |
3 |
3 |
11 |
100% |
27% |
100% |
21% |
18. Before I proceed further, it is necessary to understand what an Option Contracts is and various factors which influence the price of the Options. Options are financial derivative sold by an option writer to an option buyer. The contract offers the buyer the right, but not the obligation, to buy (call option) or sell (put option) the underlying asset at an agreed-upon price during a certain period of time or on a specific date. The factors which influence the Options prices are underlying price, strike price, time until expiration, volatility, interest rates and dividends. There are various market based models (Black and Scholes Model) which throw an indicative price of the Option after inputting the various parameters mentioned above. I note that the seller of option contract will be the writer of the contract where the risk involved would be unlimited, as theoretically writer of options is obliged to honor the contract should the buyer exercise such option. Similarly, buyer of Option will have limited risk to the extent of premium paid. Therefore, both buyer and seller of options should ideally deal in options contracts considering various market parameters as mentioned above.
19. With above background in mind, I shall now proceed to deal with the transactions executed by Noticee in some of the instances of alleged non-genuine trades.
I. Scrip Name: ANBK15AUG75.00CEW3, Trade Date: 19/8/2015
| CLIENTNAME | CP_ CLIENTNAME | TRADE_ TIME | TRADE_RATE | TRADED_QTY |
| Gurmeet Singh | Pradeep Kumar Kayan | 15:05:24.657120 | 4.4 | 12000 |
| Pradeep Kumar Kayan | Gurmeet Singh | 15:19:39.335067 | 2.2 | 12000 |
(a) I note from the above table that during the investigation period, total 2 trades amounting to total volume of 24,000 units were executed in the said contract on 19/08/2015 wherein Noticee was party to both of the said trades. While dealing in the said contract on 19/08/2015, Noticee at 15:05:24 hrs entered into 1 sell trade with counter party viz, Gurmeet Singh for 12,000 units at rate of Rs. 4.4 per unit. Thereafter, on the same day, within 15 minutes from the above trade, Noticee, at 15:19:39 hrs entered into buy trade with same counterparty for 12,000 units at Rs. 2.2 per unit.
(b) From the above, it is noted that while dealing in the said contract during the I.P., Noticee executed total 2 trades forming a pair of reversal trade (1 sell trade + 1 buy trade) with same counterparty viz. Gurmeet Singh on the same day.
(c) Thus, Noticee, through his dealing in the contract viz, “ANBK15AUG75.00CEW3” during the I.P, executed 2 non genuine trades which is 100% of the total trades from the market in the said contract during the I.P., and thereby, Noticee generated artificial volume of 24,000 units which is 100% of the volume traded in the said contract from the market during the I.P.
II. Scrip Name: RPOW15FEB50.00PEW2, Trade Date: 10/02/2015
| CLIENTNAME | CP_ CLIENTNAME | TRADE_TIME | TRADE_ RATE | TRADED_ QTY |
| Shambhu Vinimay Pvt Ltd | Pradeep Kumar Kayan | 12:16:23.542728 | 2.1 | 348000 |
| Shambhu Vinimay Pvt Ltd | Pradeep Kumar Kayan | 12:16:23.542728 | 2.05 | 4000 |
| Pradeep Kumar Kayan | Shambhu Vinimay Pvt Ltd | 12:40:56.000522 | 0.1 | 352000 |
(a) I note from the above table that during the investigation period, total 3 trades amounting to total volume of 7,04,000 units were executed in the said contract on 10/02/2015 wherein Noticee was party to all three of the said trades. While dealing in the said contract on 10/02/2015, Noticee at 12:16:23 hrs entered into 2 sell trade with counter party viz, Shambhu Vinimay Pvt Ltd for 3,48,000 units and 4,000 units at rates of Rs. 2.1 and 2.05 per unit, respectively. Thereafter, on the same day, within 15 minutes from the above trade, Noticee, during 12:40:56 hrs entered into buy trade with same counterparty for 3,52,000 units at Rs. 0.1 per unit.
(b) From the above, it is noted that while dealing in the said contract during the I.P., Noticee executed total 3 reversal trade (2 sell trade + 1 buy trade) with same counterparty viz. Shambhu Vinimay Pvt. Ltd. on the same day.
(c) Thus, Noticee, through his dealing in the contract viz., “RPOW15FEB50.00PEW2” during the I.P, executed 3 non genuine trades which is 60% of the total trades from the market in the said contract during the I.P., and thereby, Noticee generated artificial volume of 7,04,000 units which is 60% of the volume traded in the said contract from the market during the I.P.
20. From the above pattern of trades, I note that the Noticee had bought and sold option contracts with the same counter parties and also reversed its trades in a few minutes from its earlier buy / sell trades, at substantial price difference. Such pattern of dealings suggests beyond doubt that they were not driven by market factors as none of the parameters (underlying stock price, volatility, etc.) for Option pricing, as mentioned in above paragraphs, have undergone any change during period of trades. I note that the underlying stock price did not change to substantiate corresponding changes in the option price in a span of less than few seconds/minutes. I also note that similar modus operandi as mentioned above was observed in respect of the remaining 32 contracts. Therefore, I conclude that aforesaid trades of Noticee were non genuine and have created false or misleading appearance of trading in terms of artificial volume in stock options and therefore manipulative, deceptive in nature.
21. It is summarized from the above findings that the Noticee had executed non-genuine trades in 34 contracts, wherein in respect of 1 contract, all the trades were non genuine trades and the Noticee contributed to 100% artificial volumes. A number of non-genuine trades of the Noticee had contributed to the total number of trades from the market in the above contracts, which was in the range of 5% to 100% of the trades that happened in the aforementioned contracts. The volumes generated by the Noticee in each of the above contracts were artificial volume, and have contributed in the range of 1% to 100% of the total volume from the market in said contracts. Non-genuine trades executed by the Noticee in the above contracts had significant differential in buy rates and sell rates considering that the trades were reversed on same day.
22. I note that derivative contracts by its very nature derives its value from various factors including underlying price. The transactions of the Noticee as mentioned in above paragraphs clearly demonstrates that option contracts bought / sold were immediately reversed within span of few seconds / minutes at substantially different price, though there was no corresponding price changes in the underlying stock price. Further analysis of such trades also indicates that there has been a deliberate structuring for manipulative purpose as one party to the contract had deliberately foregone profitable proposition at the time of executing trade. For example, the Noticee bought two call option contract of “ADPW14SEP50.00CEW2”, on September 02, 2014 at Rs. 0.3 for total 80,000 units. As per the terms of contract, the Noticee had bought Right to Buy Option at Rs. 50 for a premium of Rs. 0.3. This means that the Noticee will incur profit (IN THE MONEY) if the underlying price of the scrip is more than Rs. 50.3 {Strike Price (50) + Premium (0.3)}. I note that the underlying stock price of Adani Power Limited (ADPW) on equity segment on September 02, 2014 opened at Rs. 50.55 and reached a high of Rs. 51.70 and a low of Rs. 50.30 and closed at Rs. 50.55. I note that the Weighted Average price (WAP) of the scrip on the said day was Rs. 51.03. Thus, it is noted that the Noticee was at a profitable position of Rs. 0.73 {(WAP-(Strike Price + Premium)} each for 80,000 units (i.e. the Premium) at the time of buying the contract.
23. This implies that seller counterparty i.e., Ginni Finance Private Limited, had sold units of options knowing full well that it was already losing money at the time of Contract and the Noticee was also fully aware that it was already in the money by Rs. 0.73. Such pattern completely runs contrary to economic rationale of any investor to buy at lesser price and sell at higher price. Any rational investor would never deal in the market to deliberately register loss to facilitate buyer to profit at the time of entering trades. Had the counterparties for trades of the Noticee were different, intraday squaring of positions would not have been possible as no genuine counter party investor would ever forego profits. The fact the counterparties are same corroborates that the trades were not genuine and executed for manipulative purpose. I also note that profits made by the Noticee was exactly same to the loss made by the counterparty which ratifies the manipulative scheme of operations.
24. Considering the fact that all these reversal transactions were carried out through a screen based trading platform on a segment with hundreds of different contracts, the placement of orders repeatedly within a time span of few seconds and a significantly high percentage of matching of these orders, appear to be practically impossible unless there is a prior understanding or a pre-meditated plan between the two entities executing them. The repeated sell/buy of illiquid stock options by the Noticee and subsequent reversal trades with the same set of entities for the same quantity, within a short span of time with a significant difference in buy and sell value of stock options, in itself, exhibits abnormal market behaviour and defies economic rationality. I note from the above trading pattern of the Noticee that it was deliberately making blatant misuse of trading platform for creating artificial volume in the illiquid stock options. I note that the rationale for such transactions entered by the Noticee are not genuine as the behaviour exhibited by the Noticee defies the logic and basic economic sense.
25. I am of the considered view that the scheme, plan, device and artifice employed by the Noticee in this case of executing reversal trades in illiquid stock options contracts at irrational, unrealistic and unreasonable prices, tantamount to fraud on the securities market in as much as it involves non-genuine/ manipulative transactions in securities and misuse of the securities market.
26. The non-genuine and deceptive transactions of these entities are, prima-facie, covered under the definition of ‘fraud’ and the dealings of the Noticee as discussed herein above were “fraudulent”, as defined under regulation 2(1)(c) of the PFUTP Regulations, 2003 and prohibited under the provisions of Regulations 3(a), (b), (c) and (d) and 4(1) and 4(2)(a) PFUTP Regulations, thereof.
27. Further, with respect to the reversal of trades carried out by the Noticee, I note that the Hon’ble Supreme Court in the matter of SEBI vs. Rakhi Trading Private Ltd., in Civil appeals no., 1969 of 2011 with Civil Appeal Nos., 3174-3177 of 2011 and Civil Appeal No., 3180 of 2011 decided on February 8, 2018 had observed that “the price discovery system itself was affected by synchronization and rapid reverse trade, which also had the impact of excluding other investors from participating in the market. The Supreme Court, therefore found that the traders having engaged in a fraudulent and unfair trade practice while dealing in securities, are hence liable to be proceeded against for violation of Regulations 3(a), 4(1) and 4(2)(a) of PFUTP Regulations”. Further Apex Court also observed that “considering the reversal transactions, quantity, price and time and sale, parties being persistent in the number of such trade transactions with huge price variations, it will be too naïve to hold that the transactions are through screen-based trading and hence anonymous. Such conclusion would be over-looking the prior meeting of minds involving synchronization of buy and sell order and not negotiated deals as per the Board’s circular. The impugned transactions are manipulative/ deceptive device to create a desired loss and/or profit. Such synchronized trading is violative of transparent norms of trading in securities.”
28. Keeping in mind the dicta of the Hon’ble Supreme Court as reproduced above, I see no reason to take a different view in the present case. In view of the foregoing, I hold that the Noticee had indulged in execution of reversal trades in Stock Options with same entities on the same day, which are non-genuine in nature and have created false or misleading appearance of trading in terms of artificial volumes.
29. The Noticee vide his letter dated December 14, 2018 had sought certain documents relating to the present Adjudication proceedings. In this connection, I would like to emphasize that all the documents which were relevant and relied upon in the SCN were provided to the Noticee, which are detailed hereunder:
(a) Copy of communication of Order dated May 29, 2018 regarding appointment of Adjudication Order;
(b) Integrated trade log of all trades of Noticee in Stock Option segment of BSE during the investigation period;
(c) Integrated trade log of all non-genuine trades of Noticee in Stock Option segment of BSE during the investigation period;
30. In this connection, I would like to refer to the observations of the Hon’ble SAT in the matter of Mayrose Capfin Private Limited Vs SEBI (decided on 30.03.2012) wherein SAT observed that: “……………………… the principles of natural justice require that the inquiry officer should make available such document and material to the delinquent on which reliance is being placed in the inquiry. It is not necessary for the inquiry officer to make available all the material that might have been collected during the course of investigation but has not been relied upon for proving charge against the delinquent. No prejudice can, therefore, be said to have been caused to the appellant on this count… “
31. In view of the above, as all the documents which were relevant and relied upon in the instant proceedings have been provided to the Noticee along with the SCN, I am of the opinion that principles of natural justice have been duly complied with in the instant proceedings and no prejudice has been caused to the Noticee.
32. I note that in the screen based trading, the manipulative or fraudulent intent can be inferred from various factors such as conduct of the party, pattern of transactions, etc., In this context, I deem it appropriate to refer to the Hon’ble SAT order dated July 14, 2006, in the case of Ketan Parekh vs. SEBI (Appeal no. 2/2004), wherein, Hon’ble SAT has observed that:
“The nature of transactions executed, the frequency with which such transactions are undertaken, the value of the transactions, the conditions then prevailing in the market are some of the factors which go to show the intention of the parties. This list of factors, in the very nature of things, cannot be exhaustive. Any one factor may or may not be decisive and it is from the cumulative effect of these that an inference will have to be drawn.”
33. Further, I would like to rely on the judgement of Hon’ble Supreme Court in the matter of SEBI vs. Rakhi Trading Private Ltd., in Civil appeals no., 1969 of 2011 with Civil Appeal Nos., 3174-3177 of 2011 and Civil Appeal No., 3180 of 2011 decided on February 8, 2018, wherein the Apex Court upheld that “the entities were engaged in a fraudulent and unfair trade practice while dealing in Options and hence were liable for violation of SEBI (PFUTP) Regulations”. The Hon’ble Apex Court has also observed that in the absence of direct proof of meeting of minds, the test should be one of preponderance of probability and also stated that the conclusion has to be gathered various circumstances like volume of trade, period of persistence of trading, particulars of buy and sell orders, proximity of time between the two and such other relevant factors.
34. In line with the aforesaid judgements of Hon’ble SAT and Hon’ble Supreme Court, I note from the foregoing findings that the trading pattern of the Noticee in terms of volume of reversal trades, proximity of buy/sell and subsequent reversal evidences the indulgence of the Noticee beyond a reasonable doubt of the manipulative intent in creation of artificial volume. Further, consistent pattern of dealings by Noticee only in such options contracts which are illiquid clearly demonstrates that the manipulative intent to use stock exchange platform to carry out non-genuine trades with the aim to execute such trades for various manipulative purposes.
35. In this regard, I would like to rely on the judgement of Hon’ble Supreme Court in the matter of SEBI vs. Rakhi Trading Private Ltd., in Civil appeals no., 1969 of 2011 with Civil Appeal Nos., 3174-3177 of 2011 and Civil Appeal No., 3180 of 2011 decided on February 8, 2018, where Apex Court stated at Para 35 and Para 41 of that said Order that “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 pre-planned and rapid reverse trades, it is not genuine; it is an unfair trade practice”. “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.”
36. From the foregoing, it is established that the Noticee by indulging in reversal trades on the stock exchange platform which are manipulative/ unfair/ fraudulent/ non-genuine, in nature, had created artificial volumes in the contracts. In view of above, I conclude that the Noticee has violated the provisions of Regulations 3(a), 3(b), 3(c), 3 (d), 4(1) and 4(2)(a) of PFUTP Regulations.
ISSUE -2: Does the violation, if any, attract monetary penalty under Section 15HA of SEBI Act.?
37. Pursuant to detailed analysis as brought out above, it is established that reversal trades are not normal transactions and it clearly demonstrates beyond reasonable doubt that the Noticee had intentionally executed these trades and manipulated the volume by artificial trading pattern in 34 contracts. Out of the 34 contracts, in respect of 1 contract, all the trades were non genuine trades, which contributed to 100% artificial volume.
38. I am of the view that the misuse of stock options as shown above not only displays an unreal picture of market activity to other investors but also defeats the basic premise of screen based electronic trading system and price discovery mechanism by repeated execution of pre decided reversal trades at irrational / arbitrary prices. Moreover, the impact of such trading on the traded volume and the price of stock options contracts is huge. Such activity deliberately or otherwise damages market integrity apart from presenting wrong picture of liquidity to gullible investors which could affect their trading/investment decisions. Options as financial instruments, ordinarily, provide hedging avenues to investors. The trading pattern of the Noticee in the instant matter was abnormal and was designed to create artificial volumes in the illiquid stock options, fail to justify any of the normal strategies of hedging/ speculation/ arbitrage. In my view, the abuse of such financial instruments, which are made available to the investors for the purpose of protection of their investment portfolios from the risks of adverse price movement, cannot be tolerated and needs to be dealt with strictly.
39. I find that the Noticee by indulging in execution of reversal trades in Stock Options with same entities on the same days, had created artificial volume, leading to false and misleading appearance of trading in the illiquid stock options at BSE and therefore violated the provisions of Regulations 3(a), 3(b), 3(c), 3(d), 4(1), and 4(2)(a) of PFUTP Regulations. Accordingly, the Noticee is liable for appropriate monetary penalty under Section 15HA of SEBI Act, 1992 the provisions of which are furnished hereunder.
Section 15HA of SEBI Act – Penalty for fraudulent and unfair trade practices
“If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty which shall not be less than five lakh rupees but which may extend to twenty five crore rupees or three times the amount of profits made out of such practices, whichever is higher”.
ISSUE – 3: If so, what would be the monetary penalty that can be imposed taking into consideration the factors mentioned in Section 15J of SEBI Act?
40. While determining the quantum of monetary penalty under Section 15HA of SEBI Act, I have considered the factors stipulated in Section 15-J of SEBI Act, which reads as under:
Section 15J – Factors to be taken into account by the Adjudicating Officer
While adjudging quantum of penalty under section 15 – I, the Adjudicating Officer shall have due regard to the following factors, namely:
(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default;
(b) the amount of loss caused to an investor or group of investors as a result of the default;
(c) the repetitive nature of the default.
Explanation.—For the removal of doubts, it is clarified that the power of an adjudicating officer to adjudge the quantum of penalty under sections 15A to 15E,clauses (b) and (c) of section 15F, 15G, 15H and 15HA shall be and shall always be deemed to have been exercised under the provisions of this section.
41. I note from the facts of the case that the first leg of trades of Noticee were reversed within a few seconds/minutes of such trades, with the same counter party, at such option prices which no rational investor would undertake, as explained in above paras. Consequent to such manipulative trades, both the parties of the trades could structure and generate profits/ loss in their accounts wherein profit/ loss made by one entity was exactly equal to the loss/ profit made by the counterparty.
42. Considering the above, I am of the view that it will be appropriate to take into account the payoff of transactions between the two parties together, rather than viewing it independently. Therefore, in respect of the non-genuine trades carried out by the Noticee which resulted in creation of artificial volume in Illiquid Stock Options, it is not possible to quantify the amount of disproportionate gain or unfair advantage made by the Noticee. Further, there is also no material on record to assess the amount of loss caused to investors as a result of the Noticee’s default. The persistent trading pattern of the Noticee, which was fraudulent and deceptive, affects the normal price discovery mechanism in the securities market. People who indulge in manipulative, fraudulent and deceptive transaction, or abet the carrying out of such transaction which are fraudulent and deceptive should be suitably penalized for such acts of omissions and commissions.
ORDER
43. After taking into consideration the nature and gravity of the violations established in the preceding paragraphs and in exercise of the powers conferred upon me under Section 15-I of the SEBI Act, 1992 read with Rule 5 of the Inquiry Rules, 1995, I hereby impose a penalty of Rs. 5,00,000/- (Rupees Five Lakh Only) on the Noticee i.e., Mr. Pradeep Kumar Kayan, under Section 15HA of the SEBI Act, for indulging in execution of reversal trades in Stock Options with same entities on the same day, thereby creating artificial volume, leading to false and misleading appearance of trading in the illiquid stock options at BSE. I am of the view that the said penalty is commensurate with the lapse/omission on the part of the Noticee.
44. Pradeep Kumar Kayan shall remit / pay the said amount of penalty within 45 days of receipt of this order either by way of Demand Draft in favour of “SEBI – Penalties Remittable to Government of India”, payable at Mumbai, OR through online payment facility available on the SEBI website www.sebi.gov.inon the following path, by clicking on the payment link.
ENFORCEMENT – Orders – Orders of AO – PAY NOW
45. Pradeep Kumar Kayan shall forward said Demand Draft or the details/confirmation of penalty so paid to the “The Division Chief, Division of Regulatory Action-2, Enforcement Department (EFD1 – DRA I), Securities and Exchange Board of India, SEBI Bhavan, Plot No. C –7, “G” Block, Bandra Kurla Complex, Bandra (E), Mumbai –400 051”. Mr. Pradeep Kumar Kayan shall provide the following details while forwarding DD/ payment information:
a) Name and PAN of the entity
b) Name of the case / matter
c) Purpose of Payment – Payment of penalty under AO proceedings
d) Bank Name and Account Number
e) Transaction Number
46. In the event of failure to pay the said amount of penalty within 45 days of the receipt of this Order, recovery proceedings may be initiated under Section 28A of the SEBI Act for realization of the said amount of penalty along with interest thereon, inter alia, by attachment and sale of movable and immovable properties.
47. In terms of rule 6 of the Inquiry Rules, 1995, copies of this order are being sent to the Noticee i.e., Mr. Pradeep Kumar Kayan and also to SEBI.
October 26, 2020
Mumbai
B J Dilip
Adjudicating Officer
Well done taxguru team.
The decision may be useful to many subscribers.
Narayan Jain, Advocate
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