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 the contract ‘HPCL15FEB600.00CE’ where the trades executed by the Noticee during the Investigation Period in the said contract were non-genuine trades.
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. 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. The trading of the Noticee in the instant matter was abnormal and was clearly 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 cannot be tolerated and needs to be dealt with strictly.
The trading behavior of the Noticee confirms that such trades were not normal and wide variation in prices of the trades in the same contract in a short span of time without any basis for such wide variation, all indicate that the trades executed by the Noticee were non-genuine trades and being non-genuine, created an appearance of artificial trading volumes in respective contract. In view of the above, I find that the allegation of violation of regulations 3(a), (b), (c), (d), 4(1) and 4(2)(a) of PFUTP Regulations, 2003 by the Noticee stands established.
I find that the Noticee by indulging in execution of reversal trades in Stock Options with same entity on the same day, 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), (b), (c), (d), 4(1), and 4(2)(a) of the PFUTP Regulations, 2003. Accordingly, I am convinced that it is a fit case for imposition of monetary penalty on the Noticee under the provisions of section 15HA of the SEBI Act, 1992.
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 Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties) Rules, 1995, I hereby impose following penalty under section 15HA of the SEBI Act, 1992 on the Noticee:
| Name of the Noticee | Violation provisions | Penalty |
| LOTWALA MIKIL VIJAYKUMAR (HUF) (PAN: AABHL7830G) | Regulations 3(a), (b), (c), (d), 4(1) and 4(2)(a) of PFUTP Regulations, 2003 |
INR. 5,00,000/-
(Rupees Five Lakh only) |
******
BEFORE THE ADJUDICATING OFFICER
SECURITIES AND EXCHANGE BOARD OF INDIA
[ADJUDICATION ORDER NO.: Order/DS/MA/2021-22/14446]
UNDER SECTION 15-I OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH RULE 5 OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (PROCEDURE FOR HOLDING INQUIRY AND IMPOSING PENALTIES) RULES, 1995
In respect of:
LOTWALA MIKIL VIJAYKUMAR (HUF)
(PAN: AABHL7830G)
256 Gurudwara Road, Behind Civil Hospital
Jalgaon, Maharashtra 425001
In the matter of dealings in Illiquid Stock Options on BSE
BACKGROUND OF THE CASE
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 the alleged creation of artificial volume in the stocks options segment. In view of the same, SEBI conducted an investigation into the trading activities of certain entities in the illiquid stock options segment at BSE for the period April 01, 2014 to September 30, 2015 (hereinafter referred to as “Investigation Period“).
2. Pursuant to investigation, it was observed that total of 2,91,744 trades comprising substantial 81.40% of all the trades executed in stock options segment of BSE, during the Investigation Period were 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 Lotwala Mikil Vijaykumar (HUF) (PAN: AABHL7830G) (hereinafter referred to as the “Noticee”) was one of the various entities who indulged in execution of reversal trades in stock options segment of BSE during the Investigation Period. Such trades were observed to be non-genuine in nature and created false or misleading appearance of trading in terms of artificial volumes in stock options and therefore were alleged to be manipulative, deceptive in nature. In view of the same, SEBI initiated adjudication proceedings against the Noticee for violation of the provisions of Regulations 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
4. 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 Adjudicating Officer vide order dated July 02, 2021 [communiqué dated July 06, 2021], under Section 19 read with Section 15-I(1) of the SEBI Act, 1992 (hereinafter referred to as “SEBI Act, 1992”) and Rule 3 of SEBI (Procedure for Holding Inquiry and Imposing Penalties) Rules, 1995 (hereinafter referred to as “Adjudication Rules”) to conduct adjudication proceedings in the manner specified under Rule 4 of Adjudication Rules read with Section 15-I(1) and (2) of SEBI Act, 1992, and if satisfied that penalty is liable, impose such penalty deemed fit in terms of Rule 5 of Adjudication Rules and Section 15HA of SEBI Act, 1992.
SHOW CAUSE NOTICE, REPLY AND HEARING
5. A Show Cause Notice bearing reference no. SEBI/HO/16892/1 dated August 03, 2021 (hereinafter referred to as ‘SCN’) was issued to the Noticee under Rule 4(1) of the Adjudication Rules to show cause as to why an inquiry should not be initiated against the Noticee and why penalty should not be imposed upon the Noticee under Section 15HA of the SEBI Act, 1992 for the violations alleged to have been committed by the Noticee. The SCN issued to the Noticee, inter alia, mentioned the following-:
5.1. It was alleged in the SCN that the Noticee was one of the entities which indulged in reversal trades which allegedly created false and misleading appearance of trading, generating artificial volumes in the Stock Options segment of BSE during the Investigation Period. The Noticee is alleged to have engaged in reversal trades (one on the buy side and one on the sell side) in the contract ‘HPCL15FEB600.00CE’ which led to creation of artificial volume of 26,000 units (buy side and sell side). These trades of the Noticee involved reversal with the same counterparty on the same day with significant difference in the buy and sell price.
5.2. Summary of the reversal trades of the Noticee in Stock Options segment of BSE during the Investigation Period are as follows:
| Trade Date | Contr act Name | Order Time | CP Order Time | Trade Time | Trade Rate (INR) | Traded Qty | % of Arti-ficial Volume gene-rated by Noticee in the contract to Noti-cee’s Total Volume in the Cont-ract | % of Arti-ficial Volume gen-erate d by Noticee in the contract to Total Volume in the Cont-ract |
| 16/02/ 2015 | HPCL
15FEB |
13:58:58.
835525 |
13:58:59
251380 |
13:58:59.
251380 |
16.65 | 13000 | 100.00 | 26.26 |
| 600.00
CE |
14:31:20.
329047 |
14:31:19
962979 |
14:31:20.
329047 |
42.3 | 13000 |
5.3. While dealing in the said contract on February 16, 2015, at 13:58:58 hrs, the Noticee placed a buy order for 13,000 units @ INR 16.65 per unit. The buy order of the Noticee got executed at 13:58:59 hrs against the sell order placed by Komal Fakirchand Sharma for 13,000 units at 13:58:59 hrs @ INR 16.65 per unit i.e. at the same rate for the same quantity. At 14:31:19 on the same day, the Noticee placed a sell order for 13,000 units @ INR 42.3 per unit, which got executed against the buy order placed by the same counterparty, Komal Fakirchand Sharma at 14:31:20 hrs at the same rate for the same quantity. This indicates that these trades are artificial and non-genuine in nature.
5.4. These alleged non-genuine trades, executed by the Noticee in above contract, had significant difference in buy rates and sell rates considering that the trades were reversed on same day.
5.5. The Noticee’s trades generated artificial volume of 26,000 units, (buy side and sell side) which contributes to 100.00% of the Noticee’s total market volume in the said contract.
5.6. The Noticee’s trades contributed to 26.26% of total volume in the said contract.
6. The SCN vide reference no SEBI/HO/16892/1 dated August 03, 2021 was served on the Noticee via Speed Post Acknowledgement Due and via email. Thereafter, the Noticee, vide email dated September 05, 2021, requested for additional time to reply to the SCN. Vide email dated September 23, 2021, the Noticee was granted an opportunity to submit the reply to the SCN by October 05, 2021. Thereafter, the Noticee, vide email dated October 05, 2021, inter alia submitted the following reply:
a. The Noticee is a retail trader who started trading in the FY 2014-2015. This was his first year of trading and he had very less knowledge of trading in stock market.
b. For the alleged trades, the Noticee kept a buy order for 13000 Qty call Option for HPCL15Feb600.00CE at INR 16.65 and the same was executed and then the Noticee kept the sell order for same quantity for INR 42.30 and this order was also got executed in the BSE exchange where volumes are low.
c. The Noticee have traded in option segment since he has very low capital base. He had no knowledge of any violation of rules under SEBI and Exchange laws.
d. As a retailer, the Noticee has less information about the trading guidelines and same should have been updated by the broker to him. But for this trade neither his broker has warned him nor did they inform him about any exchange violation.
e. During the financial year 2014-15, the Noticee had contributed INR 40462/- as Securities Transaction Tax, Rs 16558/- as Stamp Duty and INR 22417 as service Tax on Brokerage, INR 15502/- as Exchange transaction charges, INR 1579 as SEBI turnover Fees in the government kitty. And all these transactions are duly accounted in his Income tax return filing.
f. There is no gross negligence and avoidance of any law. There is a loss of INR 1205957. Though in the above discussed trade, he made profit of INR 332334/-but for the complete year of trading, he made a loss of INR 1205957/-.
7. Vide email dated October 11, 2021, the Noticee requested for an offline hearing instead of online hearing.
8. Accordingly, vide hearing notice bearing ref. no. SEBI/DDHS-3/AO/DVS/2021/28141/1 dated October 12, 2021, an opportunity of hearing was granted to the Noticee on October 28, 2021. The hearing notice was sent to the Noticee through Speed Post with Acknowledgement Due as well as via e-mail. The hearing in the matter was conducted on October 28, 2021. The hearing was attended by Shri Rahul Bhikamchand Jain, Chartered Accountant (Authorised Representative (‘AR’) of the Noticee) and Mikhil Vijaykumar Lotwala. During the course of hearing, the AR reiterated the written submissions dated October 05, 2021 submitted by the Noticee. The AR undertook to make post hearing submissions in the matter within 2 weeks. The AR of the Noticee, vide email dated November 14, 2021, submitted the post hearing reply wherein the written submissions dated October 05, 2021 was reiterated along with the following additional submissions:
8.1. The Noticee has invested INR 400000/- .
8.2. Hindustan Petroleum Corporation Ltd (HPCL) stock was having market cap of 25000 crores in FY 2014-15. It is not possible to manipulate stock or trade fraudulently in such a huge company with merely INR. 4,00,000 investment 8.3. The Noticee has traded in HPCL Call Option and not directly in stock.
8.4. The Noticee has a small business background and has started trading in the year 2014-15 with the small capital. He had placed the buy order of 13000 Qty call Option for HPCL15Feb600.00 CE at INR 16.65(Total investment in trade is INR 216450). If the trade was not genuine or in violation of SEBI rules and regulation, the broker concerned should have rejected the order or informed him of the same. But that was not the case and the buy order got executed, and he placed selling order at 42.30 and the same was also executed later that day.
8.5. The other party/person/individual concerned in this trade was not known to the Noticee. In the Futures & Options, there is always two parties involved in the trade, one is buyer and other is the seller. One party will gain in the another’s loss. In this trade, the Noticee was the buyer of the call option and earned small money and it has nothing to do with insider or fraudulent trading or unfair trade practice.
8.6. As directed in Section 15J in SEBI Act, 1992, the Noticee submitted that they have not earned any disproportionate gain or done unfair advantage, there is not loss caused to an investor or group of investors and the repetitive nature of trade is also not there.
CONSIDERATION OF ISSUES AND FINDINGS
9. I have carefully perused the charges levelled against the Noticee, his replies and the documents / material available on record. The issues that arise for consideration in the present case are :
(a) Whether the Noticee has violated Regulations 3(a), (b), (c), (d), 4(1) and 4(2)(a) of PFUTP Regulations?
(b) Does the violation, if any, attract monetary penalty under Section 15HA of the SEBI Act?
(c) If so, what would be the quantum of monetary penalty that can be imposed on the Noticee after taking into consideration the factors mentioned in section 15J of the SEBI Act?
10. On perusal of the material available on record and giving regard to the facts and circumstances of the case and submissions of the Noticee, I record my findings hereunder:
10.1. 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?
10.1.1. Before proceeding further, I would like to refer to the relevant provisions of the PFUTP Regulations as below:
PFUTP Regulations, 2003
“3. Prohibition of certain dealings in securities
No person shall directly or indirectly—
(a) buy, sell or otherwise deal in securities in a fraudulent manner;
(b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in Adjudication order in respect of Lotwala Mikil Vijaykumar (HUF) in the matter of dealing in Illiquid Stock Options at BSE contravention of the provisions of the Act or the rules or the regulations made there under;
(c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange;
(d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made there under.
4. Prohibition of manipulative, fraudulent and unfair trade practices
(1) Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities.
(2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:—
(a) indulging in an act which creates false or misleading appearance of trading in the securities market;”
10.1.2. I note that the allegation against the Noticee is that, while dealing in the stock option contracts at BSE during the IP, the Noticee had executed reversal trades which were allegedly non-genuine trades and the same have resulted in the generation of artificial volume in stock option contracts at BSE.
10.1.3. I note that reversal trades have been considered as those trades in which an entity reverses its 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 are 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.
10.1.4. I shall now proceed to deal with the transactions executed by Noticee in the alleged non-genuine trades:
i. I note from the table at para 4.2 above that while dealing in the contract of ‘HPCL15FEB600.00CE’ on February 16, 2015, the Noticee engaged in reversal trades (one on the buy side and another on the sell side), which led to generation of alleged artificial volume of 26,000 units (buy side and sell side). These trades of the Noticee involved reversal with the same counterparty within minutes, but with significant difference in buy and sell price.
ii. At 13:58:58 hrs on February 16, 2015, the Noticee placed a buy order for 13,000 units @ INR 16.65 per unit. The buy order of the Noticee got executed at 13:58:59 hrs against sell order placed by Komal Fakirchand Sharma at 13:58:59 hrs at the same rate and for the same quantity. At 14:31:20 on the same day, the Noticee placed a sell order for 13,000 units @ INR 42.3 per unit, which got executed with the same Adjudication order in respect of Lotwala Mikil Vijaykumar (HUF) in the matter of dealing in Illiquid Stock Options at BSE counterparty, Komal Fakirchand Sharma at 14:31:20 hrs at the same rate and for the same quantity.
iii. Trades executed by the Noticee in above contracts had significant difference in buy rates and sell rates considering that the trade/ position was reversed within few minutes.
iv. The Noticee’s trades generated artificial volume of 26,000 units, (buy side and sell side) which made up 100.00% of total market volume of the Noticee in the said contract.
v. Overall, the Noticee’s trades contributed to 26.26% of total volume in the said contract.
10.1.5. The buying of illiquid stock options by the Noticee and subsequent reversal trade with the same counterparty for the same quantity, within a short span of time with a significant difference in buy and sell value of stock options, where order time, order price and order quantity were matched by both the parties for both legs of the reversal trade, in itself, exhibits abnormal market behavior and defies economic rationality. I note from the above trading pattern that the Noticee has deliberately made blatant misuse of trading platform for creating artificial volume in the illiquid stock options.
10.1.6. The fact that the orders of the Noticee and the counterparty matched with such precision (considering that there was a perfect match of price, quantity and close proximity of time) indicates prior meeting of minds with a view to execute the reversal trades at a predetermined price. Since these trades were done in illiquid option contract, there was very little trading in the said contract (the Noticee contributed to 26.26% of the total trading volume in the contract) and hence, there was no price discovery in the strictest terms. The wide variation in prices of the said contracts, within a short span of time, is a clear indication that there was predetermination in the prices by the counterparties while executing the trades. I note that no justifiable rationale has been given for entering into such transactions by the Noticee as the behavior exhibited by the Noticee defies the logic and basic economic sense.
10.1.7. The Noticee has contended that the alleged trades were carried out on the anonymous trading platform of BSE under supervision of the BSE. In this regard, I note that while the trading happened within the anonymous trading platform of BSE under supervision of the BSE, however, considering the precision at which the reversal transactions had taken place, the exact matching of price with huge price variations, I am of the view that it will be too naïve to hold that just because these transactions were executed through exchange trading platform, within the applicable limits, such trades were genuine. Such conclusion would be over-looking the prior meeting of minds involving synchronization of buy and sell order w.r.t. the transactions entered into by the Noticee with its counterparty and such reversal trading is clearly in violation of the transparent norms of trading in the securities market. In view of the above observations, I hold that the said transactions executed by the Noticee in the said Stock Option contract were non-genuine trades, in which positions were reversed within a small time gap with prior meeting of mind between the parties to the trade.
10.1.8. 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 decided on February 08, 2018 held 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 the PFUTP Regulations. The Apex Court also held 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 overlooking 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.”
10.1.9. Additionally, the Hon’ble SAT in its judgment dated September 14, 2020 in the matter of Global Earth Properties and Developers Pvt. Ltd. vs SEBI (Appeal No. 212 of 2020) relied upon the aforesaid judgment of the Hon’ble Supreme Court and held that:
“…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.”
10.1.10. 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 entity on the same day, which are non-genuine in nature and have created false or misleading appearance of trading in terms of artificial volumes.
10.1.11. In the instant matter, I note that though direct evidence regarding meeting of minds or collusion of the Noticee with the counterparty is not forthcoming, the trading behavior of the Noticee, as detailed earlier, makes it clear that the aforesaid non-genuine trades could not have been possible without meeting of minds at some level. In this context, I deem it appropriate to refer to the order dated July 14, 2006 passed by Hon’ble SAT, in the case of Ketan Parekh vs SEBI (Appeal no. 2/2004), wherein, Hon’ble SAT has held 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.”
10.1.12. Further, I would like to rely on the judgement of Hon’ble Supreme Court passed in the case of SEBI vs. Rakhi Trading Private Ltd. (supra), wherein the Apex Court held 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 held 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 from 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.
10.1.13. In line with the above judgments 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 reversal of 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 through non-genuine trades.
10.1.14. In this regard, I would also like to rely on the judgment of Hon’ble Supreme Court in the matter of SEBI vs. Rakhi Trading Private Ltd. (supra), wherein the Apex Court held that:
“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.”
10.1.15. The observations made in the aforesaid judgments apply to the facts and circumstances of the present case. Therefore, applying the ratio of the above judgments, I am convinced that the execution of trades by the Noticee in the illiquid options segment with such precision in terms of order placement time, quantity and price and also the fact that the transactions were reversed with the same counterparty clearly indicates a prior meeting of mind with a view to execute the reversal trade at a pre-determined price. Such trading also involves an act amounting to manipulation of the price of the security in the sense that the price has been artificially and apparently prefixed. The price does not at all reflect the value of the underlying asset. It is also a transaction without any intention of performing it and without any intention of effecting a change of ownership of such securities, ownership being understood in the limited sense of the rights in the contract. By synchronization and reversal trades, as has been carried out by the Noticee in the instant case, the price discovery system has been affected. Except the parties who have pre-fixed the price, nobody is in the position to participate in the trade. Therefore, it has an adverse impact on the fairness, integrity and transparency of the stock market.
10.1.16. Therefore, I am inclined to note that the 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 the same are manipulative, deceptive in nature.
10.1.17. In view of above, I conclude that the Noticee had violated the provisions of Regulations 3 (a), (b), (c), (d), 4 (1) and 4 (2) (a) of PFUTP Regulations, 2003.
10.2. ISSUE II: If yes, whether the Noticee is liable for monetary penalty under Section 15HA of the SEBI Act?
10.2.1. 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 the contract ‘HPCL15FEB600.00CE’ where the trades executed by the Noticee during the Investigation Period in the said contract were non-genuine trades.
10.2.2. 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. 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. The trading of the Noticee in the instant matter was abnormal and was clearly 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 cannot be tolerated and needs to be dealt with strictly.
10.2.3. The trading behavior of the Noticee confirms that such trades were not normal and wide variation in prices of the trades in the same contract in a short span of time without any basis for such wide variation, all indicate that the trades executed by the Noticee were non-genuine trades and being non-genuine, created an appearance of artificial trading volumes in respective contract. In view of the above, I find that the allegation of violation of regulations 3(a), (b), (c), (d), 4(1) and 4(2)(a) of PFUTP Regulations, 2003 by the Noticee stands established.
10.2.4. The Hon’ble Supreme Court of India in the matter of SEBI vs. Shri Ram Mutual Fund [2006] 68 SCL 216(SC) held that:-
“In our considered opinion, penalty is attracted as soon as the contravention of the statutory obligation as contemplated by the Act and the Regulations is established and hence the intention of the parties committing such violation becomes wholly irrelevant…”
10.2.5. I find that the Noticee by indulging in execution of reversal trades in Stock Options with same entity on the same day, 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), (b), (c), (d), 4(1), and 4(2)(a) of the PFUTP Regulations, 2003. Accordingly, I am convinced that it is a fit case for imposition of monetary penalty on the Noticee under the provisions of section 15HA of the SEBI Act, 1992 which read as under.
“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”
10.3. ISSUE – III: If so, what quantum of monetary penalty should be imposed on the Noticee?
10.3.1. While determining the quantum of monetary penalty under Section 15HA of the SEBI Act, I have considered the factors stipulated in Section 15-J of the SEBI Act, which reads as under:
“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.”
10.3.2. I observe that the SCN does not quantify any disproportionate gains or unfair advantage, if any, made by the Noticee and the losses, if any, suffered by the investors due to such violations on part of the said Noticee. However, I note that the Noticee had entered into non-genuine trades, which created an appearance of artificial trading volumes in respective contract at pre-meditated prices.
10.3.3. Considering, the facts of the matter as discussed earlier, I am of the view that imposition of minimum penalty as prescribed under Section 15HA of the SEBI Act would be commensurate for the present matter.
ORDER
11. 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 Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties) Rules, 1995, I hereby impose following penalty under section 15HA of the SEBI Act, 1992 on the Noticee:
| Name of the Noticee | Violation provisions | Penalty |
| LOTWALA MIKIL VIJAYKUMAR (HUF) (PAN: AABHL7830G) | Regulations 3(a), (b), (c), (d), 4(1) and 4(2)(a) of PFUTP Regulations, 2003 |
INR. 5,00,000/-
(Rupees Five Lakh only) |
13. The Noticee shall remit / pay the said amount of penalty within 45 days of receipt of this order either by way of:
(i) Demand Draft in favor of “SEBI – Penalties Remittable to Government of India”, payable at Mumbai, and the said Demand Draft should be forwarded to the Division Chief, Enforcement Department – 1 (EFD 1), Division of Regulatory Action – 4 (DRA 4), SEBI Bhavan, Plot No. C4-A, ‘G’ Block, Bandra Kurla Complex (BKC), Bandra (East), Mumbai – 400051. The Noticee shall provide the following details while forwarding Demand Draft/ payment information:
| Sl. No. | Particulars | Details |
| 1. | Name of the Case / Matter | |
| 2. | Name and PAN of the Payee | |
| 3. | Date of Payment | |
| 4. | Amount Paid | |
| 5. | Transaction Number | |
| 6. | Bank Name and Account Number | |
| 7. | Purpose of Payment | Payment of penalty under AO proceedings |
(ii) Payment can also be made online by following the below path at SEBI website, i.e. www.sebi.gov.in on the following path, by clicking on the payment link:
ENFORCEMENT -> Orders -> Orders of AO -> PAY NOW
14. 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, 1992 for realization of the said amount of penalty along with interest thereon, inter alia, by attachment and sale of movable and immovable properties.
15. In terms of the provisions of Rule 6 of the Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties) Rules, 1995, a copy of this order is being sent to the Noticee namely, LOTWALA MIKIL VIJAYKUMAR (HUF) (PAN: AABHL7830G) and also to the Securities and Exchange Board of India, Mumbai.
DEENA VENU SARANGADHARAN
ADJUDICATING OFFICER
Date: December 08, 2021
Place: Mumbai
