MBL AND COMPANY LIMITED versus SECURITIES AND EXCHANGE BOARD OF INDIA on 26 May 2022

1. The Whole Time Member[1] of the Securities and ExchangeBoard of India[2] passed an order on 28 February 2020, in exercise of thejurisdiction under Sections 11, 11(4) and 11B read with Section 19 of theSecurities and Exchange Board of India Act 1992[3], restraining theappellant from buying, selling or otherwise dealing in securities in itsproprietary account, directly or indirectly, for a period of four years fromthe date of the order.

2. On 17 March 2020, the adjudicating officer exercised theirpowers under Section 15 I and imposed a mandatory penalty of rupeesfifteen lakhs; Rupees ten lakhs under Section 15HA for violation of theprovisions of Sections 12A(a),(b) and (c) of the SEBI Act read withRegulations 3 and 4 of the SEBI (Prohibition of Fraudulent and UnfairTrade Practices relating to Securities Market) Regulations 2003[4] andRupees five 5 lakhs under Section 15 HB of the SEBI Act for violatingthe Code of Conduct for Stock Brokers read with the SEBI (StockBrokers and Sub Brokers) Regulations 1992.

3. During the pendency of the proceedings before the SecuritiesAppellate Tribunal[5], the appellant was directed to deposit an amount ofrupees two crores with SEBI, conditional upon which the order dated28 February 2020 passed by the WTM was directed to remain stayed.

4. The WTM arrived at a finding that the appellant had engagedin manipulative trades as a consequence of which the share price of acompany by the name of Gujarat NRE Coke Limited came to bemanipulated. Out of 5,041 self-trades between 15 December 2011 and24 February 2012, it has been noted that 4,327 self-trades for 11,828shares were executed through the same terminal ID. The specific findingin this regard is contained in paragraph 23.9 of the order of the WTM,which is extracted below:

1 “WTM”

2 “SEBI”

3 “SEBI Act”

4 “PFUTP Regulations’’

5 “SAT”

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“23.9. In this regard, I note that out of 5,041 self-trades, 4,327self-trades for 11,828 shares were executed through the sameterminal ID/user ID i.e. buy and sell order was placed by sameperson/dealers manually. Further, from 5,042 self-trades, thepositive LTP contribution was Rs. 289.35 i.e. 12.64% of totalmarket positive LTP. I also note that MBL accepted that singleshare self-trade was placed by it though according to it, to checkthe current price of GNCL by impermissible means. Thus, I amof the view that MBL had intentionally, through manual trading,placed the single share self-trade from same terminal to increasethe price of GNCL for its own benefit.”

5. The WTM has also observed as follows:

“24. From the above, I note that during the period December 15,2011 to February 24, 2012, MBL had continuously placed singleshare buy order immediately after placing sell order of largequantity at a price higher than the last traded price. These singleshare order got matched with its own sell order of large quantityresulted into self-trade of 1 share. This single share self-tradeshad increased the price of shares of GNCL, which benefit MBL.Thus, MBL had artificially manipulated the price of GNCL throughsingle share self-trade. Hence, self-trades executed by MBL areintentional self-trades with an intention to manipulate price of thescrip of GNCL.

25. Considering the order placing pattern and other circumstancesmentioned at paragraph 23 and 24 above, I am of the view thatself-trades had impact on the price of the shares of GNCL,however, self-trades were so designed to appear that the volumecreation is negligible but were in fact motivated by the manipulativeintention of creation of false price ascension. Thus, preponderanceof probability is that these trades are intentional self-trades.Therefore, I conclude that the impugned self-trades by MBL areintentional and manipulative self-trades.

26. MBL contended that in order to check the price of the scrip,MBL placed a single share buy order and these insignificantquantum of trading could not impact either the price or volume ofthe scrip. In this regard, I note that single share buy order placedby MBL got matched with the already available large sell order of MBL at a price higher than the last traded price thereby establishingthe higher LTP. Further, such order placement pattern of MBLwere observed in large number of MBL self-trades and the samewere repetitive in nature. I note that due to such trading pattern,MBL had positive LTP contribution of Rs. 289.35 through 5,041self-trades. Further, I also note the observation of Hon’bleSecurities Appellate Tribunal (SAT) in order dated February 25,2020 in the matter of Mrs. Kalpana Dharmesh Chheda andothers Vs. SEBI that “…. when the appellants were holding alarge number of shares, their selling miniscule quantity ofone share each on more than four dozen occasions is nothingbut a strategy of manipulation and unfairly benefiting byoffloading the entire shareholding after raising the price toconsiderable levels…..”. Though the said observation of theHon’ble SAT was rendered in the context of manipulative tradingpattern adopted by single share transaction, the same equally holdsgood in the present factual matrix of the case as well, in respectof manipulative self-trades through single share transaction. Thus,in view of the observation of Hon’ble SAT, I am of the view thatmanipulation in the scrip can be done by single share orderplacement method also, which has precisely happened in thepresent matter, in such a scenario, volume created by such trades/self-trades in the scrip is irrelevant/immaterial. Thus, consideringat the pattern of trading done by MBL and the fact that MBL hadderived benefit through that particular scheme or nature of trading,I am of the view that the trading pattern adopted by MBL is of amanipulative and unfair nature and would fall within the ambit ofthe PFUTP Regulations. Hence, I do not find any merit in thesubmission of MBL that single share order placement could notimpact either the price or volume of the scrip.”

6. The above findings have been affirmed in appeal by the SAT,by its impugned order dated 13 May 2022.

Submissions of Counsel

7. In the present case, it has been submitted on behalf of theappellant by Dr Abhishek Manu Singhvi, senior counsel, that:

(i) The appellant had executed trades on fifty days between15 September 2011 and 9 January 2015; A

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A(ii)The net gain which was involved is an amount of Rs 3.45per share; and

(iii) Over the entire duration of fifty days when the trades werecarried out, the total profit which has been generated wouldbe in the amount of Rs 2.61 lakhs, while the volume ofBtrade represents only 0.04 per cent of the total market valuewhich is spread over the abovementioned trading days;

(iv) In this backdrop, the imposition of the bar from trading fora period of four years is disproportionate and harsh;

(v) The impact of the ban would seriously affect the employeesCof the appellant. The appellant has 450 employees;

(vi) A stay was in operation from 28 February 2020 and thedirection to deposit rupees two crores during the pendencyof appeal before the SAT was duly complied with; and

D(vii)Whereas the adjudicating officer imposed a penalty ofrupees fifteen lakhs, the WTM has proceeded to bar theappellant from carrying on trading in its proprietary accountfor a period of four years, which is disproportionate.

8. Mr Pratap Venugopal, counsel appearing on behalf of SEBI, on the other hand, submitted that the imposition of the ban by the WTM isEnot relatable to the extent of the gain which has been made by theappellant. The order passed by the WTM, it has been urged, is distinctfrom the penalty which has been imposed by the adjudicating officer. Inthe present case, it has been submitted that the trades, as noted in theorder of the WTM, were carried out from the same terminal ID andFthere is also a finding of fact that the trading was done manually and notelectronically. Hence, it has been observed that there was an intentionalmanipulation in the price of the company in question. This court, it hasbeen urged, ought not to interfere with a penalty so long as it is notdisproportionate or arbitrary, as the precedents of this court indicate.

GAnalysis

9. In the present case, the order of the WTM as well as of theSAT notes that the modus operandi of the appellant was to place ahuge sale order at a price higher than the last traded price of the companyand thereafter to make a self-trade of only one share for that higherHprice, thus, establishing a new higher LTP. This has been depicted in the following table, which is contained in the order of the WTM and in theimpugned order of the SAT:

10. The WTM found the appellant guilty of violating provisions ofSection 12A (a), (b), (c)[6] of the SEBI Act read with Regulations 3 (a),3(b), 3(c), 3(d), 4(1), 4(2)(a), 4(2) (e) and 4(2)(g)[7] of the PFUTP

6 12-A. Prohibition of manipulative and deceptive devices, insider trading andsubstantial acquisition of securities or control.—No person shall directly orindirectly—

(a) use or employ, in connection with the issue, purchase or sale of any securities listedor proposed to be listed on a recognised stock exchange, any manipulative or deceptivedevice or contrivance in contravention of the provisions of this Act or the rules or theregulations made thereunder; (b) employ any device, scheme or artifice to defraud in connection with issue or dealingin securities which are listed or proposed to be listed on a recognised stock exchange;(c) engage in any act, practice, course of business which operates or would operate asfraud or deceit upon any person, in connection with the issue, dealing in securitieswhich are listed or proposed to be listed on a recognised stock exchange, in contraventionof the provisions of this Act or the rules or the regulations made thereunder; 7 Regulation 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 orproposed to be listed in a recognized stock exchange, any manipulative or deceptive A

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ARegulations. It is in this backdrop that the WTM has come to theconclusion that the manipulation which was conducted by the appellanthas to be analyzed not only from the narrow perspective of the gainwhich has been caused to the appellant, but, on the breach of the integrityof the securities market.

B11. In a judgment of a three-Judge Bench of this Court inAdjudicating Officer, Securities and Exchange Board of India vBhavesh Pabari[8], it has been observed that:

“34. This Court, in the exercise of its jurisdiction under Section15-Z of the SEBI Act, cannot go into the proportionality andCquantum of the penalty imposed, unless the same is distinctlydisproportionate to the nature of the violation which makes itoffensive, tyrannous or intolerable. Penalty by the very nature ofthe provision is penal. We can interfere only where the quantumis wholly arbitrary and harsh which no reasonable man wouldaward. In the instant case, the factual findings are not denied and,Dthus, we are not inclined to intermeddle with the quantum of penalty.The penalty imposed is just, fair and reasonable and, thus, upheld.”

The above observations make it clear that the imposition of apenalty is subject to interference under Section 15Z of the SEBI Act device or contrivance in contravention of the provisions of the Act or the rules or theEregulations made there under;

(c) employ any device, scheme or artifice to defraud in connection with dealing in orissue of securities which are listed or proposed to be listed on a recognized stockexchange; (d) engage in any act, practice, course of business which operates or would operate asfraud or deceit upon any person in connection with any dealing in or issue of securitieswhich are listed or proposed to be listed on a recognized stock exchange in contraventionFof the provisions of the Act or the rules and the regulations made there under.Regulation 4:- Prohibition of manipulative, fraudulent and unfair trade practices(1) Without prejudice to the provisions of regulation 3, no person shall indulge in afraudulent or an unfair trade practice in securities.

(2) Dealing in securities shall be deemed to be a fraudulent or an unfair trade practice ifit involves fraud and may include all or any of the following namely:

G(a) indulging in an act which creates false or misleading appearance of trading in thesecurities market;….

(e) any act or omission amounting to manipulation of the price of a security; ….

(g) entering into a transaction in securities without intention of performing it orwithout intention of change of ownership of such security.”H8 (2019) 5 SCC 90

only where the quantum is found to be wholly arbitrary and harsh ordistinctly disproportionate to the nature of the violation.

12. In the present case, the WTM, while imposing an order ofdebarment, has specifically applied her mind to the issue as regards theimpact of such a manipulation. While dealing with this aspect, the WTMhas observed that the manipulation of the price of scrips seriouslyimpinges upon other counter parties in the securities market. In otherwords, the impact of a manipulation which is carried out by a participantin the securities market cannot be assessed only in terms of the gainwhich has been caused to the participants themselves, but in terms ofthe wider consequences of the action on the securities market.

13. In N. Narayanan v. SEBI[9], this Court observed that Section12-A of the SEBI Act read with Regulations 3 and 4 of the PFUTPRegulations specifically aim to curb market manipulations which canhave an adverse effect on investor confidence and the healthy growthof the securities market. This Court made the following observations:

“33. Prevention of market abuse and preservation of marketintegrity is the hallmark of securities law. Section 12-A read withRegulations 3 and 4 of the 2003 Regulations essentially intendedto preserve “market integrity” and to prevent “market abuse”.The object of the SEBI Act is to protect the interest of investorsin securities and to promote the development and to regulate thesecurities market, so as to promote orderly, healthy growth ofsecurities market and to promote investors’ protection. Securitiesmarket is based on free and open access to information, theintegrity of the market is predicated on the quality and the manneron which it is made available to market. “Market abuse” impairseconomic growth and erodes investor’s confidence. Market abuserefers to the use of manipulative and deceptive devices, givingout incorrect or misleading information, so as to encourage investorsto jump into conclusions, on wrong premises, which is known tobe wrong to the abusers. The statutory provisions mentioned earlierdeal with the situations where a person, who deals in securities,takes advantage of the impact of an action, may be manipulative,on the anticipated impact on the market resulting in the “creationof artificiality”. The same can be achieved by inflating the A

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Acompany’s revenue, profits, security deposits and receivables,resulting in price rise of the scrip of the company. Investors arethen lured to make their “investment decisions” on thosemanipulated inflated results, using the above devices which willamount to market abuse.”

B14. The securities market deals with the wealth of investors. Anysuch manipulation is liable to cause serious detriment to investors’ wealth.In this backdrop, the order which has been passed by the WTM cannotbe regarded as disproportionate so as to result in the interference of thisCourt in the exercise of its jurisdiction under Section 15Z of the SEBIAct. Moreover, the WTM has prohibited the appellant from participatingCin its proprietary account for a specified period, leaving it open to theappellant to continue operation in their broking account.

15. For the above reasons, we are not inclined to accede to thesubmissions which have been urged on behalf of the appellant. Theappeals shall stand dismissed.D

16. Pending application, if any, stands disposed of.

Nidhi Jain

Appeals dismissed.

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