A monetary penalty imposed on Noticee for conducting non-genuine trades and for violation of PFUTP Regulations, 2003 – THE SECURITIES AND EXCHANGE BOARD OF INDIA
A monetary penalty imposed on Noticee for conducting non-genuine trades and for violation of PFUTP Regulations, 2003 – THE SECURITIES AND EXCHANGE BOARD OF INDIA  The Noticee Manoharlal Wadhwani HUF was found to be involved in reversal trade of shares and this made erroneous trading in stock options this made the noticee   liable for violating  section 15-I of SEBI act,1992 and PFUTP regulations,2003, and a monetary penalty was imposed on noticee  by the adjudicating officer RAM RUDRA MURARI (Order/RM/RV/2021-22/14710) The background of the case is SEBI detected a large-scale shift of trades in the Stock Options of the Bombay Stock Exchange that lead to the creation of artificial volume in the stock options segment. An investigation was conducted and it was found that a total of 2,91,643 trades comprising 81.38% of all the trades executed in the Stock  Segment at the BSE during the investigation period were trades that involved a shift of buy and sell positions by the clients and counterparties in a contract and the noticee was found suspicious because reversal trades made by him comprised of the significant difference without much correctness for the change in the contract price. this resulted in the generation of artificial volumes and leading to allegations against the noticee for violation of the provisions of regulations 3(a),(b),(c),(d) and regulations 4(1),4(2)(a) of the SEBI regulation, 2003. The case was decided by the adjudicating officer and It was found out that when dealing with the stock option contracts at BSE during the Investigation Period, the Noticee had committed reversal trades that were non-genuine and this had resulted in a generation of artificial volume in stock options contracts at BSE. Reversal trades are those trades in which an entity shifts 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 considered to be non-genuine as they are not conducted in the normal course of trading, lack basic trading rationale, lead to a false or misleading appearance of trading in terms of generation of artificial volumes and hence these trades are deceptive and manipulative and from the pattern of the trades, it was found that there was a prior meeting of minds to execute the reversal trades at a predetermined price. Since these trades were conducted in illiquid option contracts. And from direct evidence, it was concluded that the Noticee had a pre-deal with the counterparty and is known to him because the behavior of the Noticee confirms that the aforesaid non-genuine trades cannot be made possible without a meeting of minds at some point in time. From the investigation and the evidence, the officer finds the Noticee liable for monetary penalty under the provisions of section 15HA of the SEBI Act and therefore the Noticee indulged in the execution of reversal trades in stock options on BSE in the Investigation Period which was non-genuine and created a false and misleading appearance of trading in terms of artificial volumes in stock options, leading to violation of regulation 3(a), (b), (c), (d), 4(1) and 4(2)(a) of PFTUP Regulations, 2003.
BEFORE THE ADJUDICATING OFFICER SECURITIES AND EXCHANGE BOARD OF INDIA ADJUDICATION ORDER NO.: Order RM RV 2021 22 14710 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 INDIARULES In respect of: Manoharlal Wadhwani HUF PAN: AAFHM9497L In the matter of dealings in Illiquid Stock Options at BSE Securities and Exchange Board of India observed large scale reversal of trades in the Stock Options segment of the Bombay Stock Exchangeleading to the alleged creation of artificial volume in the stock options segment. In this regard SEBI conducted an investigation into the trading activity in the illiquid Stock Options segment at the BSE for the period April 01 2014 to September 30 2015 hereinafter referred to as “Investigation Period”). It was observed during the course of investigation that a total of 2 91 643 trades comprising 81.38% of all the trades executed in the Stock Options Segment at the BSE during the investigation period were trades which involved reversal of buy and sell positions by the clients and counterparties in a contract on the same day. It was observed that Mr. Manoharlal Wadhwani HUFwas one such client whose reversal trades involved squaring off open positions with a significant difference without any basis for such change in the contract price. The aforesaid reversal trades allegedly resulted into Adjudication Order in respect of Manoharlal Wadhwani HUF in the matter of dealings in Illiquid Stock Options at BSE generation of artificial volumes leading to allegations that the Noticee had violated the provisions of regulations 3(a)(c)and regulations 4(1) 4(2)(a) of the SEBI Regulations 2003 read with rule 3 of the SEBI Rules 1995 hereinafter referred to as “Adjudication Rules”) vide order dated April 30 2021 to inquire into and adjudge under section 15HA of the SEBI Act against the Noticee for the alleged violation of the aforesaid provisions of PFUTP Regulations 2003. SHOW CAUSE NOTICE REPLY AND HEARING 4. A PTA RRM RV OW 2021 0000016993 1 dated July 30 2021was 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 on the Noticee under Section 15HA of the SEBI Act for the violations alleged to have been committed by the Noticee. 5. The SCN issued to the Noticee inter alia mentioned alleged the following: 5. 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 through 2 Adjudication Order in respect of Manoharlal Wadhwani HUF in the matter of dealings in Illiquid Stock Options at BSE trades in 1 unique contract which led to generation of alleged artificial volume of 53250 units. These trades of the Noticee involved reversal with the same counterparty on the same day but at different prices. 7. A summary of dealings of Noticee in ‘GRSM15APR3300.00PE’ Stock Options contracts in which the said Noticee allegedly executed reversal trades during the investigation period is … .” as follows: Summary of dealings in contracts wherein the Noticee executed reversal trades Contract Name of Artificial e During the investigation it was found that Noticee executed 1 trade reversal through 2 non genuine transactions on 25 03 2015 and with same counter party i.e PRAYASH SECURITIES PVT LTD. b) While dealing in the said contract on 25 03 2015 at 13:12:05.69 hrs the Noticee entered into a buy trade with counterparty PRAYASH SECURITIES PVT LTD for Adjudication Order in respect of Manoharlal Wadhwani HUF in the matter of dealings in Illiquid Stock Options at BSE 26625 units at Rs. 2 per unit. At 13:12:11:05 hrs the Noticee entered into a sell trade with the same counterparty for 26625 units. c) It was also found that during investigation period Noticee had only traded in one contract i.e. GRSM15APR3300.00PE therefore 100% of trade of the Noticee was in the contract of GRSM15APR3300.00PE itself. d) The Noticee’s trades while dealing in the above said contract during the investigation period allegedly generated artificial volume of 53250 units which made up 36.35 % of total market volume in the said contract during this period. 9. In view of the foregoing it is alleged that Noticee by indulging in execution of non genuine reversal of trades in Stock Options with same entities on the same day created false and misleading appearance of trading in stock options and therefore allegedly violated Regulation 3(a)(c)4(1) 4(2)(a) of PFUTP Regulations 2003. was received. 6. The SCN was served on the Noticee via Speed Post Acknowledgement Due “SPAD”) and was delivered on August 7 2021. However no reply to the SCN 7. In the interest of natural justice and in terms of the Adjudication Rules the Noticee was provided with an opportunity of personal hearing in the matter on September 23 2021 at 3 PM through the online Webex platform. Noticee vide reply email dated September 23 2021 before the Hearing attached scan of PAN Card of Authorised Representativeand reply dated September 20 2021. Noticee vide aforesaid reply submitted the Adjudication Order in respect of Manoharlal Wadhwani HUF in the matter of dealings in Illiquid Stock Options at BSE a. The transaction of Stock Option entered into by him during the FY 2014 15 as per his knowledge was carried out through proper channel and proper means and the gain realized also received through proper Banking Channel. b. Referring to point no.12 of the SCN he stated that he not aware of the Settlement Mechanism of SEBI and hence unable to take any decision. 8. During the course of the hearing the AR reiterated the submissions made by the Noticee in his reply dated September 20 2021. 9. During the hearing AR was briefed on the availability of the Settlement Mechanism in the public domain and was advised to file the application by before October 5 2021. He was given time till September 30 2021 for filing of further documents if any. However neither the application for Settlement nor any further document was received by SEBI by the stipulated date. CONSIDERATION OF ISSUES AND FINDINGS 10. I have taken into consideration the facts and circumstances of the case the material documents made available on record and the submissions of the Noticee. The issues that arise for consideration in the instant case are : a) Whether the Noticee has violated the provisions of Regulations 3(b) c) 4(1) and 4(2)(a) of PFUTP Regulations 2003 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 11. With respect to the alleged violations in the instant matter I note that it is pertinent to refer to the relevant provisions of the PFUTP Regulations 2003 which are reproduced as follows: Adjudication Order in respect of Manoharlal Wadhwani HUF in the matter of dealings in Illiquid Stock Options at BSE 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 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 6[manipulative] fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following namely : in the securities market a) indulging in an act which creates false or misleading appearance of trading Adjudication Order in respect of Manoharlal Wadhwani HUF in the matter of dealings in Illiquid Stock Options at BSE 12. I note that the allegation against the Noticee is that while dealing in the stock option contracts at BSE during the Investigation Period the Noticee had executed reversal trades which were allegedly non genuine trades and the same had resulted in generation of artificial volume in stock options contracts at BSE. Reversal trades are 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 alleged to be non genuine as they are not executed in the normal course of trading lack basic trading rationale lead to false or misleading appearance of trading in terms of generation of artificial volumes and hence are deceptive and manipulative. 13. I note from the trade log of the Noticee that the Noticee had traded in 1 unique contract in stock options segment of BSE during the Investigation Period. It is observed that the Noticee had executed 2 non genuine trades in 1 contract. I further note that the above mentioned trades of the Noticee had resulted in the creation of artificial volume of a total of 53250 units in the said 1 contract. The summary of the non genuine trades of the Noticee are as follows: Contract Name Rate No. of Rate No. of trades of in ₹) noticee in noticee in to total total volume in trades in volume in GRSM15APR3300.00PE 2.00 26625 17.00 26625 Adjudication Order in respect of Manoharlal Wadhwani HUF in the matter of dealings in Illiquid Stock Options at BSE 14. It is noted that the Noticee had executed non genuine trades in 1 contract wherein the percentage of non genuine trades of the Noticee to the total trades in the contract was 50%. Further the artificial volume generated by the Noticee in the contract amounted to a substantial 100% of total volume generated by him in the contract. It is also noted that artificial volume generated by the Noticee contributed 36.35% to the total volume from the market in the said contract. The non genuine trades executed by the Noticee in the above contract had significant difference between buy and sell rates considering that the trades were reversed on the same Upon perusing the trade log I note that the trades executed by the Noticee in the contract were squared up within a short span of time with the same counterparty. To illustrate on March 25 2015 at 13:12:05:658 the Noticee placed a buy limit order for 26625 units at a price of ₹2.00 per unit and the said order was matched with the sell limit orderof counterparty client PRAYASH SECURITIES PVT LTD. I note that the said sell limit order was placed at 13:12:05:697 i.e. after the entry of the buy limit order by the Noticee. I also note that there was no modification of either price or quantity by either the Noticee or the counterparty and the sell limit order of the Noticee got executed into trade immediately upon the entry of the buy limit order by the counterparty. Subsequently at 13:12:11:05 the Noticee placed a sell limit order for 26625 units at a price of ₹17 per unit and the said order was matched with the same counterpartywho placed a buy limit order for the same quantityand pricethe Noticee reversed the position with the same counterparty client with a significant price difference. Such a short span of time taken for reversing the trades in an illiquid stock option contract suggests the non genuineness of these trades executed by the Noticee. The fact that the orders of the Noticee and his counterparty matched with such precision indicates a prior meeting of minds with a view to execute the reversal trades at a predetermined price. Since these trades were done in illiquid option contracts there was very little trading in the said 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 determination in the prices by the counterparties while executing the trades. Therefore it is observed that the Noticee had indulged in reversal trades with his counterparty in the stock options segment of BSE and the same were non genuine trades. 16. I note that it is not a mere coincidence that Noticee could match his tradeswith the same counterparty with whom he had undertaken first leg of the respective trades. It indicates meeting of minds. In this context I would like to rely on the judgment of the Hon’ble Supreme Court of India in SEBI Vs Kishore R Ajmerawherein it was held that “…in the absence of direct proof of meeting of minds elsewhere in synchronized transactions the test should be one of preponderance of probabilities as far as adjudication of civil liability arising out of the violation of the Act or provision of the Regulations is concerned. The conclusion has to be gathered from various circumstances like that volume of the trade effected the period of persistence in trading in the particular scrip the Adjudication Order in respect of Manoharlal Wadhwani HUF in the matter of dealings in Illiquid Stock Options at BSE particulars of the buy and sell orders namely the volume thereof the proximity of time between the two and such other relevant factors. The illustrations are not exhaustive...” 17. The Hon’ble Supreme Court of India further held in the same matter that “…It is a fundamental principle of law that proof of an allegation levelled against a person may be in the form of direct substantive evidence or as in many cases such proof may have to be inferred by a logical process of reasoning from the totality of the attending facts and circumstances surrounding the allegations charges made and levelled. While direct evidence is a more certain basis to come to a conclusion yet in the absence thereof the Courts cannot be helpless. It is the judicial duty to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges allegations are founded and to reach what would appear to the Court to be a reasonable conclusion therefrom. The test would always be that what inferential process that a reasonable prudent man would adopt to arrive at a conclusion.” 18. 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 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 find it pertinent to refer to the Hon’ble SAT Order dated July 14 2006 in the matter of Ketan Parekh Vs SEBIwherein the 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.” 19. In the matter of SEBI Vs Rakhi Trading Pvt Ltd the Hon’ble Adjudication Order in respect of Manoharlal Wadhwani HUF in the matter of dealings in Illiquid Stock Options at BSE Supreme Court of India held that “…Considering the reversal transactions quantity price and time and sale parties being persistent in number of such trade transactions with huge price variations it will be too naive to hold that the transactions are through screen based trading and hence anonymous. Such conclusion would be over looking the prior meeting of minds 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....” 20. 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 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.” 21. The trading behavior of the Noticee which confirms that the trades executed by the Noticee were not normal the wide variation in prices of the trades in the same contract in a short time without any basis for such wide variation all indicate that the trades executed by the Noticee were not genuine trades and being non genuine created an appearance of artificial trading volumes in respective contracts. In view of the aforesaid I find that the allegation of violation of regulations 3(a) (c) 4(1) and 4(2)(a) of PFUTP Regulations 2003 by the Noticee stands established. The Hon’ble Supreme Court of India in the matter of SEBI Vs Shri Ram Mutual Fund 68 SCL 216(SC) held that “…In our considered opinion penalty is attracted as soon as the contravention of the Adjudication Order in respect of Manoharlal Wadhwani HUF in the matter of dealings in Illiquid Stock Options at BSE 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..” 22. In view of the aforesaid judgment of the Hon’ble Supreme Court I am convinced that in the instant matter the Noticee is liable for monetary penalty under the provisions of section 15HA of the SEBI Act which reads as follows: Penalty for fraudulent and unfair trade practices 15HA. 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. 23. While determining the quantum of penalty under section 15 HA of the SEBI Act it is pertinent to consider the relevant factors stipulated in section 15J of the SEBI Act which reads as under : Factors to be taken into account while adjudging quantum of penalty 15J. While adjudging quantum of penalty under 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 Adjudication Order in respect of Manoharlal Wadhwani HUF in the matter of dealings in Illiquid Stock Options at BSE 15A to 15E clauses and of section 15F 15G 15H and 15HA shall be and shall always be deemed to have been exercised under the provisions of this section. 24. I observe that the material documents made available on record 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 Noticee has entered into 2 non genuine trades in 1 stock option contract during the investigation period. 25. Therefore I note that the Noticee indulged in execution of reversal trades in stock options on BSE in the Investigation Period which were non genuine and created false and misleading appearance of trading in terms of artificial volumes in stock options leading to violation of regulation 3(a) (c) 4(1) and 4(2)(a) of PFTUP Regulations 2003. ORDER 26. After taking into consideration all the facts and circumstances of the case the material documents made available on record including the submissions of the Noticee the factors mentioned in section 15J of the SEBI Act and in exercise of the power conferred upon me under section 15 I of the SEBI Act read with rule 5 of the Adjudication Rules I hereby impose a penalty of ₹5 00 000 on the Noticee viz. Mr. Manoharlal Wadhwani HUF under section 15HA of the SEBI Act for the violation of regulation 3(a) (c) 4(1) and 4(2)(a) of PFTUP Regulations 2003. I am of the view that the said penalty is commensurate with the lapse omission committed by the Noticee. 27. The Noticee shall remit pay the said amount of penalty within 45days of the receipt of this order either by way of Demand Draftin favour of “SEBI Penalties Remittable to Government of India” payable at Mumbai or through online payment facility available on the website of SEBI i.e. www.sebi.gov.in i.e. Adjudication Order in respect of Manoharlal Wadhwani HUF in the matter of dealings in Illiquid Stock Options at BSE ENFORCEMENT Orders Orders of AO PAY NOW. 28. The Noticee shall forward the aforesaid DD payment confirmation details to the Division Chief Enforcement Department I FDM2 Division SEBI Bhavan Plot No.C 7 ‘ G’ Block Bandra Kurla Complex BandraMumbai 400 051 and also send an email to tad@sebi.gov.in with the following detail: Case Name Name of the ‘Payer Noticee’ along with PAN of Noticee Date of Payment Amount Paid Transaction No. Bank Name and Account No. Purpose of payment 29. In the event of failure to pay the aforesaid amount of penalty within 45 days of receipt of this Order recovery proceedings may be initiated under section 28A of the SEBI Act for realization of the said penalty amount along with interest thereon inter alia by attachment and sale of movable and immovable properties. 30. In terms of Rule 6 of the Adjudication Rules a copy of this order is sent to the Noticee and SEBI. DATE: January 7 2022 PLACE: MUMBAI Adjudication Order in respect of Manoharlal Wadhwani HUF in the matter of dealings in Illiquid Stock Options at BSE RAM RUDRA MURARI ADJUDICATING OFFICER 