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Judgment
M. T. Joshi, J
Aggrieved by the common impugned order dated July 26, 2021 passed by the learned Adjudication Officer (hereinafter referred to as ‘AO’) of the respondent Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) imposing a penalty of Rs. 20 lacs on the appellant BP Equities Pvt. Ltd. (hereinafter referred to as ‘BP Equities’), Rs. 15 lacs on the appellant Shaunak Jagdish Shah (hereinafter referred to as ‘Shaunak’) and Rs. 5 lacs on the appellant Jamson Securities Pvt. Ltd. (hereinafter referred to as ‘Jamson Securities’), the present appeals are preferred.
The learned AO found that the present appellants BP Equities and Shaunak have violated the provisions of Section 12A(a), (b) and (c) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as ‘SEBI Act’) read with Regulation 3(a), (b, (c), (d) and 4(1), 4(2)(a) and (g) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (hereinafter referred to as ‘PFUTP Regulations’). Additionally, it was also found the appellant BP Equities and appellant Jamson Securities have also violated the provisions of Regulation 9(f) of the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992 (hereinafter referred to as ‘Stockbrokers Regulations’).
The record would show that Ruchi Soya Industries Ltd. (hereinafter referred to as ‘the company’) went through the resolution plan approved by the National Company Law Tribunal, Mumbai (hereinafter referred to as ‘NCLT’). Thereafter through the resolution plan, the share of the company was reduced by 99%. The new promoters got shares in the ratio of 100:1 i.e. for every 100 shares in the company prior to the resolution plan these shareholders got 1 share each. Thus, new promoters holding became 98.87% which were under lock in period till February 15, 2021. The entire promoter holding was pledged. The remaining 1.13% stock was the only free float available in the market. It was an illiquid stock. Therefore, on January 27, 2020, it went under the Periodic Call Auction for illiquid stock and extension of pre-open session to all scrips as per relevant regulations.
Abnormal activities were noted by the respondent SEBI in the trading of the stocks, therefore, it conducted investigation in the trading commencing from January 27, 2020 to May 28, 2020 i.e. around five months. In these five months, while the opening price was Rs. 16.1, it went to Rs. 541.35. The present appellants were found to have used the pre-trades mechanism for 29 days in which they used to place orders far beyond the free float available and sometime even without there being sufficient margin for placing the order. All those orders were eventually deleted by the BSE Ltd. (hereinafter referred to as ‘BSE’). However, since those orders remained on the platform of the stock exchange for few seconds, according to SEBI, this was a practice of non-genuine trading and, therefore, the appellants have violated the provisions of PFUTP Regulations. The appellant BP Equities had the trades in its proprietary account while appellant Shaunak carried the trades through appellant Jamson Securities. Therefore, these two appellants were also found to be in violation of the Stockbrokers Regulations. Hence the present appeals.
We have heard Mr. P. N. Modi, the learned senior counsel with Ms. Kalpana Desai, Mr. Saurabh Bachhawat, Mr. Sahebrao Wamanrao Buktare, the learned counsel and Mr. Ravi Vijay Ramaiya, Chartered Accountant with Mr. Deepak Dhane, the learned counsel for the appellants and Mr. Akash Rebello, the learned counsel with Mr. Chirag Shah, Mr. Akash Jain, Ms. Daksha Kasekar, the learned counsel for the respondent.
The data collected by the respondent SEBI would show that these appellants had placed buy orders far greater than the available market float on 3 trading days and 14 trading days respectively. While available free float available in the market was 0.33 crore shares, the buy order quantity added by these appellants was 10.92 crore shares. Further, 96% orders of the appellant Shaunak and 42% orders of the appellant BP Equities were cancelled by the stock exchange’s system due to insufficient collateral. 4% orders were deleted by appellant Shaunak and 56% by BP Equities themselves immediately after placing of the orders. They however were visible on the stock exchange platform for more than 5 seconds. It was, therefore, found that all these orders were not genuine orders in these illiquid stocks.
Appellant BP Equities submitted before the respondent SEBI as well as before us that finding a good opportunity to purchase the shares, it has entered into placing the order through its dealers who were doing the jobbing during the relevant period. The dealers were not aware of the orders placed by the other dealers. As per SEBI’s own circular, the buy orders placed beyond the margin should not be included by the stock exchange system. Therefore, it was the fault of the stock exchange system. Alternatively, it was contended that merely because the order is shown pending maximum for a period of 20 seconds, it cannot be alleged that it created any mis-appearance. Even though the market supposed to be opened at 9:00:00 a.m. sharp, the order acceptance in all securities starts with some delay of few microseconds, therefore, some of the multiple orders used to be entered into the trading system and other orders ended up getting rejected by the system as the exchange has not started by that time. In all these circumstances, it wanted that the appeal be allowed.
The appellant Shaunak and appellant Jamson Securities filed a common reply. In fact appellant Shaunak is the son of one of the directors of appellant Jamson Securities. They submitted that the appellant Shounak could not purchase any shares despite buy orders remaining on the exchange system throughout the day. The last trading price of the scrip of the company before it was delisted on November 13, 2019 was Rs. 3.32. In view of the share capital reduction as approved by the NCLT, the price was expected to be Rs. 3.32 per share. On the next opening day on pro-rata basis, however, the scrip opened upon relisting was Rs. 16.10 on January 27, 2020. The appellant did not trade on that day in the trading. However, finding that the price was very less, the appellant in desperation started to recover the loss. The appellant in that desperation, tried to buy the shares of the company but failed to do so as he could not buy any shares.
Upon hearing both the sides, we find that there is no merit in the submission of the appellants. It is not the case of the appellants that they were not aware that the shares were illiquid or that free float was very limited. Despite this, they deliberately placed orders which they knew that would not be materialized. Similar is the case regarding the placing the order though no sufficient margin is already provided. Appellant BP Equities took shelter behind its dealers and some time in microsecond delay as detailed supra. It could have very well instructed it dealers as to who should place the orders and merely because there was allegedly some mismanagement from its own side in managing its own dealers, the exchange cannot be blamed for a delay of few microseconds. The learned counsel for the appellant has submitted that the case of delay in system was not dealt with by the learned AO. However, we find that in paragraph no. 40 of the order the same is specifically dealt with by the learned AO.
Learned counsel for the respondent relied on the ratio of M/s. Blue Peacock Securities Pvt. Ltd. vs. SEBI in Appeal No. 253 of 2018 decided on December 19, 2019 wherein this Tribunal’s finding is that continuously placing and dealing order in cash market was indicative of entering into non-genuine trades. In paragraph no. 13 of the said judgment, this Tribunal further held as under :-
“13. In this context, then the question is whether even if there is no other violation such as LTP violations, quantity limit violations, the strategy as described above and adopted by the appellants can be termed as deceptive according to Regulation 3(d) of the PFUTP Regulations, 2003. The answer to this question would require an examination of the volumes. Here, prima facie, we note that the volume of conversion of buy orders is generally in the range of 10 to 22% whereas conversion of sell orders is in the range of 56 to 100%. Though the appellants’ volumes as a percentage to the total market volume in no case exceeds 10% because of high liquidity in the identified scrips but the very fact that conversion of the buy orders is less than 1/5th (on the average) of the buy orders placed in the system does have the effect of displaying a larger order book than the actual one. By implication, if a number of traders adopt a similar strategy such a strategy would be disastrous for the market as the market would be far from being fair as it is expected to be. Therefore, it would be a tragedy of the commons, a self-defeating strategy and there is a need for regulations to appropriately capture such violations. The contention of the appellants that they have not violated the circuit filters or the quantity limits etc. are irrelevant since there are no allegations relating to the same nor any penalties imposed on those grounds.”
In the circumstances of the case, there is no merit in the appeals. Hence the following order :-
ORDER
Both the appeals are hereby dismissed without any order as to costs.
This order will be digitally signed by the Private Secretary on behalf of the bench and all concerned parties are directed to act on the digitally signed copy of this order. Certified copy of this order is also available from the Registry on payment of usual charges.