1. Securities and Exchange Board of India (hereinafter referred to as “SEBI”), conducted an investigation into the trading activity in illiquid Stock Options at Bombay Stock exchange (hereinafter referred to as “BSE”) for the period between April 1, 2014 to September 30, 2015 (hereinafter referred to as, “Investigation Period/IP”) after observing large scale reversal of trades in Stock Options segment of the BSE.

2. Pursuant to investigation, it was observed that during the investigation period, a total of 2,91,744 trades comprising 81.40% of all the trades executed in BSE Stock Options Segment were trades which involved reversal of buy and sell positions by the clients and counterparties in a contract. The reversal trades involved squaring off transactions, but with significant difference in the sell value and buy value of the transactions. The aforesaid reversal trades allegedly led to generation of artificial volumes.

3. Emery Tie-Up Pvt. Ltd (hereinafter referred to as “Noticee”) was one such client whose reversal trades involved squaring off transactions with significant difference in the sell value and buy value of the transactions. The aforesaid reversal trades allegedly resulted into generation of artificial volumes, leading to allegations that the Noticee had violated Regulation 3(a), (b), (c), (d) and Regulation 4(1), 4(2)(a) SEBI (Prohibition of Fraudulent and Unfair Trading Practices related to Securities Markets) Regulations, 2003 (hereinafter, referred to as “PFUTP Regulations, 2003”).

APPOINTMENT OF ADJUDICATING OFFICER

4. SEBI initiated adjudication proceedings and appointed the undersigned as Adjudicating Officer (hereinafter referred to as “AO”) under Section 15-I(1) of the Securities and Exchange Board of India Act,1992 (hereinafter referred to as “SEBI Act”) read with Rule 3 of the SEBI (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer) Rules, 1995 (hereinafter be referred to as the “Adjudication Rules”) vide order dated August 18, 2021 to inquire into and adjudge under Section 15HA of the SEBI Act, the alleged violations of the aforesaid provisions of the PFUTP Regulations, 2003, by the Noticee. The appointment of the AO was communicated vide communique dated September 30, 2021.

SHOW CAUSE NOTICE, REPLY AND HEARING

5. A Show Cause Notice with reference no. EAD-10/SM/AD/36106/1/2022 dated August 05, 2022 (hereinafter be referred to as, the “SCN”) was issued to the Noticee under Rule 4 of the Adjudication Rules read with Section 15I of the SEBI Act, to show cause as to why an inquiry should not be held against Noticee and penalty be not imposed against the Noticee under Section 15HA of the SEBI Act for the alleged violations of Regulations 3(a), (b), (c), (d), 4(1), and 4(2)(a) of the PFUTP Regulations, 2003 by Noticee.
 
6. In the aforesaid SCN, it was alleged that Noticee, by indulging in execution of aforesaid non-genuine reversal trades, had violated Regulations 3(a), (b), (c), (d), 4(1), 4(2)(a) of PFUTP Regulations,2003, which are reproduced as follows:

“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 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”

7. The SCN dated August 05, 2022 was served on the Noticee via digitally signed email dated August 08, 2022. The proof of service is on record.

8. The aforesaid SCN served to the Noticee indicated not only the nature and details of the violation alleged to have been committed by the Noticee but also intimated the Noticee regarding the SEBI Settlement Scheme, 2022 (hereinafter referred to as “SEBI Settlement Scheme”) framed by SEBI in the matter of Illiquid Stock Options. The intimation regarding settlement scheme given to the Noticee in the SCN is reproduced herein below:

“SEBI has framed the SEBI Settlement Scheme, 2022 pursuant to the Order dated May 13, 2022 passed by the Hon’ble Securities Appellate Tribunal (Annexure 5), wherein the following directions were issued to SEBI:

“17. We are, thus, of the opinion that SEBI should reconsider and seriously give a thought in coming out with a fresh scheme under Clause 26 of the Settlement Regulations, 2018. Such scheme can be a onetime scheme for this class of person. The terms of settlement should be attractive so that it could attract the noticees / entities to come forward and settle the matter which will ameliorate the harassment of penalty proceedings to the noticees and at the same time would help to clear the backlog of these pending matters before various AOs.” (Emphasis Supplied)

In compliance with the above directions of the Hon’ble Securities Appellate Tribunal, SEBI has introduced a onetime settlement scheme called the SEBI Settlement Scheme, 2022, in terms of Regulation 26 of the Securities and Exchange Board of India (Settlement Proceedings) Regulations, 2018 in the matter of Illiquid Stock Options. The said scheme proposes payment of Settlement Amount as per the details given below:

S No	Number               of Contracts*	Settlement                Amount (Rs.)
1	1-5	1,00,000/-
2	6-50	2,00,000/-
3	51 and above	5,00,000/-base amount + 10,000 per contract

* You may refer to the relevant Annexure/table of the SCN which contains a summary of the contracts you entered to determine the applicable slab for settlement.

The period of the SEBI Settlement Scheme, 2022 will commence on August 22, 2022 and will close on November 21, 2022, so as to provide an opportunity for settlement to the entities who have executed reversal trades in the stock options segment of BSE during the period April 01, 2014 to September 30, 2015, against whom enforcement proceedings have been initiated and are pending. In case you wish to avail the benefit of the said Scheme, you may access the details of the said Scheme, which would be available on the website of SEBI i.e. www.sebi.gov.in, during the said period. Necessary application for settlement may be filed within the validity period of the scheme and payment of the settlement amount shall be made online. Additionally, for any clarification in regard to settlement scheme, you may refer to the FAQs at SEBI website or send email to scheme2022@sebi.gov.in.
In case you do not wish to avail of the facility under the SEBI Settlement Scheme, 2022, the adjudication proceedings in respect of the allegations contained in Part A of the SCN shall resume. Accordingly, an inquiry shall be held against you in terms of Adjudication Rules read with section 15-I of the SEBI Act, and penalty, if any, shall be imposed under section 15HA of the SEBI Act. In such case, you are called upon to file your reply within 30 days of receipt of this Show Cause Notice”

9. Vide public notice dated November 21, 2022, it was advertised/informed that “Considering the interest of entities in availing the Scheme, the competent authority has extended the period of the Scheme till January 21, 2023”. The SEBI Settlement Scheme, 2022 expired on January 21, 2023. However, it is observed from records that Noticee did not avail the SEBI Settlement Scheme.

10. In the interest of natural justice, vide hearing notice dated March 24, 2023 the Noticee was granted an opportunity of personal hearing in the matter on April 18, 2023 through video conferencing on the WebEx platform. The said hearing notice was sent through digitally signed email as well as through Speed Post Acknowledgement Due (SPAD). The hearing notice sent to the Noticee through SPAD returned undelivered. However, it was served to Noticee through digitally signed email. On the scheduled date of hearing, Noticee failed to appear for the said hearing. Thereafter, vide hearing notice dated April 28, 2023, the Noticee was granted another opportunity of personal hearing on May 15, 2023. The said hearing notice was also sent to Noticee through SPAD and digitally signed email. The hearing notice sent through SPAD returned undelivered. However, it was served to Noticee through digitally signed email. On the schedule date of hearing the Noticee failed to attend the hearing. Further, I note that Noticee failed to submit the reply to the SCN till date.

11. In this regard, it is pertinent to note that the Hon’ble Securities Appellate Tribunal (SAT) in the matter of Classic Credit Ltd. vs. SEBI (Appeal No. 68 of 2003 decided on December 08, 2006) has, inter alia, held that, "...the appellants did not file any reply to the second show-cause notice. This being so, it has to be presumed that the charges alleged against them in the show cause notice were admitted by them”.

12. Further, the Hon’ble SAT in the matter of Sanjay Kumar Tayal & Others vs SEBI (Appeal No. 68 of 2013 decided on February 11, 2014), has also, inter alia, held that: “.... appellants have neither filed reply to show cause notices issued to them nor availed opportunity of personal hearing offered to them in the adjudication proceedings and, therefore, appellants are presumed to have admitted charges leveled against them in the show cause notices...”

13. The same position was reiterated by the Hon’ble SAT in the matter of Dave Harihar Kirtibhai vs SEBI (Appeal No. 181 of 214 dated December 19, 2014), wherein it has been stated that:

“...further, it is being increasingly observed by the Tribunal that many persons/entities do not appear before SEBI (Respondent) to submit reply to SCN or, even worse, do not accept notices/letters of Respondent and when orders are passed ex-parte by Respondent, appear before Tribunal in appeal and claim non-receipt of notice and do not appear and/or submit reply to SCN but claim violation of principles of natural justice due to not being provided opportunity to reply to SCN or not provided personal hearing. This leads to unnecessary and avoidable loss of time and resources on part of all concerned and should be eschewed, to say the least. Hence, this case is being decided on basis of material before this Tribunal...”

14. It is noted that the Noticee has neither filed any reply nor has availed the opportunity of personal hearing despite service of notices upon him. In the facts and circumstances of this case, I am of the view that the Noticee has nothing to submit and in terms of Rule 4(7) of Adjudication Rules, the matter can be proceeded ex parte on the basis of material available on record.

15. In view of the observations made by the Hon’ble SAT, I find no reason to take a different view and accordingly, I deem it appropriate to proceed against the Noticee ex parte, based on the material available on record and in absence of response of the Noticee, presume that the allegations/charges have been admitted by the Noticee.
 
CONSIDERATION OF ISSUES AND FINDINGS

16. The issues arising for consideration in the instant proceedings are: -

I. Whether the Noticee has violated the provisions of Regulations 3(a), (b), (c), (d), 4(1), 4(2)(a) of the PFUTP Regulations, 2003

II. If yes, whether Noticee is liable for imposition of monetary penalty under Section 15HA of SEBI Act

III. If yes, what would be the monetary penalty that can be imposed upon the Noticee taking into consideration the factors stipulated in Section 15J of the SEBI Act

ISSUE I Whether the Noticee has violated the provisions of Regulations 3(a), (b), (c), (d), 4(1), 4(2)(a) of the PFUTP Regulations, 2003

17. It has been alleged in the SCN that the Noticee had executed reversal trades which involved squaring off transactions with significant difference in the sell value and buy value in the illiquid Stock Options segment at BSE. It has been alleged that the aforesaid reversal trades resulted into generation of artificial volumes in the illiquid stock options contracts traded by the Noticee.

18. In this regard, I note that the allegation that the Noticee carried out reversal trades is directly supported by evidence from the BSE trade log records which were provided to the Noticee along with the SCN. I note from the BSE trade log that on March 02, 2015, March 03, 2015 and March 09, 2015 Noticee is seen to have indulged in 19 reversal trades in 5 unique contracts as illustrated below:

19. It is seen that in Stock option contract “IDFC15MAR160.00PEW3” on March 09, 2015 at 14:11:44 hrs., Noticee executed 2 buy trades for 1,78,000 units at the average buy rate of Rs 1.95 per unit with counterparties viz. Rajendra Prakash Singhal and VSP Steel Pvt. Ltd. Thereafter, at 14:22:45 hrs. and 14:23:11 hrs. the Noticee executed two sell trades for 1,78,000 units at the average sell rate of Rs. 0.3 per unit, in the said contract with the same counterparties. The aforesaid reversal trades were executed within 11 to 12 minutes of each other, thus generating volume to the extent of 3,56,000 units in the said contract which was 42.58% of the total market volume in the said contract during the IP.

20. I note that sell order and buy order for 3,56,000 units in the IDFC15MAR160.00PEW3 contract were placed within a short time of around 3 milliseconds to 34 milliseconds to from each other. I also note that there is wide variation in the sell and buy prices of the reversal trades i.e. 1,78,000 units were sold at average buy rate of Rs 1.95 per unit at 14:11:44 hrs. and then 1,78,000 units were sold at average sale rate of Rs. 0.3 per unit at 14:22:45 hrs. and 14:23:11 hrs. within 12 minutes of each other, without there being any significant movement in the price of the underlying scrip in the cash segment.

21. Similarly, on March 02, 2015 in PTCI15MAR80.00PEW1contract, buy and sell orders for 8,16,000 units were placed within a short time gap of 3 second to 14 minutes. The said orders resulted in 3 buy trades and 1 sell trade for 4,08,000 units each between the Noticee and Vision Sponge Iron Private Limited in the said contract. The average buy rate was Rs. 2.42 per unit for 4,08,000 units and sell rate was Rs. 0.1 per unit for 4,08,000 units. The
aforesaid quantities traded by the Noticee made up 28.94% of the total market volume in the said contract during the IP.

22. I note from the trade log that there were only 7 trades executed in the IDFC15MAR160.00PEW3 for a total trading volume of 8,36,000 units on one day during the IP. I also note that in PTCI15MAR80.00PEW1 contract there were only 14 trades on for a total trading volume of 28,20,000 units on three days during the IP. Thus, I note that there was minimal trading activity on the stock exchange in the aforesaid stock options contracts. Therefore, I note from the number of trades and trading volume in the aforesaid stock option contracts that these contracts were illiquid in nature.

23. I note that the price of a particular option contract is known as the option premium. In the instant matter, there was a wide variation in the buy/sell price for without any corresponding change in the price of the scrip in the cash segment. Therefore, for a given strike price, the fluctuation in option premium in the buy/sell orders of the Noticee and the counterparties could not have varied so widely within such a short period of time since there was no significant movement in the price of the underlying scrip in the cash segment at that point of time. Due to the fact that within a short span of time, reversal trades were executed between the Noticee and the counterparties at a price that had been artificially pre-fixed and which did not reflect the value of the underlying asset, I am of the view that the reversal trades executed by the Noticee in the aforesaid contracts were non-genuine. Since there was minimal trading in the stock options contracts traded by the Noticee, these contracts were illiquid in nature. Therefore, the impugned reversal trades were carried out by the Noticee with prior meeting of minds with its counterparties as inferred from the case facts. Moreover, I further note that the aforesaid reversal trades distorted the market mechanism in the stock options segment of BSE. In this context, I find it appropriate to quote the following judgement of the Hon’ble Supreme Court in the matter of SEBI vs Rakhi Trading Pvt. Ltd. (Decided on February 08, 2018) in which crucial observations were made about trading activity in the illiquid stock options segment:

“36…The trade reversals in this case indicate that the parties did not intend to transfer beneficial ownership and through these orchestrated transactions, the intention of which was not regular trading, other investors have been excluded from participating in these trades. The fact that when the trade was not synchronizing, the traders placed it at unattractive prices is also a strong indication that the traders intended to play with the market.

37…. even in the derivative segment there is a change of rights in a contract. In the instant case, through reverse trades, there was no genuine change of rights in the contract...it is clear that the traders in question did not intend to transfer beneficial ownership and therefore these trades are non-genuine.

39…. Regulation 2(1)(c) defines fraud. Under Regulation 2(1) (c)(2) a suggestion as to a fact which is not true while he does not believe it to be true is fraud. Under Regulation 2(1) (c)(7), a deceptive behaviour of one depriving another of informed consent or full participation is fraud. And Under Regulation 2(1)(c)(8), a false statement without any reasonable ground for believing it to be true is also fraud. In a synchronised and reverse dealing in securities, with predetermined arrangement to book loss or gain between pre-arranged parties, all these vices are attracted.

40…Regulation 3(a) expressly prohibits buying, selling or otherwise dealing in securities in a fraudulent manner. Under Regulation 4(2) dealing in securities shall be deemed to be fraudulent if the trader indulges in an act which creates a false or misleading appearance of trading in the securities market....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.

41….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.”

24. I also place reliance upon the judgement of Hon’ble SAT in the matter of Global Earth Properties and Developers Pvt. Ltd. vs. SEBI (SAT appeal no.212 of 2020), wherein Hon’ble SAT 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.”

25. I find that the impugned reversal trades were executed between the Noticee and its counterparties in the aforesaid illiquid stock options contracts within a short period of time with a view to execute such reversal trades at a pre- determined price, which indicated that there was no intention to transfer the beneficial ownership of securities and therefore, were non-genuine. The aforesaid reversal of trades with pre-determined arrangement are indicative of manipulation to create misleading appearance of trading in the illiquid stock options. Further, the price of the trades which was pre-fixed and did not reflect the fair value of the contracts, was the result of manipulation of the price which is also a part of creation of misleading appearance of trading. Therefore, placing reliance on the aforesaid judgements, I find that the aforesaid reversal trades executed by the Noticee were manipulative and non-genuine in nature and being non-genuine, the said trades created false and misleading appearance of trading and amounted to abuse of the stock market platform. As held in the aforesaid judgement of Hon’ble Supreme Court, by rapid reversal trades, the price discovery system was affected, which in turn resulted in the abuse of the stock market.

26. I note that in matters dealing with violation of PFUTP Regulations,2003, the reason as regards execution of non-genuine trades might not be immediately forthcoming. I also find it pertinent to note that in cases of market manipulation, where direct evidence may not be available, transactions are to be tested for any manipulative intent based on the abnormal nature of transactions. In this regard, I note the judgement of Hon’ble Supreme Court of India in SEBI vs. Kishore R. Ajmera (2016) 6 SCC 368 (Judgment dated February 23, 2016), wherein it had held that- “...According to us, knowledge of who the 2nd party / client or the broker is, is not relevant at all. While the screen based trading system keeps the identity of the parties anonymous it will be too naïve to rest the final conclusions on the said basis which overlooks a meeting of minds elsewhere. Direct proof of such meeting of minds elsewhere would rarely be forthcoming...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 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...”. The Hon’ble Supreme Court 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.”

27. Thus, placing reliance on the aforesaid judgements and considering preponderance of probabilities, I find that the Noticee executed non-genuine trades in collusion with its counterparties in the aforesaid illiquid stock options contracts and thereby abused the stock market platform by creating false and misleading appearance of trading. In view of the foregoing and placing reliance upon the aforesaid judgements, 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.

Issue II If yes, whether the failure, on the part of the Noticees would attract monetary penalty under Section 15HA of the SEBI Act

&

Issue III If yes, what would be the monetary penalty that can be imposed upon the Noticee taking into consideration the factors stipulated in Section 15J of the SEBI Act

28. It has been established in the foregoing paragraphs that the Noticee has violated Regulation 3(a), (b), (c), (d), 4(1) and 4(2)(a) of PFUTP Regulations,2003. In the context of the above, I refer to the observations of Hon’ble Supreme Court in the matter of Chairman, SEBI vs. Shriram Mutual Fund {[2006] 5 SCC 361} wherein the Hon’ble Court had 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...….”

29. Therefore, in view of the foregoing findings and placing reliance on the above judgment of Hon’ble Supreme Court, I find that the Noticee is liable for monetary penalty under Section 15HA of SEBI Act, which is reproduced as follows:

SEBI Act: 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.

30. While determining the quantum of penalty under Section 15HA of SEBI Act, the following factors stipulated in Section 15J of the SEBI Act have to be given due regard:

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.

31. As established above, the trades by the Noticee were non-genuine in nature and created a misleading appearance of trading. I note that the material 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 and does not demonstrate any repetitive default on the part of the said Noticee. However, considering that the violation by the Noticee led to creation of artificial trading volumes which had the effect of distorting the market mechanism in the illiquid stock options segment of BSE, I find that the aforesaid violations were detrimental to the integrity of securities market and therefore, the quantum of penalty must be commensurate with the serious nature of the aforesaid violations.

ORDER

32. Having considered all the facts and circumstances of the case, the material available on record, the factors mentioned in Section 15J of the SEBI Act and in exercise of 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 Rs.5,00,000/-(Rupees Five Lakhs only) on Noticee i.e. Emery Tie-Up Pvt. Ltd under Section 15HA of the SEBI Act for violations of Regulation 3(a), (b), (c), (d), 4(1) and 4(2)(a) of PFUTP Regulations, 2003.

33. The Noticee shall remit / pay the said amount of penalty within 45 days of receipt of this order through online payment facility available on the SEBI website www.sebi.gov.in on the following path, by clicking on the payment link-

ENFORCEMENT Orders Orders of AO PAY NOW

34. The Noticee shall forward the confirmation of penalty so paid to the Enforcement Department –Division of Regulatory Action –V of SEBI.

35. The Noticee shall provide the following details while forwarding confirmation of e-payment in the following format:

a) Name and PAN of the entity (Noticee)

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

In case of any difficulties in payment of penalties, Noticee may contact the support at portalhelp@sebi.gov.in.

36. In the event of failure to pay the said amount of penalty within 45 days of the receipt of this Order, SEBI may initiate consequential actions including but not limited to recovery proceedings 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 of Noticee.

37. Copy of this Adjudication Order is being sent to the Noticee and also to SEBI in terms of Rule 6 of the Adjudication Rules.