Analysis of Excessive Stress on Connection Between Parties to a Manipulative Trade

[By Anurag Shah]

The author is a student at the School of Law, Christ (Deemed to be University), Bangalore.


The online trading system of the Indian Stock Exchange works on the ‘blind trading system’. Such a system does not permit a buyer and a seller to have any form of interaction on the platform while undertaking a trade. The system works in such a way that after the buy order is placed on the trading platform, the system matches the same with a sell order and then a trade is executed on a price-time priority basis by the system.

However, even in such a spill-proof system, time and again buyers and sellers have indulged in manipulative trades which lead to market rigging. The players have identified multiple ways to execute this rigging, which include illegal synchronized trades or trades that manipulate the Last Traded Price. However, the securities regulator in India has tried to prosecute players undertaking such trades through the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (PFUTP Regulations). This regulation prohibits manipulative, fraudulent, and unfair trade practices. Whether a manipulation has been done or not is largely gathered from the intentions of the parties, however, most of the time there is no direct or conclusive evidence to such intentions. Therefore, in the absence of the same, the Courts have time and again looked into different aspects to ascertain manipulation. One such aspect is the connection between the parties to a trade. Whether it is an inter se connection between the brokers and the parties or a connection between seller and buyer, the Courts have used the same to conclusively conclude manipulation. However, recently the Securities Appellate Tribunal (SAT) has been stressing excessively on the presence of this connection. This can be analyzed through two recent orders by the SAT passed in August 2020.

SAT order in the matter of Bharti Goyal v. SEBI

The SAT in the matter of Bharti Goyal v. SEBI, modified a penalty of Rs. 5 lakhs issued by SEBI into a warning for the alleged violation of the PFUTP Regulations.

SEBI had passed an order against sixteen entities for manipulating the price of the scrip of Mapro Industries Limited. The order held that even though no connection could be established between the suspected entities, by the very nature of their trades they manipulated the prices and disturbed the market equilibrium. The aggrieved appellants approached the SAT. The first appellant defended his trades by submitting that he was a salaried employee who occasionally engaged in the stock market trading and therefore undertook the trade only based on the rumors and had no intention to manipulate the prices. The second appellant as well maintained that the trades were done in the normal course of business without any intent to manipulate. Moreover, both the appellants stressed the fact they had no connection or relationship with any connected or suspected entity.

SEBI maintained its position that making such trades was completely irrational and no rational person would do such trades until they wanted to manipulate scrip. SEBI contended that the appellants had manipulated both the price and volume of the scrip and therefore violated Regulations 3 and 4 of the PFUTP Regulations. SEBI reiterated that even though no connection/relationship of the two appellants with other authorities in question could be established, the nature and pattern of their trade itself could be found to be foul of the provisions. For this they relied upon the decision of the Supreme Court of India in the case of Securities and Exchange Board of India vs. Kishore R. Ajmera wherein the Hon’ble Court was of the view that in absence of hard evidence, the conclusion has to be gathered from various circumstances like that volume of the trade and such other relevant factors.

The tribunal was not satisfied with the contention of the appellants that they made the trades because they were keen to invest in Mapro Industries owing to its extremely promising nature. This was because the scrip was not liquid or lucrative for investment. On the other hand, the tribunal also took note of the fact that the SEBI order could not join the dots concerning the connection or relationship between the suspected entities and the appellants. Therefore due to the nature and pattern of the trades, the appellants violated the regulations, but since no conclusive relationship/connection or interaction between the appellants and the other suspected entities is established, the SAT modified the penalty into a warning.

SAT order in the matter of Rajesh Jivan Patel v. SEBI

The SAT in the matter of Rajesh Jivan Patel v. SEBI quashed an order by a Whole Time Member (WTM) of SEBI through which SEBI had restrained the appellants and other noticees from accessing the securities market for six months and further froze the mutual funds and other securities of the appellants.

The order was passed by SEBI after an investigation was conducted on the alleged violations of Regulations 3 and 4 of the PFUTP Regulations. SEBI had alleged that the appellants along with a few parties, without any intention to sell, had sold meager amounts of the shares of a company over a period of time to establish a price above the Last Trading Price (LTP). The same, if done in collusion would amount to price manipulation under the PFUTP Regulations. The WTM while adjudicating on the order held that even though there was no connection between the buyer and the seller, they had unilaterally manipulated the price. SEBI also stated that a connection between a buyer and a seller was immaterial in the question of price manipulation under the PFUTP Regulations 2013 unless it a synchronized trade.

The aggrieved appellants had appealed to the said order in the SAT. While quashing the order SAT held that the WTM had traveled beyond the specific charges listed by the SEBI in the Show Cause Notice (SCN), which included inter alia a collision to manipulate the price of the stocks. Therefore, going by precedents, the SAT quashed the order in the present case as well. Moreover, an important point noted by the SAT in the present order was that a connection between the buyer and the seller is a sine qua non for a charge of price manipulation under the PFUTP regulations. The Hon’ble tribunal also stated that the fact that SEBI did not provide the log sheets that were requested by the appellants’ show how SEBI cherry-picked the documents they wanted to share and the same amounts to a violation of principles of natural justice.

Analysis and Conclusion

A conjunct reading of both the above orders chalks out the clear picture about the stress the Hon’ble SAT has been putting on the aspect of a connection being established between a seller and a buyer. Undoubtedly, a connection between the parties is a piece of very important evidence to prove manipulation, excessive stress upon it would provide traders an excuse to manipulate a trade by making sure that the parties are not connected in any way.

Even though the precedents as well provide almost the same level of importance to the establishment of a connection, however in cases like Kishore R. Ajmera they have kept the stress on it a little low by allowing manipulation to be deduced from other factors such as volume and also by a preponderance of probabilities. Making an established connection as a sine qua non for manipulation would open a Pandora box.

Moreover, the Hon’ble tribunal also did not completely appreciate the principle of lack of business prudence. The term prudence refers to being circumspect or judicious while doing a transaction.[i] There have been precedents where the intention to undertake illegal price manipulation has been ascribed to the parties when they have been found to indulging in acts lacking business prudence. For instance, heavily buying a scrip which is fundamentally weak or illiquid, or placing orders at a price higher than the previous day’s closing price. In the order of Bharti Goyal, the Hon’ble SAT accepted that the trades were completely irrational and no rational person would do such a trade. Therefore, even this would point towards an intention to manipulate the scrip. Therefore, the Hon’ble SAT should not have put excessive stress upon a connection and should have taken into consideration the other aspects as well. Quashing the penalties and substituting them with a warning bespeaks that the Hon’ble SAT is putting excessive stress upon an established connection. The same might be exploited by players looking to undertake market rigging.


[i] Bryan A garner (ed.), Black’s Law Dictionary, Page no. 211 (8th edition).


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