The Supreme Court, on Thursday, refused to interfere with the order of the Securities Appellate Tribunal (SAT) which had affirmed the order of the Whole-Time Member, SEBI (WTM) to debar MBL Company Limited from dealing in securities in its proprietary account for a period of 4 years.
A Bench comprising Justices D.Y. Chandrachud and Bela M. Trivedi noted that even though the profit made by the Company from the violation was claimed to be meagre, the fact that the manipulation breached the integrity of the securities market and in turn caused detriment to the investor wealth is a crucial consideration. The Bench was convinced that the WTM had rightfully considered the same. Therefore, it opined that the order of the WTM cannot be regarded as disproportionate. Moreso, when the WTM has restrained MBL from participating only in its proprietary account, allowing it to continue operations in its broking account.
Securities and Exchange Board of India (SEBI) conducted an investigation in the scrip of Gujarat NRE Coke Limited to ascertain if there was a violation of provision of the SEBI Act, 1992, SEBI (PFUTP) Regulations, 2003 and SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. The investigation was for the stretch of time between 15.12.2011 to 09.10.2014, during which period the scrip was traded on the Bombay Stock Exchange Limited and National Stock Exchange of India Limited. Investigation revealed that during the said period, MBL Company Limited, the broker, had executed self-trades on NSE in its proprietary account and these self-trades though in negligible quantity, affected the total market positive Last Traded Price (LTP).
Accordingly, show cause notices were issued to MBL. After hearing MBL, the WTM concluded that it had engaged in manipulative trades as a consequence of which share price of Gujarat NRE Coke Ltd. was influenced. It noted that out of 5041 self trades 4327 self trades for 11822 shares were executed through the same terminal. In its order dated 28.02.2020 by exercising power under Sections 11, 11(4) and 11B read with Section 19 of the SEBI Act, 1992 the WTM restrained the appellant from buying, selling or otherwise dealing in securities in its proprietary account, directly or indirectly for a period of 4 years from the date of order.
As the appeal was pending before SAT, by an interim order dated 03.03.2020, it directed that the WTM order dated 28.02.2020 would remain stayed upon MBL depositing Rs. 2 crores with SEBI.
Subsequently, on 17.03.2020, the Adjudicating Officer (AO) imposed a penalty of 15 lakhs; 10 lakhs under S.15HA for violation of provisions of Section 12A(a),(b) and (c) of SEBI Act, 1992 read with SEBI (PFUTP) Regulations, 2003 and Rs 5 lakhs under Section 15HB for violating the Code of Conduct for Stock Brokers read with SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992.
Contentions raised by the parties
Senior Advocate, Mr. Abhishek Singhvi, appearing for MBL Company Ltd. submitted that it had executed trades on 50 days between 15.09.2011 and 9.1.2015 and the net gain was merely Rs. 3.45/share. He further submitted that over the entire duration of 50 days the total profit generated was Rs. 2.61 lakhs and the volume of trade represents only 0.04 percent of market value spread over the said trading period. Mr. Singhvi argued that the debarment was disproportionate and harsh. The Bench was also apprised that the order of the WTM would adversely affect the 450 employees of the company. He pointed out that when the AO had imposed a penalty of only Rs. 15 lakhs, the WTM's decision to debar is not justified.
Senior Advocate, Mr. P. Venugopal, appearing on behalf of the SEBI submitted that the debarment is not relatable solely to the extent of gain made by MBL. It was averred the WTM had reached the conclusion of intentional manipulation on the basis of the fact that the trading was done in the same terminal id and, more importantly, it was done manually. It was pointed out that the penalty imposed by AO and the debarment imposed by WTM were distinct and the latter was not harsh or disproportionate. He referred to the judgment of the Apex Court in AO SEBI v. Bhavesh Pabari (2019) 5 SCC 90 wherein the Apex Court had observed -
"This court, in the exercise of its jurisdiction under Section 15Z of the SEBI Act, cannot go into the proportionality and quantum of the penalty imposed, unless the same is distinctly disproportionate to the nature of the violation which makes it offensive, tyrannous or intolerable. Penalty by the very nature of the provision is penal. We can interfere only where the quantum is wholly arbitrary and harsh which no reasonable man would award."
Analysis by the Supreme Court
The Bench noted that the WTM while imposing order of debarment had applied her mind to the consequence of the manipulation. It took note of the fact that the WTM had accurately observed that the manipulation of price of scrips adversely impacted the other counter-parties and the securities market. The Bench was of the view -
"The manipulation is not assessed only in terms of gain but wider consequences of the action on the securities market. In the present case, order of WTM as well as that of SAT noted the modus operandi was to place huge orders higher than the last traded price of the company, thereafter to make self trade of only one share for that higher price thus establishing a new LTP…"
[Case Title: MBL v. SEBI]