Fraud tag on small trades: Sebi moves SC

New Delhi: The legal battle over the interpretation of certain fraudulent trade rules has reached the apex court. Market regulator, the Securities and Exchange Board of India (Sebi), has moved the Supreme Court in nearly a dozen cases.

The key question is whether trading a tiny portion of a company’s shares leads to fraudulent trading.

Securities Appellant Tribunal (SAT), which hears appeals against Sebi, had set aside Sebi orders in cases related to GGF Mercantile, Maltiben Gandhi, Sanjay Poddar HUF, among others, as the accused bought or sold only a small number of shares. In some cases, SAT also said Sebi failed to establish any strong connections between the accused and a larger ring of traders manipulating stocks.

The apex court admitted the cases in August and have set up a a two-Judge bench, comprising Justices Sanjiv Khanna and SVN Bhatia, to hear the cases in October.

Email queries to Sebi didn’t elicit an answer till press time.

Establishing a trade pattern is key to prove stock manipulation cases, said legal experts. Sebi has to prove the accused either alone or in connivance with other traders bought or sold shares to pump up stock prices.

“Sebi’s decision to file these appeals seems to stem from the fact that trading pattern is an important limb of evidence for fraudulent and manipulative trades,” Anil Choudhary, partner, Finsec Law Advisors, said. “SAT has dismissed these orders on the ground that the trades were miniscule. However, SAT may have missed the point that in an illiquid scrip, even a small volume of trade can impact the price of securities and can contribute to price manipulation when acted in concert with other players.”

However, trading in small quantities may not be a strong ground to exonerate someone of fraudulent trades, he added.

For instance, a case involving manipulation of shares of SFL Ltd, Sebi fined seven people for manipulating the stock. One of the accused, Maltiben Gandhi, purchased and sold 10 shares of the firm during the period of investigation. SAT set aside the ₹5 lakh fine levied on Gandhi saying the accused traded in a miniscule number of shares and Sebi had failed to establish connection between her and six other accused.

“One trade of the appellants cannot indicate a trading pattern which would result in giving a finding of any illegal act, collusion, meeting of minds or prearranged plan to inflate the price,” SAT said in its order of 11 April. SAT’s order was challenged in Supreme Court.

According to the SAT order, in the absence of a connection between appellants, or other noticees, and the fact only one trade was executed by appellants is insufficient to establish a trading pattern that is collusive. Therefore, SAT was of the opinion that the findings of the appellants playing a fraud and trades were not genuine cannot be accepted.