On 13th January, the Securities and Exchange Board of India (SEBI) issued an ex-parte order to bar Hemant Ghai, host of a show on CNBC Awaaz, from the capital market for price manipulation and unfair trade practices. Social media erupted with vindication, since complaints about SEBI’s inaction over market manipulation have been rife. Does this signal increased seriousness about tackling market manipulation, front-running and insider trading, which has been fairly brazen in the past few years?
Hold on. Investors who think that SEBI’s interim orders and show-cause notices signal improved action, need to get a glimpse into the crazy and convoluted world of regulatory orders on what are called fraudulent and unfair trade practices (FUTP). This article looks at just five recent orders for you to draw your own conclusions. Remember, SEBI’s orders make news only when they involve high-profile individuals or companies—others quietly slip below the radar. SEBI’s byzantine system of dealing with market manipulation can lead to three kinds of outcomes.
1.SEBI punishes someone and imposes a monetary penalty, but SAT (Securities Appellate Tribunal) converts it into a warning. Matter goes to the Supreme Court and is stayed (Bharti Goyal case).
2.SEBI indicts an insider/tipee but does not impose a fine (forgetting the stand above); the insider appeals to SAT to have the stigma of being an insider washed clean. SAT refuses to oblige (Utsav Pathak case).
3.SEBI’s hasty and cruel actions which I have described earlier in this article.
Monetary Penalty Waived
Bharti Goyal and Laxmikant Vyas challenged a SEBI order charging them with FUTP before SAT. The two were part of a group of 16 entities who allegedly ramped up the price of Mapro Industries from 1 July 2014 to 30 November 2014, when the scrip rose from Rs79.15 to Rs 493.40. Initially, SEBI investigated six entities, but added another 10 to the list, although they had no connection to the original six manipulators. Their 43 trades for just 1,174 shares had helped ramp up the price, says the regulator. What the 10 new entities had done was interesting. They placed buy orders for Mapro at the beginning of trading hours, well above the last traded price (LTP) of the scrip. SEBI has a detailed calculation on how this strategy helped push up Mapro’s price.
Of these, Ms Goyal and Mr Vyas filed separate appeals against the order claiming they were small investors who had nothing to do with the manipulation. They had been slapped with a penalty of Rs5 lakh each. Bharti Goyal said she had purchased only 284 shares in nine trades, while Mr Vyas claimed he bought 251 shares in seven trades. SAT heard them out. SEBI, correctly, argued that it is irrational for any investor to place a buy order substantially above the LTP that too early in the day, unless it was meant to impact prices.
Probably, because the amounts involved were small, SAT decided to sympathise with Ms Goyal and Mr Vyas. Bharti Goyal did not even have a lawyer and had appeared in person. It said, ‘the dividing line’ between placing orders to deliberately manipulate prices or not doing so was very thin in the absence of ‘some more analysis of the overall trading in the scrip during the investigation period’ to connect the dots, it was inclined to waive the penalty and convert it into a warning. However, it warned that a repetition of ‘trading of similar nature/pattern’ would lead to penal consequences.
But SEBI was charged up enough to rush to the Supreme Court with an appeal (Civil Appeal No(s).3596-3597/2020), which was heard by a bench comprising Justices DY Chandrachud, Indira Banerjee and Sanjiv Khanna on 5January 2021. It also had attorney general KK Venugopal argue the case. The crux of SEBI’s argument was that Section 15HA of the SEBI Act, which was amended in September 2014, provides for a minimum penalty of Rs5 lakh that can go up to Rs25 crore. Mr Venugopal argued, “Imposition of a warning, which is not a penalty” is beyond the jurisdiction of SAT, since “it is a creature of statute” and does not have jurisdiction under Article 226 of the Constitution.
In other words, SAT cannot convert a monetary penalty into a warning. Mr Venugopal submitted that SAT had passed such orders in “many other cases leading to several appeals being filed before this Court by SEBI.” The Supreme Court has stayed the order and two individuals will either have to fight it out before the apex court, or may find it less expensive to just pay up. We don't know what will happen.
But if you thought this was a shining example of SEBI’s tough stance against market manipulation, check out the next case.
Monetary Penalty Not Imposed: Utsav Pathak was an employee of Morgan Stanley in 2013 when it was working on an open offer by McGraw Hill Asian Holdings for acquiring shares in CRISIL Ltd. On 3 June 2013, McGraw Hill made an open offer at Rs1,210 per share, when CRISIL was trading on the exchange at Rs1,129.90. CRISIL’s price jumped 20% immediately after the offer. Now, SEBI alleges that Mr Pathak (the tipper) provided inside information to his sister, her mother-in-law and father-in-law, who traded in the shares and made a profit of nearly Rs38 lakh. Mr Pathak denied passing on any information and claimed that they were all independent professionals. But SEBI discovered that: a) the sister’s family had never traded in large quantities; 2) they traded heavily only in this scrip and sold the shares when the offer was announced; 3) one family member had even borrowed Rs1 crore and sold off existing holdings to be able to buy CRISIL’s shares.
In a separate investigation, SEBI had charged the sister’s family with insider trading and they had settled the matter by paying up Rs2 crore (which included the profit earned and interest). SEBI’s adjudication officer noted, in his order, that Mr Pathak had resigned from Morgan Stanley on 31 December 2018 and is, unemployed since then. Also, since his family had paid up over Rs2 crore, he ruled, “I am not inclined to impose any penalty on the Noticee.” So, what happened to the minimum penalty issue that was taken to the Supreme Court in the much smaller matter of Bharati Goyal? The bizarre case doesn’t end here.
Mr Pathak, apparently unemployed, found expensive lawyers to file an appeal before SAT (Misc. Application No.138 of 2020 And Appeal No.430 of 2019) and argued that merely having a close relationship doesn't make him guilty. The fact that SEBI had held him guilty of insider trading but did not impose any penalty in August 2019 was held up to support this contention. His lawyers also pointed out that another person, Ajay Bhalla and his firm, had made a profit of over Rs5 crore but were let off (I have not investigated this, as yet). On 12 June 2020, SAT rejected the argument and upheld SEBI’s order.
Hasty and Half-baked Action? Now let us come to the final order of Udyant Malhoutra, CEO (chief executive officer) and managing director of Dynamatic Technologies (DTL). In an ex-parte order on 15 June 2020, SEBI accused Mr Malhoutra of trading on the basis of unpublished inside information. SEBI alleged that he avoided a loss of Rs3.83 crore by selling 51,000 shares before the company announced its results. In a detailed interim order, SEBI said that the money be impounded and deposited in an escrow account immediately. This was in the middle of the COVID lock-down.
Was SEBI being tough and quick, for once? Without going into details of the order and the price movement of shares, what is important here is that Mr Malhoutra’s decision to sell was apparently imperative and in line with an agreement he had with a consortium of lenders to reduce (to 7.5%) the shares pledged by the promoter group with IL&FS (Infrastructure Leasing and Financial Services) as part of a ‘facility agreement’ dated 29 June 2016. The promoter group had a Rs50-crore loan against pledged shares and that Mr Malhoutra had sold the share to pre-pay the loan and bring down his holding, in line with that agreement.
The matter went to SAT which quashed SEBI’s order pointing out that “there is no real urgency in the matter to pass an ex-parte interim order especially during the pandemic period.” And said that, even if it has the powers to do so, it ought to use them sparingly and not cause irreparable injury. SEBI went to the Supreme Court with an appeal, but the apex court held that SAT was correct in setting aside the order. SEBI will hear the matter again and, probably, pass another order by examining Mr Malhoutra’s contention more closely. But it is clear that this is not a simple matter of insider trading that required such harsh action in a pandemic.
Importantly, Anant Barua, SEBI’s whole-time member (WTM) who passed the order, has been with the regulatory body for over three decades and surely understands the hardship he was seeking to inflict.
So, for all those who wonder what happens to the innumerable case of market manipulation that they have reported to the regulator—remember, this is just the starting point to what seems like a bizarre and byzantine world of SEBI orders!