The regulator said that reversal trades lack basic trading rationale leading to the false appearance of trading The Securities and Exchange Board of India (SEBI) has imposed a heavy penalty on the Noticee viz. Sanjivani Multivit Herbal Products Ltd.
The SEBI had observed large scale reversal of trades in stock options segment of Bombay Stock Exchange (BSE). The SEBI further observed that such large scale reversal of trades in stock options led to the creation of artificial volume at BSE. Given the same, the regulator conducted an investigation into the trading activities of certain entities in illiquid stock options at BSE for the period 1 April 2014 to 30 September 2015 (IP).
The Investigation revealed that total 2,91,643 trades comprising substantial 81.38 per cent of all the trades executed in stock options segment of BSE during the IP were non-genuine. The aforesaid non-genuine trades resulted into creation of artificial volume to the tune of 826.21 crore units or 54.68 per cent of the total market volume in stock options segment of BSE during the IP.
It was observed that Sanjivani Multivit Herbal Products Ltd (Noticee) was one of the various entities which indulged in the execution of reversal trades in stock options segment of BSE during the IP. Such trades were observed to be non-genuine and created a false or misleading appearance of trading in terms of artificial volumes in stock options and therefore alleged to be manipulative and deceptive.
In view of the same, SEBI initiated adjudication proceedings against the Noticee for violation of the provisions of Regulations 3(a), (b), (c), (d), 4(1) and 4(2)(a) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (PFUTP Regulations, 2003).
The Noticee had submitted that entire material gathered concerning the investigation was not provided to it. The Adjudicating Officer (AO) noted that all material relied upon in the issuance of SCN in the matter had been provided to the Noticee, and that the Noticee duly carried out an inspection of the relied upon documents.
The AO also opined that reversal trades are considered to be those trades in which an entity reverses its buy or sell positions in a contract with subsequent sell or buy positions with the same counterparty during the same day.
The non-genuineness of these transactions executed by the Noticee was evident from the fact that there was no commercial basis as to why, within a short span of time, the Noticee reversed the position with its counterparties with the significant price difference. It was noted from the trade log of the Noticee that the time taken by the Noticee for reversing its non-genuine trades ranged from 4 seconds to19 minutes and 19 seconds. Such a short span of time taken for reversing the trades in an illiquid stock option contract suggested the non-genuineness of these trades executed by the Noticee.
The fact that the transactions in a particular contract were reversed with the same counterparties indicated a prior meeting of mind with a view to execute the reversal trades at a pre-determined price. Since these trades were done in illiquid option contracts, there was no trading in the said contract and hence, there was no price discovery in the strictest terms.
The judgment of the Supreme Court in the matter in respect of SEBI v Rakhi Trading Private Limited was also referred to in which it was observed that considering the reversal transactions, quantity, price and time and sale, parties being persistent in many such trade transactions with huge price variations, it would be too naive to hold that the transactions were through screen-based trading and hence anonymous. The impugned transactions were manipulative/deceptive device to create the desired loss and/or profit.
The trading behaviour of the Noticee confirmed that such trades were not normal and wide variation in prices of the trades in the same contract in a short time without any basis for such wide variation, all indicated that the trades executed by the Noticee were not genuine and being non-genuine, created an appearance of artificial trading volumes in respective contracts.
Hence, it was held that the allegation of violation of regulations 3(a), (b), (c), (d), 4(1) and 4(2)(a) of PFUTP Regulations by the Noticee stood established, SEBI said in its judgement, dated 21 January 2021.