SEBI on Share Price Manipulation

An entity in isolation can be booked for its unilateral act of manipulation of price of the scrip if analysis of trade log and order log reflects malafide intention even without any collusion with the other entities.

Securities and Exchange Board of India (SEBI) in the matter of in the matter of ‘Anukaran Commercial Enterprises Limited’ had noticed an unusual movement in the price in the scrip of a company called ‘Anukaran Commercial Enterprises Limited’ (the Company). SEBI undertook an investigation relating to the trading activities in to ascertain whether the unusual price movement was normal or it was caused by unscrupulous acts of possible manipulation of the price of the scrip of the Company.

A Brief Background and Procedural History of the Case:

The investigation undertaken by SEBI revealed the following:
  • The Company was engaged in the business of chemicals in India and was also involved in trading in securities in the form of shares and debentures.
  • The price of the scrip of the company saw an abnormal rise, which was not supported by any corporate announcements or material changes in the business activities of the Company. It was noticed that 16 entities sold the shares of the Company at a price higher than the last traded price (LTP) and contributed to the positive LTP.
  • The investigation further revealed that out of the said 16 sellers, top three sellers contributed more than 90% to the market positive LTP variance of the scrip. Some of the sellers were noticed to be selling their shares in miniscule quantities, despite having sufficient quantities of shares in their respective demat accounts. These sellers were also executing trades at a price higher than the LTP. 
  • The off-market transfer of shares of the Company was not a genuine transfer and was carried out only for the purpose of facilitating manipulation in the price of the scrip
  • The company was served with a Show Cause Notice (SCN) which alleged that all the above mentioned acts were in  contravention of the provisions of Regulations 3 (a), (b), (c), and (d) and 4(1), (2), (a), and (e) of SEBI (Prohibition of  Fraudulent  and  Unfair  Trade  Practices)  Regulations,  2003  (PFUTP Regulations).
Analysis of the Order by SEBI:

       I.  What is Short Selling of Shares?

When a person wants to earn money out of the expected fall in price of a share, they can sell such shares without owning it and subsequently square off his sell position by buying the same quantity of shares during the day, thereby pocketing the difference in case the price falls at the time of squaring off.

Further, naked short selling is a prohibited activity that means, while short selling any share; the investor has to honour the obligation of delivering the shares at the time of settlement. The short selling position is required to be squared off on the same day. However, if an investor does not square off its position by buying the shares before closure of the market, the buyer (who had purchased shares which were short sold) shall be given delivery by the Stock Exchange by purchasing such shares in auction mechanism.

From the regulatory framework governing short selling, one can say that in order to make profit out of decreasing prices of a scrip, the investor has to first short sell and eventually, on the same trading day itself, square off their position; differential amount of two transactions being their profit/loss. Thus, to make profit, the investor needs to have adequate time so as to appropriately square off their position during the same trading day itself.

    II.  What is share price manipulation?

The Securities Appellate Tribunal (SAT) the matter of Jagruti Securities Limited v. SEBI has established that in order to contend that for the charge of artificially raising of the price of a scrip, it is necessary to show element of collusion between buyer and seller. SAT in the case of Ketan Parekh v. SEBI, while dealing with the issue of manipulative trade observed that any transaction executed with the intention to defeat the market mechanism whether negotiated or not would be illegal. Whether a transaction has been executed  with  the  intention  to  manipulate  the  market  or  defeat  its  mechanism  will  depend  upon  the  intention  of  the  parties which could be inferred from the attending circumstances because direct evidence in such cases may not be available.

The  nature  of  the  transaction  executed,  the  frequency  with  which  such  transactions  are  undertaken,  the  value  of  the  transactions, whether they involve circular trading and whether there is real change of beneficial ownership, the conditions then prevailing in the market are some of the factors which go to show the intention of the parties. This list of factors, in the very nature of things, cannot be exhaustive. Any one factor may or may not be decisive and it is from the cumulative effect of these that an inference will have to be drawn.

In context with the current case, such transactions go on to show that the trades as well as the transfer of shares which preceded such trades were all part of a pre-mediated arrangement with the sole purpose of stirring up the price of the scrip and to create artificial appearance of trading in the said scrip so as to induce the investors to trade in the scrip.

III. Whether unusual price movement in the scrip of the company was normal or was it caused by unscrupulous acts leading to any possible manipulation of the price of the scrip of the Company?

Considering the trading pattern of the Company and absence of any documents to support those justifications advanced, SEBI was of the view that the said acts were not genuine and such trades were sufficient to mislead and induce the genuine investors to deal in the securities market.

Acts of a party can be proven to be malafide and manipulative in nature, even in the absence of any proven nexus with the counter party buyers or any allegation of collusion/nexus with any other person.

It is common understanding that if a reasonable person claims to reap benefits out of a scrip of a company before others get into said scrip, such a person would naturally buy the shares and wait for the price to rise, which will happen if the scrip becomes popular and such person can then sell those shares so as to make some profit. Under no circumstances, a person who is anticipating the share to become popular, will ever enter into short sell of such shares. The act of short selling therefore expresses the inherent intention that of expecting a price fall in the scrip.

In the absence of any cogent reason to justify repeated acts of indulging in unsuccessful short selling in the shares of the Company that too always at prices higher than the LTP, there cannot be any motive except for an intention to carry out an agenda to manipulate the price, implemented meticulously, in the scrip of the Company.

Finally, any transaction executed with the intention to defeat the market mechanism whether negotiated or not would be illegal. Whether a transaction has been executed with the intention to manipulate the market or defeat its mechanism will depend upon the intention of the parties which could be inferred from the attending circumstances because direct evidence in such cases may not be available. The nature of the transaction executed, the frequency with which such transactions are undertaken, the value of the transactions, whether they involve circular trading and whether there is real change of beneficial ownership, the conditions then prevailing in the market are some of the factors which go to show the intention of the parties. This list of factors, in the very nature of things, cannot be exhaustive. Any one factor may or may not be decisive and it is from the cumulative effect of these that an inference will have to be drawn.

 IV.  Reliance on unilateral act of manipulation of price of the scrip:

SAT in numerous orders has laid down that an entity in isolation can be booked for its unilateral act of manipulation of price of the scrip if analysis of trade log and order log reflects malafide intention even without any collusion with the other entities.

Even in cases where there has been no loss borne by investors due to alleged trades, establishment of direct quantified damage/loss to an investor in personam is not an essential ingredient to prove the charges of the price manipulation. The very acts of marking up the price of a scrip higher by manipulative trading practices even by a selected few persons can induce the investors in rem.

In a quasi-judicial proceeding, the standard of proof is preponderance of probability.  It  is  a  fundamental  principle  of  law  that  proof  of  an  allegation levelled against a person may be in the form of direct substantive evidence or, as in many cases, such proof may have to be inferred by a logical process of reasoning from the totality of the attending facts and circumstances surrounding the allegations/charges made and levelled. While direct evidence is a more certain basis to come to a conclusion, yet, in the absence thereof the Courts cannot be helpless. It is the judicial duty to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded and to reach what would appear to the Court to be a reasonable conclusion therefrom.
 
Conclusion:

Based on the foregoing factual analysis and observations, SEBI was of the opinion that the trades established were clearly manipulative and unfair. They distorted the price discovery mechanism of the Securities Market. By executing those manipulative trades repeatedly at higher prices, the Company was able to trigger rapid rise in the price of the scrip, which was not real but only an outcome of such manipulative trades. It was finally held that the of acts as discussed in detail above, were violative of Regulation 3 (a), (b), (c), (d) and 4 (1), 4(2), (a) and (e) of PFUTP Regulations.