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SAT: Connection with related entities essential to prove price manipulation

Finsec Law Advisors

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In Bharti Goyal v. SEBI, the Securities Appellate Tribunal (SAT) modified the penalty order imposed by SEBI for the manipulation in the scrip price of a listed entity into a warning, on account of non-establishment of a connection between the appellants and the connected/suspected entities that are alleged to have manipulated the price.


SEBI had passed an order against sixteen entities, including the appellant, for manipulating the price of the scrip of Mapro Industries Limited (Mapro), a listed company, by trading above the last traded price (LTP) and violating various provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (PFUTP Regulations). While six of the entities which had engaged in market manipulation were suspected to be related entities, the appellants were part of the other ten entities which were not shown to be connected to these related entities. Without delving into the aspect of connection between the appellants and the connected/suspected entities, SEBI held that by the very nature of their trades, the appellants manipulated the scrip price and disturbed the market equilibrium.

Contentions of the Parties

The appellants defended their trades by submitting that they placed orders at a price higher than the LTP since they viewed Mapro to be a good investment, and they were not able to purchase shares at a lower price. Moreover, the appellants stressed on the fact that they had no connection or relationship with any of the suspected/connected entities.

SEBI argued that entering into such trades by the appellants was completely irrational. Relying on the Supreme Court case of SEBI v. Kishore R Ajmera, SEBI believed that the trading dynamics alone, i.e. placing orders at higher than LTP, early in the day, and for a small number of shares, etc, are sufficient to establish the deceptive nature of the trades and prove the violation of the provisions of PFUTP Regulations.


While SAT disagreed with the rationale provided by the appellants for entering into such trades, it also acknowledged the possibility of an investor entering into such trades without an intention to manipulate the market. SAT observed that SEBI has not established the existence of any connection between the appellants and the suspected/connected entities or the promoters/directors of Mapro. Further, it observed that the lack of evidence of a meeting of minds has to be balanced with the unconvincing response of the appellants.

In light of the above, SAT held that even though the nature and pattern of trading of the appellants are violative of the provisions of PFUTP Regulations, in light of the lack of establishment of any connection, monetary or otherwise, or even any interaction, between the appellants and the other suspected entities or promoters of Mapro, it cannot uphold the imposition of a penalty, and modified the penalty to a warning.

It is interesting to note the importance SAT ascribed to the establishment of a connection between the suspected entities and the appellants in a matter pertaining to manipulation of the scrip price of a listed entity, which requires a meeting of minds between the entities involved. While an inference of meetings of minds can be drawn from the nature of their trades, SAT has rightly observed that the establishment of some connection between the parties is necessary to draw such an inference.