SEBI Slams Traders: ₹5 Lakh Penalty Imposed for Manipulating BSE's Illiquid Stock Options

SEBI Slams Traders: ₹5 Lakh Penalty Imposed for Manipulating BSE's Illiquid Stock Options​

The Securities and Exchange Board of India (SEBI) has issued an adjudication order, penalizing Rajwadi Retail Trade Systems Private Limited for alleged manipulative trading practices in the stock options segment of the Bombay Stock Exchange (BSE). The order specifically targets the creation of artificial volumes through non-genuine reversal trades.

The investigation was conducted into trading activities spanning from April 01, 2014, to September 30, 2015. SEBI initiated proceedings following observations of large-scale reversal of trades in the illiquid stock options segment.

Allegations of Non-Genuine Trading and Artificial Volumes​

SEBI observed that the trading activities conducted by the noticee, Rajwadi Retail Trade Systems Private Limited, were alleged to be non-genuine. These actions created a false or misleading appearance of market activity.

The inquiry revealed significant discrepancies, noting that a total of 2,91,744 trades, constituting 81.40% of all options trades during the period, were alleged to be non-genuine.

Specifically, the adjudication order highlighted that the noticee executed 43 non-genuine trades across 6 stock options contracts. These actions resulted in the generation of artificial volumes amounting to a total of 3,57,500 units.

Basis of Violation: PFUTP Regulations​

The core allegation revolves around the practice of reversal trades, where an entity reverses its buy or sell position with the same counterparty on the same day. SEBI contends that these specific reversal trades were non-genuine and manipulative.

The proceedings were initiated for alleged violations of Regulations 3(a), (b), (c), (d), 4(1), and 4(2)(a) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003.

Legal precedents cited during the proceedings emphasize that the test for manipulation is not merely circumstantial. The order drew upon Supreme Court judgments, confirming that evidence of synchronized trading with the same counterparty strongly suggests a "prior meeting of minds" to execute trades at a predetermined price.

Adjudication and Ex-Parte Proceedings​

The noticee was initially issued a Show Cause Notice (SCN) on August 08, 2022, detailing the alleged violations. However, despite multiple attempts by SEBI to serve the notice through various channels, including SPAD, email, and affixed notice, the noticee did not respond.

Relying on the principle of natural justice and drawing parallels with past rulings from the Securities Appellate Tribunal (SAT), the Adjudicating Officer proceeded ex-parte. SEBI thus concluded that in the absence of a response, the allegations presented in the notice were presumed to have been admitted by the noticee.

Penalty Imposed for Manipulative Practices​

Upon careful consideration of the evidence, SEBI found that the trading behavior of Rajwadi Retail Trade Systems Private Limited clearly indicated that the trades executed were non-genuine and manipulative. This confirmed the violation of the specified provisions of the PFUTP Regulations.

SEBI noted that the imposition of a penalty under Section 15HA of the SEBI Act was deemed appropriate. While the record did not quantify any specific disproportionate gains or losses to investors, the sheer volume and pattern of non-genuine trades warranted punitive action.

Consequently, the adjudicating officer imposed a monetary penalty of ₹ 5,00,000/- (Rupees Five Lakhs only) on Rajwadi Retail Trade Systems Private Limited. The order stipulates that the penalty must be remitted within 45 days of receipt. Failure to comply may lead to further recovery proceedings by SEBI.