SEBI Slaps ₹5 Lakh Penalty on Trader for Executing Non-Genuine Options Trades, Flags Market Manipulation

SEBI Slaps ₹5 Lakh Penalty on Trader for Executing Non-Genuine Options Trades, Flags Market Manipulation​

The Securities and Exchange Board of India (SEBI) has released an Adjudication Order imposing a penalty on an individual for allegedly engaging in manipulative and non-genuine trading practices in illiquid stock options. The order confirms that the transactions created a false appearance of artificial volume in the stock options segment of the Bombay Stock Exchange (BSE).

The case revolves around trading activities between April 01, 2014, and September 30, 2015. SEBI initiated proceedings after observing large-scale reversals of trades in the options segment, which led to concerns regarding market integrity.

Establishing Non-Genuine Trading Practices​

The investigation revealed significant discrepancies in the trading data. SEBI observed that a total of 2,91,744 trades, constituting 81.40% of all trades executed in the options segment during the period, were allegedly non-genuine.

The adjudication focused specifically on Ararti Karmakar, who was identified as an entity indulging in reversal trades in the illiquid stock options. These trades were deemed non-genuine, manipulative, and deceptive in nature, thereby creating artificial volumes.

The allegations formed the basis for violations under 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.

Key Evidence: Pattern of Reversal Trades​

The adjudicating officer noted that the primary evidence pointing towards manipulation involved the execution of reversal trades. These were defined as positions reversed with the same counterparty during the same trading day.

In the specific case reviewed, the Noticee was found to have executed four non-genuine trades across two stock option contracts, resulting in an artificial volume of 2,71,750 units. The investigation showed that the trades involved a consistent counterparty, Sargam Lefins Pvt Ltd.

Crucially, the trades displayed wide variations in prices over short spans, coupled with the pattern of reversing positions with the same counterparty. The regulatory body cited this pattern to establish a "prior meeting of minds," suggesting a pre-determined price was executed by the counterparties.

Legal Basis for Findings and Penalty Imposition​

The SEBI's findings heavily relied on judicial precedents, including rulings from the Supreme Court and the Securities Appellate Tribunal (SAT). These judgments established that when direct proof of a meeting of minds is absent, the test shifts to one of 'preponderance of probabilities' based on various surrounding factors.

The finding that the Noticee’s trading behavior demonstrated synchronization—matching buy and sell orders with the same counterparty and the same quantity—was deemed definitive. This pattern strongly indicated collusion to execute trades at predetermined prices.

The violation of the PFUTP Regulations was found to be established, leading to the imposition of monetary penalties under Section 15HA of the SEBI Act, 1992.

Penalty and Compliance Requirements​

Following a comprehensive consideration of the material on record, the adjudicating officer formally imposed a penalty on Ararti Karmakar.

The penalty amount ordered is Rs 5,00,000 (Rupees Five Lakhs only). The order specifies that this amount must be paid within 45 days of receiving the order through SEBI's designated online payment facility.

The order also cautions that failure to remit the penalty within the stipulated period could result in SEBI initiating consequential recovery proceedings under Section 28A of the SEBI Act, potentially involving the attachment and sale of properties.