Supreme Court Upholds SEBI Ban on Manipulative Trading: MBL and Company Limited vs. SEBI (26 May 2022)

Date of the Judgment: 26 May 2022
Citation: [Not provided in the source]
Judges: Dr Dhananjaya Y Chandrachud, J and Bela M Trivedi, J.

Can a regulatory body like the Securities and Exchange Board of India (SEBI) impose a ban on a company for engaging in manipulative trading practices, and if so, is the ban justified? The Supreme Court of India recently addressed this question in the case of MBL and Company Limited vs. Securities and Exchange Board of India. The core issue revolved around whether SEBI’s order to restrain MBL and Company Limited from trading for four years was proportionate to the manipulative trading practices they were found to have engaged in. The judgment was delivered by a two-judge bench comprising Dr. Dhananjaya Y Chandrachud, J, and Bela M Trivedi, J, with the majority opinion authored by Dr. Dhananjaya Y Chandrachud, J.

Case Background

The case involves MBL and Company Limited, a stockbroker, and the Securities and Exchange Board of India (SEBI). SEBI found that MBL had engaged in manipulative trading of shares of Gujarat NRE Coke Limited (GNCL) between 15 December 2011 and 24 February 2012. MBL was found to have placed large sell orders at prices higher than the last traded price, and then placed a buy order for a single share at that higher price, creating an artificial increase in the Last Traded Price (LTP).

The Whole Time Member (WTM) of SEBI, on 28 February 2020, restrained MBL from buying, selling, or dealing in securities for four years. Subsequently, on 17 March 2020, an adjudicating officer imposed a penalty of rupees fifteen lakhs for violations of the SEBI Act and its regulations. MBL appealed against these orders before the Securities Appellate Tribunal (SAT), which upheld the SEBI orders on 13 May 2022.

Timeline

Course of Proceedings

The Whole Time Member (WTM) of SEBI found MBL guilty of manipulative trading practices and imposed a four-year ban on trading. The adjudicating officer imposed a monetary penalty of fifteen lakhs. MBL appealed to the Securities Appellate Tribunal (SAT), which upheld the orders of SEBI. MBL then appealed to the Supreme Court of India, challenging the ban as disproportionate.

Legal Framework

The case involves the interpretation and application of several key legal provisions. Section 12A of the Securities and Exchange Board of India Act, 1992 (SEBI Act) prohibits manipulative and deceptive devices, insider trading, and substantial acquisition of securities. Specifically, Section 12A(a), (b), and (c) of the SEBI Act were cited, which state:

• (a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognised stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made thereunder;
• (b) employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognised stock exchange;
• (c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder;

The SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations) were also cited. Specifically, Regulations 3 and 4 of the PFUTP Regulations were considered:

• Regulation 3 prohibits fraudulent dealings in securities, including using manipulative devices, schemes to defraud, and acts that operate as fraud.
• Regulation 4 prohibits manipulative, fraudulent, and unfair trade practices, including creating a false appearance of trading, manipulating prices, and entering into transactions without intending to change ownership.

Arguments

Appellant’s Submissions (MBL and Company Limited):

• The trades were executed over fifty days between 15 September 2011 and 9 January 2015.
• The net gain was only Rs 3.45 per share, and the total profit was Rs 2.61 lakhs.
• The trading volume represented only 0.04% of the total market value.
• The four-year trading ban was disproportionate and harsh.
• The ban would severely impact the company’s 450 employees.
• A stay was in operation from 28 February 2020, and a deposit of rupees two crores was made as directed by the SAT.
• The penalty imposed by the adjudicating officer was rupees fifteen lakhs, while the WTM imposed a four-year trading ban, which was disproportionate.

Respondent’s Submissions (Securities and Exchange Board of India):

• The trading ban imposed by the WTM was not related to the amount of gain made by the appellant.
• The ban is distinct from the penalty imposed by the adjudicating officer.
• The trades were carried out from the same terminal ID, and the trading was done manually, indicating intentional manipulation.
• The court should not interfere with a penalty unless it is disproportionate or arbitrary.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue that the court addressed was:

1. Whether the four-year ban imposed by the WTM of SEBI on MBL and Company Limited for manipulative trading practices was disproportionate and warranted interference by the Supreme Court.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

The Supreme Court also considered the following legal provisions:

• Section 12A of the SEBI Act: Prohibits manipulative and deceptive devices, insider trading, and substantial acquisition of securities.
• Regulations 3 and 4 of the PFUTP Regulations: Prohibit fraudulent and unfair trade practices in the securities market.

Judgment

The Supreme Court dismissed the appeals filed by MBL and Company Limited, upholding the SEBI’s ban.

How each authority was viewed by the Court?

• Adjudicating Officer, Securities and Exchange Board of India v Bhavesh Pabari [CITATION]: The Court followed this authority to reiterate that it can only interfere with penalties if they are wholly arbitrary or disproportionate.
• N. Narayanan v. SEBI [CITATION]: The Court relied on this authority to emphasize the importance of preventing market abuse and preserving market integrity.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily driven by the need to maintain the integrity of the securities market and protect investor confidence. The Court emphasized that manipulative trading practices, even if they involve small gains, can have a significant adverse impact on the market. The Court considered the following points:

The court’s reasoning was based on the following logical flow:

The Court considered the argument that the gains were small and the trading volume was low, but rejected it on the grounds that the impact of manipulation extends beyond the immediate gain to the manipulator. The Court emphasized that the integrity of the securities market must be protected.

The Court quoted the following from the judgment:

• “In the present case, the WTM, while imposing an order of debarment, has specifically applied her mind to the issue as regards the impact of such a manipulation.”
• “The securities market deals with the wealth of investors. Any such manipulation is liable to cause serious detriment to investors’ wealth.”
• “Prevention of market abuse and preservation of market integrity is the hallmark of securities law.”

Key Takeaways

• Manipulative trading practices, even with small gains, can result in significant penalties, including trading bans.
• The Securities and Exchange Board of India (SEBI) has broad powers to regulate the securities market and protect investor confidence.
• The Supreme Court will not interfere with penalties imposed by SEBI unless they are wholly arbitrary or disproportionate.
• Market integrity is paramount, and actions that undermine this will be dealt with severely.
• The impact of manipulative trading is not limited to the gains made by the manipulator but includes the wider impact on the market and investor confidence.

Directions

No specific directions were given by the Supreme Court in this case.

Development of Law

The ratio decidendi of this case is that the Supreme Court will not interfere with the penalties imposed by SEBI for market manipulation unless they are wholly arbitrary or disproportionate. The court reiterated that maintaining market integrity and protecting investor confidence are paramount concerns. This case reinforces the principle that the impact of manipulative trading should not be assessed solely based on the gains made by the manipulator but on the wider consequences for the securities market. There is no change in the previous positions of law.

Conclusion

The Supreme Court’s decision in MBL and Company Limited vs. Securities and Exchange Board of India upholds SEBI’s authority to impose trading bans for manipulative practices. The Court emphasized the importance of market integrity and investor protection, stating that even small-scale manipulations can have significant adverse effects. The judgment reinforces the principle that penalties for market manipulation are not solely based on the gains made but on the broader impact on the securities market.

Category

• Securities Law
  • Market Manipulation
  • Securities and Exchange Board of India Act, 1992
  • Section 12A, Securities and Exchange Board of India Act, 1992
  • SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003
  • Regulation 3, SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003
  • Regulation 4, SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003

FAQ

Q: What was the main issue in the MBL and Company Limited vs. SEBI case?

A: The main issue was whether the four-year trading ban imposed by SEBI on MBL and Company Limited for manipulative trading practices was disproportionate.

Q: What did SEBI find MBL and Company Limited guilty of?

A: SEBI found MBL and Company Limited guilty of engaging in manipulative self-trades to artificially inflate the price of shares of Gujarat NRE Coke Limited (GNCL).

Q: What is the significance of this judgment?

A: This judgment reinforces the principle that market integrity is paramount and that penalties for market manipulation are not solely based on the gains made but on the broader impact on the securities market. It also highlights that SEBI has broad powers to regulate the securities market and protect investor confidence.

Q: What does the Supreme Court mean by “market integrity”?

A: “Market integrity” refers to the fairness and transparency of the securities market, ensuring that all participants have equal access to information and that the market is not manipulated for the benefit of a few.

Q: Can a company be banned from trading for small gains?

A: Yes, the Supreme Court has upheld that even small gains from manipulative trading can lead to significant penalties, including trading bans, as the impact of manipulation extends beyond the immediate gain to the manipulator.