SEBI imposes INR 5 lakh penalty for dealing in Illiquid Stock Options at BSE

SEBI imposes INR 5 lakh penalty for dealing in Illiquid Stock Options at BSE

The Securities and Exchange Board of India (SEBI) has imposed a penalty of Rs.5 lakh on the Noticee viz. Rohan Finance & Securities Limitedunder the provisions of Section 15HAof the SEBI Act, 1992 in the matter of dealings in Illiquid Stock Options at BSE.

The SEBI had observed large scale reversal of trades in stock options segment of Bombay Stock Exchange (BSE). SEBI observed that such large scale reversal of trades in stock options lead to creation of artificial volume at BSE. In view of the same, SEBI conducted an investigation into the trading activities of certain entities in illiquid stock options at BSE for the period April 1, 2014 to September 30, 2015 (IP).

SEBI initiated adjudication proceedings against the Noticee for violation of the provisions of Regulations 3(a), (b), (c), (d), 4(1) and 4(2)(a) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (PFUTP Regulations, 2003).

In this case the Adjudicating Officer (AO) put forth that the Noticee had executed non-genuine trades in 22contracts, wherein percentage of non-genuine trades of the Noticee in stock options contracts to total trades in the contracts were in the range of 33% to 100%.

A substantial 100% of volume generated by the Noticees in certain contracts was artificial volume, and further artificial volume generated by the Noticee also contributed to significant 32% to 100% of the total volume from the market in the said contracts. Non-genuine trades executed by the Noticee in the above contracts had significantdifferential in buy rates and sell ratesconsidering that the trades were reversed on sameday.

According to the AO, the non-genuineness of these transactions executed by the Noticee was evident from the fact that there was no commercial basis as to why, within a short span of time, the Noticee reversed the position with its counter-parties with significant price difference.

The AO observed that the time taken by the Noticee for reversing its non-genuine trades ranged from 36 seconds to 45 minutes & 30 seconds, on the same day. Such a short span of time taken for reversing the trades in anilliquid stock option contract suggested thenon-genuinenessof these trades executed by the Noticee.

The AO held, "The fact that the transactions in a particular contract were reversed with the same counterparties indicates a prior meeting of mind with a view to execute the reversal trades at a pre-determined price. Since these trades were done in illiquid option contracts, there was no trading in the said contract and hence, there was no price discovery in the strictest terms."

In view of the above, the allegation of violation of regulations 3(a), (b), (c), (d), 4(1) and 4(2)(a) of PFUTP Regulations by the Noticee stood established.

As per the AO, the entities involved in these non-genuine trades had either booked gains or loss and the gains or loss appeared to be of notional in nature. Generally, there isnil or negligible participation of the public in the trading in illiquid stock option contracts. Hence, the impact of these non-genuine trade had been considered.

When the impact of artificial volume created by the two counterparties is seen as a whole, it is not possible from the material on record to quantify the amount of disproportionate gain or unfair advantage resulting from the artificial trades between the counter parties or the consequent loss caused to investors as a result of the default. The Noticee had entered into 44 non-genuine transactions in 22 stock option contracts which demonstrated the repetitive nature of the default onitspart.