The stand taken by SEBI on ‘self-trade’ — a set of orders that are matched on the exchange platform without any change in ownership of shares — has caused anxiety among market participants. SEBI’s reply to the Finance Ministry on the issue and its stand in the Securities Appellate Tribunal seem to contradict each other, legal experts dealing with the matter told BusinessLine .
Cases involving trade orders worth several crores have been classified as ‘self-trade’ and are under SEBI scanner. A letter written by its assistant manager Naveen Kumar, dated June 8, 2017, had informed Shalini Mahajan, Assistant Director, Finance Market Division, Department of Economic Affairs, Ministry of Finance, that “mere occurrence of ‘self-trade’ is not per se illegal in the absence of any other additional evidence to prove manipulation or intent to defraud.”
Relies on past instances
“In the view of the above, the ongoing enforcement cases involving allegations of self-trade would be dealt with accordingly and the entities which have been charged for occurrence of self-trade without any manipulative intent can also take benefit of settlement proceedings,” SEBI told the Finance Ministry.
But in its filings to SAT, SEBI has relied upon some of the past instances and orders to argue that self-trade orders, irrespective of the volume, even if minuscule could be punishable. In its affidavit to SAT last year, SEBI has relied on four judgments, which conclude that self-trade, even if minuscule and accidental, may be punishable. It is this approach of SEBI that has become concerning for market participants. Self-trades are punishable under SEBI’s Prevention of Fraudulent and Unfair Trade Prevention (PFUTP) Act.
SEBI did not reply to emails sent by BusinessLine on the issue.
In a letter dated May 9, 2018, the Finance Ministry asked SEBI to reply each of the complainants directly in the matter and intimate the department about it.
Reportedly, when SEBI’s secondary market advisory committee discussed the problem of self-trades in 2014, it acknowledged that such trades can occur when multiple algo orders of the same broker get matched or different traders in the same brokerage house place buy-sell orders. It recommended that SEBI consider imposing a penalty only for manipulative self-trades.
Following this, SEBI had also decided that cases of ‘self-trades’ may not be punished unless an ‘intention’ to indulge in such trades was established on the broker’s part.