Of late, instances of front-running scam have been on the rise. The market regulator has been unearthing case after case of front-running, including a recent one involving big fish Ketan Parekh.
Front-running occurs when a trader or fund manager tries to pocket a profit from knowledge of upcoming trades from their institutional clients.
Front-running is an illegal practice where a fund manager, dealer, trader or employee places large orders for buying or selling shares ahead of their institutional employer or big client. This gives the ‘privy’ traders an unfair advantage, allowing them to profit from the expected movement in the security’s price because of the impending larger client orders that follow.
Modus operandi
Recently, market regulator SEBI passed an interim order against 22 entities, including Rohit Salgaocar and Ketan Parekh, debarring them and impounding wrongful gains of around ₹66 crore.
The Big Client is a US-based fund house which has various funds registered as foreign portfolio investors with SEBI. These FPIs invest in the Indian securities markets through various registered trading members. Among them was Salgaocar.
The order alleges that Salgaocar (a Singapore-based trader) and Parekh orchestrated a novel method of front-running the trades of a US-based fund house, managing around $2.5 trillion. For executing the scheme, Parekh used his earlier network of Kolkata-based entities.
Not one-off instances
While Parekh’s front-running is surprising, given his involvement in an earlier scam, the other cases are no less so.
SEBI, in December, uncovered a front-running scheme involving PNB MetLife India Insurance Company equity dealer Sachin Bakul Dagli and eight other entities, who generated illegal gains of ₹21.16 crore. According to SEBI findings, the front-running by these entities continued for more than three years.
A few days ago, Meghana Gosar and Devan Sangoi settled a front-running case with SEBI by paying collectively ₹91 lakh. SEBI, which had conducted a probe into potential front-running of the trades of an entity, executed during August 1, 2021-April 30, 2022, passed a consent order, accepting the applications of the accused. Sangoi was Chief Investment Officer at the “unnamed” big client.
Similarly, stock broking firm Angel One has settled allegations of front-running of orders of a big client by one of its authorised persons by paying ₹21 lakh.
Last May, the regulator had barred two individuals,Gaurav Dedhia (chief dealer of IDBI Capital & Securities Market) and Kajal Savla, from the securities markets for three years and directed them to disgorge unlawful gains of ₹1.67 crore for indulging in front-running trades.
While one can appreciate the diligence with which market regulator SEBI is pursuing cases of front-running, at the same time, repeated instances shake the confidence of market participants.
Besides, if investors have explanations on why certain cases are allowed to be settled through consent mechanisms, it will improve the credibility quotient of the market regulator as well. Clarity on that front would also eliminate unnecessary speculation.
Navneet Gupta, Partner at SNG & Partners, Advocates & Solicitors, said Ketan Parekh, despite having been barred from trading, managed to take advantage of the system’s inefficiencies. and SEBI could not prevent him from committing another scam. Parekh was earlier imprisoned and debarred from stock markets for 14 years for his role in the infamous stock market scam of 2000.
Habitual offenders such as Parekh need to be dealt with an iron hand so that the faith of investors, including foreign investors, in the Indian stock market is not shaken, he added.