Sebi to review front-running regulations to curb fraud

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SummaryThe Securities and Exchange Board of India is planning to review and strengthen regulations related to front-running so that individuals involved in fraudulent and unfair practices can be kept out of the capital market.

The Securities and Exchange Board of India (Sebi) is planning to review and strengthen regulations related to front-running so that individuals involved in fraudulent and unfair practices can be kept out of the capital market. The review has been necessitated following a recent ruling by the Securities Appellate Tribunal (SAT).

Sebi chariman UK Sinha has said that the review would look at the definition of front-running so that orders challenged at the appellate body or even the higher courts can stand the test of law. “On this particular aspect of front-running, we will have to have look at our regulations to see if it needs more improvement and strengthening,” Sinha said on Sunday.

Front-running refers to an illegal practise where a stockbroker executes orders on a security for his or her own account taking advantage of advance knowledge of pending orders.

Front-runners use confidential information for buying or selling securities ahead of a large order with the objective of benefiting from the subsequent price movement.

“Front-running as an offence is definitely pursued to be for intermediaries. So (does) somebody who is an indirect beneficiary comes under the purview or not? Of course, common sense and justice demands that it should be there,” Sinha said.

On November 9, the SAT overruled an order passed by Sebi wherein an employee of a portfolio manager of a foreign institutional investor (FII) was barred from the market for front-running activities. According to the Sebi probe, Dipak Patel, who was working with Passport India Investment (Mauritius), passed on information related to proposed trades of the FII to his cousins to trade in their personal accounts.

Patel further told his cousins to sell when Passport India actually executed the buy trades. Sebi alleged that Patel, along with his cousins, made a profit of R1.56 crore. While Sebi barred Patel from the securities market, his cousins were directed to deposit the profits to the tune of Rs 1.03 crore. Sebi found the individuals guilty, violating the provisions of Regulation 3(a), (b), (c) and (d) of Fraudulent and Unfair Trade Practices (FUTP) regulations and imposed monetary penalty under Section 15HA.

The SAT, however, overruled the order saying that the existing prohibition of FUTP regulations of 2003 do not clearly define “front-running”, and even if a particular fraudulent transaction could be construed as front-running, the regulations applied only to market intermediaries and not individuals.

The Sebi chairman said that the issue arose as the regulations governing insider trading were amended a few years back. “Earlier, the regulations were different. But now the regulations are that even if you are in the know of that information, whether we are able to establish whether you have used that information or not is immaterial. The very fact that you are possessing that information is enough for us. Given this particular example, we will need to have a serious look at our regulation,” he said.

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