A recent ruling by the Securities Appellate Tribunal (SAT), wherein it held that front-running is illegal only when done by a market intermediary, has stumped many legal experts. Lawyers specialising in securities market say that while it likely that Sebi would appeal against the order, this could lead to a similar plea by a lot of other entities.
On November 9, SAT over-ruled an order passed by the Securities and Exchange Board of India (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 Dipak, along with his cousins, made profits of R1.56 crore. While Sebi barred Patel from the securities market, his cousins were directed to deposit the profits to the tune of R1.03 crore. Sebi found the individuals guilty, violating the provisions of Regulation 3(a), (b), (c) and (d) of FUTP regulations and imposed monetary penalty under section 15HA.
?I would find it very hard to believe that one must be registered with the Sebi to be called an intermediary,? says Sandeep Parekh of Finsec Law Advisors. ?If a portfolio manager to an FII is not an intermediary then who is? Merely relying on the definition of an intermediary, who is required to be registered with Sebi, will narrow the definition to exclude even investment advisors. Clearly, this is not the end of this story and Sebi will likely appeal against this,? he explains.
Legal experts say SAT has strictly relied on the Sebi (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, that recognises front-running only when done by an intermediary. Incidentally, the PFUTP Regulations of 1995 covered front-running by any person.
?The provisions of FUTP Regulation 3 are wide and similar to Rule 10b-5 of the Securities Act, 1933, of US, under which Rajat Gupta and others are charged. Therefore, individuals can also be charged under the current FUTP regulations,? says PR Ramesh of Economic Laws Practice. ?The SAT order does not deal with Sebi?s charge under Regulation 3 but exonerates the appellant on the grounds saying that there is no specific legal provision in the Regulations. I think there is good ground for Sebi to appeal this order,? Ramesh said.
Experts said the order could also lead to Sebi revisiting the norms and drafting it in a manner that bars front-running by non-intermediaries also.