SC upholds Sebi order against 3 defaulters in 'front-running' cases

Dipak, Kanaiyalal and Anandkumar held guilty of violating FUTP regulations; fund manager Passport India Investment also implicated in case

The Supreme Court has upheld a 2011 order by the Securities and Exchange Board of India (Sebi), giving it a boost while prosecuting 'front-running' cases.
 

Front-running is referred to buying or selling of securities ahead of a large order so as to benefit from the subsequent price move.

Sebi's powers in the matter came under the cloud after the Securities Appellate Tribunal (SAT) in 2012 struck down the regulator's order against Dipak Patel, an employee of a Mauritius-based fund manager and his relatives, who executed trades based on information passed on by him. SAT's position was that the front-running rules could not be invoked for persons other than the intermediary.

Allowing Sebi's appeals on Wednesday, the bench constituted by Justice N V Ramana and Justice Ranjan Gogoi said: "Taking into consideration the facts and circumstances of the case before us and the laws laid down, along with the judicial verdict in the Sebi vs Kishore R Ajmera (Supra) case, we can only lead to one conclusion that the concerned parties to the transaction were involved in an apparent fraudulent practice violating market integrity."

The bench added: "The parting of information with regard to an imminent bulk purchase and the subsequent transaction thereto are so intrinsically connected that lead to no other conclusion but one of joint liability of both the initiator of the fraudulent practice and the other party who had knowingly aided in the same. Consequently, civil appeal No 2595, 2596 and 2666 of 2013 are allowed."

Sebi had conducted a probe into the trades of Kanaiyalal Baldevbhai Patel, an individual trader, and Passport India Investment - a foreign institutional investor (FII)- for the period between January 2007 and March 2009. It was noted that Patel had placed and executed orders before the orders of the FII and consequently squared off his position when the orders were placed for trading.

Dipak Patel was the portfolio manager of the FII and was also related to Kanaiyalal and Anandkumar Baldevbhai Patel. Sebi noted that Dipak provided information to Kanaiyalal and Anandkumar regarding the forthcoming trading activity of the FII.

Taking advantage of the same, Kanaiyalal indulged in 'front running'. It was noted by the market regulator that trades were executed using a telephone number registered in the name of Anandkumar at the common residential address of Kanaiyalal and Anand Kumar. Through the process, Kanaiyalal earned a total profit of Rs 1.56 crore

The adjudicating officer of Sebi found Dipak, Kanaiyalal and Anandkumar guilty of violating the provisions of Regulation 3(a), 3(b), 3(c) and 3(d) of the FUTP regulations and imposed a monetary penalty on them. A year later, the SAT had set aside the Sebi order. Following the SAT order, the then Sebi chairman had said there was a need to review the regulations governing the practice. Soon, Sebi moved the apex court challenging the SAT order.