The Securities Appellate Tribunal (SAT) today upheld Sebi's penalty of Rs 1 crore on an individual in a case related to fraudulent trading in scrips of four companies.
Pooja Menghani was found guilty by the Securities and Exchange Board of India (Sebi) in April, 2012 of indulging in fraudulent and unfair trades in shares of Amtek Auto, Amtek India, Monnet Ispat and Ahmednagar Forgings.
As per Sebi, Menghani had resorted to 'front-running' and had earned ill-gotten profits (Rs 49 lakh) by such trades.
Subsequently, Menghani had approached SAT challenging Sebi's ruling in the case.
"The mischief of front-running, apart from being fraudulent and manipulative in nature is almost akin to the offence of insider trading wherein also someone is in advantageous position and hence in possession of certain information which he or she has come to know before others can do so," the tribunal said in an order.
It also said the penalty of Rs 1 crore imposed on Menghani which is even less than three times the profit of Rs 49 lakh made by her in an illegal manner "does not require any interference of this tribunal".
Front-running refers to activities wherein entities use confidential information for buying or selling securities ahead of a large order with the objective of benefiting from the subsequent price movement.
The term is not mentioned as such in Sebi regulations but is condemned and is treated as a fraud on the market.
Sebi investigation had found that Menghani was always trading in the four scrips through her brokers with prior knowledge of the buy orders of the companies.
Dissenting with the majority order, SAT member A S Lamba said that a lot of questions in the case remained unanswered which made upholding of penalty on Menghani "in isolation, difficult", though it had been proved that she had violated Sebi norms.
"The most important point regarding the case is seller/ buyer are the two components of front running and one cannot succeed without connivance of other...Yet it is a complicity of the two (buyer and seller) and one cannot be held violative of PFUTP (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, while other is not proceeded with, at all," Lamba noted.
