India’s market regulator SEBI says it has uncovered an alleged front-running scheme involving Ketan Parekh--convicted in 2008 for stock market manipulation--and others.
The regulator impounded unlawful gains of ₹65.77 crore from those involved and debarred Parekh from dealing with the securities market.
Parekh and Salgaocar, through Parekh's company, orchestrated “illicit” trades based on confidential, non-public information (NPI) related to substantial stock orders from a US-based foreign portfolio investor (FPI), referred to as “Big Client”, according to investigations of the Securities and Exchange Board of India (Sebi).
“The evidence gathered, including digital footprints, WhatsApp chats, phone calls, and Bloomberg messages, suggests that Ketan Parekh was directly involved in executing the front-running strategy,” said the order by SEBI's whole-time member Kamlesh Varshney. The order noted that Parekh allegedly received crucial trade instructions through intermediaries and passed them to traders, resulting in unlawful gains.
Parekh's role in the scheme is considered particularly egregious due to his prior involvement in the 2001 stock market crash and his previous 14-year ban from the market, which was lifted only recently. The investigation revealed that Salgaoncar communicated orders with traders at firms like Nuvama Wealth Management Ltd and Motilal Oswal Financial Services Ltd, which were executing trades for the Big Client, SEBI said.
SEBI has forwarded the order to Nuvama and Motilal Oswal so that they can take appropriate actions to strengthen their internal controls to prevent future occurrences of such violations.
The timing, volume, and price of trades matched suspiciously with those of six entities, referred to as “front runners”, according to the regulator. These entities, including Salasar Stock Broking and GRD Securities, are alleged to have made illicit profits by trading ahead of the Big Client's orders. The referral system helped Salgaocar earn substantial amounts by routing the trades through these brokers. According to the SEBI order, the profits generated from these trades amounted to ₹38.70 crore, while Salgaocar, who facilitated these actions, earned additional commissions totaling ₹27.07 crore from the brokers involved.
SEBI said the investigation also pointed out that this case was not isolated and had broader implications for the integrity of India’s securities markets. The regulator's swift action was deemed essential to prevent further manipulation. SEBI pointed to the extensive use of technology by the parties involved, who took elaborate steps to cover their tracks, including sharing non-public information over encrypted messages.
“The trading activities which are prima facie swarmed with illicit design, were repeatedly carried out for a long time,” Varshney said in the order. “The accused were able to generate large amounts of profits which is prima facie found to be unlawful, which may be siphoned off beyond the regulatory reach if immediate steps are not taken.”
According to the order, the nexus between the accused, the use of technology to share information, and the sharing of large amounts of profits made it imperative for SEBI to protect against siphoning off the unlawful gains made by suspects.
The total illicit gains from this front-running operation are estimated at ₹65.77 crore, which the regulator has ordered will be impounded from the involved parties, with joint and several liabilities imposed on the individuals and entities responsible.
The implicated parties have been directed to deposit the amount into interest-bearing accounts in scheduled commercial banks until further proceedings are determined. SEBI issued a show-cause notice to the entities and individuals named, asking them to explain within 21 days why further penalties should not be imposed for their role in the allegedly fraudulent scheme.
(By arrangement with livemint.com)
